<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1998
Commission File No.: 0-29770
WEST ESSEX BANCORP, INC.
(exact name of registrant as specified in its charter)
UNITED STATES 22-3597632
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
417 Bloomfield Avenue, Caldwell, New Jersey 07006
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 226-7911
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $15,548,290 based upon the last sales price of $9.563 as
listed on The Nasdaq National Market for March 1, 1999. Solely for purposes of
this calculation, the shares held by West Essex Bancorp, M.H.C. and the
directors and officers of the registrant are deemed to be shares held by
affiliates.
The number of shares of Common Stock outstanding as of March 1, 1999 is:
4,197,233.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders and the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on April 21,
1999 are incorporated herein by reference to Parts II and III, respectively, of
this Form 10-K.
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INDEX
PART I
PAGE
Item 1. Business.................................................. 1
Additional Item. Executive Officers of the Registrant............... 36
Item 2. Properties................................................ 37
Item 3. Legal Proceedings......................................... 37
Item 4. Submission of Matters to a Vote of Security Holders....... 37
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 38
Item 6. Selected Financial Data................................... 38
Item 7. Management's Discussion and Analysis of Financial......... 38
Condition and Results of Operations....................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data............... 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant........ 38
Item 11. Executive Compensation.................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 39
Item 13. Certain Relationships and Related Transactions............ 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 39
SIGNATURES
<PAGE>
Item 1. Business.
- - -----------------
General
West Essex Bancorp, Inc. (the "Company") became the federally chartered
stock holding company for West Essex Bank (the "Bank"), a federally chartered
stock savings bank on October 2, 1998 in connection with the conversion of the
Bank from the mutual to stock form and reorganization of the Bank into a mutual
holding company structure ("Reorganization"). In connection with the
Reorganization, West Essex Bancorp, M.H.C. (the "MHC") was organized and became
a majority holder of the Company's outstanding common stock. The Company, the
Bank and the MHC are regulated by the Office of Thrift Supervision (the "OTS").
The Bank is a federally chartered savings bank and is wholly-owned by the
Company. The Company is a savings and loan holding company and is subject to
regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC") and the Securities and Exchange Commission
("SEC"). Currently, other than investing in various securities, the Company does
not directly transact any material business other than through the Bank.
Accordingly, the discussion herein addresses the operations of the Company as
they are conducted through the Bank. At December 31, 1998, the Company had
total assets of $328.6 million, total deposits of $238.3 million and total
stockholders' equity of $46.8 million.
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 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.
The Company's and Bank's executive offices are located at 417 Bloomfield
Avenue, Caldwell, New Jersey 07006. The telephone number is (973) 226-7911.
Market Area and Competition
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.
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 has benefitted from its geographical
proximity to New York City. Originally an agricultural region,
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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 December
31, 1998, the Bank had total loans receivable of $143.0 million, of which $114.7
million were one- to four-family, residential mortgage loans, equalling 80.2% of
the Bank's total loans receivable. At such date, the remainder of the Bank's
loan portfolio consisted primarily of: $11.6 million of commercial real estate
loans or 8.1% of total loans receivable; $9.6 million of home equity loans and
lines of credit, or 6.7% of total loans receivable; $1.9 million of multi-family
residential loans, or 1.4% of total loans receivable; $4.4 million of
construction and development loans, or 3.1% of total loans receivable; and
$706,000 of consumer loans, or 0.5% 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 $143.0 million
at December 31, 1998.
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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 December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- ------------------ ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
----------- --------- -------- --------- -------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family..... $114,690 80.20% $ 87,489 75.34% $60,741 71.88% $65,002 74.50% $61,747 70.33%
Multi-family............ 1,943 1.36 2,004 1.73 2,068 2.45 1,115 1.28 1,400 1.59
Home equity loans and
lines(1)............... 9,631 6.73 8,554 7.37 6,653 7.87 4,388 5.03 5,014 5.71
Commercial real estate 11,589 8.11 10,695 9.21 12,275 14.53 12,707 14.56 13,815 15.74
Construction and
development.............. 4,394 3.07 6,485 5.58 2,080 2.46 3,032 3.47 5,079 5.78
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loan... 142,247 99.47 115,227 99.23 83,817 99.19 86,244 98.84 87,055 99.15
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Commercial loans.......... 49 0.04 59 0.05 87 0.10 234 0.27 259 0.29
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Consumer Loans:
Passbook or certificate. 401 0.28 550 0.47 427 0.51 543 0.62 398 0.46
Other................... 305 0.21 291 0.25 168 0.20 234 0.27 90 0.10
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans.. 706 0.49 841 0.72 595 0.71 777 0.89 488 0.56
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total loans receivable.... 143,002 100.00% 116,127 100.00% 84,499 100.00% 87,255 100.00% 87,802 100.00%
====== ====== ====== ====== ======
Less:
Construction loans in
process................ (1,311) (1,437) (440) (592) (1,474)
Allowance for loan
losses................. (1,717) (1,885) (1,564) (1,200) (1,236)
Deferred loan fees, net. 298 (70) (361) (432) (481)
-------- -------- ------- ------- -------
Loans receivable, net..... $140,272 $112,735 $82,134 $85,031 $84,611
======== ======== ======= ======= =======
</TABLE>
(1) Includes second mortgage loans other than home equity loans of $-0-,
$63,000, $74,000, $91,000 and $191,000 at March 31, 1998 and December 31,
1998, 1997, 1996, 1995 and 1994, respectively.
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Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at December 31, 1998. The table does not include
the effect of future principal repayments or prepayments.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------------------------
One- to Equity Construction
Four- Multi- Loans and Commercial and Total
Family Family Lines Real Estate Development Commercial Consumer Loans
--------- --------- --------- -------------- ------------- ---------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less....................... $ 374 $ - $ - $ 27 $ 4,351 $ - $415 $ 5,167
-------- ------ ------ ------- ------- -------- ---- --------
After one year:
More than one year to three years.... 1,913 140 379 454 9 -- 112 3,007
More than three years to five years.. 2,756 74 486 1,078 34 -- 148 4,576
More than five years to ten years.... 9,398 -- 2,557 1,621 -- 49 -- 13,625
More than 10 years to 20 years....... 25,913 1,668 5,650 8,279 -- -- 31 41,541
More than 20 years................... 74,336 61 559 130 -- -- -- 75,086
-------- ------ ------ ------- ------- -------- ---- --------
114,316 1,943 9,631 11,562 43 49 291 137,835
-------- ------ ------ ------- ------- -------- ---- --------
Total due after one year............... 114,690 1,943 9,631 11,589 4,394 49 706 143,002
-------- ------ ------ ------- ------- -------- ---- --------
Total due
Less:
Loans in process................... -- -- -- -- (1,311) -- -- (1,311)
Deferred loan (fees) costs......... 397 -- -- (78) (21) -- -- 298
Allowance for loan losses.......... (1,084) (20) (77) (112) (418) -- (6) (1,717)
-------- ------ ------ ------- ------- -------- ---- --------
(687) (20) (77) (190) (1,750) -- (6) (2,730)
-------- ------ ------ ------- ------- -------- ---- --------
Loans receivable, net................ $114,003 $1,923 $9,554 $11,399 $ 2,644 $49 $700 $140,272
======== ====== ====== ======= ======= ======== ==== ========
</TABLE>
4
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The following table sets forth, at December 31, 1998, the dollar amount of
loans contractually due after December 31, 1999, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
-----------------------------
Fixed Adjustable Total
------- ---------- --------
<S> <C> <C> <C>
(In thousands)
Mortgage loans:
One- to four-family.................... $72,544 $41,772 $114,316
Multi-family........................... 1,943 -- 1,943
Equity loans and lines................. 5,847 3,784 9,631
Commercial real estate................. 10,256 1,306 11,562
Construction and development........... 43 -- 43
------- ------- --------
Total mortgage loans.................. 90,633 46,862 137,495
Commercial loans........................ 49 -- 49
Consumer loans.......................... 260 31 291
------- ------- --------
Total loans.......................... $90,942 $46,893 $137,835
======= ======= ========
</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 1998, the
Bank originated $50.5 million in mortgage loans, up from $46.4 million in 1997
and $14.4 million in 1996.
During the years ended December 31, 1998 and December 31, 1997, the Bank
originated $45.8 million and $39.3 million of one- to four-family loans,
respectively, including home equity loans and lines 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 December 31, 1998, the Bank
had 5 loan participations through TICIC totalling $1.9 million. The Bank has
in its loan
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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 Years Ended
December 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Beginning balance.................................. $116,127 $ 84,499 $ 87,255
-------- -------- --------
Purchases--Multi-family mortgage loans........... 281 -- 1,621
-------- -------- --------
Loans originated:
Mortgage loans:
One- to four-family.......................... 41,194 35,017 6,546
Multi-family................................. -- -- --
Home equity lines............................ 4,644 4,330 4,726
Commercial real estate....................... 2,310 1,436 2,090
Construction and land development............ 2,317 5,610 1,015
-------- -------- --------
Total mortgage loans....................... 50,465 46,393 14,377
-------- -------- --------
Consumer loans:
Passbook loans............................... 371 477 660
Automobile................................... 167 222 65
Credit lines(1).............................. 3 28 --
-------- -------- --------
Total consumer loans....................... 541 727 725
-------- -------- --------
Loans made to facilitate the sale of
real estate owned............................. -- -- --
-------- -------- --------
Total originations......................... 51,006 47,120 15,102
-------- -------- --------
Loans transferred (to) from real estate owned.... -- (680) (377)
-------- -------- --------
Principal repayments and other, net............. (24,412) (14,812) (19,102)
-------- -------- --------
Ending balance..................................... $143,002 $116,127 $ 84,499
======== ======== ========
</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. Loan originations are generally obtained
from the Bank's in-house loan representatives located at all of the Bank's
branch offices from local real estate agents, from wholesale brokers and their
contacts in the Bank's local real estate industry, from existing or past
customers and 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 December 31, 1998, one- to four-family
mortgage loans totalled $114.7 million, or 80.2% of the Bank's total loans
receivable. Of the Bank's mortgage loans secured by one- to four-family
residences, $41.8 million, or 36.4%, were fixed-rate loans and $72.9 million or
63.6% were ARM loans.
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The Bank currently offers fixed-rate mortgage loans with terms from 10 to
30 years. The Bank generally retains for its portfolio all loans it originates.
The Bank also offers ARM loan programs made for terms of 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. 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 one- to four-
family residential mortgage loans to qualified individuals. These loans are
originated using the Bank's standard underwriting guidelines. With respect to
loans granted under this program, the Bank 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 $150,000. 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. 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 loan-
to-value ("LTV") ratio on home equity loans and equity lines of credit is 70%;
however, this policy provides that management has the discretion to make such
real estate loans in excess of 70%. At December 31, 1998, the Bank had in its
loan portfolio an aggregate of $14.6 million of home equity loans and equity
lines of credit, of which $5.7 million were fixed-rate home equity loans and
$8.9 million were equity lines of credit. Of the $8.9 million equity lines of
credit, $3.9 million was drawn upon such loans at December 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
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home equity loans and lines of credit are secured by first or second liens on
one- to four-family residences and condominiums 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 December 31, 1998 was
$5.2 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 December 31, 1998 was $1.9 million, or 1.4%, of total
loans receivable and the Bank's commercial real estate loan portfolio at such
date was $11.6 million, or 8.1%, of total loans receivable.
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.
Construction and Development Lending. The Bank originates construction and
development loans 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 unimproved
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 for up to two year terms and adjustable interest rates which
adjust monthly and float at margins which are generally indexed to the Prime
Rate of interest as reported in The Wall Street Journal. Proceeds of
construction loans are disbursed 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. At December 31,
1998, the Bank had $4.4 million of construction loans which amounted to 3.1% 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
8
<PAGE>
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 December 31, 1998 amounted to
$706,000, or 0.5% of the Bank's total loans receivable, and consisted primarily
of $401,000 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 December 31, 1998, the Bank had $49,000 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 above $300,000, but less than or equal to $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.
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
usually underwrites loans in accordance 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 commercial real estate 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.
9
<PAGE>
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.
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.
10
<PAGE>
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 December 31, 1998,
the Bank had $2.6 million, or 0.80% of total assets, of assets designated as
"Substandard," consisting of fifteen one- to four-family mortgage loans,
totalling $1.4 million, two construction loans totalling $728,000, one
commercial mortgage of $160,000 and real estate owned totalling $373,000. At
December 31, 1998, the largest loan designated as "Substandard" had a carrying
balance of $694,000, and was a construction loan secured by a partially
completed condominium project. At December 31, 1998, no assets were designated
as "Doubtful" or "Loss."
11
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------------- -----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Residential Mortgage......... 1 $ 15 14 $1,201 10 $ 528 19 $1,652
---- ----- ---- ------ ------ -------- ---- ------
Commercial Mortgage.......... -- -- 1 158 -- -- 1 119
Construction and land
development............... -- -- 2 725 -- -- 2 718
---- ----- ---- ------ ------ -------- ---- ------
Total loans................. 1 $ 15 17 $2,084 10 $ 528 22 $2,489
===== ===== ==== ====== ====== ======== ==== ======
Delinquent loans to total
loans..................... 0.01% 0.01% 1.25% 1.46% 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
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans:
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%
===== ===== ==== ======
</TABLE>
12
<PAGE>
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding nonaccrual loans and REO. At December 31, 1998, REO
totalled $582,000 million and consisted of six 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 years ended
December 31, 1998 and 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 $162,000 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 December 31,
1998 and 1997, total impaired loans were $1.46 million and $1.65 million,
respectively. 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 year ended December 31, 1998, the average recorded value of
impaired loans was $1.54 million. For these loans, no interest income was
recognized.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Residential Mortgages.............. $1,201 $1,576 $1,733 $ 931 $1,369
Commercial Mortgages............... 158 119 431 380 263
Construction and land development.. 725 718 705 734 1,346
------ ------ ------ ------ ------
Total nonaccrual loans............ 2,084 2,413 2,869 2,045 2,978
Restructured loans:
Residential Mortgages.............. 94 94 99 104 112
------ ------ ------ ------ ------
Total non-performing loans........ 2,188 2,507 2,968 2,149 3,090
Real estate owned, net(1)........... 582 1,215 1,394 1,352 1,864
------ ------ ------ ------ ------
Total non-performing assets....... $2,770 $3,722 $4,362 $3,501 $4,954
====== ====== ====== ====== ======
Non-performing loans as a
percent of total loans(2).......... 1.46% 2.16% 3.51% 2.46% 3.52%
====== ====== ====== ====== ======
Non-performing assets as
a percent of total assets(3)....... 0.84% 1.24% 1.85% 1.57% 2.48%
====== ====== ====== ====== ======
</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 loans 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.
13
<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 December 31, 1998 and 1997, the Bank's
allowance for loan losses was 1.20% and 1.62%, respectively, of total loans
receivable and 0.82% and 0.78%, respectively, of nonaccrual loans. The Bank had
non-accrual loans of $2.1 million and $2.4 million at December 31, 1998 and
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 non-performing 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 $26.9 million or 23.1% in 1998 and 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's
14
<PAGE>
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 a conservative, but appropriate level of unallocated reserves.
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 Years Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............ $1,885 $1,564 $ 1,200 $1,236 $1,550
------ ------ ------- ------ ------
Provision for (recapture of) loan losses.. (131) 487 232 510 (247)
------ ------ ------- ------ ------
Charge-offs:
Mortgage loans:
One- to four-family.................... 37 60 -- -- 57
Multi-family........................... -- -- -- 56 --
Commercial real estate................... -- 106 -- -- --
Construction and land development........ -- -- -- 490 10
------ ------ ------- ------ ------
Total mortgage loans................... 37 166 -- 546 67
------ ------ ------- ------ ------
Recoveries:
Construction and land development........ -- -- 132 -- --
------ ------ ------- ------ ------
Balance at end of period.................. $1,717 $1,885 $ 1,564 $1,200 $1,236
====== ====== ======= ====== ======
Ratio of net charge-offs during
the period to average gross loans
during the period....................... 0.03% 0.17% (0.15)% 0.63% 0.08%
====== ====== ======= ====== ======
Allowance for loan losses as a
percent of total loans................... 1.20% 1.62% 1.85% 1.38% 1.41%
====== ====== ======= ====== ======
Allowance for loan losses as a
percent of non-performing loans.......... 78.47% 75.19% 52.70% 55.84% 40.00%
====== ====== ======= ====== ======
</TABLE>
15
<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 December 31, 1998
--------------------------------------------------------------------------------------------
1998 Percent of 1997 Percent 1996 Percent
------------------ Loans in ------------------ of Loans ------------------ of Loans
Percent of 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........................ $ 763 44.44% 88.29% $ 621 32.94% 84.44% $ 511 32.67% 82.20%
Commercial real estate............. 122 7.11 8.11 112 5.94 9.21 184 11.77 14.53
Construction and land development.. 418 24.34 3.07 628 33.32 5.58 349 22.31 2.46
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans............. 1,303 75.89 99.47 1,361 72.20 99.23 1,044 66.75 99.19
Commercial loans..................... -- -- 0.04 -- -- 0.05 -- -- 0.10
Consumer loans....................... 6 0.35 0.49 6 0.32 0.72 4 0.26 0.71
------ ------ ------ ------ ------ ------ ------ ------ ------
1,309 76.24 100.00% 1,367 72.52 100.00% 1,048 67.01 100.00%
====== ====== ======
Unallocated.......................... 408 23.76 518 27.48 516 32.99
------ ------ ------ ------ ------ ------
Total allowance
for loan losses.................. $1,717 100.00% $1,885 100.00% $1,564 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
------------------------------------------------------------
1995 Percent 1994 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........................ $ 413 34.42% 80.81% $ 383 30.99% 77.63%
Commercial real estate............. 190 15.83 14.56 171 13.84 15.74
Construction and land development.. 141 11.75 3.47 223 18.04 5.78
------ ------ ------ ------ ------ ------
Total mortgage loans............. 744 62.00 98.84 777 62.87 99.15
Commercial loans..................... 1 0.08 0.27 1 0.08 0.29
Consumer loans....................... 6 0.50 0.89 2 0.16 0.56
------ ------ ------ ------ ------ ------
751 62.58 100.00% 780 63.11 100.00%
====== ======
Unallocated.......................... 449 37.42 456 36.89
------ ------ ------ ------
Total allowance
for loan losses.................. $1,200 100.00% $1,236 100.00%
====== ====== ====== ======
</TABLE>
16
<PAGE>
Real Estate Owned. At December 31, 1998, the Bank had $582,000 million of
real estate owned consisting of 6 properties, 5 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
The Company can invest in common and preferred stocks, limited partnerships
and all investments the Bank is permitted to invest in. Anything other than
that requires the Board of Director's approval. 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. 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 December 31, 1998, the Company had $155.5 million in securities,
consisting primarily of mortgage-backed securities, U.S. Government and agency
obligations, trust preferred securities and municipal obligations. SFAS No. 115
requires the Company to designate its securities as held-to-maturity, available-
for-sale or trading depending on the Company's intent regarding its investments.
The Company does not currently maintain a trading portfolio of securities. At
December 31, 1998, all of the Company's mortgage-backed securities were
classified as held-to-maturity. Also at that date, 18.3% of the Company's
investment securities were classified as available-for-sale and 81.7% were
classified as held-to-maturity. Of the Company's total investment securities and
mortgage-backed securities portfolio, the Company's securities classified as
held-to-maturity had an aggregate market value of $148.4 million and an
amortized cost of $147.2 million. The Company's securities classified as
available-for-sale had an aggregate market value of $8.3 million and an
amortized cost of $8.0 million at December 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 December 31, 1998, mortgage-backed
securities totalled $110.4 million, or 33.6% of total assets and 35.0% of total
17
<PAGE>
interest-earning assets, and all were classified as held-to-maturity. At
December 31, 1998, 64.3% of the mortgage-backed securities were adjustable-rate
and 35.7% were fixed-rate. The mortgage-backed securities portfolio had coupon
rates ranging from 5.00% to 15.00% and had a weighted average yield of 6.63% at
December 31, 1998. The estimated fair value of the Bank's mortgage-backed
securities held to maturity at December 31, 1998, was $111.5 million, which is
$1.1 million more than the amortized cost of $110.4 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 loan servicing and
payment guarantees. 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 $110.4 million mortgage-backed securities portfolio at December 31, 1998,
$817,000 with a weighted average yield of 7.79% had contractual maturities
within five years and $109.6 million with a weighted average yield of 6.62% 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 December 31, 1998, the U.S. Government and Agency securities
portfolio totalled $33.9 million, or 10.3% of total assets, $25.6 million of
which were classified as held-to-maturity. In addition, the Bank held $388,000
in obligations of a New Jersey municipal subdivision.
Trust Preferred Securities. At December 31, 1998, the investment portfolio
included $10.9 million, or 3.3% of total assets, in trust preferred securities,
all of which were purchased in 1998. Trust preferred securities are non-
perpetual cumulative preferred stock issued by a wholly owned subsidiary of a
bank and are classified as debt securities under generally accepted accounting
principles. Securities of this nature are permissible investments for banks and
thrifts provided they are of investment grade quality and are rated as
18
<PAGE>
such by any of the top rating services. Before purchasing these investments, the
Bank researched extensively the permissibility and suitability of these
investments and whether they had a place on the balance sheet of the Bank. The
Bank's policy as approved by the Board of Directors allows for the purchase of
investments which are considered investment grade and are permissible
investments under OTS regulations. Securities considered investment grade must
be rated in on of the four highest categories by a nationally recognized
statistical rating agency. Additionally, the Board's policy limits these type of
investments to a maximum aggregate dollar amount to $10,000,000. The Bank's
conclusion was that these investments had a place on the balance sheet and over
a period of time $10.0 million of trust preferred security investments in five
of the most well known large commercial banks in the eastern United States was
made. In addition to such securities owned by the Bank, the Company owns one
trust preferred security which is carried at $907,000.
The $10.9 million in trust preferred securities is a combination of $7.0
million in floating rate (spread to Libor) investments and $3.9 million in fixed
rate investments. The adjustable investments offer quarterly interest
adjustments, uncapped coupons and call protection unavailable in most other
types of adjustable investments. The $3.9 million in fixed rate investments
offer yield for the balance sheet and presented a cost of funds spread which was
unavailable in other types of alternative investments. These investments
present the normal type of risk to the Company and the Bank that is associated
with other forms of marketable debt securities. These include credit risk,
which is associated with the underlying creditworthiness of the issuer,
liquidity risk, which is associated with the ability to dispose of a security
in a reasonable time period at a reasonable price, and call risk, which is
associated with these securities having call provisions after 10 years.
The following table sets forth certain information regarding the amortized
cost and fair value of securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ------- --------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available-for-sale(1):
U.S. Government obligations................. $ 7,983 $ 8,282 $ 6,980 $ 7,081 $ -- $ --
Obligations of states and
municipal subdivisions..................... -- -- -- -- 115 120
Mutual fund................................. -- -- -- -- 1,554 1,527
------- ------- ------- ------- ------- -------
Total securities available-for-sale........ 7,983 8,282 6,980 7,081 1,669 1,647
------- ------- ------- ------- ------- -------
Investment securities held-to-maturity (1):
U.S. Government and
Agency obligations......................... 25,582 25,884 22,929 23,339 22,476 22,766
Trust preferred securities.................. 10,903 10,619 -- -- -- --
Obligations of states and
municipal subdivisions.................... 388 388 -- -- -- --
------- ------- ------- ------- ------- -------
36,873 36,891 22,929 23,339 22,476 22,766
------- ------- ------- ------- ------- -------
Federal Home Loan Bank of
New York stock (2).......................... 2,607 2,607 2,184 2,184 1,670 1,670
------- ------- ------- ------- ------- -------
Total...................................... $47,463 $47,780 $32,093 $32,604 $25,815 $26,083
======= ======= ======= ======= ======= =======
</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.
The following table sets forth investment securities activities for the
periods indicated.
19
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Investment securities:
Investment securities, beginning of period(1).. $30,009 $ 24,124 $20,414
------- -------- -------
Purchases:
Investment securities--held-to-maturity..... 23,640 10,400 10,998
Investment securities--available-for-sale... 1,000 7,034 88
Calls:
Investment securities--held-to-maturity..... (7,740) (10,000) (5,000)
Investment securities--available-for-sale... -- -- --
Maturities:
Investment securities--held-to-maturity..... (2,150) -- (2,000)
Investment securities--available-for-sale... -- (115) (192)
Sales of securities available-for-sale......... -- (1,608) (100)
Increase (decrease) in net premium............. 199 52 (2)
Increase (decrease) in unrealized gains........ 198 122 (82)
------- -------- -------
Net increase in investment securities....... 15,147 5,885 3,710
------- -------- -------
Investment securities, end of period........... $45,156 $ 30,009 $24,124
======= ======== =======
</TABLE>
- - --------------
(1) Includes investment securities available-for-sale.
20
<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 December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
Amortized of Fair Amortized of Fair Amortized of Fair
Cost Total(1) Value Cost Total(1) Value Cost Total(1) Value
----------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
By Issuer:
GNMA..................... $ 58,816 53.29% $ 59,500 $ 78,657 60.42% $ 79,775 $ 65,996 58.27% $ 67,095
FHLMC.................... 26,699 24.19 27,019 26,551 20.40 26,749 32,041 28.29 32,023
FNMA..................... 20,101 18.21 20,267 24,959 19.17 25,150 15,204 13.43 15,227
Other.................... 4,760 4.31 4,727 7 0.01 7 13 0.01 13
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total mortgage-backed
securities (1)(2).. $110,376 100.00% $111,513 $130,174 100.00% $131,681 $113,254 100.00% $114,358
======== ====== ======== ======== ====== ======== ======== ====== ========
By Coupon Type:
Adjustable-rate.......... $ 70,919 64.25% $ 71,390 $ 82,938 63.71% $ 83,740 $ 62,849 55.49% $ 63,693
Fixed-rate............... 39,457 35.75 40,123 47,236 36.29 47,941 50,405 44.51 50,665
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total mortgage-backed
securities (1)(2).. $110,376 100.00% $111,513 $130,174 100.00% $131,681 $113,254 100.00% $114,358
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
- - -----------------
(1) Based on amortized cost.
(2) Includes net unamortized premiums of $206, $243 and $193 at December 31,
1998, 1997 and 1996, respectively.
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
For the Years
Ended December 31,
-------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Beginning balance............................. $130,174 $113,254 $100,031
Purchases.................................... 21,892 37,026 30,570
Principal repayments......................... (41,587) (20,084) (17,384)
Net amortization and accretion of discounts
and premiums............................... (103) (22) 37
-------- -------- --------
Ending balance................................ $110,376 $130,174 $113,254
======== ======== ========
</TABLE>
21
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of investment securities
available-for-sale and held-to-maturity and mortgage-backed securities held-to-
maturity as of December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years Total
------------------ ------------------ ------------------ ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available-for-sale:
U.S. Treasury and
Government agency
obligations............. $ -- --% $7,283 5.92% $ -- --% $ 999 7.01% $ 8,282 6.05%
====== ====== ======= ======== ========
Investment securities
held-to-maturity:
U.S. Treasury and
Government agency
obligations............. $1,000 6.39 $2,000 6.10 $14,000 7.04 $ 8,582 7.08 $ 25,582 6.95
Municipal obligations...... 150 3.65 -- -- -- -- 238 4.46 388 4.15
Trust preferred
securities................ -- -- -- -- -- -- 10,903 6.65 10,903 6.65
------ ------ ------- -------- --------
Total investment
securities held
to maturity............ $1,150 6.03 $2,000 6.10 $14,000 7.04 $ 19,723 6.77 $ 36,873 6.83
====== ====== ======= ======== ========
Mortgage-backed securities
held-to-maturity:
Adjustable-rate:
GNMA..................... $ -- -- $ -- -- -- -- $ 48,833 6.44 $ 48,833 6.44
FHLMC.................... -- -- -- -- -- -- 8,941 5.95 8,941 5.95
FNMA..................... -- -- -- -- -- -- 13,145 6.27 13,145 6.27
------ ------ ------- -------- --------
Total................. -- -- -- -- -- -- 70,919 6.34 70,919 6.34
------ ------ ------- -------- --------
Fixed-rate:
GNMA..................... 3 12.00 4 8.00 3,429 7.60 6,547 7.48 9,983 7.52
FHLMC.................... 394 8.00 118 9.00 3,400 6.61 13,846 7.11 17,758 7.05
FNMA..................... 298 7.00 -- -- 717 7.00 5,941 7.09 6,956 7.08
Other.................... -- -- -- -- -- -- 4,760 6.76 4,760 6.76
------ ------ ------- -------- --------
Total................. 695 7.58 122 8.97 7,546 7.10 31,094 7.14 39,457 7.14
------ ------ ------- -------- --------
Total mortgage-backed
securities
held-to-maturity............ $ 695 7.58 $ 122 8.97 $ 7,546 7.10 $102,013 6.58 $110,376 6.63
====== ====== ======= ======== ========
</TABLE>
22
<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 year ended December 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 December
31, 1998, 83.8% 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 Years Ended December
31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Beginning balance $238,192 $179,946 $178,392
-------- -------- --------
Purchase of deposits from another -- 51,007 --
institution
Net deposits (withdrawals) (9,626) (850) (5,595)
Interest credited 9,747 8,089 7,149
-------- -------- --------
Increase in deposit accounts 121 58,246 1,554
-------- -------- --------
Ending balance $238,313 $238,192 $179,946
======== ======== ========
</TABLE>
At December 31, 1998, the Bank had $17.7 million in certificate accounts in
amounts of $100,000 or more maturing as follows.
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
- - --------------- --------- ---------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 5,655 5.51%
Over 3 through 6 months 3,647 5.22
Over 6 through 12 months 5,549 5.71
Over 12 months 2,805 5.67
------- ----
Total $17,656 5.54%
======= ====
</TABLE>
23
<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 Years Ended December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
---------- --------- -------- --------- --------- -------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts.............. $ 33,631 14.10% 1.01% $ 24,863 12.60% 1.18% $ 21,679 12.18% 1.24%
Savings and Club accounts.... 62,120 26.05 2.69 53,221 26.97 2.55 51,138 28.74 2.50
Certificates of deposit...... 142,714 59.85 5.42 119,272 60.43 5.40 105,141 59.08 5.33
-------- ------ -------- ------ -------- ------
Total................. $238,465 100.00% 4.09% $197,356 100.00% 4.10% $177,958 100.00% 4.02%
======== ====== ======== ====== ======== ======
Certificate accounts(1):
Less than six months...... $ 70,208 49.74% 5.15% $ 70,186 49.32% 5.24% $ 51,854 48.17% 5.08%
Over six through 12 months 48,109 34.08 5.32 44,047 30.95 5.59 34,720 32.25 5.45
Over 12 months through 36 19,572 13.86 5.46 25,309 17.78 5.96 16,417 15.25 5.54
months...................
Over 36 months............ 3,280 2.32 5.75 2,782 1.95 6.96 4,656 4.33 6.48
-------- ------ -------- ------ -------- ------
Total certificate
accounts............ $141,169 100.00% 5.26 $142,324 100.00% 5.51% $107,647 100.00% 5.33%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Based on remaining maturity of certificates calculated as of the end of the
period.
24
<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 December 31, 1998.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1998 At December 31,
-------------------------------------------------------------- -------------------------------
Two to Three to Four to After
Less than One to Three Four Five Five
One Year Two years years years years Years 1998 1997 1996
------------ ---------- -------- -------- ------- ------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
to 4.00%.................... $ 4,811 $ 40 $ -- $ -- $ -- $ -- $ 4,851 $ 2,538 $ 11,101
4.01 to 5.00%.............. 39,298 5,243 822 9 113 -- 45,485 33,593 21,836
5.01 to 6.00%.............. 66,573 6,549 1,739 1,356 1,198 314 77,729 88,877 60,352
6.01 to 7.00%.............. 5,667 4,247 537 271 19 -- 10,741 14,451 11,851
7.01 to 8.00%.............. 1,734 395 -- -- -- -- 2,129 2,069 1,486
Over 9.00%................. -- -- -- -- -- -- -- 536 847
-------- ------- ------ ------ ------ ------ -------- -------- --------
$118,083 $16,474 $3,098 $1,636 $1,330 $314 $140,935 142,064 107,473
======== ======= ====== ====== ====== ======
Accrued interest payable................................................................ 234 260 174
-------- -------- --------
Total.................................................................................. $141,169 $142,324 $107,647
======== ======== ========
</TABLE>
25
<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 December 31, 1998, the Bank had $42.0 million in
outstanding FHLB borrowings, compared to $30.3 million at December 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 Years
Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
(Dollars in thousands)
Average balance outstanding............ $42,364 $26,223 $18,092
Maximum amount outstanding at any
month-end during the period........ 52,145 43,675 23,650
Balance outstanding at end of period... 42,010 30,300 23,650
Weighted average interest rate
during the period.................... 5.83% 5.97% 6.36%
Weighted average interest rate at
end of period........................ 5.69% 6.08% 6.20%
</TABLE>
Subsidiary Activities
The Corporation is the parent corporation of one wholly owned subsidiary,
the Bank. In addition, the Bank is the parent corporation of one wholly owned
subsidiary corporation, West Essex Insurance Agency ("WEIA"). 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 $165,000 for the year ended December 31, 1998. 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.
Personnel
As of December 31, 1998, the Bank had 49 authorized full-time employee
positions and 6 authorized part-time employee positions. The employees are not
represented by a collective bargaining unit and the Association considers its
relationship with its employees to be good.
26
<PAGE>
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 the
Company, the MHC and the Bank and their operations. The MHC, as a federal mutual
holding company and the Company, 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.
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 December 31, 1998, the Bank's regulatory limit on loans-to-one
borrower was $5.2 million. At December 31, 1998, the Bank's largest aggregate
amount of loans-to-one borrower was $2.0 million, consisting of a $1.0 million
construction loan and a $980,000 commercial real estate loan.
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 December 31, 1998, the Bank
maintained 81.0% 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."
27
<PAGE>
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998
established three tiers of institutions based primarily on an institution's
capital level. An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier 1 Association") and had not been
advised by the OTS that it was in need of more than normal supervision, could,
after prior notice but without obtaining approval of the OTS, make capital
distributions during the 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 the excess capital over its capital requirements at the beginning of
the calendar year or (ii) 75% of its net income for the previous four quarters.
Any additional capital distributions required prior regulatory approval. At
December 31, 1998, the Bank was a Tier 1 Association. Effective April 1, 1999,
the OTS's capital distribution regulation will change. Under the new
regulation, an application to and the prior approval of the OTS will be required
prior to any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution. In the event the Bank's capital fell below its
regulatory 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.
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 December 31,
1998 was 7.38%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
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, 1998 totalled $76,000.
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.
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
28
<PAGE>
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 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 minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution
29
<PAGE>
rating system), and, together with the risk-based capital standard itself, a 4%
Tier 1 risk-based capital standard. The OTS regulations also require that, in
meeting the tangible, leverage and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, the Bank met each of
its capital requirements.
The following table presents the Bank's capital position at December 31,
1998.
<TABLE>
<CAPTION>
Excess Capital
---------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible.......... $33,000 $ 4,743 $28,257 10.44% 1.50%
Core (Leverage)... 33,000 12,649 20,351 10.44 4.00%
Risk-based........ 34,500 9,580 24,920 28.81 8.00%
</TABLE>
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
30
<PAGE>
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
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The Bank's assessment rate for fiscal 1998 was zero basis points and no
premium was paid for this period. Payments toward the FICO bonds amounted to
$136,000. The FDIC has authority to increase insurance assessments. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Association.
Management cannot predict what insurance assessment rates will be in the future.
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.
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."
31
<PAGE>
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 December 31, 1998 of
$2.6 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 December 31, 1998, the Bank had $42.0
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, 1998, 1997 and
1996, dividends from the FHLB to the Bank amounted to approximately $180,000,
$126,000 and $107,000, 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.
Holding Company Regulation
General. The Company is a federal savings and loan holding company within
the meaning of the HOLA. As such, the Company 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 the
Company 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 the Company.
Restrictions Applicable to Mutual Holding Companies. Pursuant to Section
10(o) of the HOLA and the Regulations, a mutual holding company, such as the
MHC, 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
32
<PAGE>
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.
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.
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.
Stock Holding Company Subsidiary Regulation. The OTS has adopted
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 rules, the stock holding company subsidiary holds all the
shares of the mutual holding company's savings association subsidiary and issues
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. Finally, OTS regulations maintain that the
stock holding company subsidiary must be federally chartered for supervisory
controls.
33
<PAGE>
Thrift Rechartering
Legislation enacted in 1996 provided that hte BIF And SAIF were to have
merged on January 1, 1999 if there were no more savings associations as of that
date. Various proposals to eliminate the federal savings association charter,
create a uniform financial institutions charter, abolish the OTS and restrict
savings and loan holding company activities have been introduced in Congress.
The Bank is unable to predict whether such legislation will be enacted or the
extent to which the legislation would restrict or disrupt its operations.
34
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Bank, the Company and the MHC 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, the Company and the MHC. 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 the Company 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 the Company 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
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.
35
<PAGE>
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. The Company 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, the Company and the MHC file 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). For New Jersey tax purposes, regular corporations are presently
taxed at a rate equal to 9% of taxable income.
Additional Item. Executive Officers of the Registrant.
- - ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
<TABLE>
<CAPTION>
Name Age at 12/31/98 Position
- - ------------------- ---------------- ----------------------------------------------
<S> <C> <C>
Dennis A. Petrello 47 Executive Vice President and Chief Financial
Officer
Charles E. Filippo 58 Executive Vice President of the Company and
the Bank and Chief Lending Officer of the
Bank
Craig L. Montanaro 32 Senior Vice President, Secretary and Treasurer
</TABLE>
36
<PAGE>
Item 2. 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 Company.
<TABLE>
<CAPTION>
Original Net Book Value
Year of Property or
Leased Leased Leasehold
or or Improvements at
Location Owned Acquired December 31, 1998
- - -------- ------ -------- -----------------
(In thousands)
<S> <C> <C> <C>
Administrative/Corporate/
Branch Office:
417 Bloomfield Avenue Owned 1962 $387
Caldwell, NJ 07006
Branch Offices:
216 Main Street Owned 1987 148
West Orange, NJ 07052
487 Pleasant Valley Way Owned 1987 226
West Orange, NJ 07052
574 Franklin Avenue Leased 1978 2
Franklin Lakes, NJ 07417
653 Westwood Avenue Owned 1997 478
River Vale, NJ 07675
267 Changebridge Road Owned 1974 245
Pine Brook, NJ 07058
207 Old Tappan Road Owned 1997 487
Old Tappan, NJ 07675
119 Paris Avenue Owned 1997 321
Northvale, NJ 07647
</TABLE>
Item 3. Legal Proceedings.
- - ---------------------------
The Company and the Bank are parties 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. Currently, the plaintiffs have four loans with the Bank
totalling $390,901 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 Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- - -------------------------------------------------------------
None.
37
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- - -------------------------------------------------------------------------------
West Essex Bancorp, Inc. common stock is traded on the Nasdaq National
Market under the symbol "WEBK." The stock began trading on October 2, 1998.
The high and low sales price for the quarter ended December 31, 1998 were $9.25
and $10.125, respectively.
As of December 31, 1998, the Company had approximately 614 stockholders of
record.
Item 6. Selected Financial Data.
- - ---------------------------------
Information regarding selected financial data appears on pages 3 and 4 of
the 1998 Annual Report under the caption "Selected Consolidated Financial and
Other Data" and is incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations.
- - --------------
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 5 through 20 of the 1998
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- - ---------------------------------------------------------------------
Information regarding qualitative and quantitative disclosures about market
risk are contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Management of Interest
Rate Risk and Market Risk Analysis" in the 1998 Annual Report and is
incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
- - -----------------------------------------------------
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 21 through 58 of the 1998 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- - ------------------------------------------------------------------------
Financial Disclosure.
- - ---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- - -------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 21, 1999,
at pages 4 and 5.
38
<PAGE>
Item 11. Executive Compensation.
- - ---------------------------------
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 21, 1999,
at pages 6 through 13 (excluding the Executive Compensation Committee Report and
Stock Performance Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- - -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 21, 1999,
at pages 3 and 5.
Item 13. Certain Relationships and Related Transactions.
- - ---------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on
April 21, 1999, at pages 13 through 14.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- - ---------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................... 21
Consolidated Statements of Financial Condition for the Years Ended
December 31, 1998 and 1997......................................... 22
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and 1996....................... 23
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996................................... 24
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996............... 25
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996....................... 26
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996..................... 28
</TABLE>
39
<PAGE>
The remaining information appearing in the 1998 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
<S> <C>
(a) The following exhibits are filed as part of this report.
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.*
10.1 West Essex Bank Employee Stock Ownership Plan
10.2 West Essex Bank Employee Stock Ownership Plan Trust
10.3 ESOP Loan Commitment Letter
10.4 West Essex Bank Employee Stock Ownership Trust Loan and Security Agreement
10.5 Employment Agreement between West Essex Bank and Leopold W. Montanaro
10.6 Employment Agreement between West Essex Bancorp, Inc. and Leopold W.
Montanaro
10.7 Three Year Change in Control Agreement between West Essex Bank and
Dennis A. Petrello
10.8 Three Year Change in Control Agrrement between West Essex Bank and
Charles E. Filippo
10.9 Three Year Change in Control Agreement bewteen West Essex Bank and Craig
L. Montanaro
10.10 Three Year Change in Control Agreement between West Essex Bancorp,
Inc. and Dennis A. Petrello
10.11 Three Year Change in Control Agreement between West Essex Bancorp, Inc. and
Charles E. Filippo
10.12 Three Year Change in Control Agreement between West Essex Bancorp, Inc.
and Craig L. Montanaro
10.13 West Essex Bank Employee Severance Compensation Plan
10.14 West Essex Bank Supplemental Executive Retirement Plan
10.15 West Essex Bank Management Supplemental Executive Retirement Plan
10.16 Restated Executive Supplemental Retirement Income Agreement for Leopold
W. Montanaro*
10.17 Restated Executive Supplemental Retirement Income Agreement for Charles
E. Filippo*
11.0 Computation of Earnings Per Share
13.0 Portions of the 1998 Annual Report to Shareholders
21.0 Subsidiary information is incorporated herein by reference to "Part I-
Business-Subsidiary Activities"
23.0 Consent of Radics & Co., LLC
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
__________________________________
</TABLE>
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, filed on June 12, 1998, as
amended, Registration No. 333-56729.
40
<PAGE>
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WEST ESSEX BANCORP, INC.
By: /s/ Leopold W. Montanaro
---------------------------------------
Leopold W. Montanaro
President, Chief Executive Officer and
Director
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- - ---- ----- ----
/s/ Leopold W. Montanaro President, Chief Executive March 30, 1999
- - ------------------------ Officer and Director
Leopold W. Montanaro (principal executive officer)
/s/ Dennis A. Petrello Executive Vice President March 30, 1999
- - ------------------------ and Chief Financial Officer
Dennis A. Petrello (principal accounting and
financial officer)
/s/ William J. Foody Chairman of the Board March 30, 1999
- - -------------------------
William J. Foody
/s/ David F. Brandley Director March 30, 1999
- - -------------------------
David F. Brandley
/s/ Everett N. Leonard Director March 30, 1999
- - -------------------------
Everett N. Leonard
/s/ James P. Vreeland Director March 30, 1999
- - -------------------------
James P. Vreeland
/s/ John J. Burke Director March 30, 1999
- - -------------------------
John J. Burke
41
<PAGE>
West Essex Bank
Employee Stock Ownership Plan
Effective January 1, 1998
<PAGE>
West Essex Bank
Employee Stock Ownership Plan
Certification
I, Leopold W. Montanaro, President and Chief Executive Officer of, West
Essex Bank, a federally-chartered stock savings bank, hereby certify that the
attached West Essex Bank Employee Stock Ownership Plan, effective January 1,
1998, was adopted at a duly held meeting of the Board of Directors of the Bank.
ATTEST: West Essex Bank
/s/ Craig L. Montanaro By:/s/ Leopold W. Montanaro
- - ------------------------ --------------------------------
Craig L. Montanaro Leopold W. Montanaro
Secretary President and Chief Executive
<PAGE>
West Essex Bank
Employee Stock Ownership Plan
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Section 1 - Introduction....................................... 1
Section 2 - Definitions........................................ 2
Section 3 - Eligibility and Participation...................... 9
Section 4 - Contributions...................................... 11
Section 5 - Allocation and Valuation........................... 14
Section 6 - Vesting and Forfeitures............................ 21
Section 7 - Distributions...................................... 24
Section 8 - Voting of Company Stock and Tender Offers.......... 29
Section 9 - The Committee and Plan Administration.............. 30
Section 10 - Rules Governing Benefit Claims.................... 34
Section 11 - The Trust......................................... 36
Section 12 - Adoption, Amendment and Termination............... 38
Section 13 - General Provisions................................ 40
Section 14 - Top-Heavy Provisions.............................. 42
</TABLE>
<PAGE>
West Essex Bank
Employee Stock Ownership Plan
Section 1
Introduction
Section 1.01 Nature of the Plan.
------------------
Effective as of January 1, 1998, (the "Effective Date"),West Essex Bank, a
federally-chartered savings bank (the "Bank"), hereby establishes the West Essex
Bank Employee Stock Ownership Plan (the "Plan") to enable Eligible Employees (as
defined in Section 2.01(p) of the Plan) to acquire stock ownership interests in
West Essex Bancorp, Inc., the holding company of the Bank (the "Company"). The
Bank intends this Plan to be a tax-qualified stock bonus plan under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and an
employee stock ownership plan within the meaning of Section 407(d)(6) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Sections 409 and 4975(e)(7) of the Code. The Plan is designed to invest
primarily in the common stock of the Company, which stock constitutes
"qualifying employer securities" within the meaning of Section 407(d)(5) of
ERISA and Sections 409(l) and 4975(e)(8) of the Code. Accordingly, the Plan and
Trust Agreement (as defined in Section 2.01(oo) of the Plan) shall be
interpreted and applied in a manner consistent with the Bank's intent for it to
be a tax-qualified plan designed to invest primarily in qualifying employer
securities.
Section 1.02 Employers and Affiliates.
------------------------
The Bank and each of its Affiliates (as defined in Section 2.01(c) of the Plan)
which, with the consent of the Bank, adopt the Plan pursuant to the provisions
of Section 12.01 of the Plan are collectively referred to as the "Employers" and
individually as an "Employer." The Plan shall be treated as a single plan with
respect to all participating Employers.
<PAGE>
Section 2
Definitions
Section 2.01 Definitions.
-----------
In this Plan, whenever the context so indicates, the singular or the plural
number and the masculine or feminine gender shall be deemed to include the
other, the terms "he," "his," and "him," shall refer to a Participant or
Beneficiary, as the case may be, and, except as otherwise provided, or unless
the context otherwise requires, the capitalized terms shall have the following
meanings:
(a) "Account" or "Accounts" mean a Participant's or Beneficiary's Company Stock
Account and/or his Other Investments Account, as the context so requires.
(b) "Acquisition Loan" means a loan (or other extension of credit, including an
installment obligation to a "party in interest" (as defined in Section 3(14) of
ERISA) incurred by the Trustee in connection with the purchase of Company Stock.
(c) "Affiliate" means any corporation, trade or business, which, at the time of
reference, is together with the Bank, a member of a controlled group of
corporations, a group of trades or businesses (whether or not incorporated)
under common control, or an affiliated service group, as described in Sections
414(b), 414(c), and 414(m) of the Code, respectively, or any other organization
treated as a single employer with the Bank under Section 414(o) of the Code;
provided, however, that, where the context so requires, the term "Affiliate"
shall be construed to give full effect to the provisions of Sections 409(l)(4)
and 415(h) of the Code.
(d) "Bank" means West Essex Bank, and any entity which succeeds to the business
of West Essex Bank and which adopts this Plan in accordance with the provisions
of Section 12.02 of the Plan or by written agreement assuming the obligations
under the Plan.
(e) "Beneficiary" means the person(s) entitled to receive benefits under the
Plan following a Participant's death, pursuant to Section 7.03 of the Plan.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means the individual(s) responsible for the administration of
the Plan in accordance with Section 9 of the Plan.
(h) "Company" means West Essex Bancorp, Inc. and any entity which succeeds to
the business of West Essex Bancorp, Inc.
2
<PAGE>
(i) "Company Stock" means shares of the voting common stock or preferred stock,
meeting the requirements of Section 409 of the Code and Section 407(d)(5) of
ERISA, issued by the Bank or its Affiliates.
(j) "Company Stock Account" means the account established and maintained in the
name of each Participant or Beneficiary to reflect his share of the Trust Fund
invested in Company Stock.
(k) "Compensation" means an Employee's wages, salary, fees and other amounts
defined as compensation in Section 415(c)(3) of the Code and Income Tax
Regulations Sections 1.415-2(d)(2) and (3), received for personal services
actually rendered in the course of employment with the employer for the calendar
year, prior to any reduction pursuant to a Compensation Reduction Agreement.
Compensation shall include commissions, overtime, bonuses, wage continuation
payments to an Employee absent due to illness or disability of a short-term
nature, amounts paid or reimbursed by the Employer for Employee moving expenses
(to the extent not deductible by the Employee), and the value of any
nonqualified stock option granted to an Employee by the Employer (to the extent
includable in gross income for the year granted).
Compensation does not include contributions made by the Employer to any other
pension, deferred compensation, welfare or other employee benefit plan, amounts
realized from the exercise of a nonqualified stock option or the sale of a
qualified stock option, and other amounts which receive special tax benefits.
A Participant's Compensation shall not exceed $150,000 (as periodically adjusted
pursuant to Section 401(a)(17) of the Code (the "Compensation Limit")). If a
Participant's Compensation is determined on a basis of a period of less than
twelve (12) calendar months, then the Compensation Limit for such Participant
shall be the Compensation Limit in effect for the Plan Year in which the period
begins multiplied by a ratio obtained by dividing the number of full months in
the period by twelve (12).
(l) "Conversion Date" means the date the Company first issues common stock
pursuant to its initial public offering.
(m) "Disability" means a physical or mental condition, which renders the
Participant eligible for benefits under the Employer's long-term disability
plan.
(n) "Effective Date" means January 1, 1998.
(o) "Eligible Employee" means any Employee who is not precluded from
participating in the Plan by reason of the provisions of Section 3.02 of the
Plan.
(p) "Employee" means any person who is actually performing services for the Bank
or an Affiliate in a common-law, employer-employee relationship as determined
under Sections 31.3121(d)-1, 31.3306(i)-1, or 31.3401(c)-1 of the Treasury
Regulations and any "leased employee" (within the meaning of Section 414(n) of
the Code).
3
<PAGE>
(q) "Employer" or "Employers" means the Bank and its Affiliates, which adopt the
Plan in accordance with the provisions of Section 12.01 of the Plan, and any
entity which succeeds to the business of the Bank or its Affiliates and which
adopts the Plan in accordance with the provisions of Section 12.02 of the Plan
or by written agreement assumes the obligations under the Plan.
(r) "Entry Date" means the first day of each January and July coinciding with or
next following the date the Employee satisfies the eligibility requirements
under Section 3 of the Plan.
(s) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(t) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(u) "Financed Shares" means shares of Company Stock acquired by the Trustee with
the proceeds of an Acquisition Loan, which shall constitute "qualifying employer
securities" under Section 409(l) of the Code and any shares of Company Stock
received upon conversion or exchange of such shares.
(v) "Highly Compensated Employee" means an Employee who, for a particular Plan
Year, satisfies one of the following conditions:
(i) was a "5-percent owner" (as defined in Section 414(q)(2) of the Code)
during the year or the preceding year, or
(ii) for the preceding year,
(A) had "compensation" (as defined in Section 414(q)(4) of the Code)
from the Bank and its Affiliates exceeding $80,000 (as periodically
adjusted pursuant to Section 414(q)(1) of the Code), and
(B) if the Employer elects, was in the "top-paid group" (as defined in
Section 414(q)(3) of the Code) of Employees for such preceding year.
(w) "Hours of Service" means each hour for which an Employee is paid or entitled
to be paid for performing duties for the Employer.
For purposes of determining whether an Employee has incurred a One Year Break in
Service and for vesting and participation purposes, if an Employee begins a
maternity/paternity leave of absence described in Section 411(a)(6)(E)(i) of the
Code, his Hours of Service shall include the Hours of Service that would have
been credited to him if he had not been so absent (or eight (8) Hours of Service
for each day of such absence if the actual Hours of Service cannot be
determined). An
4
<PAGE>
Employee shall be credited for such Hours of Service (up to a maximum of 501
Hours of Service) in the Plan Year in which his absence begins (if such
crediting will prevent him from incurring a One Year Break in Service in such
Plan Year) or, in all other cases, in the following Plan Year. An absence from
employment for maternity or paternity reasons means an absence:
(i) by reason of pregnancy of the Employee,
(ii) by reason of a birth of a child of the Employee,
(iii) by reason of the placement of a child with the Employee in connection
with the adoption of such child by such Employee, or
(iv) for purposes of caring for such child for a period beginning
immediately following such birth or placement.
(x) "Loan Suspense Account" means that portion Trust Fund consisting of Company
Stock acquired with an Acquisition Loan which has not yet been allocated to the
Participants' Accounts.
(y) "Matching Contribution" means any contribution made to the Plan pursuant to
the provisions of Section 4.01(c) of the Plan.
(aa) "Normal Retirement Age" means the date the Employee attains age sixty-five
(65).
(bb) "Normal Retirement Date" means the first day of the month coincident with
or next following the Participant's attainment of Normal Retirement Age.
(cc) "One Year Period of Severance" means a twelve (12) consecutive month period
following an Employee's Termination of Service with the Employer during which
the Employee did not perform an Hour of Service. Notwithstanding the foregoing,
if an Employee is absent from employment for maternity or paternity reasons,
such absence during the twenty-four (24) month period commencing on the first
date of such absence shall not constitute a One Year Period of Severance. An
absence from employment for maternity or paternity reasons means an absence:
(i) by reason of pregnancy of the Employee,
(ii) by reason of a birth of a child of the Employee,
(iii) by reason of the placement of a child with the Employee in connection
with the adoption of such child by such Employee, or
(iv) for purposes of caring for such child for a period beginning
immediately following such birth or placement.
5
<PAGE>
(dd) "Other Investments Account" means the account established and maintained in
the name of each Participant or Beneficiary to reflect his share of the Trust
Fund, other than Company Stock.
(ee) "Participant" means any Employee who has become a participant in accordance
with Section 3.01 of the Plan or any other person with an Account balance under
the Plan.
(ff) "Period of Service" means a period commencing on the date an Employee first
performs an Hour of Service for the Employer upon initial employment or, if
applicable, upon reemployment, and ending on the date such Employee first incurs
a Termination of Service. Notwithstanding the foregoing, the period between the
first and second anniversary of the first date of a maternity or paternity
absence described under Section 2.01(cc) of the Plan shall not be included in
determining a Period of Service. A period during which an individual was not
employed by the Employer shall nevertheless be deemed to be a Period of Service
if such individual incurred a Termination of Service and:
(i) such Termination of Service was the result of resignation, discharge or
retirement and such individual is reemployed by the Employer within one (1)
year after such Termination of Service; or
(ii) such Termination of Service occurred when the individual was otherwise
absent for less than one (1) year and he was reemployed by the Employer
within one (1) year after the date such absence began.
All Periods of Service not disregarded under Sections 3.04 and 6.03 of the Plan
shall be aggregated. Wherever used in the Plan, a Period of Service means the
quotient obtained by dividing the days in all Periods of Service not disregarded
hereunder by 365 and disregarding any fractional remainder.
(gg) "Plan" means this West Essex Bank Employee Stock Ownership Plan, as amended
from time to time.
(hh) "Plan Year" means the calendar year.
(ii) "Postponed Retirement Date" means the first day of the month coincident
with or next following a Participant's date of actual retirement which occurs
after his Normal Retirement Date.
(jj) "Recognized Absence" means a period for which:
(i) an Employer grants an Employee a leave of absence for a limited period
of time, but only if an Employer grants such leaves of absence on a
nondiscriminatory basis to all Eligible Employees; or
6
<PAGE>
(ii) an Employee is temporarily laid off by an Employer because of a change
in the business conditions of the Employer; or
(iii) an Employee is on active military duty, but only to the extent that
his employment rights are protected by the Military Selective Service Act
of 1967 (38 U.S.C. sec. 2021).
(kk) "Retirement Date" means a Participant's Normal Retirement Date or Postponed
Retirement Date, whichever is applicable.
(ll) "Savings Plan" means the West Essex Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended from time to time.
(mm) "Service" means employment with the Bank or an Affiliate.
(nn) "Termination of Service" means the earlier of (a) the date on which an
Employee's service is terminated by reason of his resignation, retirement,
discharge, death or Disability or (b) the first anniversary of the date on which
such Employee's service is terminated for disability of a short-term nature or
any other reason. Service in the Armed Forces of the United States shall not
constitute a Termination of Service but shall be considered to be a period of
employment by the Employer provided (i) such military service is caused by war
or other emergency or the Employee is required to serve under the laws of
conscription in time of peace, (ii) the Employee returns to employment with the
Employer within six (6) months following discharge from such military service
and (iii) such Employee is reemployed by the Employer at a time when the
Employee had a right to reemployment at his former position or substantially
similar position upon separation from such military duty in accordance with
seniority rights as protected under the laws of the United States. A leave of
absence granted to an Employee by the Employer shall not constitute a
Termination of Service provided that the Participant returns to the active
service of the Employer at the expiration of any such period for which leave has
been granted. Notwithstanding the foregoing, an Employee who is absent from
service with the Employer beyond the first anniversary of the first date of his
absence for maternity or paternity reasons set forth in Section 2.01(cc) of the
Plan shall incur a Termination of Service for purposes of the Plan on the second
anniversary of the date of such absence.
(oo) "Treasury Regulations" means the regulations promulgated by the Department
of Treasury under the Code.
(pp) "Trust" means the West Essex Bank Employee Stock Ownership Plan Trust
created in connection with the establishment of the Plan.
(qq) "Trust Agreement" means the trust agreement establishing the Trust.
7
<PAGE>
(rr) "Trust Fund" means the assets held in the Trust for the benefit of
Participants and their Beneficiaries.
(ss) "Trustee" means the trustee or trustees from time to time in office under
the Trust Agreement.
(tt) "Valuation Date" means the last day of the Plan Year and each other date as
of which the Committee shall determine the investment experience of the Trust
Fund and adjust the Participants' Accounts accordingly.
(uu) "Valuation Period" means the period following a Valuation Date and ending
with the next Valuation Date.
Section 3
Eligibility and Participation
Section 3.01 Initial Participation.
---------------------
(a) Employees Employed as of the Conversion Date. Any Eligible Employee who is
--------------------------------------------
employed by an Employer at any time from the Effective Date to the Conversion
Date shall enter the Plan and become a Participant immediately as of the later
of the Effective Date or the date he first performs an Hour of Service for the
Employer.
(b) Employees Employed After the Conversion Date. An Eligible Employee who
--------------------------------------------
becomes employed by an Employer subsequent to the Conversion Date shall enter
the Plan and become a Participant as of the Entry Date coincident with or next
following the date he satisfies the following requirements:
(i) He has completed a Period of Service of one hundred eighty-two (182)
days; and
(ii) He has attained 21 years of age.
Section 3.02 Certain Employees Ineligible.
----------------------------
The following Employees are ineligible to participate in the Plan:
(a) Employees covered by a collective bargaining agreement between the Employer
and the Employee's collective bargaining representative if:
(i) retirement benefits have been the subject of good faith bargaining
between the Employer and the representative, and
8
<PAGE>
(ii) the collective bargaining agreement does not expressly provide that
Employees of such unit be covered under the Plan;
(b) Employees paid solely on a daily fee, or retainer basis;
(c) Employees who are nonresident aliens and who receive no earned income from
an Employer which constitutes income from sources within the United States;
(d) Employees of an Affiliate that has not adopted the Plan pursuant to Sections
12.01 or 12.02 of the Plan; and
(e) Any "leased employees" (within the meaning of Section 414(n) of the Code).
Section 3.03 Transfer to Eligible Employment.
-------------------------------
If an Employee ineligible to participate in the Plan by reason of Section 3.02
of the Plan transfers to employment as an Eligible Employee, he shall enter the
Plan as of the later of:
(a) the first Entry Date after the date of transfer, or
(b) the first Entry Date on which he could have become a Participant pursuant to
Section 3.01 of the Plan if his prior employment with the Bank or Affiliate had
been as an Eligible Employee.
Section 3.04 Participation After Reemployment and Recognized Absences.
--------------------------------------------------------
(a) If an Employee incurs a One Year Period of Severance prior to satisfying
the eligibility requirements of Section 3.01 of the Plan, such Employee's
service prior to the One Year Period of Severance shall be disregarded and such
Employee must again satisfy the eligibility requirements of Section 3.01(b) of
the Plan as a new Employee.
(b) If an Employee incurs a One Year Period of Severance after satisfying the
eligibility requirements of Section 3.01 of the Plan and such Employee is not
vested in any portion of his Accounts under the Plan and the Employee again
performs an Hour of Service with an Employer, he shall receive credit for
Periods of Service prior to a One Year Period of Severance only if the number of
consecutive One Year Periods of Severance is less than the greater of:
(i) five, or
(ii) the aggregate number of his Periods of Service credited before his One
Year Period of Severance.
9
<PAGE>
If such former Employee's Periods of Service are again credited to the Employee
pursuant to this Section 3.04(b), such former Employee shall be eligible to
participate in the Plan immediately upon his reemployment, provided such
Employee is not excluded from participating in the Plan pursuant to Section 3.02
of the Plan. If such former Employee's Periods of Service prior to his One Year
Period of Severance are not recredited under this Section 3.04(b), such Employee
must satisfy the eligibility requirements of Section 3.01(b) of the Plan as a
new Employee.
(c) If an Employee incurs a One Year Period of Severance after satisfying the
eligibility requirements of Section 3.01 of the Plan and such Employee is vested
in any portion of his Accounts under the Plan and the Employee again performs an
Hour of Service with an Employer, he shall receive credit for Periods of Service
prior to a One Year Period of Severance and shall be eligible to participate in
the Plan immediately upon reemployment, provided such Employee is not excluded
from participating in the Plan pursuant to Section 3.02 of the Plan.
Section 3.05 Participation Not Guarantee of Employment.
-----------------------------------------
Participation in the Plan does not constitute a guarantee or contract of
employment and will not give any Employee the right to be retained in the employ
of the Bank or any of its Affiliates nor any right or claim to any benefit under
the terms of the Plan unless such right or claim has specifically accrued under
the Plan.
10
<PAGE>
Section 4
Contributions
Section 4.01 Employer Contributions.
----------------------
(a) Discretionary Contributions. Each Plan Year, each Employer, in its
discretion, may make a contribution to the Trust. Each Employer making a
contribution for any Plan Year under this Section 4.01(a) will contribute to the
Trustee cash equal to, or Company Stock or other property having an aggregate
fair market value equal to, such amount as the Board of Directors of the
Employer shall determine by resolution. Notwithstanding the Employer's
discretion with respect to the medium of contribution, an Employer shall not
make a contribution in any medium which would make such contribution a
prohibited transaction (for which no exemption is provided) under Section 406 of
ERISA or Section 4975 of the Code.
(b) Employer Contributions for Acquisition Loans. Each Plan Year, the
Employers shall, subject to the provisions of the Bank's "Plan of Conversion"
(as filed with the appropriate governmental agencies in connection with the
Bank's conversion from a mutual to stock form of organization) and any related
regulatory prohibitions, contribute an amount of cash sufficient to enable to
the Trustee to discharge any indebtedness incurred with respect to an
Acquisition Loan pursuant to the terms of the Acquisition Loan. The Employers'
obligation to make contributions under this Section 4.01(b) shall be reduced to
the extent of any investment earnings attributable to such contributions and any
cash dividends paid with respect to Company Stock held by the Trustee in the
Loan Suspense Account. The Employers' obligation to make contributions under
this Section 4.01(b) shall further be reduced to the extent of any cash
contribution made pursuant to the provisions of paragraph (c) of this Section
4.01. If there is more than one Acquisition Loan, the Employers shall designate
the one to which any contribution pursuant to this Section 4.01(b), and, if
applicable paragraph (c) of this Section 4.01, is to be applied.
(c) Employer Matching Contributions under the Savings Plan. For each Plan Year,
each Employer, in its discretion, may make a contribution to the Trust equal to
a percentage of the Employee's voluntary contributions made for the Plan Year
under the Savings Plan. Each Employer making a contribution for any Plan Year
under this Section 4.01(c) shall contribute to the Trustee cash equal to, or
Company Stock or other property having an aggregate fair market value equal to,
such amount as the Board of Directors of the Employer shall determine by
resolution or as shall be set forth in the Savings Plan, as applicable.
Notwithstanding the Employer's discretion with respect to the medium of
contribution, an Employer shall not make a contribution in any medium which
would make such contribution a prohibited transaction (for which no exemption is
provided) under Section 406 of ERISA or Section 4975 of the Code.
11
<PAGE>
Section 4.02 Limitations on Contributions.
----------------------------
In no event shall an Employer's contribution(s) made under Section 4.01 of the
Plan for any Plan Year exceed the lesser of:
(a) The maximum amount deductible under Section 404 of the Code by that Employer
as an expense for Federal income tax purposes; and
(b) The maximum amount which can be credited for that Plan Year in accordance
with the allocation limitation provisions of Section 5.05 of the Plan.
Section 4.03 Acquisition Loans.
-----------------
The Trustee may incur Acquisition Loans from time to time to finance the
acquisition of Company Stock for the Trust or to repay a prior Acquisition Loan.
An Acquisition Loan shall be for a specific term, shall bear a reasonable rate
of interest, and shall not be payable on demand except in the event of default,
and shall be primarily for the benefit of Participants and Beneficiaries of the
Plan. An Acquisition Loan may be secured by a collateral pledge of the Financed
Shares so acquired and any other Plan assets which are permissible security
within the provisions of Section 54.4975-7(b) of the Treasury Regulations. No
other assets of the Plan or Trust may be pledged as collateral for an
Acquisition Loan, and no lender shall have recourse against any other Trust
assets. Any pledge of Financed Shares must provide for the release of shares so
pledged on a basis equal to the principal and interest (or if the requirements
of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the
Employer so elects, principal payments only), paid by the Trustee on the
Acquisition Loan. The released Financed Shares shall be allocated by
Participants' Accounts in accordance with the provisions of Sections 5.04 or
5.09 of the Plan, whichever is applicable. Payment of principal and interest on
any Acquisition Loan shall be made by the Trustee only from the Employer
contributions paid in cash to enable the Trustee to repay such loan in
accordance with Sections 4.01(b) or 4.01(c) of the Plan, from earnings
attributable to such contributions, and any cash dividends received by the
Trustee on Financed Shares acquired with the proceeds of the Acquisition Loan
(including contributions, earnings and dividends received during or prior to the
year of repayment less such payments in prior years), whether or not allocated.
Financed Shares shall initially be credited to the Loan Suspense Account and
shall be transferred for allocation to the Company Stock Account of Participants
only as payments of principal and interest (or, if the requirements of Section
54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so
elects, principal payments only), on the Acquisition Loan are made by the
Trustee. The number of Financed Shares to be released from the Loan Suspense
Account for allocation to Participants' Company Stock Account for each Plan Year
shall be based on the ratio that the payments of principal and interest (or, if
12
<PAGE>
the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are
met and the Employer so elects, principal payments only), on the Acquisition
Loan for that Plan Year bears to the sum of the payments of principal and
interest on the Acquisition Loan for that Plan Year plus the total remaining
payment of principal and interest projected (or, if the requirements of Section
54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so
elects, principal payments only), on the Acquisition Loan over the duration of
the Acquisition Loan repayment period, subject to the provisions of Section 5.05
of the Plan.
Section 4.04. Conditions as to Contributions.
------------------------------
In addition to the provisions of Section 12.03 of the Plan for the return of an
Employer's contributions in connection with a failure of the Plan to qualify
initially under the Code, any amount contributed by an Employer due to a good
faith mistake of fact, or based upon a good faith but erroneous determination of
its deductibility under Section 404 of the Code, shall be returned to the
Employer within one year after the date on which the Employer originally made
such contribution, or within one year after its nondeductibility has been
finally determined. However, the amount to be returned shall be reduced to take
account for any adverse investment experience within the Trust in order that the
balance credited to each Participant's Accounts is not less that it would have
been if the contribution had never been made by the Employer.
Section 4.05 Employee Contributions.
----------------------
Employee contributions are neither required nor permitted under the Plan.
Section 4.06 Rollover Contributions.
----------------------
Rollover contributions of assets from other tax-qualified retirement plans are
not permitted under the Plan.
Section 4.07 Trustee-to-Trustee Transfers.
----------------------------
Trustee-to-trustee transfer of assets from other tax-qualified retirement plans
are not permitted under the Plan.
13
<PAGE>
Section 5
Plan Accounting
Section 5.01 Accounting for Allocations.
--------------------------
The Committee shall establish the Accounts (and sub-accounts, if deemed
necessary) for each Participant, and the accounting procedures for the purpose
of making the allocations to the Participants' Accounts provided for in this
Section 5. The Committee shall maintain adequate records of the cost basis of
shares of Company Stock allocated to each Participant's Company Stock Account.
The Committee also shall keep separate records of Financed Shares attributable
to each Acquisition Loan and of contributions made by the Employers (and any
earnings thereon) made for the purpose of enabling the Trustee to repay any
Acquisition Loan. From time to time, the Committee may modify its accounting
procedures for the purpose of achieving equitable and nondiscriminatory
allocations among the Accounts of Participants, in accordance with the
provisions of this Section 5 and the applicable requirements of the Code and
ERISA. In accordance with Section 9 of the Plan, the Committee may delegate the
responsibility for maintaining Accounts and records.
Section 5.02 Maintenance of Participants' Company Stock Accounts.
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As of each Valuation Date, the Committee shall adjust the Company Stock Account
of each Participant to reflect activity during the Valuation Period as follows:
(a) First, charge to each Participant's Company Stock Account all distributions
and payments made to him that have not been previously charged;
(b) Next, credit to each Participant's Company Stock Account the shares of
Company Stock, if any, that have been purchased with amounts from his Other
Investments Account, and adjust such Other Investments Account in accordance
with the provisions of Section 5.03 of the Plan; and
(c) Finally, credit to each Participant's Company Stock Account the shares of
Company Stock representing contributions made by the Employers in the form of
Company Stock and the number of Financed Shares released from the Loan Suspense
Account under Section 4.03 of the Plan that are to be allocated and credited as
of that date in accordance with the provisions of Section 5.04 of the Plan.
Section 5.03 Maintenance of Participants' Other Investments Accounts.
-------------------------------------------------------
As of each Valuation Date, the Committee shall adjust the Other Investments
Account of each Participant to reflect activity during the Valuation Period as
follows:
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(a) First, charge to each Participant's Other Investments Account all
distributions and payments made to him that have not previously been charged;
(b) Next, if Company Stock is purchased with assets from a Participant's Other
Investments Account, the Participant's Other Investments Account shall be
charged accordingly;
(c) Next, subject to the dividend provisions of Section 5.09 of the Plan, credit
to the Other Investments Account of each Participant any cash dividends paid to
the Trustee on shares of Company Stock held in that Participant's Company Stock
Account (as of the record date for such cash dividends) and dividends paid on
shares of Company Stock held in the Loan Suspense Account that have not been
used to repay any Acquisition Loan. Cash dividends that have not been used to
repay an Acquisition Loan and have been credited to a Participant's Other
Investments Account shall be applied by the Trustee to purchase shares of
Company Stock, which shares shall then be credited to the Company Stock Account
of such Participant. The Participant's Other Investments Account shall then be
charged by the amount of cash used to purchase such Company Stock or used to
repay any Acquisition Loan. In addition, any earnings on:
(i) Other Investments Accounts will be allocated to Participants' Other
Investments Account, pro rata, based on such Other Investment Accounts
balances as of the first day of the Valuation Period, and
(ii) the Loan Suspense Account, other than dividends used to repay the
Acquisition Loan, will be allocated to Participants' Other Investments
Accounts, pro rata, based on their Other Investment Account Balances as of
the first day of the Valuation Period.
(d) Next, allocate and credit the Employer contributions made pursuant to
Section 4.01(b) of the Plan for the purpose of repaying any Acquisition Loan in
accordance with Section 5.04 of the Plan. Such amount shall then be used to
repay any Acquisition Loan and such Participant's Other Investments Account
shall be charged accordingly; and
(e) Finally, allocate and credit the Employer contributions (other than amounts
contributed to repay an Acquisition Loan) that are made in cash (or property
other than Company Stock) for the Plan Year to the Other Investments Account of
each Participant in accordance with Section 5.04 of the Plan.
Section 5.04 Allocation and Crediting of Employer Contributions.
--------------------------------------------------
(a) Except as otherwise provided for in Section 5.09 of the Plan, as of the
Valuation Date for each Plan Year:
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(i) Company Stock released from the Loan Suspense Account for that year and
shares of Company Stock contributed directly to the Plan shall be allocated
and credited to each Active Participant's (as defined in paragraph (c) of
this Section 5.04) Account as follows:
(A) first the number of shares of Company Stock with a fair market
value (valued as of the time the Matching Contributions are accrued
under the Savings Plan) equal to the Matching Contributions made under
Section 4.01(c) of the Plan on behalf of an Active Participant shall
be credited to the Active Participant's Company Stock Account (and a
matching contribution sub-account); and then
(B) the number of shares of Company Stock that bears the same ratio as
the Active Participant's Compensation bears to the aggregate
Compensation of all Active Participants for the Plan Year shall be
credited to such Active Participant's Company Stock Account, and then
(ii) The cash contributions not used to repay an Acquisition Loan and any
other property (other than shares of Company Stock) contributed for that
year and forfeitures (as determined pursuant to Section 6 of the Plan)
shall be allocated and credited to each Active Participant's Account based
on the ratio determined by comparing each Active Participant's Compensation
to the aggregate Compensation of all Active Participants for the Plan Year.
(b) For purposes of this Section 5.04, the term "Active Participant" means:
(i) with respect to contributions made pursuant to Section 4.01(c) of the
Plan, those Participants who would have otherwise have been entitled to an
allocation of Matching Contributions under the terms of the Savings Plan
for such period; and
(ii) with respect to contributions made pursuant to Sections 4.01(a) and
4.01(b) of the Plan, those Employees who:
(A) were employed by that Employer, including Employees on a
Recognized Absence, on the last day of the Plan Year; or
(B) who terminated employment during the Plan Year by reason of death,
Disability, or attainment of their Retirement Date.
Section 5.05 Limitations on Allocations.
--------------------------
(a) In General. Subject to the provisions of this Section 5.05, Section 415 of
the Code shall be incorporated by reference into the terms of the Plan. No
allocation shall be made under Section 5.04 of the Plan that would result in a
violation of Section 415 of the Code.
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(b) Code Section 415 Compensation. For purposes of this Section 5.05,
Compensation shall be adjusted to reflect the general rule of Section 1.415-2(d)
of the Treasury Regulations.
(c) Limitation Year. The "limitation year" (within the meaning of Section 415
of the Code) shall be the calendar year.
(d) Multiple Defined Contribution Plans. In any case where a Participant also
participates in another defined contribution plan of the Bank or its Affiliates,
the appropriate committee of such other plan shall first reduce the after-tax
contributions under any such plan, shall then reduce any elective deferrals
under any such plan subject to Section 401(k) of the Code, shall then reduce all
other contributions under any other such plan and, if necessary, shall then
reduce contributions under this Plan, subject to the provisions of paragraph (f)
of this Section 5.05.
(e) Combined Plan Limitations. To the extent necessary to comply with the
requirements of Section 415(e) of the Code, the plan administration or
appropriate committee shall first reduce the annual benefit payable under any
defined benefit plan in which the Participant participates and, if necessary,
the Committee shall thereafter reduce the contributions under the defined
contribution plans in which such Participant participates in accordance with
paragraph (d) of this Section 5.05.
(f) Excess Allocations. If, after applying the allocation provisions under
Section 5.04 of the Plan, allocations under Section 5.04 of the Plan would
otherwise result in a violation of Section 415 of the Code, the Committee shall
allocate and reallocate employer contributions to other Participants in the Plan
for the limitation year or, if such allocation and reallocation causes the
limitations of Section 415 of the Code to be exceeded, shall hold excess
amounts in an unallocated suspense account for allocation in a subsequent Plan
Year in accordance with Section 1.415-6(b)(6)(i) of the Treasury Regulations.
Such suspense account, if permitted, will be credited before any allocation of
contributions for subsequent limitation years.
Section 5.06 Other Limitations.
-----------------
Aside from the limitations set forth in Sections 5.05 of the Plan, in no event
shall more than one-third of the Employer contributions to the Plan (including
Matching Contributions) be allocated to the Accounts of Highly Compensated
Employees. In order to ensure such allocations are not made, the Committee
shall, beginning with the Participants whose Compensation exceeds the limit then
in effect under Section 401(a)(17) of the Code, reduce the amount of
Compensation of such Highly Compensated Employees on a pro-rata basis per
individual that would otherwise be taken into account for purposes of allocating
benefits under Section 5.04 of the Plan. If, in order to satisfy this Section
5.06, any such Participant's Compensation must be reduced to an amount that is
lower than the Compensation amount of the next highest paid (based on such
Participant's Compensation) Highly Compensated Employee (the "breakpoint
amount"), then, for purposes of allocating benefits under Section 5.04 of the
Plan, the Compensation of all concerned Participants shall be reduced to an
amount not to exceed such breakpoint amount.
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Section 5.07 Limitations as to Certain Section 1042 Transactions.
---------------------------------------------------
To the extent that a shareholder of Company Stock sell qualifying Company Stock
to the Plan and elects (with the consent of the Bank) nonrecognition of gain
under Section 1042 of the Code, no portion of the Company Stock purchased in
such nonrecognition transaction (or dividends or other income attributable
thereto) may accrue or be allocated during the nonallocation period (the ten
(10) year period beginning on the later of the date of the sale of the qualified
Company Stock or the date of the Plan allocation attributable to the final
payment of an Acquisition Loan incurred in connection with such sale) for the
benefit of:
(a) The selling shareholder;
(b) the spouse, brothers or sisters (whether by the whole or half blood),
ancestors or lineal descendants of the selling shareholder or descendant
referred to in (a) above; or
(c) any other person who owns, after application of Section 318(a) of the Code,
more than twenty-five percent (25%) of:
(i) any class of outstanding stock of the Bank or any Affiliate, or
(ii) the total value of any class of outstanding stock of the Bank or any
Affiliate.
For purposes of this Section 5.07, Section 318(a) of the Code shall be applied
without regard to the employee trust exception of Section 318(a)(2)(B)(i) of the
Code.
Section 5.08 Nondiscrimination Test for Matching Contributions.
-------------------------------------------------
(a) Notwithstanding anything herein to the contrary, the Plan shall meet the
nondiscrimination test of Section 401(m) of the Code for each Plan Year. In
order to meet the nondiscrimination test, any or all of the following steps may
be taken:
(i) At any time during the Plan Year, the Committee may limit the amount
of Matching Contributions that may be made on behalf of Highly
Compensated Employees;
(ii) The Committee may distribute to Highly Compensated Employees the
excess aggregate contributions made for the Plan Year, to the extent
necessary to meet the requirements of Section 401(m) of Code, on the
basis of the amount of contributions on behalf of, or by, each Highly
Compensated Employee;
(iii) The Committee may recommend to the Board of Directors of the Bank
that the Employer make an additional Matching Contribution to the
Plan for the benefit
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of Participants who are not Highly Compensated Employees to the
extent necessary to meet the requirements of Section 401(m) of the
Code; and
(iv) The Committee may take any other steps that the Committee deems
appropriate.
(b) The nondiscrimination requirements of Section 401(m) of the Code require
that, in each Plan Year, the "Contribution Percentage" (defined below) of the
eligible Highly Compensated Employees for such Plan Year does not exceed the
greater of:
(i) The Contribution Percentage of all other eligible Employees for the
preceding Plan Year multiplied by 1.25; or
(ii) The lesser of the Contribution Percentage of all other eligible
Employees for the preceding Plan Year multiplied by 2, or the
Contribution Percentage of all other eligible Employees for the
preceding Plan Year plus 2 percentage points. (Use of this alternative
limitation shall be subject to the provisions of Section 1.401(m)-2 of
the Treasury Regulations regarding the multiple use of the alternative
deferral tests set for forth in Section 401(k) and 401(m) of the
Code.)
The Committee may elect to calculate the Contribution Percentages using the Plan
Year rather than the preceding Plan Year; provided, however, that if the
Committee so elects, the election may only be changed as provided by the
Secretary of the Treasury.
(c) The "Contribution Percentage" for a group of Employees is the average of
the ratios, calculated separately for each Employee in the group, of the amount
of Matching Contributions that are credited under the Plan on behalf of each
Employee for the Plan Year, to the Employee's Compensation for the Plan Year.
Section 5.09 Dividends.
---------
(a) Stock Dividends. Dividends on Company Stock which are received by the
Trustee in the form of additional Company Stock shall be retained in the portion
of the Trust Fund consisting of Company Stock, and shall be allocated among the
Participant's Accounts and the Loan Suspense Account in accordance with their
holdings of the Company Stock on which the dividends have been paid.
(b) Cash Dividends on Allocated Shares. Dividends on Company Stock credited to
Participants' Accounts which are received by the Trustee in the form of cash
shall, at the direction of the Bank, either:
(i) be credited to Participants' Accounts in accordance with Section 5.03
of the Plan and invested as part of the Trust Fund;
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(ii) be distributed immediately to the Participants;
(iii) be distributed to the Participants within ninety (90) days of the
close of the Plan Year in which paid; or
(iv) be used to repay principal and interest on the Acquisition Loan used
to acquire Company Stock on which the dividends were paid.
(c) Cash Dividends on Unallocated Shares. Dividends on Company Stock held in
the Loan Suspense Account which are received by the Trustee in the form of cash
shall be applied as soon as practicable to payments of principal and interest
under the Acquisition Loan incurred with the purchase of the Company Stock.
(d) Financed Shares. Financed Shares released from the Loan Suspense Account
by reason of dividends paid with respect to such Company Stock shall be
allocated under Sections 5.03 and 5.04 of the Plan as follows:
(i) First, Financed Shares with a fair market value at least equal to the
dividends paid with respect the Company Stock allocated to Participants'
Accounts shall be allocated among and credited to the Accounts of such
Participants, pro rata, according to the number of shares of Company Stock
held in such accounts on the date such dividend is declared by the Company;
(ii) Then, any remaining Financed Shares released from the Loan Suspense
Account by reason of dividends paid with respect to Company Stock held in
the Loan Suspense Account shall be allocated among and credited to the
Accounts of all Participants, pro rata, according to each Participant's
Compensation.
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Section 6
Vesting and Forfeitures
Section 6.01 Deferred Vesting in Accounts.
----------------------------
(a) A Participant shall become vested in his Accounts in accordance with the
following schedule:
Period of Service Vested Percentage
----------------- -----------------
Less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 years or more 100%
(b) For purposes of determining a Participant's Period of Service under this
Section 6.01, employment with the Bank or an Affiliate shall be deemed
employment with the Employer. For purposes of determining a Participant's
vested percentage in his Accounts, all Periods of Service shall be included.
Section 6.02 Immediate Vesting in Certain Situations.
---------------------------------------
(a) Notwithstanding Section 6.01(a) of the Plan, a Participant shall become
fully vested in his Accounts upon the earlier of:
(i) Termination of the Plan or upon the permanent and complete
discontinuance of contributions by his Employer to the Plan; provided,
however, that in the event of a partial termination, the interest of each
Participant shall fully vest only with respect to that part of the Plan
which is terminated;
(ii) The Participant's Normal Retirement Age;
(iii) A "Change in Control" (as defined below); or
(iv) Termination of employment by reason of death or Disability.
For purposes of this Section 6.02, a "Change in Control" of the Bank or the
Company means an event of a nature that: (i) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Company within the meaning of the Home Owners' Loan Act of 1933, as
amended,
<PAGE>
the Federal Deposit Insurance Act and the Rules and Regulations promulgated by
the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in
effect on the date hereof (provided, that in applying the definition of change
in control as set forth under the rules and regulations of the OTS, the Board
shall substitute its judgment for that of the OTS); or (iii) without limitation
such a Change in Control shall be deemed to have occurred at such time as (A)
any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of voting securities of the Bank or the
Company representing 25% or more of the Bank's or the Company's outstanding
voting securities or right to acquire such securities except for any voting
securities of the Bank purchased by the Company and any voting securities
purchased by any employee benefit plan of the Bank or the Company, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Company or
similar transaction occurs in which the Bank or Company is not the resulting
entity.
Section 6.03 Treatment of Forfeitures.
------------------------
(a) If a Participant who is not fully vested in his Accounts terminates
employment, that portion of his Accounts in which he is not vested shall be
forfeited upon the earlier of:
(i) the date the Participant receives a distribution of his entire vested
benefits under the Plan, or
(ii) the date at which the Participant incurs five (5) consecutive One Year
Periods of Severance.
(b) If a Participant who has terminated employment and has received a
distribution of his entire vested benefits under the Plan is subsequently
reemployed by an Employer prior to incurring five (5) consecutive One Year
Periods of Severance, he shall have the portion of his Accounts which was
previously forfeited restored to his Accounts, provided he repays to the Trustee
within five (5) years of his subsequent employment date an amount equal to the
distribution. The amount restored to the Participant's Account shall be
credited to his Account as of the last day of the Plan Year in which the
Participant repays the distributed amount to the Trustee and the restored amount
shall come from other Employees' forfeitures and, if such forfeitures are
insufficient, from a special contribution by his Employer for that year. If a
Participant's employment terminates prior to his Account having become vested,
such Participant shall be deemed to have received a distribution of his entire
vested interest as of the Valuation Date next following his termination of
employment.
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(c) If a Participant who has terminated employment but has not received a
distribution of his entire vested benefits under the Plan is subsequently
reemployed by an Employer subsequent to incurring five (5) consecutive One Year
Periods of Severance, any undistributed balance of his Accounts from his prior
participation which was not forfeited shall be maintained as a fully vested
subaccount with his Account.
(d) If a portion of a Participant's Account is forfeited, assets other than
Company Stock must be forfeited before any Company Stock may be forfeited.
(e) Forfeitures shall be reallocated among the other Participants in the Plan
pursuant to Section 5.04(a)(ii) above.
Section 6.04 Accounting for Forfeitures.
--------------------------
A forfeiture shall be charged to the Participant's Account as of the first day
of the first Valuation Period in which the forfeiture becomes certain pursuant
to Section 6.03 of the Plan. Except as otherwise provided in Section 6.03 of the
Plan, a forfeiture shall be added to the contributions of the terminated
Participant's Employer which are to be credited to other Participants pursuant
to Section 4 as of the last day of the Plan Year in which the forfeiture becomes
certain.
Section 6.05 Vesting Upon Reemployment.
-------------------------
(a) If an Employee is not vested in his Accounts, incurs a One Year Period of
Severance and again performs an Hour of Service, such Employee shall receive
credit for his Periods of Service prior to his One Year Period of Severance only
if the number of consecutive One Year Periods of Severance is less than the
greater of: (i) five (5) years of (ii) the aggregate number of his Periods of
Service credited before his One Year Period of Severance.
(b) If a Participant is partially vested in his Accounts, incurs a One Year
Period of Severance and again performs an Hour of Service, such Participant
shall receive credit for his Periods of Service prior to his One Year Period of
Severance; provided, however, that after five (5) consecutive One Year Periods
of Severance, a former Participant's vested interest in his Accounts
attributable to Periods of Service prior to his One Year Period of Severance
shall not be increased as a result of his Periods of Service following his
reemployment date.
(c) If a Participant is fully vested in his Accounts, incurs a One Year Period
of Severance and again performs an Hour of Service, such Participant shall
receive credit for all his Periods of Service prior to his One Year Period of
Severance.
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Section 7
Distributions
Section 7.01 Distribution of Benefit Upon a Termination of Employment.
--------------------------------------------------------
(a) A Participant whose employment terminates for any reason shall receive the
entire vested portion of his Accounts in a single payment on a date selected by
the Committee; provided, however, that such date shall be on or before the 60th
day after the end of the Plan Year in which the Participant's employment
terminated. The benefits from that portion of the Participant's Other
Investments Account shall be calculated on the basis of the most recent
Valuation Date before the date of payment. Subject to the provisions of Section
7.05 of the Plan, if the Committee so provides, a Participant may elect that his
benefits be distributed to him in the form of either Company Stock, cash, or
some combination thereof.
(b) Notwithstanding paragraph (a) of this Section 7.01, if the balance credited
to a Participant's Accounts exceeds, or has ever exceeded at the time such
benefit was distributable, $5,000, his benefits shall not be paid before the
latest of his 65th birthday or the tenth anniversary of the year in which he
commenced participation in the Plan, unless he elects an early payment date in a
written election filed with the Committee. Such an election is not valid unless
it is made after the Participant has received the required notice under Section
1.411(a)-11(c) of the Treasury Regulations that provides a general description
of the material features of a lump sum distribution and the Participant's right
to defer receipt of his benefits under the Plan. The notice shall be provided
no less than 30 days and no more than 90 days before the first day on which all
events have occurred which entitle the Participant to such benefit. Written
consent of the Participant to the distribution generally may not be made within
30 days of the date the Participant receives the notice and shall not be made
more than 90 days from the date the Participant receives the notice. However, a
distribution may be made less than 30 days after the notice provided under
Section 1.411(a)-11(c) of the Treasury Regulations is given, if:
(i) the Committee clearly informs the Participant that he has a right to
period of at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and if applicable, a
particular distribution option), and
(ii) the Participant, after receiving the notice, affirmatively elects a
distribution.
A Participant may modify such an election at any time, provided any new benefit
payment date is at least 30 days after a modified election is delivered to the
Committee.
Section 7.02 Minimum Distribution Requirements.
---------------------------------
With respect to all Participants, other than those who are "5% owners" (as
defined in Section 416 of the Code), benefits shall be paid no later than the
April 1st of the later of:
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(i) the calendar year following the calendar year in which the Participant
attains age 70-1/2, or
(ii) the calendar year in which the Participant retires.
With respect to all Participants who are 5% owners within the meaning of Section
416 of the Code, such Participants benefits shall be paid no later than the
April 1st of the calendar year following the calendar year in which the
Participant attains age 70-1/2.
Section 7.03 Benefits on a Participant's Death.
---------------------------------
(a) If a Participant dies before his benefits are paid pursuant to Section 7.01
of the Plan, the balance credited to his Accounts shall be paid to his
Beneficiary in a single distribution on or before the 60th day after the end of
the Plan Year in which the Participant died. If the Participant has not named a
Beneficiary or if his named Beneficiary should not survive him, then the balance
in his Account shall be paid to his estate. The benefits from that portion of
the Participant's Other Investments Account shall be calculated on the basis of
the most recent Valuation Date before the date of payment.
(b) If a married Participant dies before his benefit payments begin, then,
unless he has specifically elected otherwise, the Committee shall cause the
balance in his Accounts to be paid to his spouse, as Beneficiary. A married
Participant may name an individual other than his spouse as his Beneficiary,
provided that such election is accompanied by the spouse's written consent,
which must:
(i) acknowledge the effect of the election;
(ii) explicitly provide either that the designated Beneficiary may not
subsequently be changed by the Participant without the spouse's further
consent or that it may be changed without such consent; and
(iii) must be witnessed by the Committee, its representative, or a notary
public.
This requirement shall not apply if the Participant establishes to the
Committee's satisfaction that the spouse may not be located.
(c) The Committee shall from time to time take whatever steps it deems
appropriate to keep informed of each Participant's marital status. Each
Employer shall provide the Committee with the most reliable information in the
Employer's possession regarding its Participants' marital status, and the
Committee may, in its discretion, require a notarized affidavit from any
Participant as to his marital status. The Committee, the Plan, the Trustee, and
the Employers shall be fully protected and discharged from any liability to the
extent of any benefit payments made as a result of the Committee's good faith
and reasonable reliance upon information obtained from a Participant as to the
Participant's marital status.
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Section 7.04 Delay in Benefit Determination.
------------------------------
If the Committee is unable to determine the benefits payable to a Participant or
Beneficiary on or before the latest date prescribed for payment pursuant to this
Section 7, the benefits shall in any event be paid within 60 days after they can
first be determined, with whatever makeup payments may be appropriate in view of
the delay.
Section 7.05 Options to Receive and Sell Stock.
---------------------------------
(a) Unless ownership of virtually all Company Stock is restricted to active
Employees and qualified retirement plans for the benefit of Employees pursuant
to the certificates of incorporation or by-laws of the Employers issuing Company
Stock, a terminated Participant or the Beneficiary of a deceased Participant may
instruct the Committee to distribute the Participant's entire vested interest in
his Accounts in the form of Company Stock. In that event, the Committee shall
apply the Participant's vested interest in his Other Investments Account to
purchase sufficient Company Stock to make the required distribution.
(b) Any Participant who receives Company Stock pursuant to this Section, and any
person who has received Company Stock from the Plan or from such a Participant
by reason of the Participant's death or incompetency, by reason of divorce or
separation from the Participant, or by reason of a rollover distribution
described in Section 402(c) of the Code, shall have the right to require the
Employer which issued the Company Stock to purchase the Company Stock for its
current fair market value (hereinafter referred to as the "put right"). The put
right shall be exercisable by written notice to the Committee during the first
60 days after the Company Stock is distributed by the Plan, and, if not
exercised in that period, during the first 60 days in the following Plan Year
after the Committee has communicated to the Participant its determination as to
the Company Stock's current fair market value. If the put right is exercised,
the Trustee may, if so directed by the Committee in its sole discretion, assume
the Employer's rights and obligations with respect to purchasing the Stock.
However, the put right shall not apply to the extent that the Company Stock, at
the time the put right would otherwise be exercisable, may be sold on an
established market in accordance with federal and state securities laws and
regulations.
(c) With respect to a put right, the Employer or the Trustee, as the case may
be, may elect to pay for the Company Stock in equal periodic installments, not
less frequently than annually, over a period not longer than five (5) years from
the 30th day after the put right is exercised pursuant to paragraph (b) of this
Section 7.05, with adequate security and interest at a reasonable rate on the
unpaid balance, all such terms to be set forth in a promissory note delivered to
the seller with normal terms as to acceleration upon any uncured default.
(d) Nothing contained in this Section 7.05 shall be deemed to obligate any
Employer to register any Company Stock under any federal or state securities law
or to create or maintain a public market to facilitate the transfer or
disposition of any Company Stock. The put right described in this Section
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7.05 may only be exercised by a person described in the paragraph (b) of this
Section 7.05, and may not be transferred with any Company Stock to any other
person. As to all Company Stock purchased by the Plan in exchange for any
Acquisition Loan, the put right be nonterminable. The put right for Company
Stock acquired through a Acquisition Loan shall continue with respect to such
Company Stock after the Acquisition Loan is repaid or the Plan ceases to be an
employee stock ownership plan. Except as provided above, in accordance with the
provisions of Sections 54.4975-7(b)(4) of the Treasury Regulations, no Company
Stock acquired with the proceeds of an Acquisition Loan may be subject to any
put, call or other option or buy-sell or similar arrangement while held by, and
when distributed from, the Plan, whether the Plan is then an employee stock
ownership plan.
Section 7.06 Restrictions on Disposition of Stock.
------------------------------------
Except in the case of Company Stock which is traded on an established market, a
Participant who receives Company Stock pursuant to this Section 7, and any
person who has received Company Stock from the Plan or from such a Participant
by reason of the Participant's death or incompetency, by reason of divorce or
separation from the Participant, or by reason of a rollover distribution
described in Section 402(c) of the Code, shall, prior to any sale or other
transfer of the Company Stock to any other person, first offer the Company Stock
to the issuing Employer and to the Plan at its current fair market value. This
restriction shall apply to any transfer, whether voluntary, involuntary, or by
operation of law, and whether for consideration or gratuitous. Either the
Employer or the Trustee may accept the offer within 14 days after it is
delivered. Any Company Stock distributed by the Plan shall bear a conspicuous
legend describing the right of first refusal under this Section 7.06, as
applicable, as well as any other restrictions upon the transfer of the Company
Stock imposed by federal and state securities laws and regulations.
Section 7.07 Direct Transfer of Eligible Plan Distributions.
----------------------------------------------
(a) A Participant or Beneficiary may direct that an "eligible rollover
distribution" (as defined below) included in a payment made pursuant to this
Section 7 be paid directly to an "eligible retirement plan" (as defined below).
(b) To effect such a direct transfer, the Participant or Beneficiary must notify
the Committee that a direct transfer is desired and provide to the Committee the
eligible retirement plan to which the payment is to be made. Such notice shall
be made in such form and at such time as the Committee may prescribe. Upon
receipt of such notice, the Committee shall direct the Trustee to make a
trustee-to-trustee transfer of the eligible rollover distribution to the
eligible retirement plan so specified.
(c) For purposes of this Section 7.07, an "eligible rollover distribution" shall
have the meaning set forth in Section 402(c)(4) of the Code and any Treasury
Regulations promulgated thereunder. To the extent such meaning is not
inconsistent with the above references, an eligible rollover distribution shall
mean any distribution of all or any portion of the Participant's Account, except
that
27
<PAGE>
such term shall not include any distribution which is one of a series of
substantially equal periodic payments (not less frequently than annually) made
(i) for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and a designated Beneficiary, or
(ii) for a period of ten years or more. Further, the term "eligible rollover
distribution" shall not include any distribution required to be made under
Section 401(a)(9) of the Code.
(d) For purposes of this Section 7.07, an "eligible retirement plan" shall have
the meaning set forth in Section 402(c)(8) of the Code and any Treasury
Regulations promulgated thereunder. To the extent such meaning is not
inconsistent with the above references, an eligible retirement plan shall mean:
(i) an individual retirement account described in Section 408(a) of the Code;
(ii) an individual retirement annuity described in Section 408(b) of the Code
(other than an endowment contract), (iii) a qualified trust described in Section
401(a) of the Code and exempt under Section 501(a) of the Code, and (iv) an
annuity plan described in Section 403(a) of the Code.
28
<PAGE>
Section 8
Voting of Company Stock and Tender Offers
Section 8.01 Voting of Company Stock.
-----------------------
(a) In General. The Trustee shall generally vote all shares of Company Stock
held in the Trust in accordance with the provisions of this Section 8.01.
(b) Allocated Shares. Shares of Company Stock which have been allocated to
Participants' Accounts shall be voted by the Trustee in accordance with the
Participants' written instructions.
(c) Uninstructed and Unallocated Shares. Shares of Company Stock which have
been allocated to Participants' Accounts but for which no written instructions
have been received by the Trustee regarding voting shall be voted by the Trustee
in a manner calculated to most accurately reflect the instructions the Trustee
has received from Participants regarding voting shares of allocated Company
Stock. Shares of unallocated Company Stock shall also be voted by the Trustee
in a manner calculated to most accurately reflect the instructions the Trustee
has received from Participants regarding voting shares of allocated Company
Stock. Notwithstanding the preceding two sentences, all shares of Company Stock
which have been allocated to Participants' Accounts and for which the Trustee
has not timely received written instructions regarding voting and all
unallocated shares of Company Stock must be voted by the Trustee in a manner
determined by the Trustee to be solely in the best interests of the Participants
and Beneficiaries.
(d) Voting Prior to Allocation. In the event no shares of Company Stock have
been allocated to Participants' Accounts at the time Company Stock is to be
voted, each Participant shall be deemed to have one share of Company Stock
allocated to his Accounts for the sole purpose of providing the Trustee with
voting instructions.
(e) Procedure and Confidentiality. Whenever such voting rights are to be
exercised, the Employers, the Committee, and the Trustee shall see that all
Participants and Beneficiaries are provided with the same notices and other
materials as are provided to other holders of the Company Stock, and are
provided with adequate opportunity to deliver their instructions to the Trustee
regarding the voting of Company Stock allocated to their Accounts or deemed
allocated to their Accounts for purposes of voting. The instructions of the
Participants with respect to the voting of shares of Company Stock shall be
confidential.
Section 8.02 Tender Offers.
-------------
In the event of a tender offer, Company Stock shall be tendered by the Trustee
in the same manner set forth in Section 8.01 of the Plan regarding the voting of
Company Stock.
<PAGE>
Section 9
The Committee and Plan Administration
Section 9.01 Identity of the Committee.
-------------------------
The Committee shall consist of three or more individuals selected by the Bank.
Any individual, including a director, trustee, shareholder, officer, or Employee
of an Employer, shall be eligible to serve as a member of the Committee. The
Bank shall have the power to remove any individual serving on the Committee at
any time without cause upon ten (10) days written notice to such individual and
any individual may resign from the Committee at any time without reason upon ten
(10) days written notice to the Bank. The Bank shall notify the Trustee of any
change in membership of the Committee.
Section 9.02 Authority of Committee.
----------------------
(a) The Committee shall be the "plan administrator" within the meaning of ERISA
and shall have exclusive responsibility and authority to control and manage the
operation and administration of the Plan, including the interpretation and
application of its provisions, except to the extent such responsibility and
authority are otherwise specifically:
(i) allocated to the Bank, the Employers, or the Trustee under the Plan and
Trust Agreement;
(ii) delegated in writing to other persons by the Bank, the Employers, the
Committee, or the Trustee; or
(iii) allocated to other parties by operation of law.
(b) The Committee shall have exclusive responsibility regarding decisions
concerning the payment of benefits under the Plan.
(c) The Committee shall have full investment responsibility with respect to the
Investment Fund except to the extent, if any, specifically provided in the Trust
Agreement.
(d) In the discharge of its duties, the Committee may employ accountants,
actuaries, legal counsel, and other agents (who also may be employed by an
Employer or the Trustee in the same or some other capacity) and may pay such
individuals reasonable compensation and expenses for their services rendered
with respect to the operation or administration of the Plan to the extent such
payments are not otherwise prohibited by law.
<PAGE>
Section 9.03 Duties of Committee.
-------------------
(a) The Committee shall keep whatever records may be necessary in connection
with the maintenance of the Plan and shall furnish to the Employers whatever
reports may be required from time to time by the Employers. The Committee shall
furnish to the Trustee whatever information may be necessary to properly
administer the Trust. The Committee shall see to the filing with the
appropriate government agencies of all reports and returns required with respect
to the Plan under ERISA and the Code and other applicable laws.
(b) The Committee shall have exclusive responsibility and authority with respect
to the Plan's holdings of Company Stock and shall direct the Trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of
Company Stock and the creation and satisfaction of any Acquisition Loan to the
extent such responsibilities are not set forth in the Trust Agreement.
(c) The Committee shall at all times act consistently with the Bank's long-term
intention that the Plan, as an employee stock ownership plan, be invested
primarily in Company Stock. Subject to the direction of the Committee with
respect to any Acquisition Loan pursuant to the provisions of Section 4.03 of
the Plan, and subject to the provisions of Sections 7.05 and 11.04 of the Plan
as to Participants' rights under certain circumstances to have their Accounts
invested in Company Stock or in assets other than Company Stock, the Committee
shall determine, in its sole discretion, the extent to which assets of the Trust
shall be used to repay any Acquisition Loan, to purchase Company Stock, or to
invest in other assets selected by the Committee or an investment manager. No
provision of the Plan relating to the allocation or vesting of any interests in
the Company Stock or investments other than Company Stock shall restrict the
Committee from changing any holdings of the Trust Fund, whether the changes
involve an increase or a decrease in the Company Stock or other assets credited
to Participants' Accounts. In determining the proper extent of the Trust Fund's
investment in Company Stock, the Committee shall be authorized to employ
investment counsel, legal counsel, appraisers, and other agents and to pay their
reasonable compensation and expenses to the extent such payments are not
prohibited by law.
(d) If the valuation of any Company Stock is not established by reported
trading on a generally recognized public market, then the Committee shall have
the exclusive authority and responsibility to determine value of the Company
Stock for all purposes under the Plan. Such value shall be determined as of
each Valuation Date and on any other date as of which the Trustee purchases or
sells Company Stock in a manner consistent with Section 4975 of the Code and the
Treasury Regulations thereunder. The Committee shall use generally accepted
methods of valuing stock of similar corporations for purposes of arm's length
business and investment transactions, and in this connection the Committee shall
obtain, and shall be protected in relying upon, the valuation of Company Stock
as determined by an independent appraiser experienced in preparing valuations of
similar businesses.
<PAGE>
Section 9.04 Compliance with ERISA and the Code.
----------------------------------
The Committee shall perform all acts necessary to ensure the Plan's compliance
with ERISA and the Code. Each individual member of the Committee shall
discharge his duties in good faith and in accordance with the applicable
requirements of ERISA and the Code.
Section 9.05 Action by Committee.
-------------------
All actions of the Committee shall be governed by the affirmative vote of a
number of the members of the Committee which is a majority of the total number
of the members of the Committee. The members of the Committee may meet
informally and may take any action without meeting as a group.
Section 9.06 Execution of Documents.
----------------------
Any instrument executed by the Committee may be signed by any member of the
Committee.
Section 9.07 Adoption of Rules.
-----------------
The Committee shall adopt such rules and regulations of uniform applicability as
it deems necessary or appropriate for the proper operation, administration and
interpretation of the Plan.
Section 9.08 Responsibilities to Participants.
--------------------------------
The Committee shall determine which Employees qualify to participate in the
Plan. The Committee shall furnish to each Eligible Employee whatever summary
plan descriptions, summary annual reports, and other notices and information may
be required under ERISA. The Committee also shall determine when a Participant
or his Beneficiary qualifies for the payment of benefits under the Plan. The
Committee shall furnish to each such Participant or Beneficiary whatever
information is required under ERISA or the Code (or is otherwise appropriate) to
enable the Participant or Beneficiary to make whatever elections may be
available pursuant to Section 7, and the Committee shall provide for the payment
of benefits in the proper form and amount from the Trust. The Committee may
decide in its sole discretion to permit modifications of elections and to defer
or accelerate benefits to the extent consistent with the terms of the Plan,
applicable law, and the best interests of the individuals concerned.
Section 9.09 Alternative Payees in Event of Incapacity.
-----------------------------------------
If the Committee finds at any time that an individual qualifying for benefits
under this Plan is a minor or is incompetent, the Committee may direct the
benefits to be paid, in the case of a minor, to his parents, his legal guardian,
a custodian for him under the Uniform Transfers to Minors Act, or the person
having actual custody of him, or, in the case of an incompetent, to his spouse,
his legal
32
<PAGE>
guardian, or the person having actual custody of him. The Committee and the
Trustee shall not be obligated to inquire as to the actual use of the funds by
the person receiving them under this Section 9.09, and any such payment shall
completely discharge the obligations of the Plan, the Trustee, the Committee,
and the Employers to the extent of the payment.
Section 9.10 Indemnification by Employers.
----------------------------
Except as separately agreed in writing, the Committee, and any member or
employee of the Committee, shall be indemnified and held harmless by the
Employers, jointly and severally, to the fullest extent permitted by law
against any and all costs, damages, expenses, and liabilities reasonably
incurred by or imposed upon the Committee or such individual in connection
with any claim made against the Committee or such individual or in which the
Committee or such individual may be involved by reason of being, or having
been, the Committee, or a member or employee of the Committee, to the extent
such amounts are not paid by insurance.
Section 9.11 Abstention by Interested Member.
-------------------------------
Any member of the Committee who also is a Participant in the Plan shall take no
part in any determination specifically relating to his own participation or
benefits under the Plan, unless his abstention would render the Committee
incapable of acting on the matter.
33
<PAGE>
Section 10
Rules Governing Benefit Claims
Section 10.01 Claim for Benefits.
------------------
Any Participant or Beneficiary who qualifies for the payment of benefits shall
file a claim for his benefits with the Committee on a form provided by the
Committee. The claim, including any election of an alternative benefit
form, shall be filed at least 30 days before the date on which the benefits
are to begin. If a Participant or Beneficiary fails to file a claim by the
30th day before the date on which benefits become payable, he shall be
presumed to have filed a claim for payment for the Participant's benefits in
the standard form prescribed by Section 7 of the Plan.
Section 10.02 Notification by Committee.
-------------------------
Within 90 days after receiving a claim for benefits (or within 180 days, if
special circumstances require an extension of time and written notice of the
extension is given to the Participant or Beneficiary within 90 days after
receiving the claim for benefits), the Committee shall notify the Participant or
Beneficiary whether the claim has been approved or denied. If the Committee
denies a claim in any respect, the Committee shall set forth in a written notice
to the Participant or Beneficiary:
(a) each specific reason for the denial;
(b) specific references to the pertinent Plan provisions on which the denial is
based;
(c) a description of any additional material or information which could be
submitted by the Participant or Beneficiary to support his claim, with an
explanation of the relevance of such information; and
(d) an explanation of the claims review procedures set forth in Section 10.03 of
the Plan.
Section 10.03 Claims Review Procedure.
-----------------------
Within 60 days after a Participant or Beneficiary receives notice from the
Committee that his claim for benefits has been denied in any respect, he may
file with the Committee a written notice of appeal setting forth his reasons for
disputing the Committee's determination. In connection with his appeal the
Participant or Beneficiary or his representative may inspect or purchase copies
of pertinent documents and records to the extent not inconsistent with other
Participants' and Beneficiaries' rights of privacy. Within 60 days after
receiving a notice of appeal from a prior determination (or within 120 days, if
special circumstances require an extension of time and written notice of the
extension is given to the Participant or Beneficiary and his representative
within 60 days after receiving the notice of appeal), the Committee shall
furnish to the Participant or
34
<PAGE>
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
35
<PAGE>
Section 11
The Trust
Section 11.01 Creation of Trust Fund.
----------------------
All amounts received under the Plan from an Employer and investments shall be
held in a Trust Fund pursuant to the terms of this Plan and the Trust Agreement.
The benefits described in this Plan shall be payable only from the assets of the
Trust Fund. Neither the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, nor the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
Section 11.02 Company Stock and Other Investments.
-----------------------------------
Trust Fund held by the Trustee shall be divided into Company Stock and
investments other than Company Stock. The Trustee shall have no investment
responsibility for the portion of the Trust Fund consisting of Company Stock,
but shall accept any Employer contributions made in the form of Company Stock,
and shall acquire, sell, exchange, distribute, and otherwise deal with and
dispose of Company Stock in accordance with the instructions of the Committee.
Section 11.03 Acquisition of Company Stock.
----------------------------
From time to time the Committee may, in its sole discretion, direct the Trustee
to acquire Company Stock from the issuing Employer or from shareholders,
including shareholders who are or have been Employees, Participants, or
fiduciaries with respect to the Plan. The Trustee shall pay for such Company
Stock no more than its fair market value, which shall be determined conclusively
by the Committee pursuant to Section 9.03(d) of the Plan. The Committee may
direct the Trustee to finance the acquisition of Company Stock through an
Acquisition Loan subject to the provisions of Section 4.03 of the Plan.
Section 11.04 Participants' Option to Diversify.
---------------------------------
The Committee shall provide for a procedure under which each Participant may,
during the first five years of a certain six-year period, elect to have up to 25
percent of the value of his Accounts committed to alternative investment options
within an "Investment Fund." For the sixth year in this period, the Participant
may elect to have up to 50 percent of the value of his Accounts committed to
other investments. The six-year period shall begin with the Plan Year following
the first Plan Year in which the Participant has both reached aged 55 and
completed 10 years of participation in the Plan; a Participant's election to
diversify his Accounts must be made within the 90-day period immediately
following the last day of each of the six Plan Years. The Committee shall see
that the Investment Fund includes a sufficient number of investment options to
comply with Section 401(a)(28)(B) of the Code. The Committee may, in its
discretion, permit a transfer of a portion of the Participant's Accounts to the
Savings Plan in order to satisfy this Section 11.04, provided such
36
<PAGE>
investments comply with Section 401(a)(28)(B) and such transfer is not otherwise
prohibited under the Code or ERISA. The Trustee shall comply with any investment
directions received from Participants in accordance with the procedures adopted
from time to time by the Committee under this Section 11.04.
37
<PAGE>
Section 12
Adoption, Amendment and Termination
Section 12.01 Adoption of Plan by Other Employers.
-----------------------------------
With the consent of the Bank, any entity may become a participating Employer
under the Plan by:
(a) taking such action as shall be necessary to adopt the Plan;
(b) becoming a party to the Trust Agreement establishing the Trust Fund; and
(c) executing and delivering such instruments and taking such other action as
may be necessary or desirable to put the Plan into effect with respect to the
entity's Employees.
Section 12.02 Adoption of Plan by Successor.
-----------------------------
In the event that any Employer shall be reorganized by way of merger,
consolidation, transfer of assets or otherwise, so that an entity other than an
Employer shall succeed to all or substantially all of the Employer's business,
the successor entity may be substituted for the Employer under the Plan by
adopting the Plan and becoming a party to the Trust Agreement. Contributions by
the Employer shall be automatically suspended from the effective date of any
such reorganization until the date upon which the substitution of the successor
entity for the Employer under the Plan becomes effective. If, within 90 days
following the effective date of any such reorganization, the successor entity
shall not have elected to become a party to the Plan, or if the Employer shall
adopt a plan of complete liquidation other than in connection with a
reorganization, the Plan shall be automatically terminated with respect to
Employees of the Employer as of the close of business on the 90th day following
the effective date of the reorganization, or as of the close of business on the
date of adoption of a plan of complete liquidation, as the case may be.
Section 12.03 Plan Adoption Subject to Qualification.
--------------------------------------
Notwithstanding any other provision of the Plan, the adoption of the Plan and
the execution of the Trust Agreement are conditioned upon their being determined
initially by the Internal Revenue Service to meet the qualification requirements
of Section 401(a) of the Code, so that the Employers may deduct currently for
federal income tax purposes their contributions to the Trust and so that the
Participants may exclude the contributions from their gross income and recognize
income only when they receive benefits. In the event that this Plan is held by
the Internal Revenue Service not to qualify initially under Section 401(a) of
the Code, the Plan may be amended retroactively to the earliest date permitted
by the Code and the applicable Treasury Regulations in order to secure
qualification under Section 401(a) of the Code. If this Plan is held by the
Internal Revenue Service not to qualify initially under Section 401(a) of the
Code either as originally adopted or as amended, each Employer's contributions
to the Trust under this Plan (including any earnings thereon) shall be
38
<PAGE>
returned to it and this Plan shall be terminated. In the event that this Plan is
amended after its initial qualification and the Plan as amended is held by the
Internal Revenue Service not to qualify under Section 401(a) of the Code, the
amendment may be modified retroactively to the earliest date permitted by the
Code and the applicable Treasury Regulations in order to secure approval of the
amendment under Section 401(a) of the Code.
Section 12.04 Right to Amend or Terminate.
---------------------------
The Bank intends to continue this Plan as a permanent program. However, each
participating Employer separately reserves the right to suspend, supersede, or
terminate the Plan at any time and for any reason, as it applies to that
Employer's Employees, and the Bank reserves the right to amend, suspend,
supersede, merge, consolidate, or terminate the Plan at any time and for any
reason, as it applies to the Employees of all Employers. No amendment,
suspension, supersession, merger, consolidation, or termination of the Plan
shall reduce any Participant's or Beneficiary's proportionate interest in the
Trust Fund, or shall divert any portion of the Trust Fund to purposes other than
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan. Except as is required for
purposes of compliance with the Code or ERISA, the provisions of Section 4.04
relating to the crediting of contributions, forfeitures and shares of Company
Stock released from the Loan Suspense Account, nor any other provision of the
Plan relating to the allocation of benefits to Participants, may be amended more
frequently than once every six months. Moreover, there shall not be any
transfer of assets to a successor plan or merger or consolidation with another
plan unless, in the event of the termination of the successor plan or the
surviving plan immediately following such transfer, merger, or consolidation,
each participant or beneficiary would be entitled to a benefit equal to or
greater than the benefit he would have been entitled to if the plan in which he
was previously a participant or beneficiary had terminated immediately prior to
such transfer, merger, or consolidation. Following a termination of this Plan
by the Bank, the Trustee shall continue to administer the Trust and pay benefits
in accordance with the Plan and the Committee's instructions.
39
<PAGE>
Section 13
General Provisions
Section 13.01 Nonassignability of Benefits.
----------------------------
The interests of Participants and other persons entitled to benefits under the
Plan shall not be subject to the claims of their creditors and may not be
voluntarily or involuntarily assigned, alienated, pledged, encumbered, sold, or
transferred. The prohibitions set forth in this Section 13.01 shall also apply
any judgement, decree, or order (including approval of a property or settlement
agreement) which relates to the provision of child support, alimony, or property
rights to a present or former spouse, child, or other dependent of a Participant
pursuant to a domestic relations order, unless such judgement, decree or order
is determined to be a "qualified domestic relations order" as defined in Section
414(p) of the Code.
Section 13.02 Limit of Employer Liability.
---------------------------
The liability of the Employers with respect to Participants and other persons
entitled to benefits under the Plan shall be limited to making contributions to
the Trust from time to time, in accordance with Section 4 of the Plan.
Section 13.03 Plan Expenses.
-------------
All expenses incurred by the Committee or the Trustee in connection with
administering the Plan and Trust shall be paid by the Trustee from the Trust
Fund to the extent the expenses have not been paid or assumed by the Employers
or by the Trustee.
Section 13.04 Nondiversion of Assets.
----------------------
Except as provided in Sections 5.05 and 12.03 of the Plan, under no
circumstances shall any portion of the Trust Fund be diverted to or used for any
purpose other than the exclusive benefit of the Participants and their
Beneficiaries prior to the satisfaction of all liabilities under the Plan.
Section 13.05 Separability of Provisions.
--------------------------
If any provision of the Plan is held to be invalid or unenforceable, the other
provisions of the Plan shall not be affected but shall be applied as if the
invalid or unenforceable provision had not been included in the Plan.
Section 13.06 Service of Process.
------------------
The agent for the service of process upon the Plan shall be the president of the
Bank and the Trustee, or such other person as may be designated from time to
time by the Bank.
40
<PAGE>
Section 13.07 Governing Law.
-------------
The Plan is established under, and its validity, construction and effect shall
be governed by the laws of the State of New Jersey to the extent those laws are
not preempted by federal law, including the provisions of ERISA.
Section 13.08 Special Rules for Persons Subject to Section 16(b)
--------------------------------------------------
Requirements.
- - ------------
Notwithstanding anything herein to the contrary, any former Participant who is
subject to the provisions of Section 16(b) of the Securities Exchange Act of
1934, who becomes eligible to again participate in the Plan, may not become a
Participant prior to the date that is six months from the date such former
Participant terminated participation in the Plan. In addition, any person
subject to the provisions of Section 16(b) of the 1934 Act receiving a
distribution of Company Stock from the Plan must hold such Company Stock for a
period of six months commencing with the date of distribution. However, this
restriction will not apply to Company Stock distributions made in connection
with death, retirement, disability or termination of employment, or made
pursuant to the terms of a qualified domestic relations order.
41
<PAGE>
Section 14
Top-Heavy Provisions
Section 14.01 Top-Heavy Provisions.
--------------------
If, as of the last day of the first Plan Year, or thereafter, if as of the day
next preceding the beginning of any Plan Year (the "Determination Date"), the
Plan is a "top-heavy plan" (determined in accordance with the provisions of
Section 416(g) of the Code); that is, the aggregate present value of the accrued
benefits and account balances of all "Key Employees" (within the meaning of
Section 416(i) of the Code and for this purpose using the definition of
Compensation, as modified under Section 5.5(b) of the Plan) and their
Beneficiaries, the provision specified in this Section 14 will automatically
become effective as of the first day of the Plan Year. For purposes of the
above sentence, the aggregate present value of the accrued benefits and account
balances of a Participant who has not performed any services for the Bank or any
of its Affiliates during the five-year period ending on the Determination Date
shall not be taken into account. This calculation shall be made in accordance
with Section 416(g) of the Code, taking into consideration plans which are
considered part of the Aggregation Group. The term "Aggregation Group" shall
include each plan of the Bank or any of its Affiliates that includes a Key
Employee and each plan of the Bank or any of its Affiliates that allows the Plan
to meet the requirements of Section 401(a)(4) of the Code or Section 410 of the
Code and may include any other plan of the Bank or any of its Affiliates, if the
Aggregation Group would continue to meet the requirements of Sections 401(a)(4)
and 410 of the Code.
Section 14.02 Plan Modifications Upon Becoming Top-Heavy.
------------------------------------------
(a) Minimum Accruals. Section 5.04 of the Plan will be modified to provide that
the aggregate amount of Employer contributions allocated in each Plan Year to
the Accounts of each Participant who is a Non-Key Employee (within the meaning
of Section 416(i)(1) of the Code), and who is employed by an Employer as of the
last day of the Plan Year, may not be less than the lesser of:
(i) three percent of his Compensation for the Plan Year; and
(ii) a percentage of his Compensation equal to the largest percentage
obtained by dividing the sum of the amount credited to the Accounts of any
key Employee by that key Employee's Compensation; and
(b) Section 415(e) of the Code. Section 5.05 of the Plan will be modified to
provide that the dollar limitations in the denominators of the "defined benefit
plan fraction" and "defined contribution plan fraction" (as such terms are
defined in Section 415(e) of the Code) will be multiplied by 1.0 instead of
1.25. However, the above sentence shall not apply if "four percent" is
substituted for "three percent" in paragraph (a) of this Section 14.02.
42
<PAGE>
The preceding provisions will remain in effect for the period in which the Plan
is top-heavy. If, for any particular year thereafter, the Plan is no longer
top-heavy, the provisions contained in this Section 14 shall cease to apply,
except that any previously vested portion of any Account balance shall remain
nonforfeitable.
Section 14.03 Super Top-Heavy Provisions.
--------------------------
If, as of a Determination Date, the aggregate present value of the accrued
benefits and Account balances of all "Key Employees" (within the meaning of
Section 416(i) of the Code) and their Beneficiaries exceed 90% of the aggregate
present value of the accrued benefits and Account balances of all Participants
and Beneficiaries, paragraph (a) of Section 14.02 will automatically become
effective as of the first day of such Plan Year, except that Section 14.02(b) of
the Plan will be modified to provide that the dollar limitations in the
denominators of the defined benefit plan fraction and defined contribution plan
fraction in Section 5.05 of the Plan shall be multiplied by 1.0 instead of 1.25,
whether or not the minimum benefit is increased under Section 14.02(a) of the
Plan.
43
<PAGE>
TRUST AGREEMENT
BETWEEN
WEST ESSEX BANK
AND
MARINE MIDLAND BANK
FOR THE
WEST ESSEX BANK
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
<PAGE>
CONTENTS
Page No.
<TABLE>
<CAPTION>
<S> <C>
Section 1 Creation of Trust 1
Section 2 Investment of Trust Fund and
Administrative Powers of the
Trustee 2
Section 3 Compensation and Indemnification
of Trustee and Payment of Expenses
and Taxes 7
Section 4 Records and Valuation 8
Section 5 Instructions from Committee 9
Section 6 Change of Trustees 10
Section 7 Miscellaneous 11
</TABLE>
<PAGE>
This TRUST AGREEMENT dated September 10, 1998, BETWEEN WEST ESSEX BANK, a
federally-chartered savings bank with its principal office at 417 Bloomfield
Avenue, Caldwell, New Jersey 07006-4980 (hereinafter called the "Bank"), AND
MARINE MIDLAND BANK, with offices at 140 Broadway, 11th Floor, New York, New
York 10005 (hereinafter called the "Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, effective January 1, 1998, the Bank approved and adopted an
employee stock ownership plan for the benefit of its employees, West Essex Bank
Employee Stock Ownership Plan, (hereinafter called the "Plan"); and
WHEREAS, the Bank has authorized the execution of this Trust Agreement and
has appointed Marine Midland Bank as Trustee of the Trust Fund created pursuant
to the Plan; and
WHEREAS, Marine Midland Bank has agreed to act as trustee and to hold and
administer the assets of the Plan in accordance with the terms of this Trust
Agreement;
NOW, THEREFORE, the Bank and the Trustee agree as follows:
Section 1. Creation of Trust.
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1.1 Trustee. Marine Midland Bank shall be trustee of the Trust Fund
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created in accordance with and in furtherance of the Plan, and shall serve as
Trustee until its removal or resignation in accordance with Section 6.
1.2 Trust Fund. The Trustee hereby agrees to accept contributions from
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the Employer as defined in the Plan and amounts transferred from other qualified
retirement plans from time to time in accordance with the terms of the Plan.
All such property and contributions, together with income thereon and increments
thereto, shall constitute the "Trust Fund" to be held in accordance with the
terms of the Trust Agreement.
1.3 Incorporation of Plan. An instrument entitled "West Essex Bank
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Employee Stock Ownership Plan" is incorporated herein by reference, and this
Trust Agreement shall be interpreted consistently with that Plan. All words and
phrases defined in that Plan shall have the same meaning when used in this Trust
Agreement, unless otherwise noted.
1.4 Name. The name of this trust shall be "West Essex Bank Employee Stock
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Ownership Plan Trust."
1.5 Nondiversion of Assets. In no event shall any part of the corpus or
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income of the Trust Fund be used for, or diverted to, purposes other than for
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan, except to the extent that assets
may be returned to the Employer in accordance with the Plan where the Plan fails
to qualify initially under Section 401(a) of the Internal Revenue Code (the
"Code"), or where they are attributable to contributions made by mistake of fact
or in excess of the deductibility allowed under the Code.
<PAGE>
Section 2. Investment of Trust Fund and Administrative Powers of the
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Trustee.
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2.1 Stock and Other Investments. The basic investment policy of the Plan
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shall be to invest primarily in Stock of the Employer for the exclusive benefit
of the Participants and their Beneficiaries. The Committee shall have full and
complete investment authority and responsibility with respect to the purchase,
retention, sale, exchange, and pledge of Stock and the payment of Acquisition
Loans, and the Trustee shall not deal in any way with Stock except in accordance
with the Trustee's obligations pursuant to this trust document and the written
instructions of the Committee. The Trustee shall invest, or keep invested, all
or a portion of the Trust Fund in Stock, and shall pay Acquisition Loans out of
assets of the Trust Fund, as instructed from time to time by the Committee. The
Trustee shall invest any balance of the Trust Fund (the "Investment Fund") in
such other property as the Committee, in its sole discretion, shall deem
advisable, subject to any delegation of such investment responsibility pursuant
to Section 2.2. Nothing contained herein shall provide investment discretion
authority or any like kind responsibility in regard to the assets of the Trust
Fund.
In connection with instructions to acquire Stock, the Trustee may purchase
newly issued or outstanding Stock from the Employer or any other holders of
Stock, including Participants, Beneficiaries, and Plan fiduciaries. All
purchases and sales of Stock shall be made by the Trustee at fair market value
as determined by the Committee in good faith and in accordance with any
applicable requirements under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Such purchases may be made with assets of the Trust
Fund, with funds borrowed for this purpose (with or without guarantees of
repayment to the lender by the Employer), or by any combination of the
foregoing.
Notwithstanding any other provision of this Trust Agreement or the Plan,
neither the Committee nor Trustee shall make any purchase, sale, exchange,
investment, pledge, valuation, or loan, or take any other action involving those
assets for which it is responsible which (i) is inconsistent with the policy of
the Plan and Trust, (ii) is inconsistent with the prudence and diversification
requirements set forth in Sections 404(a)(1)(B) and (C) of ERISA (to the extent
such requirements apply to an employee stock ownership plan and trust), (iii) is
prohibited by Section 406 or 407 of ERISA, or (iv) would impair the
qualification of the Plan or the exemption of the Trust under Sections 401 and
501, respectively, of the Code.
2.2 Delegation of Investment Responsibility. The Committee may, by
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written notice and in accordance with the Plan, direct the Trustee to segregate
any portion or all of the Investment Fund into one or more separate accounts for
each of which full investment responsibility will be delegated to an investment
manager appointed in such notice pursuant to Section 402(c)(3) of ERISA
(hereinafter a "Manager"). For any separate account where the Trustee is to
maintain custody of the assets, the Trustee and the Manager shall agree upon
procedures for the transmittal of investment
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instructions from the Manager to the Trustee, and the Trustee may provide the
Manager with such documents as may be necessary to authorize the Manager to
effect transactions directly on behalf of the segregated account.
Further, the Committee may, by written notice and in accordance with the
Plan, direct the Trustee to segregate any portion or all of the Investment Fund
into one or more separate accounts for each of which full investment
responsibility will be delegated to an insurance company through one or more
group annuity contracts, deposit administration contracts, or similar contracts,
which may provide for investments in any commingled separate accounts
established under such contracts. An insurance company shall be a Manager with
respect to any amounts held under such a contract except to the extent the
insurer's assets are not deemed assets of the Plan and Trust Fund pursuant to
Section 401(b)(2) of ERISA. The allocation of amounts held under such a
contract among the insurer's general account and one or more individual or
commingled separate accounts shall be determined by the Committee except as
otherwise agreed by the Committee and the insurer.
Any Manager shall have all of the powers given to the Trustee pursuant to
Section 2.3 with respect to the portion of the Trust Fund committed to its
investment discretion and control. The Trustee shall be responsible for the
safekeeping of any assets which remain in its custody, but in no event shall the
Trustee be under any duty to question or make any inquiry or suggestion
regarding the action or inaction of a Manager or an insurer or the advisability
of acquiring, retaining, or disposing of any asset of a segregated account. The
Employer shall indemnify and hold the Trustee harmless from any and all costs,
damages, expenses, and liabilities which the Trustee may incur by reason of any
action taken or omitted to be taken by the Trustee upon directions from the
Committee, a Manager, or an insurer pursuant to this Section 2.2.
2.3 Trustee Powers. In addition to and not by way of limitation upon the
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fiduciary powers granted to it by law, the Trustee shall have the following
specific powers, subject to the limitations set forth in Section 2.1:
2.3-1 to receive, hold, manage, invest and reinvest the money or other
property which constitutes the Trust Fund, without distinction between principal
and income;
2.3-2 to hold funds uninvested temporarily without liability for interest
thereon, and to deposit funds in one or more savings or similar accounts with
any banks and savings and loan associations which are insured by an
instrumentality of the federal government, including the Trustee if it is such
an institution.
2.3-3 at the direction of the Committee, to invest or reinvest the whole
or any portion of the money or other property which constitutes the Trust Fund
in such common or preferred stocks, investment trust shares, mutual funds,
commingled trust funds, partnership interests, bonds, notes, or other evidences
of indebtedness, and real and personal property as the Trustee in its absolute
judgment and discretion may deem to be for the best interests of the Trust Fund,
regardless of nondiversification to the extent that such nondiversification is
clearly prudent, and regardless of
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whether any such investment or property is authorized by law regarding the
investment of trust funds, of a wasting asset nature, temporarily nonincome
producing, or within or without the United States;
2.3-4 to invest in common and preferred stocks, bonds, notes, or other
obligations of any corporation or business enterprise in which an Employer or
its owners may own an interest;
2.3-5 at the direction of the Committee, to exchange any investment or
property, real or personal, for other investments or properties at such time and
upon such terms as the Trustee shall deem proper;
2.3-6 at the direction of the Committee, to sell, transfer, convey or
otherwise dispose of any investment or property, real or personal, for cash or
on credit, in such manner and upon such terms and conditions as the Trustee
shall deem advisable, and no person dealing with the Trustee shall be under any
duty to inquire as to the validity, expediency, or propriety of any such sale or
as to the application of the purchase money paid to the Trustee;
2.3-7 to hold any investment or property in the name of the Trustee, with
or without the designation of any fiduciary capacity, or in name of a nominee,
or unregistered, or in such other form that title may pass by delivery;
provided, however, that the Trustee's records always show that such investment
or property belongs to the Trust Fund and the Trustee shall not be relieved
hereby of its responsibility to maintain safe custody of such investment or
property;
2.3-8 to organize one or more corporations to hold, manage, or liquidate
any property, including real estate, owned or acquired by the Trust Fund if in
the sole discretion of the Trustee the organization of such corporation or
corporations is for the best interest of the Trust and the Plan participants and
beneficiaries;
2.3-9 to extend the time for payment of, to modify, to renew, or to
release security from any mortgage, note or other evidence of indebtedness, or
to take advantage of or waive any default; to foreclose mortgages and bid on
property under foreclosure or to take title to property by conveyance in lieu of
foreclosure, either with or without the payment of additional consideration;
2.3-10 to vote in person or by proxy all stocks and other securities
having voting privileges; to exercise or refrain from exercising any option or
privilege with respect to stocks and other securities, including any right or
privilege to subscribe for or otherwise to acquire stocks and other securities;
or to sell any such right or privilege; to assent to and join in any plan of
refinance, merger, consolidation, reorganization or liquidation of any
corporation or other enterprise in which this Trust may have an interest, to
deposit stocks and other securities with any committee formed to effectuate the
same, to pay any expense incidental thereto, to exchange stocks and other
securities for those which may be issued pursuant to any such plan, and to
retain as an investment the stocks and other securities received by the Trustee;
and to deposit any investment in a voting trust; notwithstanding the preceding,
participants and beneficiaries shall be entitled to direct the manner in which
stock
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allocated to their respective accounts are to be voted on all matters. All stock
which has been allocated to participant's accounts for which the Trustee has
received no written direction and all unallocated Employer securities will be
voted by the Trustee in direct proportion to any participant directions received
and solely in the interest of the participants and beneficiaries. Whenever such
voting rights are to be exercised, the Employer, the Committee and the Trustee
shall see that all participants and beneficiaries are provided with adequate
opportunity to deliver their instructions to the Trustee regarding voting of
stock allocated to their accounts. The instructions of the participants with
respect to the voting of allocated shares hereunder shall be confidential;
2.3-11 to abandon any property, real or personal, which the Trustee shall
consider to be worthless or not of sufficient value to warrant its keeping or
protecting; to abstain from the payment of taxes, water rents, assessments,
repairs, maintenance, and upkeep of any such property; to permit any such
property to be lost by tax sale or other proceedings, and to convey any such
property for a nominal consideration or without consideration;
2.3-12 to borrow money from the Employer or from others (including the
Trustee), and to enter into installment contracts, for the purchase of Stock
upon such terms and conditions and at such reasonable rates of interest as the
Committee may deem to be advisable, to issue its promissory notes as Trustee to
evidence such debt, to secure the payment of such notes by pledging any property
of the Trust Fund, and to authorize the holders of any such notes to pledge them
to secure obligations of the holders and in connection therewith to repledge any
assets of the Trust as security therefor; provided that, with respect to any
extension of credit to the Trust involving, as a lender or guarantor, the
Employer or other "disqualified person" within the meaning of Section 4975(e)(2)
of the Code:
(a) each loan or installment contract is primarily for the benefit of
Participants and Beneficiaries of the Plan;
(b) any interest on a loan or installment contract does not exceed a
reasonable rate;
(c) the proceeds of any loan shall be used only to acquire Stock, to repay
the loan, or to repay a previous loan meeting these conditions, and the
subject of any installment contract shall be only the Trust's purchase
of Stock;
(d) any collateral pledged to a creditor by the Trustee shall consist only
of qualifying employer securities as that term is defined under Section
4975(e)(8) of the Code and any other collateral permissible under
applicable law and the creditor shall have no recourse against the
Trust Fund except with respect to the collateral (although the creditor
may have recourse against an Employer as guarantor);
(e) payments with respect to a loan or installment contract shall be made
only from those amounts contributed by the Employer to the Trust Fund,
from amounts earned on such contributions, and from cash dividends
received on unallocated Stock held by the Trust as collateral for such
an obligation; and
(f) upon the payment of any portion of balance due on a loan or upon any
installment payment, a proportionate part of any qualified employer
securities originally pledged as collateral for such indebtedness shall
be released from encumbrance in accordance with the applicable
provisions of the Plan and the Committee shall at least annually
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advise the Trustee of the number of shares of Stock so released and the
proper allocation of such shares under the terms of the Plan;
2.3-13 to manage and operate any real property which shall at any time
constitute an asset of the Trust Fund; to make repairs, alterations, and
improvements thereto; to insure such property against loss by fire or other
casualty; to lease or grant options for the sale of such property, which lease
or option may be for a period of time which may extend beyond the life of this
Trust; and to take any other action or enter into any other contract respecting
such property which is consistent with the best interests of the Trust;
2.3-14 to pay any and all reasonable and normal expenses incurred in
connection with the exercise of any power, right, authority or discretion
granted herein, and, upon prior notice to the Company, to employ and compensate
agents, investment counsel, custodians, actuaries, attorneys, and accountants in
such connection;
2.3-15 to employ and consult with any legal counsel, who also may be
counsel to an Employer or the Administrator, with respect to the meaning or
construction of this Trust Agreement, the extent of the Trustee's obligations
and duties hereunder, and whether the Trustee should take or decline to take a
particular action hereunder, and the Trustee shall be fully protected with
respect to any action taken or omitted by such Trustee in good faith pursuant to
such advice;
2.3-16 to defend any action or proceeding instituted against the Trust
Fund, to institute any action on behalf of the Trust Fund, and to compromise or
submit to arbitration any dispute concerning the Trust Fund;
2.3-17 to make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted;
2.3-18 to commingle the Trust Fund created pursuant hereto, in whole or in
part, in a single trust with all or any portion of any other trust fund,
assigning an undivided interest to each such commingled trust fund, provided
that such commingled trust is itself exempt from taxation pursuant to Section
501(a) of the Code, or its successor Section; and provided further that the
trust agreement governing such commingled trust shall be deemed incorporated by
reference in the Plan;
2.3-19 where two or more trusts governed by this Trust Agreement have an
undivided interest in any property, to credit the income from such property to
such trusts in proportion to their undivided interests, and when non pro rata
distributions of property or money are made from such trusts, to make
appropriate adjustments to the undivided fractional interests of such trusts;
2.3-20 to invest all or any portion of the Trust Fund in one or more group
annuity contracts, deposit administration contracts, and other such contracts
with insurance companies, including any commingled separate accounts established
under such contracts;
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2.3-21 generally, with respect to all cash, stocks and other securities,
and property, both real and personal, received or held in the Trust Fund by the
Trustee, to exercise all the same rights and powers as are or may be lawfully
exercised by persons owning cash, or stocks and other securities, or such
property in their own right; and to do all other acts, whether or not expressly
authorized, which it may deem necessary or proper for the protection of the
Trust Fund; and
2.3-22 whenever more than two persons shall qualify to act as co-trustees,
to exercise and perform every power (including discretionary powers), authority
or duty by the concurrence of a majority of them the same effect as if all had
joined therein, except that the unanimous vote of such persons shall be
necessary to determine the number (one or more) and identity of persons who may
sign checks, make withdrawals from financial institutions, have access to safe
deposit boxes, or direct the sale of trust assets and the disposition of the
proceeds.
2.4 Brokerage. If permitted in writing by the Committee the Trustee shall
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have the power and authority, to be exercised in its sole discretion at any time
and from time to time, to issue and place orders for the purchase or sale of
securities with qualified brokers and dealers. Such orders may be placed with
such qualified brokers and/or dealers who also provide investment information or
other research or statistical services to the Trustee in its capacity as a
fiduciary or investment manager for other clients.
Section 3. Compensation and Indemnification of Trustee and Payment of
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Expenses and Taxes.
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3.1 Fees and Expenses from Fund. Compensation of Trustee. In
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consideration for rendering services pursuant to this Trust Agreement the
Trustee shall be paid fees in accordance with the Trustee's fee schedule as in
effect from time to time. Fee changes resulting in fee increases shall be
effective upon not less than 30 days' notice to the Company. In addition, the
Trustee shall be reimbursed for any reasonable expenses, including reasonable
attorneys' fees, incurred in the administration of the Trust created hereby.
Fees and expenses shall be allocated to Participant Accounts, if any, unless
paid directly by the Employer. All compensation and expenses of the Trustee
shall be paid out of the Trust Fund or by the Employer as specified in the Plan.
If and to the extent the Trust Fund shall not be sufficient, such compensation
and expenses shall be paid by the Employer upon demand. If payment is due but
not paid by the Employer, such amount shall be paid from the assets of the Trust
Fund. The Trustee is hereby empowered to withdraw all such compensation and
expenses which are 60 days past due from the Trust Fund, and, in furtherance
thereof, liquidate any assets of the Trust Fund, without further authorization
or direction from or by any person.
3.2 Indemnification. Notwithstanding any other provision of this Trust
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Agreement, any individual designated as a trustee hereunder shall be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
individual in connection with any claim made against him or in which he may be
involved
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by reason of his being, or having been, a trustee hereunder, to the extent such
amounts are not satisfied by insurance maintained by the Employer, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken. Further, any
corporate trustee and its officers, directors and agents may be indemnified and
held harmless by the Employer to the fullest extent permitted by law against any
and all costs, damages, expenses and liabilities including, but not limited to
attorneys' fees and disbursements reasonably incurred by or imposed upon such
persons and/or corporation in connection with any claim made against it or them
or in which such persons and/or corporation may be involved by reason of its
being, or having been, a trustee hereunder, except liability which is
adjudicated to have resulted from the gross negligence or willful misconduct of
the Trustee by reason of any action so taken.
3.3 Expenses. All expenses of administering this Trust and the Plan,
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whether incurred by the Trustee or the Committee, shall be paid by the Trustee
from the Trust Fund to the extent such expenses shall not have been assumed by
the Employer.
3.4 Taxes. All taxes that may be levied or assessed upon or in respect of
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the Trust Fund shall be paid from the Trust Fund. The Trustee shall notify the
Committee of any proposed or final assessments of taxes and may assume that any
such taxes are lawfully levied or assessed unless the Committee advises it in
writing to the contrary within fifteen days after receiving the above notice
from the Trustee. In such case, the Trustee, if requested by the Committee in
writing, shall contest the validity of such taxes in any manner deemed
appropriate by the Committee; the Employer may itself contest the validity of
any such taxes, in which case the Committee shall so notify the Trustee and the
Trustee shall have no responsibility or liability respecting such contest. If
either party to this Agreement contests any such proposed levy or assessments,
the other party shall provide such information and cooperation as the party
conducting the contest shall reasonably request.
Section 4. Records and Valuation.
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4.1 Records. The Trustee, and any investment manager appointed pursuant
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to Section 2.2, shall maintain accurate and detailed records and accounts of all
investments, receipts, disbursements and other transactions made by it with
respect to the Trust Fund, and all accounts, books and records relating thereto
shall be open at all reasonable time to inspection and audit by the Committee
and the Employer.
4.2 Valuation. From time to time upon the request of the Committee, but
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at least annually as of the last day of each Plan Year, the Trustee shall
prepare a balance sheet of the Investment Fund in accordance with Section 8.2 of
the Plan and shall deliver copies of the balance sheet to the Committee and the
Employer.
4.3 Discharge of Trustee. Ninety days after the filing of any balance
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sheet under Section 4.2 or any accounting under Section 6, the Trustee shall be
forever released and discharged from any liability or accountability other than
for gross negligence or wilful misconduct on the part of the
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Trustee to anyone with respect to the transactions shown or reflected in such
balance sheet or accounting, except with respect to any acts or transactions as
to which the Committee, within such ninety-day period, files written objections
with the Trustee. The written approval of the Committee of any balance sheet or
accounting so filed by the Trustee, or the Committee's failure to file written
objections within ninety days, shall be a settlement of such balance sheet or
accounting as against all persons, and shall forever release and discharge the
Trustee from any liability of accountability to anyone with respect to the
transactions shown or reflected in such balance sheet or accounting other than
liability arising out of the Trustee's gross negligence or wilful misconduct. If
a statement of objections is filed by the Committee and the Committee is
satisfied that its objections should be withdrawn or if the balance sheet or
accounting is adjusted to its satisfaction, the Committee shall indicate its
approval of the balance sheet or accounting in a written statement filed with
the Trustee and the Trustee shall be forever released and discharged from any
liability of accountability to anyone in accordance with the immediately
preceding sentence. If an objection is not settled by the Committee and the
Trustee, the Trustee may start a proceeding for a judicial settlement of the
balance sheet or accounting in any court of competent jurisdictions; the only
parties that need be joined in such a proceeding are the Trustee, the Committee,
the Employer and any other parties whose participation is required by law.
4.4 Right to Judicial Settlement. Nothing in this Agreement shall prevent
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the Trustee from having its account settled by a court of competent jurisdiction
at any time. The only parties that need be joined in any such proceeding are the
Employer, the Committee, the Trustee and any other parties whose participation
is required by law.
Section 5. Instructions from Committee.
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5.1 Certification of Members of the Committee. From time to time the
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Company shall certify to the Trustee in writing the names of the individuals
comprising the Committee and shall furnish to the Trustee specimens of their
signatures and the signatures of their agents, if any. The Trustee shall be
entitled to presume that the identities of such individuals and their agents are
unchanged until it receives a certification from the Company notifying it of any
changes.
5.2 Instructions to Trustee.
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(a) The Trustee shall pay benefits and administrative expenses under the
Plan only when it receives (and in accordance with) written instructions of the
Committee indicating the amount of the payment and the name and address of the
recipient in accordance with the terms of the Plan. The Trustee need not inquire
into whether any payment the Committee instructs the Trustee to make is
consistent with the terms of the Plan or applicable law or otherwise proper. Any
payment made by the Trustee in accordance with such instructions shall be a
complete discharge and acquittance to the Trustee. If the Committee advises the
Trustee that benefits have become payable with respect to a Participant's
interest in the Trust Fund but does not instruct the Trustee as to the manner of
payment, the Trustee shall hold the Participant's interest in the Trust until
the Trustee receives written instructions from the Committee as to the manner of
payment. The Trustee shall not pay benefits
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from the Trust Fund without such instructions, even though it may be informed
from other sources, including, without limitation, a Participant or Beneficiary,
that benefits are payable under the Plan. The Trustee shall have no
responsibility to determine when, to whom or in what amount benefits and
expenses are payable under the Plan. Further, the Trustee shall have no power,
authority or duty to interpret the Plan or inquire into the decisions or
determinations of the Committee, or to question the instructions given to it by
the Committee. If the Committee so directs, the Trustee shall segregate amounts
payable with respect to the interest in the Plan of any Participant and
administer them separately from the rest of the Trust Fund in accordance with
the Committee's instructions.
(b) The Trustee may require the Committee to certify in writing that any
payment of benefits or expenses it instructs the Trustee to make pursuant to
Section 5.2(a) above is: (i) in accordance with the terms of the Plan and/or
(ii) one which the Committee is authorized by the Plan and any other applicable
instruments to direct and/or (iii) made for the exclusive purpose of providing
benefits to Participants and Beneficiaries, or defraying reasonable expenses of
Plan administration and/or (iv) not made to a party in interest (within the
meaning of ERISA Section 3(14)), and/or (v) not a prohibited transaction (within
the meaning of Code Section 4975 and ERISA Section 406). If the Trustee
requests, instructions to pay benefits shall be made by the Committee on forms
prepared by the Trustee to include any or all of the above representations. The
Trustee shall be fully protected in relying on the truth of any such
representation by the Committee and shall have no duty to investigate whether
such representations are correct or to see to the application of any amounts
paid to and received by the recipient.
5.3 Plan Change. In the event of an amendment, merger, division, or
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termination of the Plan, the Trustee shall continue to disburse funds and to
take other proper actions in accordance with the instructions of the Committee.
Section 6. Change of Trustees.
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The Company may at any time remove any person or entity serving as Trustee
hereunder by giving to such person or entity written notice of removal and, if
applicable, the name and address of the successor trustee. Any person or entity
serving as Trustee hereunder may resign at any time by giving written notice to
the Company. Any such removal or resignation shall take effect within 30 days
after notice has been given by the Trustee or by the Company, as the case may
be. Within those 30 days, the removed or resigned Trustee shall transfer, pay
over and deliver any portion of the Trust Fund in its possession or control
(less an appropriate reserve for any unpaid fees, expenses, and liabilities) and
all pertinent records to the successor or remaining trustee; provided, however,
that any assets which are invested in a collective fund or in some other manner
which prevents their immediate transfer shall be transferred and delivered to
the successor trustee as soon as may be practicable. Thereafter, the removed or
resigned Trustee shall have no liability for the Trust Fund or for its
administration by the successor or remaining trustee, but shall render an
accounting to the Committee of its administration of the Trust Fund through the
date on which its trusteeship shall have been terminated. The Company may also,
upon 30 days' notice to each person currently serving as a Trustee, appoint one
or more persons to serve as co-trustees hereunder.
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Section 7. Miscellaneous.
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7.1 Right to Amend. This Trust Agreement may be amended from time to time
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by an instrument executed by the Company; provided, however, that any amendment
affecting the powers, duties or liabilities of the Trustee must be approved by
the Trustee, and provided, further, that no amendment may divert any portion of
the Trust Fund to purposes other than the exclusive benefit of the Participants
and their Beneficiaries prior to the satisfaction of all liabilities for
benefits. Any amendment shall apply to the Trust Fund as constituted at the
time of the amendment as well as to that portion of the Trust Fund which is
subsequently acquired.
7.2 Compliance with ERISA. In the exercise of its powers and the
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performance of its duties, the Trustee shall act in good faith and in accordance
with the applicable requirements under ERISA. Except as may be otherwise
required by ERISA, the Trustee shall not be required to furnish any bond in any
jurisdiction for the performance of its duties and, if a bond is required
despite this provision, no surety shall be required on it.
7.3 Nonresponsibility for Funding. The Trustee shall be under no duty to
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enforce the payment of any contributions and shall not be responsible for the
adequacy of the Trust Fund to satisfy any obligations for benefits, expenses,
and liabilities under the Plan.
7.4 Reports. The Trustee shall file any report which it is required by
--------
law to file with any governmental authority with respect to this Trust, and the
Committee shall furnish to the Trustee whatever information is necessary to
prepare the report.
7.5 Dealings with Trustee. Persons dealing with the Trustee, including
----------------------
but not limited to banks, brokers, dealers, and insurers, shall be under no
obligation to inquire concerning the validity of anything which the Trustee
purports to do, nor need any person see to the proper application of any money
paid or any property transferred upon the order of the Trustee or to inquire
into the Trustee's authority as to any transaction.
7.6 Limitation Upon Responsibilities. The Trustee shall have no
---------------------------------
responsibilities with respect to the Plan or Trust other than those specifically
enumerated or explicitly allocated to it under this Trust Agreement or the
provisions of ERISA. All other responsibilities are retained and shall be
performed by one or more of the Employer, the Committee, and such advisors or
agents as they choose to engage.
The Trustee may execute any of the trusts or powers hereof and perform any
of its duties by or through attorneys, agents, receivers or employees and shall
not be answerable for the conduct of the same if chosen with reasonable care and
shall be entitled to advice of counsel concerning all matters of trust hereof
and the duties hereunder, and may in all cases pay such reasonable compensation
to all such attorneys, agents, receivers and employees as may reasonably be
employed in connection with the trusts hereof. The Trustee may act upon the
opinion or advice of any attorney (who may be the attorney for the trustee or
attorney for the Committee), approved
11
<PAGE>
by the Trustee in the exercise of reasonable care. The Trustee shall not be
responsible for any loss or damage resulting from any action or non-action in
good faith in reliance upon such opinion or advice.
The Trustee shall be protected in acting upon any notice, request, consent,
certificate, order, affidavit, letter, telegram or other paper or document
believed to be genuine and correct and to have been signed or sent by the proper
person or persons, and the Trustee shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing but
may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained.
The Trustee shall not be liable for other than its gross negligence or
willful misconduct. Except in the case of gross negligence or wilful misconduct
on the part of the Trustee, the Trustee in its corporate capacity shall not be
liable for claims of any persons in any manner regarding the Plan; such claims
shall be limited to the Trust Fund. Unless the Trustee participates knowingly
in, or knowingly undertakes to conceal, an act or omission of the Committee or
any other fiduciary, knowing such act or omission to be a breach of fiduciary
responsibility, the Trustee shall be under no liability for any loss of any kind
which may result by reason of such act or omission.
Before taking any action hereunder at the request or direction of the
Committee, the Trustee may require that indemnity in form and amount
satisfactory to the Trustee be furnished for the reimbursement of any and all
costs and expenses to which it may be put including, without limitation,
reasonable attorneys' fees and to protect it against all liability, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.
No provision of this Agreement shall require the Trustee to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or powers..
7.7 Qualification of Plan and Trust. The Trustee shall be fully protected
--------------------------------
in assuming that the Plan and Trust meet the requirements of Code Section 401
and 501, respectively, and all the applicable provisions of ERISA unless it is
advised to the contrary in writing by the Committee or a governmental agency.
7.8 Party in Interest Information. The Employer shall provide the Trustee
------------------------------
with such information concerning the relationship between any person or
organization and the Plan as the Trustee reasonably requests in order to
determine whether such person or organization is a party in interest with
respect to the Plan within the meaning of ERISA Section 3(14).
7.9 Disputes. If a dispute arises as to the payment of any funds or
---------
delivery of any assets by the Trustee, the Trustee may withhold such payment or
delivery until the dispute is determined by a court of competent jurisdiction or
finally settled in writing by the parties concerned.
12
<PAGE>
7.10 Successor Trustees. This Trust Agreement shall apply to any person
-------------------
who shall be appointed to succeed the person currently appointed as the Trustee;
and any reference herein to the Trustee shall be deemed to include any one or
more individuals or corporations or any combination thereof who or which have at
any time acted as a co-trustee or as the sole trustee.
7.11 Governing State Law. This Trust Agreement shall be interpreted in
--------------------
accordance with the laws of the State of New Jersey to the extent those laws may
be applicable under the provisions of ERISA.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ATTEST: WEST ESSEX BANK
/s/ Craig L. Montanaro By: /s/ Dennis A. Petrello
- - ----------------------------- --------------------------
Craig L. Montanaro Dennis A. Petrello
Secretary Executive Vice President and
Chief Financial Officer
ATTEST: MARINE MIDLAND BANK
as TRUSTEE
By: /s/ Richard A. Glover
- - ------------------------------ --------------------------
Richard A. Glover
14
<PAGE>
[WEST ESSEX BANCORP, INC. LETTERHEAD]
September 9, 1998
West Essex Bancorp, Inc.
417 Bloomfield Avenue
Caldwell, New Jersey 07006
Dear Mr. Montanaro:
This letter confirms West Essex Bancorp, Inc.'s (in organization), (the
"Company") commitment to fund a leveraged ESOP in an amount sufficient to
purchase 8% of the shares offered in the West Essex Bank, FSB's reorganization
into the two-tier form of mutual holding company structure and concurrent stock
offering by the Company (the "Reorganization and Offering"), including those
shares contributed to the charitable foundation formed in connection with the
Reorganization and Offering. The commitment is subject to the following terms
and conditions:
1. Lender: West Essex Bancorp, Inc.
------
2. Borrower: West Essex Bank Employee Stock Ownership Plan Trust.
--------
3. Trustee: Marine Midland Bank
--------
4. Security: Unallocated shares of stock of the Company held in the West
--------
Essex Bank Employee Stock Ownership Plan Trust.
5. Maturity: Up to 10 years from takedown.
--------
6. Amortization: Equal annual principal and interest payments
------------
7. Pricing:
-------
a. Lowest "prime rate" as published in the Wall Street Journal on
the date of the loan transaction.
<PAGE>
8. Interest Payments:
-----------------
a. Annual on a 360 day basis.
9. Prepayment: Voluntary prepayments are permitted at any time.
----------
10. Conditions Precedent to Closing: Receipt by the Company and the
-------------------------------
Borrower of all supporting loan documents in a form and with terms and
conditions satisfactory to the Company and its counsel and the
Borrower and its counsel. Consummation of the transaction will also
be contingent upon no material adverse change occurring in the
condition of West Essex Bank or the Company.
If the terms and conditions are agreeable to you, please indicate your
acceptance by signing the enclosed copy and returning it to my attention.
Sincerely,
/s/ Dennis A. Petrello
----------------------------
Dennis A. Petrello
Executive Vice President and
Chief Financial Officer
Accepted on Behalf of
West Essex Bank Employee Stock Ownership Plan Trust
By: /s/ Leopold W. Montanaro Date: September 9, 1998
-------------------------------------- ---------------------
Leopold W. Montanaro
President and Chief Executive Officer
<PAGE>
WEST ESSEX BANK
EMPLOYEE STOCK OWNERSHIP TRUST
LOAN AND SECURITY AGREEMENT
West Essex Bancorp, Inc. October 1, 1998
417 Bloomfield Avenue
Caldwell, New Jersey 07006-4980
Gentlemen:
The undersigned, Marine Midland Bank ("Trustee"), not individually but
solely as Trustee under the West Essex Bank Employee Stock Ownership Plan Trust
(the "Trust") effective September 10, 1998 ("Borrower"), applies to you, West
Essex Bancorp, Inc., (hereinafter referred to as the "Lender"), for your
commitment, subject to all terms and conditions hereof and on the basis of the
representations hereinafter set forth, to make a loan available to the Borrower
as hereinafter set forth. The term "Bank" as used herein refers to West Essex
Bank, the sponsoring employer of the West Essex Bank Employee Stock Ownership
Plan (the "ESOP").
SECTION ONE. THE TERM LOAN.
1.1 Amount and Terms. Subject to and upon the terms and conditions herein
----------------
set forth, the Lender agrees to lend amounts to the Borrower, (the "Loan"), from
time to time during the period of this agreement up to but not including the
maturity date of December 31, 2007 an aggregate principal amount ("Loan Amount")
sufficient to permit the Borrower to acquire a number of shares ("Shares") of
common stock, par value $0.01 ("Common Stock") of West Essex Bancorp, Inc., a
federally-chartered corporation and the stock holding company of the Bank, equal
to 8% of the minority interest Shares issued in connection with the
reorganization and offering of the Bank from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank in the mutual holding
company form of organization (the "Reorganization"), including the shares issued
to the West Essex Bancorp Charitable Foundation, a charitable foundation being
established in connection with the Reorganization.
The Loan is intended to be an "exempt loan" as described in Section
4975(d)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), as
defined in Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"),
as described in Section 408(b)(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and as described in Department of Labor
Regulations Section 2550.408b-3 (collectively, the "Exempt Loan Rules").
<PAGE>
1.2 The Note. The disbursement of the Loan pursuant to Section 1.1 hereof
--------
shall be made against and evidenced by a promissory note of the Borrower in the
form annexed hereto as Exhibit A (the "Note"), such Note is to bear interest as
hereinafter provided, and to mature in ten (10) equal annual installments
consisting of both principal and interest amortized over a ten (10) year period
in an amount sufficient to repay all borrowed amounts plus interest, commencing
on December 31, 1998 and on the last day of each and every December each year
thereafter, except that the final installment in the amount of all principal and
interest not sooner paid shall be due on December 31, 2007, the final maturity
thereof.
Without regard to the principal amount of the Note stated on its face, the
actual principal amount at any time outstanding and owed by the Borrower on
account of the Note shall be the amount of the disbursement of the Loan made by
the Lender under Section 1.1 hereof less all payments of principal actually
received by the Lender. The amount of such disbursement made by the Lender and
any repayments of principal thereof shall be recorded by the Lender on its books
or records or, at its option, endorsed on the reverse side of the Note by the
Lender and the unpaid principal balance at any time so recorded or endorsed by
the Lender shall be prima facie evidence in any court or other proceedings
brought to enforce the Note of the principal amount remaining unpaid thereon.
1.3 Exempt Loan Rules. Notwithstanding anything to the contrary contained
------------------
in this Loan and Security Agreement (the "Agreement") or in the Note, the
Borrower shall be obligated to make repayments of the Loan only to the extent
that such repayments when added to the repayments theretofore made during the
applicable plan year would not exceed an amount which would cause the
limitations of Section 415 of the Code to be exceeded for any ESOP participant.
Except as set forth in the next succeeding sentence and to the extent
permitted by applicable law, including, without limitation, the Exempt Loan
Rules, the principal amount of the Loan and any interest thereon shall be
payable solely from contributions (other than contributions of employer
securities) made to the Trust in accordance with the ESOP, and cash dividends
received on the Shares, to enable the Borrower to pay its obligations under the
Loan and from earnings attributable to the Shares and the investment of such
contributions and dividends.
The Lender acknowledges and agrees that it shall have no other recourse
against the Borrower for repayment of the Loan and that it shall have no
recourse against assets of the ESOP included in the Trust other than pursuant to
Sections 3 and 8 hereof.
SECTION TWO. INTEREST AND FEES.
2.1 Interest Rate. The Loan shall bear interest (which the Borrower
-------------
hereby promises to pay) prior to maturity (whether by lapse of time,
acceleration or otherwise) at a rate per annum equal at all times to the
"Interest Rate," defined for purposes of this Agreement to mean the lowest prime
rate reported in the Wall Street Journal on the date of the Reorganization.
2
<PAGE>
2.2 Basis and Payment Dates. All interest accruing on the Note prior to
-----------------------
maturity shall be due and payable on a annual basis on the last day of each year
(commencing December 31, 1998) and at maturity (unless prepaid in whole prior to
such date, then on the date of such prepayment in whole) and interest accruing
after maturity shall be due and payable upon demand. All interest on the Note
shall be computed on the basis of a year of 360 days.
SECTION THREE. COLLATERAL.
3.1 Grant of Security Interest-Pledged Shares. The Borrower hereby
-----------------------------------------
grants, pledges and assigns to the Lender all Shares of the issued and
outstanding common stock, par value $.01 per share all of which were either (i)
purchased by the Borrower from the proceeds of the disbursement of the Loan;
(ii) acquired by the Borrower with the proceeds of a prior exempt loan within
the meaning of Section 54.4975-7(b) of the Regulations, and pledged as
collateral for such prior exempt loan, where the balance of such prior exempt
loan has been repaid with the proceeds of the disbursement of the Loan (the
"Pledged Shares" being hereinafter referred to as the "Collateral"). The Pledged
Shares shall be evidenced by a stock certificate. The assignment and pledge
herein granted and provided for is made and given to secure and shall secure the
prompt payment of principal of and interest on the Note as and when the same
becomes due and payable and the payment, observance and performance of any and
all obligations and liabilities arising under or provided for in this Agreement
or the Note or any of them in each instance as the same may be amended or
modified and whether now existing or hereafter arising.
3.2 Further Assurances. The Borrower covenants and agrees that it will at
------------------
any time and from time to time as requested by the Lender execute and deliver
such further instruments and perform such other acts as the Lender may
reasonably deem necessary or desirable to provide for or perfect the lien of the
Lender in the Collateral hereunder.
3.3 Voting. Upon the occurrence of a Default, as defined in Section 9
------
hereunder, the Lender shall have the right to transfer the Collateral or any
part thereof into its name or into the name of its nominee. The Lender shall not
be entitled to vote the Pledged Shares unless and until a Default has occurred
and so long as the same shall not have been waived by the Lender.
3.4 Partial Releases. The Lender agrees, provided always that no Default
----------------
shall have occurred and be continuing, as promptly as is practicable after
December 31 in each year (the period commencing the date hereof and ending
December 31 and each subsequent 12-month period ending on December 31 being
hereinafter referred to as a "Plan Year"), to release that number of Pledged
Shares then being held to secure the Loan which is equal to the number of such
Pledged Shares held as of the last day of the Plan Year multiplied by a
fraction, the numerator of which is the aggregate amount of all principal and
interest payments made on the Note during the Plan Year and the denominator of
which is the sum of the numerator plus the unpaid principal and interest of the
Note as of the last day of such Plan Year.
3
<PAGE>
SECTION FOUR. PAYMENTS.
4.1 Place and Application. All payments of principal, interest, fees and
---------------------
all other amounts payable hereunder shall be made to the Lender at 417
Bloomfield Avenue, Caldwell, New Jersey 07006-4980, for the account of the
Lender (or at such other place for the account of the Lender as the Lender may
from time to time in writing specify to the Borrower) in immediately available
and freely transferable funds. All payments shall be paid in full without setoff
or counterclaim and without reduction for and free from any and all taxes,
levies, duties, fees, charges, deductions, withholdings, restrictions or
conditions of any nature imposed by any government or any political subdivision
or taxing authority thereof.
4.2 Prepayments. The Borrower shall have the privilege of prepaying in
-----------
whole or in part the Note at any time upon giving three (3) Business Days' prior
notice to the Lender, each such prepayment to be made by the payment of the
principal amount to be prepaid and accrued interest thereon to the date fixed
for prepayment. The term "Business Day" shall mean any day on which savings
institutions are generally open for business in New Jersey, other than Saturday
and Sunday. All such prepayments shall be made without premium or penalty.
Prepayments shall first be applied to the several installments of the Note in
the inverse order of their respective maturities.
SECTION FIVE. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants, to the best of its knowledge, to the
Lender as follows:
5.1 The Trust is a duly organized, validly existing employee stock
ownership trust.
5.2 The proceeds of the disbursement of the Loan shall be applied in their
entirety to the payment of the purchase price for the Pledged Shares.
5.3 The Borrower has full right, power and authority to enter into this
Agreement, to make the borrowings hereunder provided for, to issue the Note in
evidence thereof and to perform each and all of the matters and things herein
and therein provided for and this Agreement does not, and the Note when issued
will not, nor will the performance or observance by the Borrower of any of the
matters or things herein or therein provided, contravene any provision of law or
the Trust or any other covenant or agreement affecting the Trust or any of its
assets. As of the date of the disbursement of the Loan, the Pledged Shares will
be fully paid and non-assessable and the Pledged Shares will be owned by the
Borrower free and clear of all liens, charges and encumbrances whatsoever,
except for any lien of Lender provided for herein.
5.4 Except as disclosed to the Lender in writing, there is no litigation
or governmental proceeding pending, nor to the knowledge of the Borrower
threatened, against the ESOP and Trust.
5.5 The ESOP and Trust have no material liabilities, whether absolute or
contingent, except for those heretofore disclosed to the Lender.
4
<PAGE>
SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender represents and warrants that:
6.1 The Lender is a corporation duly organized under the laws of the
United States, and is validly existing and not in violation of its federal
charter and bylaws issued under the laws of the United States. The Lender has
full power and authority and legal right to make and perform this Agreement.
6.2 The execution, delivery and performance by the Lender of this
Agreement have been duly authorized by all necessary action by the Lender and is
not and will not violate any provisions of law applicable to the Lender, any
rules, regulations or orders applicable to the Lender or any judgments or
decrees binding upon the Lender. This Agreement is a valid and legally binding
obligation of the Lender enforceable against the Lender in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting credits' rights generally
and the general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
6.3 No authorizations, approvals or consents of, and no filings or
registrations with, any governmental regulatory authority or agency are required
for the execution, delivery or performance by the Lender of this Agreement, or
any transaction contemplated hereby, or for the validity or enforceability
against the Lender hereof except as have already been received or accomplished.
6.4 The execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated hereby will not violate, conflict
with or constitute a default under (i) any of the provisions of the Lender's
Federal Charter or Bylaws, (ii) any provision of any agreement, instrument,
order, arbitration award, judgment or decree to which the Lender is a party or
by which it is or its assets are bound or (iii) any statute, rule or regulation
of any federal, state or local government or agency applicable to the Lender,
except in any such case (i), (ii), (iii) above, for any such conflicts,
violations, defaults which either individually or in the aggregate do not have a
material adverse effect on the business properties of the Lender and its
subsidiaries, taken as a whole.
6.5 The Bank has taken such actions as are required by applicable law to
be taken by it to establish the ESOP and the Trust.
6.6 There is no action, suit, investigation or proceeding pending, or to
the best knowledge of the Bank, threatened against or affecting the ESOP before
any court or governmental department, agency or instrumentality.
6.7 The Loan will be an "exempt loan" as that term is defined under
Section 54.4975-7(b)(1)(iii) of the Regulations, provided the ESOP Committee
determines that the interest rate is not more than reasonable; and the
transactions contemplated by this Agreement which are
5
<PAGE>
"prohibited transactions" within the meaning of Section 4975 of the Code or
Section 406(a) of ERISA are subject to exemption pursuant to Section 4975(d)(3)
of the Code and Section 408 of ERISA.
6.8 Except as otherwise provided in this Agreement, the Shares are not
subject to any restriction on transfer under applicable Federal securities law
and may be freely traded over-the-counter.
6.9 The Bank shall apply for a determination letter from the Internal
Revenue Service that the Plan and the Trust, taken together, qualify as an
employee stock ownership plan for purposes of Section 4975(e)(7) of the Code and
the rules and regulations thereunder.
6.10 The Bank or its affiliates shall make contributions to the ESOP
sufficient to enable the Trustee to make payments on the Loan as required in
accordance with its terms.
SECTION SEVEN. CONDITIONS PRECEDENT.
The obligation of the Lender to make the Loan shall be subject to
satisfaction of the following conditions precedent:
7.1 The Lender shall have received executed originals of this Agreement
and the Note duly signed and properly completed.
7.2 The Lender shall have received either (i) the certificate evidencing
all the Pledged Shares together with duly executed blank stock power therefore
or (ii) if such Pledged Shares are not yet available, a duly executed agreement
to pledge such stock in the form attached hereto as Exhibit B (in which event
such certificate and stock power will be delivered within 6 days of the date of
the Lender makes the Loan).
7.3 The Lender shall have received copies (executed or certified, as may
be appropriate) of all legal documents or proceedings taken in connection with
the execution and delivery of this Agreement and the Note.
SECTION EIGHT. COVENANTS.
Borrower covenants and agrees that so long as any amount remains unpaid on
the Note or the Commitment is outstanding, except to the extent compliance in
any case or cases is waived in writing by the Lender:
8.1 Compliance. The Borrower will comply with all requirements of the
----------
Code, ERISA and any other law, rule or regulation applicable to it as such laws,
rules or regulations affect the ESOP or the Trust.
6
<PAGE>
8.2 Reports.
-------
(a) The Borrower will maintain a system of accounting for the ESOP
and the Trust in accordance with sound accounting practice and will, from
time to time, furnish to the Lender and its duly authorized
representatives, such information and data with respect to the financial
condition of the ESOP and the Trust as the Lender may reasonably request.
(b) Without any request the Borrower will furnish to the Lender
promptly after knowledge thereof shall have come to the attention of the
Borrower, written notice of the occurrence of any Default hereunder or of
any threatened or pending litigation or governmental proceeding against the
Plan or the Trust.
SECTION NINE. DEFAULT AND REMEDIES.
9.1 Default. Any one or more of the following events shall constitute a
--------
Default hereunder:
(a) As of the date when due, the Borrower fails to make payment of
principal and/or interest with respect to the Note or any other amounts
payable under this Agreement within five (5) business days of the date when
due;
(b) As of the date proven false, the Borrower makes any
representation, warranty or statement herein or in connection with the
making of the Loan which proves to be incorrect in any material respect;
(c) As of the date the Borrower fails to perform or observe any term,
covenant or agreement (other than those referred to in subparts (a) and
(b), inclusive, of this Section 9.1) contained in this Agreement and such
failure continues unremedied for a period of 30 days after notice to the
Borrower by the Lender or any other holder of the Note;
(d) As of the date of termination of the ESOP if such termination is
prior to the expiration of the term of this Agreement.
9.2 Limitations on Use of Trust Assets. When any Default described in
-----------------------------------
subsections (a) to (c), of Section 9.1 has occurred and is continuing, the
Lender or the holder of the Note shall have no rights to assets of the Trust
other than (i) contributions (other than contributions of employer securities)
that are made by the Lender to enable the Borrower to meet its obligations
pursuant to the Loan, cash dividends received by the Borrower on the Pledged
Shares and earnings attributable to the investment of such contributions and
dividends and (ii) the Pledged Shares; provided further, however, that the value
of Trust assets transferred to the Lender as a result of a Default shall not
exceed the amount of the repayment then in default, and, provided further, that
so long as the Lender is a "party in interest" within the meaning of ERISA
Section 3(14) or a "disqualified person" within
7
<PAGE>
the meaning of Section 4975(e)(2) of the Code, a transfer of Trust assets upon
Default shall be made only if, and to the extent of, the Borrower's failure to
meet the loan's payment schedule.
9.3 Rights Upon Default. When any Default has occurred and is continuing
--------------------
the Lender may, in addition to such other rights or remedies as it may have,
then or at any time or times thereafter exercise with respect to the Collateral
any and all of the rights, options and remedies of a secured party under the
Uniform Commercial Code of New Jersey (the "UCC") including without limitation
the sale of all or any part of the Collateral at any brokers' board or any
public or private sale, provided, however that the Lender shall only be able to
exercise such rights and remedies to the extent of all interest and principal
payments which are due and payable as of the date of the Default and provided
further that prior to such exercise the Lender shall release from the Collateral
so much thereof as it would have been required to release under Section 3.4
hereof if the period from the previous December 31 to the date of such release
constituted a Plan Year and no Default had occurred. The net proceeds of any
such sale, after deducting all costs and expenses incurred in the collection,
protection, sale and delivery of the Collateral (which expenses Borrower
promises to pay) shall be applied first to the payment of any costs and expenses
incurred by the Lender in selling or otherwise disposing of the Collateral,
second, to the payment of the principal of and the interest on the Note, and,
third, ratably as among any other items of the indebtedness hereby secured. Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Borrower or to whomsoever a court of competent jurisdiction
shall determine to be entitled thereto. Any requirement of said UCC as to
reasonable notice shall be met by the Lender personally delivering or mailing
notice (by certified mail - return receipt requested) to the Borrower at its
address as provided in Section 10.6 hereof at least ten (10) days prior to the
event giving rise to the requirement of such notice. In connection with any
offer, solicitation or sale of the Collateral, the Lender may restrict bidders
and otherwise proceed in whatever manner it reasonably believes appropriate in
order to comply or assure compliance with applicable legal requirements
pertaining to the offer and sale of securities of the same type as the
Collateral.
9.4 ERISA Restrictions. The number of Pledged Shares as to which the
-------------------
Lender may exercise the rights set forth in this Section 9 may not exceed that
number of shares (then remaining subject to pledge hereunder) which is then
equal in current value to the amount in default under the Note. The remedies set
forth in this Section 9 may only be exercised to the extent consistent with the
restrictions on remedies set forth in Section 408(b)(3) of ERISA and the
regulations thereunder and Section 4975(d)(3) of the Code and the regulations
thereunder.
SECTION TEN. MISCELLANEOUS.
10.1 Holidays. If any principal of the Note shall fall due on Saturday,
--------
Sunday or on another day which is a legal holiday for savings institutions in
the State of New Jersey interest at the rate the Note bears for the period prior
to maturity shall continue to accrue on such principal from the stated due date
thereof to and including the next succeeding Business Day on which the same is
payable.
8
<PAGE>
10.2 No Waiver, Cumulative Remedies. No delay or failure on the part of
------------------------------
the Lender or the part of the holder of the Note in the exercise of any power or
right shall preclude any other or further exercise thereof, or the exercise of
any other power or right, and the rights and remedies hereunder of the Lender
and of any holder of the Note are cumulative to, and not exclusive of, any
rights or remedies which any of them would otherwise have.
10.3 Amendments, Etc. No amendment, modification, termination or waiver
----------------
any provision of this Agreement or of the Note nor consent to any departure by
the Borrower therefrom, shall in any event be effective unless the same shall be
in writing and signed by the Lender, and then such consent, modification or
waiver shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other further notice or demand in similar or
other circumstances.
10.4 Survival of Representations. All representations and warranties
---------------------------
made herein or in certificates given in connection with the Loan shall survive
the execution and delivery of this Agreement and of the Note, and shall continue
in full force and effect with respect to the date as of which they were made as
long as any credit is in use or available hereunder.
10.5 Payments. So long as the Lender is the holder of the Note, the
--------
Borrower will promptly and punctually pay the principal of and interest on the
Note without presentment of the Note.
10.6 Addresses for Notices. All communications provided for herein shall
---------------------
be in writing and shall be deemed to have been given or made when served
personally or when deposited in the United States mail addressed, if to the
Borrower at Marine Midland Bank, 140 Broadway, 11th Floor, New York, New York
10005, Attention: Richard A. Glover, Vice President with copy to Helm, Shapiro,
Anito & McCale, P.C., 20 Corporate Woods Boulevard, Albany, New York 12211,
Attention: Brian P. Goldstein, Esq.; if to the Lender at 417 Bloomfield Avenue,
Caldwell, New Jersey 07006-4980, Attention: Leopold Montanaro with copy to
Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016,
Attention: Thomas P. Hutton; or at such other address as shall be designated by
any party hereto in a written notice to each other party pursuant to this
Section 10.6.
10.7 Headings. Article and Section headings used in this Agreement are for
--------
convenience of reference only and are not a part of this Agreement for any other
purpose.
10.8 Severability of Provisions. Any provision of this Agreement which is
--------------------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such unenforceability without impairing the enforceability of
the remaining provisions hereof affecting the enforceability of such provision
in any other jurisdiction.
10.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, and by different parties hereto on separate counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.
9
<PAGE>
10.10 Binding Nature, Governing Law, Etc. This Agreement shall be
-----------------------------------
binding upon the Borrower and its successors and assigns and shall inure to the
benefit of the Lender and the benefit of its successors and assigns, including
any subsequent holder of the Note. To the extent not preempted by Federal law,
this Agreement and the rights and duties of the parties hereto shall be
construed and determined in accordance with the laws of the State of New Jersey
without regard to principles of conflicts of laws. This Agreement constitutes
the entire understanding of the parties with respect to the subject matter
hereof and any prior agreements, whether written or oral, with respect thereto
are superseded hereby.
10.11 Concerning the Borrower. The term "Borrower" as used herein
-----------------------
shall mean and include the undersigned as Trustee of the Trust and its
successors in trust not individually but solely as Trustee under that certain
West Essex Bank Employee Stock Ownership Trust effective September 10, 1998, by
and between the undersigned and West Essex Bank and this Agreement shall be
binding upon the undersigned and its successors and assigns and upon the trust
estate. The undersigned assumes no personal or individual liability or
responsibility for payment of the indebtedness evidenced by the Note or for
observance or performance of the covenants and agreements herein contained or
for the truthfulness of the representations and warranties herein contained, the
undersigned having executed this Agreement and the Note solely in its capacity
as Trustee as aforesaid to bind the undersigned, its successors in trust and the
trust estates.
10.12 Limited Liability. Anything contained herein or in the Note to
-----------------
the contrary notwithstanding, the sole and only recourse of the Lender and any
other holder of the Note for payment of the obligations hereunder and under the
Note, as against the Borrower for the payment of the obligations hereunder and
under the Note shall be to (i) the Collateral, (ii) contributions, other than
employer securities not constituting Collateral hereunder, made to the ESOP and
the Trust by sponsoring employers to enable the Borrower to meet its obligations
hereunder and under the Note, and (iii) earnings attributable to the Pledged
Shares and to the investment of such employer contributions, but only to the
extent of the failure of the Borrower to meet the payment schedule of the Loan
provided for herein. The Trust assets may be transferred to Lender upon the
occurrence of a Default only upon and to the extent of the failure of the Plan
to meet the payment schedule of the Loan. In no event may the value of the Trust
assets so transferred exceed the amount of the default.
10.13 Lender's Duty of Care. It is agreed and understood that the
---------------------
Lender's duty with respect to the Collateral shall be solely to use reasonable
care in the custody and preservation of the Collateral in the Lender's
possession, which shall not include any steps necessary to preserve rights
against prior parties.
All provisions in this Agreement shall be construed so as to maintain (i)
the ESOP as a qualified leveraged employee stock ownership plan under Sections
401(a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under
Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the
Exempt Loan Rules.
10
<PAGE>
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 1st day of October, 1998
Marine Midland Bank, and its successors in trust, as
Trustee under that certain West Essex Bank Employee
Stock Ownership Plan Trust effective September 10, 1998
by and between the undersigned and West Essex Bank.
By /s/ Richard A. Glover
------------------------------------
Accepted and agreed to at Caldwell, New Jersey as of the date last above
written.
WEST ESSEX BANCORP, INC.
By /s/ Dennis A. Petrello
------------------------------------
11
<PAGE>
EXHIBIT A
PROMISSORY NOTE
Amount sufficient to satisfy the Loan Amount October 1, 1998
Caldwell, New Jersey
For VALUE RECEIVED, the undersigned, Marine Midland Bank, not individually
but solely as Trustee under that certain West Essex Bank Employee Stock
Ownership Plan Trust effective September 10, 1998 by and between the undersigned
("Borrower") and West Essex Bank promises to pay to the order of West Essex
Bancorp, Inc. (the "Lender") at its office at 417 Bloomfield Avenue, Caldwell,
New Jersey 07006-4980, the aggregate unpaid principal amount of all loan amounts
or advances under the loan made to the Borrower under Section 1.1 of the Loan
and Security Agreement hereinafter referred to in ten (10) consecutive annual
equal installments, consisting of both principal and interest, amortized over a
ten (10) year period in an amount sufficient to repay all borrowed amounts plus
interest, payable annually on the last business day of December, 1998, and
continuing on the last business day of each and every December thereafter,
except that the final installment of principal and interest not sooner paid
shall be due on December 31, 2007, the final maturity hereof.
The Borrower promises to pay interest (computed on the basis of a year of
360 days) at said office on the balance of principal from time to time remaining
outstanding and unpaid hereon at the rate per annum equal at all times to the
Interest Rate as defined in Section 2.1 of the Loan and Security Agreement (as
defined below) on the last business day of each and every December, commencing
December 31, 1998, and in each year thereafter and on the final maturity date of
this Note. On demand, the Borrower promises to pay interest on any overdue
principal hereof (whether by lapse of time, acceleration, or otherwise) until
paid at the stated rate.
This Note is issued under the terms and provisions of that certain West
Essex Bank Employee Stock Ownership Plan Trust Loan and Security Agreement
bearing even date herewith by and between the Borrower and the Lender (the "Loan
and Security Agreement") and this Note and the holder hereof are entitled to all
the benefits and security provided for, by or referred to in such Loan and
Security Agreement.
This Note may be declared due prior to its express maturity and voluntary
prepayments may be made hereon, all in the events, on the terms and in the
manner as provided in such Loan and Security Agreement.
Recourse for the payment of this Note has been limited by the provisions of
the Loan and Security Agreement and this Note is expressly made subject to such
provisions notwithstanding anything contained herein to the contrary. This Note
shall be governed by and construed in
12
<PAGE>
accordance with the laws of New Jersey without regard to principles of conflicts
of laws. The Borrower hereby waives presentment for payment and demand.
Upon the occurrence of a Default as such term is defined in the Loan and
Security Agreement at the option of the Lender, all amounts payable by the
Borrower to the Lender under the terms of this Note may immediately become due
and payable by the Borrower to the Lender pursuant to the provisions of Section
9.3 of the Loan and Security Agreement, and the Lender shall have all of the
rights, powers, and remedies available under the terms of this Note, any of the
other documents evidencing and securing this Loan and all applicable laws. The
Borrower and all endorsers, guarantors, and other parties who may now or in the
future be primarily or secondarily liable for the payment of the indebtedness
evidenced by this Note hereby severally waive presentment, protest and demand,
notice of protest, notice of demand and of dishonor and non-payment of this Note
and expressly agree that this Note and any payment hereunder may be extended
from time to time without in any way affecting the liability of the Borrower,
guarantors and endorsers.
Marine Midland Bank, its successors in
trust, as Trustee under that certain West
Essex Bank Employee Stock Ownership Plan
Trust effective September 10, 1998 by and
between the undersigned and West Essex Bank
By: /s/ Richard A. Glover
------------------------------------
Richard A. Glover
13
<PAGE>
EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by West Essex Bancorp, Inc.,
("Lender") to the undersigned ("Borrower"), the receipt whereof is hereby
acknowledged and subject to the terms and provisions of the Loan and Security
Agreement described below, the Borrower does hereby grant a security interest to
said Lender in the instruments or negotiable documents hereafter described
("Collateral"), in all of which Collateral the Borrower warrants that the
Borrower has good, valid and effective rights to the ownership and possession
thereof and to the grant the security interest hereby made:
All Shares of the common stock, par value $.01 per share, of West Essex
Bancorp, Inc., a federally-chartered corporation, acquired with the
proceeds of the Loan Amount.
Borrower agrees to deliver said collateral to said Lender as soon as
practicable after Borrower's receipt of one or more certificates therefore.
Said security interest secures the payment of all indebtedness and
liabilities as undertaken in the Loan and Security Agreement to which this is a
part, now existing or hereafter arising, and the Lender has all the rights with
respect to said Collateral and said security interest as more fully set forth in
the form of secured note or notes executed and delivered by the undersigned to
said Lender prior hereto or contemporaneously herewith.
This agreement, including matters of interpretation and construction, and
the rights of the Lender and the duties and obligations of the debt hereunder
are to be determined in accordance with the laws of the State of New Jersey,
particularly the Uniform Commercial Code, except where preempted by federal law.
Dated at the 1st day of October, 1998
Marine Midland Bank, and its successors in
trust, as Trustee under that certain West Essex
Bank Employee Stock Ownership Plan Trust
effective September 10, 1998 by and between the
undersigned and West Essex Bank.
By: /s/ Richard A. Glover
--------------------------------------
Richard A. Glover
14
<PAGE>
WEST ESSEX BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made and entered into this 17th day of February, 1999, by
and among West Essex Bank (the "Bank"), a federally-chartered stock savings
institution, with its principal administrative office at 417 Bloomfield Avenue,
Caldwell, New Jersey, West Essex Bancorp, Inc., a federally-chartered
corporation and holding company for the Bank ("Holding Company") and Leopold W.
Montanaro ("Executive").
WHEREAS, the Bank wishes to continue to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive shall be nominated
and elected and or appointed to serve as Chief Executive Officer and President
of the Bank. Executive shall render administrative and management services to
the Bank such as are customarily performed by persons situated in a similar
executive capacity. During said period, Executive also agrees to serve, if
elected, as an officer and director of any subsidiary or affiliate of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing at each anniversary
date thereafter, the Board of Directors of the Bank ("Board"), may extend the
Agreement an additional year such that the remaining term of the Agreement shall
be three (3) years unless the Executive elects not to extend the term of this
Agreement by giving notice in accordance with Section 9 of the Agreement. The
Board will review the Executive's performance annually for purposes of
determining, whether to extend the Agreement, and the rationale and the results
thereof shall be included in the minutes of the Board's meeting. The Board shall
give notice to the Executive as soon as possible after such review as to whether
the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank and which activities may include
<PAGE>
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and condition of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Bank of not less
than $275,000 per year ("Base Salary"). Base Salary shall include any amounts
of compensation deferred by Executive under any tax-qualified retirement or
welfare benefit plan or any other deferred compensation arrangement maintained
by the Bank. Executive's Base Salary shall be payable in accordance with the
Bank's normal payroll practices. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or a Committee designated by the Board,
and the Board or the Committee of the Board may increase Executive's Base
Salary. The increased Base Salary shall become the "Base Salary" for purposes of
the Agreement. In addition to the Base Salary provided in this Section 3(a),
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, including the payment for (i)
the use of an automobile and payment for automobile insurance and any costs
associated with its operation and maintenance, (ii) membership to a country club
and the expenses and assessments associated therewith and (iii) attendance to
national and state conventions and educational conferences and the expenses
associated therewith for the Executive and his spouse, and the Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would materially adversely affect Executive's
rights or benefits thereunder except to the extent that such changes would
affect all of the Bank's employees. Without limiting the generality of the
foregoing provisions of this Subsection (b), Executive shall be entitled to
participate in or receive benefits under all plans relating to stock options,
restricted stock awards, stock purchases, pension, thrift, supplemental
retirement, profit-sharing, employee stock ownership, group life insurance,
medical and other health and welfare coverage, education, cash or stock bonuses
that are now or hereafter made available by the Bank in the future to its senior
executives and key management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to the Executive under any
2
<PAGE>
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
(c) This Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof,
Termination for Cause, as defined in Section 8 hereof, retirement in accordance
with the Bank's pension plan or Disability as defined in Section 7; (ii)
Executive's resignation from the Bank's employ, in the manner set forth below,
upon any (A) failure to elect or appoint Executive as President and Chief
Executive Officer of the Bank unless consented to by the Executive, (B) material
changes in Executive's functions, duties or responsibilities, which would cause
Executive's position to become one of lesser responsibility, importance or scope
from the position and attributes described in Section 1, above, unless consented
to by the Executive, (C) relocation of Executive's principal place of employment
by more than 50 miles from its location at the effective date of this Agreement,
unless consented to by the Executive, (D) material reduction in the benefits and
perquisites to the Executive from those being provided as of the effective date
of this Agreement, unless consented to by the Executive, (E) liquidation or
dissolution of the Bank or in the event of any governmental confiscation of the
net worth of the Bank, or (F) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D) or (F), above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full calendar months after the event giving rise to said right
to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, the Bank shall be obligated to pay Executive, or, in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be a sum equal to: (i) the Base Salary and bonuses in accordance with
Section 3(a) of this Agreement, that would have been paid to Executive for the
remaining term of this Agreement had the Event of Termination not occurred; and
(ii) all benefits that would have been provided to Executive for the remaining
term of this Agreement had an Event of Termination not occurred, provided,
--------
however, that any payments pursuant to this subsection shall not, in the
- - -------
aggregate, exceed three times Executive's Average Annual Compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years ("Average Annual Compensation"). Average
Annual Compensation shall include all taxable income paid by the Bank or Holding
Company including
3
<PAGE>
but not limited to Base Salary, commissions and bonuses, as well as
contributions on behalf of Executive to any pension and profit sharing plan,
director or committee fees and fringe benefits paid or to be paid to the
Executive in any such year and any payment of expense items without
accountability or business purpose or that do not meet the Internal Revenue
Service requirements for deductibility by the Bank. In the event that the Bank
is not in compliance with its minimum capital requirements or if such payments
would cause the Bank's capital to be reduced below its minimum capital
requirements, such payments shall be deferred to the extent required by
applicable law until such time as the Bank is in capital compliance. At the
election of the Executive, which election is to be made prior to the Executive's
Date of Termination, such payments shall be made in a lump sum or paid monthly
during the remaining term of this Agreement following the Executive's
termination. In the event that no lump sum election is made, payment to the
Executive will be made on a monthly basis during the remaining term of this
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment unless the Executive's
other employment constitutes a breach of Section 11 of this Agreement. In such
event the Bank shall be entitled to seek any remedies available to it for breach
of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and long-term disability coverage
substantially identical to the coverage maintained by the Bank for Executive
prior to his termination at no premium cost to the Executive. Such coverage
shall cease upon the expiration of the remaining term of this Agreement. Any
bond outstanding for country club membership shall be transferred without
payment therefore by the Executive and the Bank shall pay the annual membership
dues and assessments for the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (A) would be required to
be reported in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); (B) results in a Change in Control of
the Bank or the Holding Company within the meaning of the Home Owners' Loan Act
of 1933, as amended, the Federal Deposit Insurance Act, and the Rules and
Regulations promulgated by the Office of Thrift Supervision (or its successor
agency), as in effect on the date hereof (provided that in applying the
definition of a change in control as set forth under the rules and regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or (C)
without limitation such a Change in Control shall be deemed to have occurred at
such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of voting securities of
the Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company and any voting securities purchased by any of the Bank's or the Holding
Company's employee benefit plans; or (b) individuals who constitute the Board of
the Bank or the Holding Company on the date of
4
<PAGE>
the Conversion (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date of the Conversion or Reorganization whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Bank's or the Holding
Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or the Holding Company is not the resulting entity, provided however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory waiting periods.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c) and (d) of this Section 5 upon his subsequent termination of
employment at any time during the term of this Agreement due to: (1) Executive's
dismissal; or (2) voluntary resignation following any demotion, loss of title,
office or significant authority or responsibility, reduction in any compensation
or benefits or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death or Termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank shall pay Executive, or in the event of his subsequent death following
such termination, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to three
(3) times Executive's "Average Annual Compensation" (as defined herein) for the
five (5) most recent taxable years that Executive has been employed by the Bank
or such number of years the Executive has been employed by the Bank if less than
five. At the election of the Executive, which election is to be made prior to a
Change in Control, such payment may be made in a lump sum as of the Executive's
Date of Termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and long-term
disability coverage substantially equivalent to the coverage maintained by the
Bank for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months.
5
<PAGE>
6. CHANGE IN CONTROL RELATED PROVISIONS
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive, under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by the paragraphs of Section 5
shall be determined by the Executive.
7. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's permanent incapacity due to injury or
sickness, such incapacity being determined by a doctor selected by the Bank and
the Executive, he shall have been absent from his duties with the Bank on a
full-time basis for six (6) consecutive months, and within thirty (30) days
after written notice of potential termination is given he shall not have
returned to the full-time performance of his duties, the Bank may terminate
Executive's employment for "Disability."
(b) The Bank will pay Executive, as disability pay, an amount equal to one
hundred percent (100%) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination, on a bi-weekly basis. These disability
payments shall commence on the effective date of Executive's termination and
will end on the earlier of (i) the date Executive returns to the full-time
employment of the Bank in the same capacity as he was employed prior to his
termination for Disability and pursuant to an employment agreement between
Executive and the Bank; (ii) Executive's death; or (iii) the Executive reaching
age 65. Notwithstanding any other provisions to the contrary, any amounts due
under this subsection (b) shall first be reduced by any benefits payable to the
Executive under a disability insurance policy provided by the Bank or any
amounts the Bank pays to Executive in the event he returns on a part-time basis
or in a capacity other than that held immediately prior to being terminated for
Disability.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. Disability coverage
under this subsection (c) and payments shall cease upon the earlier of (i) the
date Executive returns to the full-time employment of the Bank in a position
qualifying him for benefits comparable to those received immediately prior to
his Disability; (ii) the Executive's death; or (iii) the Executive reaching the
age of 65.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing his duties hereunder by reason of temporary disability.
6
<PAGE>
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination that shall include a copy of
a resolution duly adopted by the affirmative vote of not less than a majority of
the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the reasons thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties or, by a binding arbitration award,
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence and
solely in accordance with Section 20 of this agreement. Notwithstanding the
pendency of any such dispute, in the event Executive is terminated for reasons
other than
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Termination for Cause, the Bank will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue him as a participant
in all compensation, benefit and insurance plans in which he was participating
when the notice of dispute was given, until the earlier of: (1) the resolution
of the dispute in accordance with this Agreement; or (2) the expiration of the
remaining term of this Agreement as determined as of the Date of Termination.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
10. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 10 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
11. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Bank for a period of one (1) year following such termination in
any city, town or county in which the Bank has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination except as otherwise agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work in an
executive capacity for any financial institution whose business materially
competes with the depository, lending or other business activities of the Bank.
The parties hereto, recognizing that irreparable injury will result to the Bank,
its business and property in the event of Executive's breach of this Subsection
11 (a) agree that in the event of any such breach by Executive, the Bank will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive's partners,
agents, servants, employers, employees and all persons acting for or with
Executive. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, following the term of his
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever except as
authorized by the Board. Notwithstanding the foregoing, Executive may disclose
any knowledge of banking, financial
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and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation pursuant to formal regulatory requests. In the event of a breach or
threatened breach by the Executive of the provisions of this Section 11, the
Bank will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Bank from pursuing any other
remedies available to the Bank for such breach or threatened breach, including
the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated February 2, 1999,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank on a quarterly
basis.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to the Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by
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operation of law, and any attempt, voluntary or involuntary, to affect any such
action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. REQUIRED PROVISIONS.
(a) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein above.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Executive all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 16(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) (12 U.S.C. (S)1818(e)(4)
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or 8(g)(1)) of the Federal Deposit Insurance Act (12 U.S.C. (S)1818(e)(4) or
(g)(1)), all obligations of the Bank under this contract shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) (12 U.S.C.
(S)1813(x)(1)) of the Federal Deposit Insurance Act) all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the association, (i) by the Director or his or
her designee at the time the Federal Deposit Insurance Corporation enters into
an agreement to provide assistance to or on behalf of the association under the
authority contained in section 13(c) of the Federal Deposit Insurance Act, or
(ii) by the Director or his or her designee at the time the Director or his or
her designee approves a supervisory merger to resolve problems related to the
operation of the association or when the association is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties that
have already vested, however, shall not be affected by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S) 545.121 and any rules and regulations promulgated
thereunder.
17. REINSTATEMENT OF BENEFITS UNDER SECTION 16(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 16(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
18. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
19. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
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20. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of New Jersey but
only to the extent not superseded by Federal law.
21. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
22. PAYMENT OF LEGAL FEES.
In the event any action is instituted by the Executive or the Bank
including under Section 21 of this Agreement all reasonable legal fees and
expenses shall be paid and reimbursed by the party who is not successful on the
merits as determined by a legal judgment, settlement or arbitration award.
23. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) to the fullest extent permitted under
Federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues 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.
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24. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, West Essex Bank has caused this agreement to be
executed and its seal to be affixed hereunto by its duly authorized officers,
and Executive has signed this Agreement, on the 2nd day of February, 1999.
ATTEST: [SEAL] WEST ESSEX BANK
/s/ Craig L. Montanaro By: /s/ William J. Foody
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William J. Foody
For the Entire Board of Directors
WITNESS: EXECUTIVE
/s/ Dennis A. Petrello By: /s/ Leopold W. Montanaro
- - --------------------------- ------------------------------
Leopold W. Montanaro
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WEST ESSEX BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT is made and entered into this 17th day of February, 1999, by
and among West Essex Bancorp, Inc (the "Holding Company"), a federally-
chartered corporation and holding company for West Essex Bank (the "Bank"), with
its principal administrative office at 417 Bloomfield Avenue, Caldwell, New
Jersey, and Leopold W. Montanaro ("Executive").
WHEREAS, the Holding Company wishes to continue to assure itself of the
services of Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Holding Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive shall be nominated
and elected and or appointed to serve as President and Chief Executive Officer
of the Holding Company. Executive shall render administrative and management
services to the Holding Company such as are customarily performed by persons
situated in a similar executive capacity. During said period, Executive also
agrees to serve, if elected, as an officer and director of any subsidiary or
affiliate of the Holding Company.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing at each anniversary
date thereafter, the Board of Directors of the Holding Company ("Board"), may
extend the Agreement an additional year such that the remaining term of the
Agreement shall be three (3) years unless the Executive elects not to extend the
term of this Agreement by giving notice in accordance with Section 9 of the
Agreement. The Board will review the Executive's performance annually for
purposes of determining whether to extend the Agreement, and the rationale and
the results thereof shall be included in the minutes of the Board's meeting. The
Board shall give notice to the Executive as soon as possible after such review
as to whether the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the
<PAGE>
organization, operation and management of the Holding Company and which
activities may include participation in community and civic organizations;
provided, however, that, with the approval of the Board, as evidenced by a
resolution of such Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment, will not
present any conflict of interest with the Holding Company, or materially affect
the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
the Executive during the term of this Agreement, subject to the terms and
condition of this Agreement. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as President and Chief Executive Officer of the Holding
Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company or
its subsidiaries of not less than $275,000 per year ("Base Salary"). Base
Salary shall include any amounts of compensation deferred by Executive under any
tax-qualified retirement or welfare benefit plan or any other deferred
compensation arrangement maintained by the Holding Company or its subsidiaries.
Executive's Base Salary shall be payable in accordance with the normal payroll
practices of the Holding Company or its subsidiaries. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or a Committee designated
by the Board, and the Board or the Committee of the Board may increase
Executive's Base Salary. The increased Base Salary shall become the "Base
Salary" for purposes of the Agreement. In addition to the Base Salary provided
in this Section 3(a), Executive shall be entitled to incentive compensation and
bonuses as provided in any plan of the Holding Company or its subsidiaries in
which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, including the payment for (i)
the use of an automobile and payment for automobile insurance and any costs
associated with its operation and maintenance, (ii) membership to a country club
and the expenses and assessments associated therewith and (iii) attendance to
national and state conventions and educational conferences and the expenses
associated therewith for the Executive and his spouse, and the Holding Company
or its subsidiaries will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder except to the extent
that such changes would affect all of the Holding Company's or its subsidiaries
employees. Without limiting the generality of the foregoing
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provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted stock
awards, stock purchases, pension, thrift, supplemental retirement, profit-
sharing, employee stock ownership, group life insurance, medical and other
health and welfare coverage, education, cash or stock bonuses that are now or
hereafter made available by the Holding Company or its subsidiaries in the
future to its senior executives and key management employees, subject to and on
a basis consistent with the terms, conditions and overall administration of such
plans and arrangements. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) This Holding Company shall pay or reimburse Executive for all
reasonable travel and other reasonable expenses incurred by Executive performing
his obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company or its subsidiaries of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof, Termination for Cause, as defined in Section 8 hereof,
retirement in accordance with the Bank's pension plan or Disability as defined
in Section 7; (ii) Executive's resignation from the Holding Company's employ, in
the manner set forth below, upon any (A) failure to elect or appoint Executive
as President and Chief Executive Officer of the Holding Company unless consented
to by the Executive, (B) material changes in Executive's functions, duties or
responsibilities, which would cause Executive's position to become one of lesser
responsibility, importance or scope from the position and attributes described
in Section 1, above, unless consented to by the Executive, (C) relocation of
Executive's principal place of employment by more than 50 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) liquidation or dissolution of the
Holding Company or its subsidiaries or in the event of any governmental
confiscation of the net worth of the Holding Company or its subsidiaries, or (F)
breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A), (B), (C), (D) or (F), above, Executive shall
have the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
six full calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, the Company shall be obligated to pay Executive, or, in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be a sum equal to: (i) the Base Salary
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and bonuses in accordance with Section 3(a) of this Agreement, that would have
been paid to Executive for the remaining term of this Agreement had the Event of
Termination not occurred; and (ii) all benefits set forth in Section 3(b) of
this Agreement that would have been paid or provided to Executive for the
remaining term of this Agreement had an Event of Termination not occurred,
provided, however, that any payments pursuant to this subsection shall not,
- - -------- -------
in the aggregate, exceed three times Executive's Average Annual Compensation for
the five most recent taxable years that Executive has been employed by the
Holding Company or such lesser number of years in the event that Executive shall
have been employed by the Holding Company for less than five years ("Average
Annual Compensation"). Average Annual Compensation shall include all taxable
income paid by the Bank or Holding Company including but not limited to Base
Salary, commissions and bonuses, as well as contributions on behalf of Executive
to any pension and profit sharing plan, director or committee fees and fringe
benefits paid or to be paid to the Executive in any such year and any payment of
expense items without accountability or business purpose or that do not meet the
Internal Revenue Service requirements for deductibility by the Holding Company
or its subsidiaries. In the event that the Holding Company or its subsidiaries
are not in compliance with its minimum capital requirements or if such payments
would cause the Bank's capital to be reduced below its minimum capital
requirements, such payments shall be deferred to the extent required by
applicable law until such time as the Bank is in capital compliance. At the
election of the Executive, which election is to be made prior to the Executive's
Date of Termination, such payments shall be made in a lump sum or paid monthly
during the remaining term of this Agreement following the Executive's
termination. In the event that no lump sum election is made, payment to the
Executive will be made on a monthly basis during the remaining term of this
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment unless the Executive's
other employment constitutes a breach of Section 11 of this Agreement. In such
event the Bank shall be entitled to seek any remedies available to it for breach
of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Holding Company or
its subsidiaries will cause to be continued life, medical, dental and long-term
disability coverage substantially identical to the coverage maintained by the
Holding Company or its subsidiaries for Executive prior to his termination at no
premium cost to the Executive. Such coverage shall cease upon the expiration of
the remaining term of this Agreement. Any bond outstanding for country club
membership shall be transferred without payment therefore by the Executive and
the Holding Company or its subsidiaries shall pay the annual membership dues and
assessments for the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (A) would be required to
be reported in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); (B) results in a Change in Control of
the Bank or the Holding Company within the meaning of the Home Owners' Loan Act
of 1933, as amended, the Federal Deposit Insurance Act, and the Rules and
Regulations
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promulgated by the Office of Thrift Supervision (or its successor agency), as in
effect on the date hereof (provided that in applying the definition of a change
in control as set forth under the rules and regulations of the OTS, the Board
shall substitute its judgment for that of the OTS); or (C) without limitation
such a Change in Control shall be deemed to have occurred at such time as (a)
any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of voting securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Bank purchased by the Holding Company and any voting
securities purchased by any of the Bank's or the Holding Company's employee
benefit plans; or (b) individuals who constitute the Board of the Bank or the
Holding Company on the date of the Conversion (the "Incumbent Board") cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date of the Conversion or Reorganization
whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Bank's or the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (b), considered as though he were a member of the Incumbent Board;
or (c) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or the Holding Company is not the resulting
entity, provided however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c) and (d) of this Section 5 upon his subsequent termination of
employment at any time during the term of this Agreement due to: (1) Executive's
dismissal; or (2) voluntary resignation following any demotion, loss of title,
office or significant authority or responsibility, reduction in any compensation
or benefits or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death or Termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company or its subsidiaries shall pay Executive, or in the event of
his subsequent death following such termination, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to three (3) times Executive's "Average Annual
Compensation" (as defined herein) for the five (5) most recent taxable years
that Executive has been employed by the Holding Company or its subsidiaries or
such number of years the Executive has been employed by the Holding Company if
less than five. At the election of the Executive, which election is to be made
prior to a Change in Control, such payment may be made in a lump sum as of the
Executive's Date of Termination. In the event that no election is made, payment
to the Executive will be made on a monthly basis during the remaining term of
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the Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company or its subsidiaries will cause to be continued life,
medical, dental and long-term disability coverage substantially equivalent to
the coverage maintained by the Holding Company or its Subsidiaries for Executive
at no premium cost to Executive prior to his severance. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
6. CHANGE IN CONTROL RELATED PROVISIONS
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive, under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by the paragraphs of Section 5
shall be determined by the Executive.
7. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's permanent incapacity due to injury or
sickness, such incapacity being determined by a doctor selected by the Holding
Company or its subsidiaries and the Executive, he shall have been absent from
his duties with the Holding Company or its subsidiaries on a full-time basis for
six (6) consecutive months, and within thirty (30) days after written notice of
potential termination is given he shall not have returned to the full-time
performance of his duties, the Holding Company may terminate Executive's
employment for "Disability."
(b) The Holding Company or its subsidiaries will pay Executive, as
disability pay, a an amount equal to one hundred percent (100%) of Executive's
bi-weekly rate of Base Salary on the effective date of such termination on a bi-
weekly basis. These disability payments shall commence on the effective date of
Executive's termination and will end on the earlier of (i) the date Executive
returns to the full-time employment of the Holding Company in the same capacity
as he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Holding Company; (ii) Executive's
death; or (iii) the Executive reaching age 65. Notwithstanding any other
provisions to the contrary, any amounts due under this subsection (b) shall
first be reduced by any benefits payable to the Executive under a disability
insurance policy provided by the Holding Company or any amounts the Holding
Company pays to Executive in the event he returns on a part-time basis or in a
capacity other than that held immediately prior to being terminated for
Disability.
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(c) The Holding Company or its subsidiaries will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Holding Company for Executive prior to his
termination for Disability. Disability coverage under this subsection (c) and
payments shall cease upon the earlier of (i) the date Executive returns to the
full-time employment of the Holding Company in a position qualifying him for
benefits comparable to those received immediately prior to his Disability; (ii)
the Executive's death; or (iii) the Executive reaching the age of 65.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing his duties hereunder by reason of temporary disability.
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination that shall include a copy of
a resolution duly adopted by the affirmative vote of not less than a majority of
the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the reasons thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of
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Termination (which, in the case of Termination for Cause, shall not be less than
thirty days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties or, by a binding arbitration award,
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence and
solely in accordance with Section 20 of this agreement. Notwithstanding the
pendency of any such dispute, in the event Executive is terminated for reasons
other than Termination for Cause, the Holding Company or its subsidiaries will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
earlier of: (1) the resolution of the dispute in accordance with this
Agreement; or (2) the expiration of the remaining term of this Agreement as
determined as of the Date of Termination. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
10. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 10 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company or its subsidiaries. Executive
shall, upon reasonable notice, furnish such information and assistance to the
Holding Company as may reasonably be required by the Holding Company in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
11. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Holding Company or its subsidiaries for a period of one (1)
year following such termination in any city, town or county in which the Holding
Company or its subsidiaries have an office or have filed an application for
regulatory approval to establish an office, determined as of the effective date
of such termination except as otherwise agreed to pursuant to a resolution duly
adopted by the Board. Executive agrees that during such period and within said
cities, towns and counties, Executive shall not work in an executive capacity
for any financial institution whose business materially competes with the
depository, lending or other business activities of the Holding Company or its
subsidiaries. The parties hereto, recognizing that irreparable injury will
result to the Holding Company or its subsidiaries, its business and property in
the event of Executive's
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breach of this Subsection 11 (a) agree that in the event of any such breach by
Executive, the Holding Company will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Nothing herein will be
construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Holding Company. Executive will not,
following the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Holding Company or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever except as authorized by the Board. Notwithstanding
the foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Holding Company or its
subsidiaries. Further, Executive may disclose information regarding the
business activities of the Holding Company to the Office of Thrift Supervision
and the Federal Deposit Insurance Corporation pursuant to formal regulatory
requests. In the event of a breach or threatened breach by the Executive of the
provisions of this Section 11, the Holding Company will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Holding Company or affiliates thereof, or from rendering any services to any
person, firm, corporation, other entity to whom such knowledge, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated February 2, 1999,
between Executive and the Bank, such compensation payments and benefits paid by
the Bank will be subtracted from any amounts due simultaneously to Executive
under similar provisions of this Agreement. Payments pursuant to this Agreement
and the Bank Agreement shall be allocated in proportion to the services rendered
and time expended on such activities by Executive as determined by the Holding
Company and the Bank on a quarterly basis.
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13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to the Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. REQUIRED PROVISIONS.
(a) The Holding Company may terminate the Executive's employment at any
time, but any termination by the Holding Company, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 8 herein above.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Holding Company's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. (S)1818(e)(3) or (g)(1), the Holding Company's obligations under this
contract shall be suspended as of the date of service,
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unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Holding Company may in its discretion (i) pay the Executive all
or part of the compensation withheld while their contract obligations were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Holding Company's affairs by a notice
described in Section 16(b) hereof (the "Notice") during the term of this
Agreement and a Change in Control, as defined herein, occurs, the Holding
Company will assume its obligation to pay and Executive will be entitled to
receive all of the termination benefits provided for under Section 5 of this
Agreement upon the Holding Company's receipt of a dismissal of charges in the
Notice.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Holding Company's affairs by an order issued
under Section 8(e)(4) (12 U.S.C. (S)1818(e)(4) or 8(g)(1)) of the Federal
Deposit Insurance Act (12 U.S.C. (S)1818(e)(4) or (g)(1)), all obligations of
the Holding Company under this contract shall terminate as of the effective date
of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Holding Company is in default (as defined in Section 3(x)(1) (12
U.S.C. (S)1813(x)(1)) of the Federal Deposit Insurance Act) all obligations of
the Holding Company under this contract shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(e) All obligations of the Holding Company under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the Holding Company, (i) by the
Director or his or her designee at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the Holding Company under the authority contained in section 13(c) of the
Federal Deposit Insurance Act, or (ii) by the Director or his or her designee at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to the operation of the Holding Company or when the
Holding Company is determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S) 545.121 and any rules and regulations promulgated
thereunder.
17. REINSTATEMENT OF BENEFITS UNDER SECTION 16(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Holding Company's affairs by a notice
described in Section 16(b) hereof (the "Notice") during the term of this
Agreement and a Change in Control, as defined herein, occurs, the Holding
Company will assume its obligation to pay and Executive will be entitled to
receive
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all of the termination benefits provided for under Section 5 of this Agreement
upon the Holding Company's receipt of a dismissal of charges in the Notice.
18. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
19. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of New Jersey,
but only to the extent not superseded by Federal law.
21. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
22. PAYMENT OF LEGAL FEES.
In the event any action is instituted by the Executive or the Holding
Company including under Section 21 of this Agreement all reasonable legal fees
and expenses shall be paid and reimbursed by the party who is not successful on
the merits as determined by a legal judgment, settlement or arbitration award.
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23. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) to the fullest extent permitted under
Federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Holding
Company (whether or not he continues 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.
24. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, West Essex Bancorp, Inc., has caused this agreement to
be executed and its seal to be affixed hereunto by its duly authorized officers,
and Executive has signed this Agreement, on the 2nd day of February, 1999.
ATTEST: [SEAL] WEST ESSEX BANCORP, INC.
/S/ Craig L. Montanaro /s/ William J. Foody
_______________________ By: __________________________
Secretary William J. Foody
For the Entire Board of Directors
WITNESS: EXECUTIVE
/s/ Dennis A. Petrello /s/ Leopold W. Montanaro
_______________________ By: __________________________
Leopold W. Montanaro
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EXHIBIT 10.7
WEST ESSEX BANK
THREE YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of February 2, 1999, by and between
West Essex Bank (the "Bank"), a federally chartered stock savings institution,
with its principal administrative office at 417 Bloomfield Avenue, Caldwell, New
Jersey, 07006, Dennis A. Petrello ("Executive"), and West Essex Bancorp, Inc.
(the "Holding Company"), a corporation organized under the laws of the United
States which is the holding company of the Bank.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Bank.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of the West Essex Bank Three Year Change in Control Agreement (the
"Agreement") shall be deemed to have commenced as of the date first above
written and shall continue for a period of thirty-six (36) full calendar months
thereafter. Commencing on the first anniversary date of this Agreement and
continuing at each anniversary date thereafter, the Board of Directors of the
Bank ("Board") may extend the Agreement for an additional year. The Board will
review the Agreement and Executive's performance annually for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
-----------------
(a) If a Change in Control (as defined herein) has occurred or the Board
has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in Section 3 upon his subsequent termination
of employment at any time during the term of this Agreement due to (i)
Executive's dismissal, or (ii) Executive's voluntary resignation following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or material reduction in benefits or
relocation of his principal place of employment by more than 50 miles from its
location immediately prior to the Change in Control, unless such termination is
because of his death or Termination for Cause.
<PAGE>
(b) For purposes of this Plan, a "Change in Control" of the Bank or Holding
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Holding Company within the meaning of the Home Owners' Loan Act of
1933, as amended, the Federal Deposit Insurance Act, or the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the Rules and Regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 25% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
voting securities purchased by any employee benefit plan of the Bank or the
Holding Company, or (B) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; provided, however, that
such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory periods.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed
to have been Terminated for Cause unless and until there shall have been
delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the Board of Directors of the Bank at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive's conduct justified a finding of
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the
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Notice of Termination for Cause pursuant to Section 4 hereof through the Date of
Termination for Cause, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and any
such unvested awards shall become null and void and shall not be exercisable by
or delivered to Executive at any time subsequent to such Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by termination of the Executive's employment due to:
(1) Executive's dismissal or (2) Executive's voluntary termination pursuant to
Section 2(a), unless such termination is due to Termination for Cause, the Bank
and the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
sum equal to three (3) times Executive's average annual compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years. Such average annual compensation shall
include Base Salary, commissions, and bonuses, as well as contributions on
Executive's behalf to any pension and/or profit sharing plan, retirement
payments, directors or committee fees, fringe benefits paid or to be paid to the
Executive in any such year and payment of any expense items without
accountability or business purpose or that do not meet the Internal Revenue
Service requirements for deductibility by the Bank; provided however, that any
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payment under this provision and subsection 3(b) below shall not exceed three
(3) times the Executive's average annual compensation. At the election of
Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Bank or
Holding Company for Executive prior to his severance, except to the extent such
coverage may be changed in its application to all Bank or Holding Company
employees on a nondiscriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) full calendar months from the Date of
Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
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dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Bank or by Executive in connection
with a Change in Control shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event the Executive is terminated for reasons other than
Termination for Cause, the Bank will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
Further, the Holding Company guarantees such payment and provision of all
amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.
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6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of Bank or shall impose on the Bank any obligation to employ or
retain Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors, heirs and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 2(c) hereinabove.
5
<PAGE>
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the association's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. (S)1818(e)(3) or (g)(1)), the association's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay Executive all or part of the compensation withheld
while their contract obligations were suspended and (ii) reinstate (in whole or
in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
(S)1818(c)(4) or (g)(1)), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, all obligations of the Bank under this contract shall
terminate as of the date of default, but this paragraph shall not affect any
vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director of the Office of Thrift
Supervision (or his or her designee) at the time the Director (or his or her
designee) approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S) 545.121 and any rules and regulations promulgated
thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
--------------------------------------------
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
6
<PAGE>
11. SEVERABILITY.
------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Federal law.
14. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement, other
than in the case of a Termination for Cause.
15. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank (which payments are guaranteed by the Holding
Company pursuant to Section 5 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
---------------
(a) The Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
Federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues 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.
7
<PAGE>
17. SUCCESSOR TO THE BANK
---------------------
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
8
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, West Essex Bank and West Essex Bancorp, Inc. have
caused this Agreement to be executed by their duly authorized officers, and
Executive has signed this Agreement, on the 2/nd/ day of February, 1999.
ATTEST: WEST ESSEX BANK
/s/ Craig L. Montanaro By: /s/ Leopold W. Montanaro
- - ------------------------------ --------------------------------
Secretary Leopold W. Montanaro
For the Entire Board of Directors
SEAL
ATTEST: WEST ESSEX BANCORP, INC.
(Guarantor)
/s/ Lisa Mulligan By: /s/ Leopold W. Montanaro
- - ------------------------------ --------------------------------
Leopold W. Montanaro
For the Entire Board of Directors
SEAL
WITNESS: EXECUTIVE
/s/ Lisa Mulligan By: /s/ Dennis A. Petrello
- - ------------------------------ -------------------------------
Dennis A. Petrello
9
<PAGE>
EXHIBIT 10.8
Mr. Filippo's Change in Control Agreement with West Essex Bank is the
same as Mr. Petrello's Change in Control Agreement with West Essex Bank (Exhibit
10.7) which is incorporated herein by reference except as to the name of the
Executive which is Charles E. Filippo.
<PAGE>
EXHIBIT 10.9
Mr. Craig Montanaro's Change in Control Agreement with West Essex Bank
is the same as Mr. Petrello's Change in Control Agreement with West Essex Bank
(Exhibit 10.7) which is incorporated herein by reference except as to the name
of the Executive which is Craig L. Montanaro.
<PAGE>
EXHIBIT 10.10
WEST ESSEX BANCORP, INC.
THREE YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of February 2, 1999, by and between
West Essex Bancorp, Inc. (the "Holding Company"), a corporation organized under
the laws of the United States which is the holding company of West Essex Bank
(the "Bank") with its principal administrative office at 417 Bloomfield Avenue,
Caldwell, New Jersey 07006 and Dennis A. Petrello ("Executive").
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and its subsidiaries and wishes to
protect Executive's position therewith for the period provided in this
Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Holding
Company.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of the West Essex Bancorp, Inc. Three Year Change in Control
Agreement (the "Agreement") shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six months (36)
full calendar months thereafter. Commencing on the first anniversary date of
this Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Holding Company ("Board") may extend the Agreement for an
additional year. The Board will review the Agreement and Executive's
performance annually for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
2. CHANGE IN CONTROL.
-----------------
(a) If a Change in Control (as defined herein) has occurred or the Board
has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in Section 3 upon his subsequent termination
of employment at any time during the term of this Agreement due to (i)
Executive's dismissal, or (ii) Executive's voluntary resignation following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or material reduction in benefits or
relocation of his principal place of employment by more than 50 miles from its
location immediately prior to the Change in Control, unless such termination is
because of his death or Termination for Cause.
<PAGE>
(b) For purposes of this Plan, a "Change in Control" of the Bank or Holding
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Holding Company within the meaning of the Home Owners' Loan Act of
1933, as amended, the Federal Deposit Insurance Act, or the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the Rules and Regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 25% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
voting securities purchased by any employee benefit plan of the Bank or the
Holding Company, or (B) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; provided, however, that
such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory periods.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed
to have been Terminated for Cause unless and until there shall have been
delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the Board of Directors of the Holding Company at a meeting of the Board called
and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive's conduct
justified a finding of Termination for Cause and specifying the particulars
thereof in detail. Executive shall not have the right to receive compensation
or other benefits for any period after the Date of Termination for Cause.
During the period beginning on the date of
2
<PAGE>
the Notice of Termination for Cause pursuant to Section 4 hereof through the
Date of Termination for Cause, stock options and related limited rights granted
to Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and any
such unvested awards shall become null and void and shall not be exercisable by
or delivered to Executive at any time subsequent to such Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by termination of the Executive's employment due to:
(1) Executive's dismissal or (2) Executive's voluntary termination pursuant to
Section 2(a), unless such termination is due to Termination for Cause, the
Holding Company shall pay Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal
to three (3) times Executive's average annual compensation Annual Compensation
(defined herein) for the five most recent taxable years that Executive has been
employed by the Holding Company or its subsidiaries or such lesser number of
years in the event that Executive shall have been employed by the Holding
Company or its subsidiaries for less than five years. Annual Compensation shall
include Base Salary, commissions, and bonuses, as well as contributions on
Executive's behalf to any pension and/or profit sharing plan, retirement
payments, directors or committee fees, fringe benefits paid or to be paid to the
Executive in any such year and payment of any expense items without
accountability or business purpose or that do not meet the Internal Revenue
Service requirements for deductibility by the Holding Company or its
subsidiaries; provided however, that any payment under this provision and
-------- -------
subsection 3(b) below shall not exceed three (3) times the Executive's average
annual compensation. At the election of Executive, which election is to be made
prior to a Change in Control, such payment shall be made in a lump sum. In the
event that no election is made, payment to Executive will be made on a monthly
basis in approximately equal installments during the remaining term of this
Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Holding Company or its subsidiaries shall cause to be continued
life, medical and disability coverage substantially identical to the coverage
maintained by the Bank or Holding Company for Executive prior to his severance,
except to the extent such coverage may be changed in its application to all Bank
or Holding Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar months
from the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be
3
<PAGE>
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount," as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 3 shall be determined by
Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Holding Company or by Executive in
connection with a Change in Control shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event the Executive is terminated for reasons other than
Termination for Cause, the Holding Company or its subsidiaries will continue to
pay Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to his annual salary) and continue
him as a participant in all compensation, benefit and insurance plans in which
he was participating when the notice of dispute was given, until the earlier of:
(1) the resolution of the dispute in accordance with this Agreement or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Holding
Company or its subsidiaries.
4
<PAGE>
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Holding Company and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of the Holding Company or shall impose on the Holding Company any
obligation to employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Holding Company and their respective successors, heirs and
assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 2(c) hereinabove.
5
<PAGE>
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. (S)1818(e)(3) or (g)(1)), the institution's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
institution may in its discretion (i) pay Executive all or part of the
compensation withheld while their contract obligations were suspended and (ii)
reinstate (in whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
(S)1818(c)(4) or (g)(1)), all obligations of the institution under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations under this contract shall
terminate as of the date of default, but this paragraph shall not affect any
vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director or his or her
designee at the time the Federal Deposit Insurance Corporation or Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director or his or her designee at the
time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the institution or when the institution
is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S) 545.121 and any rules and regulations promulgated
thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
--------------------------------------------
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Holding Company's affairs by a notice
described in Section 9(b) hereof (the "Notice") during the term of this
Agreement and a Change in Control, as defined herein, occurs, the Bank will
assume its obligation to pay and Executive will be entitled to receive all of
the termination benefits provided for under Section 3 of this Agreement upon the
Holding Company's receipt of a dismissal of charges in the Notice.
6
<PAGE>
11. SEVERABILITY.
------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Federal law.
14. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement, other
than in the case of a Termination for Cause.
15. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Holding Company if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
---------------
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the
7
<PAGE>
Holding Company (whether or not he continues 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.
17. SUCCESSOR TO THE HOLDING COMPANY
--------------------------------
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Holding Company, expressly and
unconditionally to assume and agree to perform the Holding Company's obligations
under this Agreement, in the same manner and to the same extent that the Holding
Company would be required to perform if no such succession or assignment had
taken place.
8
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, West Essex Bancorp, Inc. has caused this Agreement to
be executed by its duly authorized officers, and Executive has signed this
Agreement, on the 2/nd/ day of February, 1999.
ATTEST: WEST ESSEX BANCORP, INC.
/s/ Craig L. Montanaro By: /s/ Leopold W. Montanaro
- - ------------------------------- ------------------------------------
Secretary Leopold W. Montanaro
For the Entire Board of Directors
SEAL
WITNESS: EXECUTIVE
/s/ Lisa Mulligan By: /s/ Dennis A Petrello
- - ------------------------------- ----------------------------------
Dennis A Petrello
9
<PAGE>
EXHIBIT 10.11
Mr. Filippo's Change in Control Agreement with West Essex Bancorp, Inc.
is the same as Mr. Petrello's Change in Control Agreement with West Essex
Bancorp, Inc. (Exhibit 10.10) which is incorporated herein by reference except
as to the name of the Executive which is Charles E. Filippo.
<PAGE>
EXHIBIT 10.12
Mr. Craig Montanaro's Change in Control Agreement with West Essex
Bancorp, Inc. is the same as Mr. Petrello's Change in Control Agreement with
West Essex Bancorp, Inc. (Exhibit 10.10) which is incorporated herein by
reference except as to the name of the Executive which is Craig L. Montanaro.
<PAGE>
Exhibit 10.13
WEST ESSEX BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of the West Essex Bank Employee Severance Compensation Plan
is to assure for West Essex Bank (the "Bank") the services of Employees of the
Bank in the event of a Change in Control (capitalized terms are defined in
section 2.1) of West Essex Bancorp, Inc. (the "Holding Company") or the Bank.
The benefits contemplated by the Plan recognize the value to the Bank of the
services and contributions of the Employees of the Bank and the effect upon the
Bank resulting from the uncertainties of continued employment, reduced Employee
benefits, management changes and relocations that may arise in the event of a
Change in Control of the Bank or the Holding Company. The Bank's and the Holding
Company's Boards of Directors believe that it is in the best interests of the
Bank and the Holding Company to provide Employees of the Bank who have been with
the Bank for a minimum of one (1) year with such benefits in order to defray the
costs and changes in Employee status that could follow a Change in Control. The
Board of Directors believes that the Plan will also aid the Bank in attracting
and retaining highly qualified individuals who are essential to its success and
the Plan's assurance of fair treatment of the Bank's Employees will reduce the
distractions and other adverse effects on Employees' performance in the event of
a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as the "West
Essex Bank Employee Severance Compensation Plan."
1.2 Applicability of Plan
---------------------
The benefits provided by this Plan shall be available to all Employees
of the Bank, who, at or after the Effective Date, meet the eligibility
requirements of Article III, except for those executive officers who have
entered into, or who enter into in the future, and continue to be subject to an
employment or change in control agreement with the Employer.
1.3 Contractual Right to Benefits
-----------------------------
This Plan establishes and vests in each Participant a contractual right
to the benefits to which each Participant is entitled hereunder, enforceable by
the Participant against the Employer.
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings
set forth below.
(a) "Annual Compensation" of a Participant means and includes all
wages, salary, bonus, and cash compensation, if any, paid (including accrued
amounts) by an Employer as consideration for the Participant's service during
the 12 months ended the date as of which Annual Compensation is to be
determined, which are or would be includable in the gross income of the
Participant receiving the same for federal income tax purposes.
(b) "Bank" means West Essex Bank or any successor as provided for in
Article VII hereof.
(c) "Change in Control" shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act or
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency) as in effect on the date hereof (provided
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity.
(d) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Board that it is either not possible
to determine if or when such Disability will terminate or that it
2
<PAGE>
appears probable that such Disability will be permanent during the remainder of
said employees lifetime.
(e) "Effective Date" means the date the Plan is approved by the Board
of Directors of the Bank, or such other date as the Board of Directors of the
Bank shall designate in its resolution approving the Plan.
(f) "Employee" means any Employee of the Bank or any subsidiary of the
Bank or any parent of the Bank who has completed at least one Year of Service
with the Bank, or any subsidiary thereof, provided, however, that any Employee
who is covered or hereinafter becomes covered by an employment contract or
change in control agreement with the Employer shall not be considered to be an
"Employee" for purposes of this Plan.
(g) "Employer" means the Bank or a subsidiary of the Bank or a parent
of the Bank which has adopted the Plan pursuant to Article VI hereof.
(h) "ERISA" means Employee Retirement Income Security Act of 1974, as
amended.
(i) "Expiration Date" means the date ten (10) years from the Effective
Date, unless the Plan is earlier terminated pursuant to Section 8.2 of the Plan
or extended pursuant to Section 8.1 of the Plan.
(j) "Termination for Cause" shall include termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or violation of any final cease-and desist
order, or material breach of any provision of the plan. In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institutions industry.
(k) "Leave of Absence" and "LOA" mean (i) the taking of an authorized
or approved leave of absence under the provisions of the federal Family and
Medical Leave Act ("FMLA"), (ii) any state law providing qualitatively similar
benefits as the FMLA, or (iii) a leave of absence authorized under the policies
of the Bank. "Leave of Absence" and "LOA" are defined in this paragraph for the
exclusive purposes of this Plan.
(l) "Payment" means the payment of severance compensation as provided
for in Article IV hereof.
(m) "Participant" means an Employee who meets the eligibility
requirements of Article III.
(n) "Plan Year" means the period beginning on the Effective Date and
ending on December 31 and the 12 consecutive-month period ending each year
thereafter.
(o) "Plan" means this West Essex Bank Employee Severance Compensation
Plan.
3
<PAGE>
(p) "Year of Service" means each consecutive 12 month period, beginning
with an Employee's date of hire in which an Employee is credited with at least
one hour of service in each of the 12 calendar months in such period. The taking
of a LOA shall not eliminate a period of time from being a Year of Service if
such period of time otherwise qualifies as such. Further if a particular 12
month period of time would not otherwise qualify under the Plan as a Year of
Service because one hour of service is not credited during each month of such
period due to the taking of a LOA, then such period of time shall be deemed to
be a Year of Service for all other purposes of this Plan.
2.2 Applicable Law
--------------
The laws of the State of New Jersey shall be the controlling law in all
matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term Participant shall include all Employees of the Employer who
have completed at least one (1) Year of Service with the Employer at the time of
any termination pursuant to Section 4.2 of this Plan. Notwithstanding the
foregoing, persons who have entered into and continue to be covered by an
employment contract or change in control agreement with the Employer shall not
be entitled to participate in this Plan.
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to receipt
of a Payment shall remain a Participant in this Plan until the full amount of
such Payment has been paid to the Participant.
4
<PAGE>
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his respective Employer
a Payment in the amount provided in Section 4.3 of the Plan if there has been a
Change in Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 4.2 of the Plan, whether the termination of
employment is voluntary or involuntary. A Participant shall not be entitled to a
Payment if termination occurs by reason of death, voluntary retirement,
voluntary termination other than for reasons specified in Section 4.2 of the
Plan, Disability, or as a result of Termination for Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a
Payment if employment by an Employer is terminated, voluntarily or
involuntarily, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control.
(b) The Employer materially changes the Participant's function,
duties or responsibilities which would cause the Participant's position to be
one of lesser responsibility, importance or scope with the Employer than
immediately prior to the change in control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than twenty-five (25) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to the Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control,
provided, however, that a material reduction in benefits and perquisites
generally provided to all Employees of the Employer on a nondiscriminatory basis
would not trigger a payment pursuant to this Plan.
(e) A successor to the Bank fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Bank or any successor to the Bank breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Termination for Cause.
5
<PAGE>
4.3 Amount of Payment
-----------------
(a) Each Participant entitled to a Payment under this Plan shall
receive from the Bank, a lump sum cash payment equal to one-twelfth of his
Annual Compensation for each Year of Service up to a maximum of 199% of Annual
Compensation.
(b) Notwithstanding the provisions of paragraph (a) above, if a
Payment to a Participant who is a "Disqualified Individual" shall be in an
amount which includes an "Excess Parachute Payment," the Payment hereunder to
that Participant shall be reduced to the maximum amount which does not include
an Excess Parachute Payment. The terms "Disqualified Individual" and "Excess
Parachute Payment" shall have the same meanings as under Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor provision thereto.
The Participant shall not be required to mitigate damages on the amount
of the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty (20) business days after the termination of the
Participant's employment. If any Participant should die after termination of the
employment but before all amounts have been paid, such unpaid amounts shall be
paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for
hereunder shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.
6
<PAGE>
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of Directors of the Bank, this Plan
may be adopted by any "Subsidiary" or "Parent" of the Bank. Upon such adoption,
the Subsidiary or Parent shall become an Employer hereunder and the provisions
of the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent. The term "Subsidiary" means any corporation in which the Bank, directly
or indirectly, holds a majority of the voting power of its outstanding shares of
capital stock. The term "Parent" means any corporation which holds a majority of
the voting power of the Bank's outstanding shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Employer shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this plan, in the same manner and to the same extent that the Employer would be
required to perform if no such succession or assignment had taken place.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of
the Expiration Date, unless sooner terminated as provided in Section 8.2 of the
Plan, or unless extended for an additional period or periods by resolution
adopted by the Board of Directors of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution
adopted by a majority of the Board of Directors of the Bank, unless a Change in
Control has previously occurred. If a Change in Control occurs, the Plan no
longer shall be subject to amendment, change, substitution, deletion, revocation
or termination in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board of
Directors. A proper amendment of the Plan automatically shall effect a
corresponding amendment to each Participant's rights hereunder. A proper
termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
7
<PAGE>
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under
this Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit of,
Employee and the Bank and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by
a party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Employer may terminate an Employee's employment at any time,
but any termination by the Employer, other than Termination for Cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. Employee shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined hereunder.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(3) or (g)(1), the Bank's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1), all obligations
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations under this Plan shall be terminated, except to
the extent determined that continuation of the Plan is necessary for the
8
<PAGE>
continued operation of the association: (i) by the Director or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the association under the authority contained in Section 13(c)
of the Federal Deposit Insurance Act; or (ii) by the Director or his or her
designee at the time the Director or his or her designee approves a supervisory
merger to resolve problems related to the operations of the association or when
the association is determined by the Director to be in an unsafe or unsound
condition. Any rights of the Participants that have already vested, however,
shall not be affected by such action.
10.6 Any payments made to a Participant pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and 12 C.F.R. 545.121 and any regulations promulgated
thereunder.
ARTICLE XI
ADMINISTRATIVE PROVISIONS
11.1 Plan Administrator. The administrator of the Plan shall be under
------------------
the supervision of the Board of Directors of the Bank or a Committee appointed
by the Board of Directors of the Bank (the "Board"). It shall be a principal
duty of the Board to see that the Plan is carried out in accordance with its
terms, for the exclusive benefit of persons entitled to participate in the Plan
without discrimination among them. The Board will have full power to administer
the Plan in all of its details subject, however, to the requirements of ERISA if
the Plan is subject to such requirements. For this purpose, the Board's powers
will include, but will not be limited to, the following authority, in addition
to all other powers provided by this Plan: (a) to make and enforce such rules
and regulations as it deems necessary or proper for the efficient administration
of the Plan; (b) to interpret the Plan, its interpretation thereof in good faith
to be final and conclusive on all persons claiming benefits under the Plan;
(c) to decide all questions concerning the Plan and the eligibility of any
person to participate in the Plan; (d) to compute the amount of Payment that
will be payable to any Participant or other person in accordance with the
provisions of the Plan, and to determine the person or persons to whom such
benefits will be paid; (e) to authorize Payments; (f) to appoint such agents,
counsel, accountants, consultants and actuaries as may be required to assist in
administering the Plan; and (g) to allocate and delegate its responsibilities
under the Plan and to designate other persons to carry out any of its
responsibilities under the Plan, any such allocation, delegation or designation
to be by written instrument and in accordance with Section 405 of ERISA if
applicable.
11.2 Named fiduciary. The Board will be a "named fiduciary" for
---------------
purposes of Section 402(a)(1) of ERISA with authority to control and manage the
operation and administration of the Plan, and will be responsible for complying
with all, if any, of the reporting and disclosure requirements of Part 1 of
Subtitle B of Title I of ERISA.
11.3 Claims and review procedures.
----------------------------
(a) Claims procedure. If any person believes he is being denied any
----------------
rights or benefits under the Plan, such person may file a claim in writing with
the Board. If any such claim is wholly or partially denied, the Board will
notify such person of its decision in writing. Such notification will be written
in a manner calculated to be understood by such person and will contain
9
<PAGE>
(i) specific reasons for the denial, (ii) specific reference to pertinent Plan
provisions, (iii) a description of any additional material or information
necessary for such person to perfect such claim and an explanation of why such
material or information is necessary and (iv) information as to the steps to be
taken if the person wishes to submit a request for review. Such notification
will be given within 90 days after the claim is received by the Board (or within
180 days, if special circumstances require an extension of time for processing
the claim, and if written notice of such extension and circumstances is given to
such person within the initial 90 day period). If such notification is not given
within such period, the claim will be considered denied as of the last day of
such period and such person may request a review of his claim.
(b) Review procedure. Within 60 days after the date on which a person
----------------
receives a written notice of a denied claim (or, if applicable, within 60 days
after the date on which such denial is considered to have occurred) such person
(or his duly authorized representative) may (i) file a written request with the
Board for a review of his denied claim and of pertinent documents and
(ii) submit written issues and comments to the Board. The Board will notify such
person of its decision in writing. Such notification will be written in a manner
calculated to be understood by such person and will contain specific reasons for
the decision as well as specific references to pertinent Plan provisions. The
decision on review will be made within 60 days after the request for review is
received by the Board (or within 120 days, if special circumstances require an
extension of time for processing the requests such as an election by the Board
to hold a hearing, and if written notice of such extension and circumstances is
given to such person within the initial 60 day period). If the decision on
review is not made within such period, the claim will be considered denied.
11.4 Nondiscriminatory exercise of authority. Whenever, in the
---------------------------------------
administration of the Plan, any discretionary action by the Board is required,
the Board shall exercise its authority in a nondiscriminatory manner so that all
persons similarly situated will receive substantially the same treatment.
11.5 Indemnification of Board. The Bank will indemnify and defend to
------------------------
the fullest extent permitted by law any person serving on the Board or as a
member of a committee designated as Board (including any person who formerly
served as a Board member or as a member of such committee) against all
liabilities, damages, costs and expenses (including attorneys fees and amounts
paid in settlement of any claims approved by the Bank) occasioned by any act or
omission to act in connection with the Plan, if such act or omission is in good
faith.
11.6 Benefits solely from general assets. The benefits provided
-----------------------------------
hereunder will be paid solely from the general assets of the Employer. Nothing
herein will be construed to require the Employer or the Board to maintain any
fund or segregate any amount for the benefit of any Participant, and no
Participant or other person shall have any claim against, right to, or security
or other interest in, any fund, account or asset of the Employer from which any
payment under the Plan may be made.
10
<PAGE>
Having been adopted by its Board of Directors on June 8, 1998, this Plan is
executed by its duly authorized officers this 8th day of February, 1999.
<TABLE>
<CAPTION>
ATTEST WEST ESSEX BANK
<S> <C>
/s/ Dennis A. Petrello By: /s/ Leopold W. Montanaro
- - -------------------------------------- ------------------------------------
Leopold W. Montanaro
For the Entire Board of Directors
</TABLE>
11
<PAGE>
WEST ESSEX BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I.................................................. 2
Purpose of the Plan.................................... 2
ARTICLE II................................................. 2
Definitions........................................... 2
2.1 Bank.......................................... 2
----
2.2 Board......................................... 2
-----
2.3 Code.......................................... 2
----
2.4 Eligible Employee............................. 2
-----------------
2.5 Employee...................................... 2
--------
2.6 ERISA......................................... 2
-----
2.7 ESOP.......................................... 2
----
2.8 Former Participant............................ 2
------------------
2.9 Non-qualified Plan............................ 3
------------------
2.10 Participant................................... 3
-----------
2.11 Period of Participation....................... 3
-----------------------
2.12 SERP.......................................... 3
----
2.13 Supplemental ESOP Benefit..................... 3
-------------------------
2.14 Termination of Service........................ 3
----------------------
ARTICLE III................................................ 3
Participation......................................... 3
3.1 Eligibility for Participation................. 3
-----------------------------
3.2 Supplemental ESOP Benefit Account............. 3
---------------------------------
3.3 Commencement of Participation................. 4
-----------------------------
3.4 Termination of Participation.................. 4
----------------------------
ARTICLE IV................................................. 4
Benefits to Participants.............................. 4
4.1 Supplemental Benefits......................... 4
---------------------
4.2 Benefits Under Previous Benefit Formulas...... 4
----------------------------------------
4.3 Release from Liability........................ 5
----------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE V................................................... 5
Administration......................................... 5
5.1 Duties of the Board............................ 5
-------------------
5.2 Liabilities of the Board....................... 5
------------------------
5.3 Expenses....................................... 5
--------
5.4 Unfunded Character of Plan..................... 5
--------------------------
ARTICLE VI.................................................. 6
Amendment and Termination.............................. 6
6.1 Amendment and Termination....................... 6
-------------------------
6.2 Vesting and Payment Upon Termination............ 6
------------------------------------
6.3 Preservation of Benefits on Amendment........... 6
-------------------------------------
ARTICLE VII................................................. 6
Miscellaneous Provisions............................... 6
7.1 Governing Law................................... 6
-------------
7.2 No Right to Continued Employment................ 7
--------------------------------
7.3 Construction of Language........................ 7
------------------------
7.4 Non-alienation of Benefits...................... 7
--------------------------
7.5 Operation as Unfunded Nonqualified Plan......... 7
---------------------------------------
7.6 Reliance Upon Information....................... 7
-------------------------
7.7 Required Regulatory Provisions.................. 8
------------------------------
7.8 Effective Date.................................. 9
--------------
</TABLE>
ii
<PAGE>
WHEREAS, the Board of Directors of West Essex Bank ("Bank") has adopted the
West Essex Bank Employee Stock Ownership Plan ("ESOP") to provide benefits to
the employees of the Bank; and
WHEREAS, the Internal Revenue Code of 1986, as amended ("Code") imposes
limitations on the amount of contributions that may be made to the ESOP by the
Bank on the behalf of Participants, and limits the amount of compensation which
may be considered in determining benefits under the plan; and
WHEREAS, the Board of Directors of the Bank desires to implement a plan to
provide certain employees with benefits to replace benefits to which they would
be entitled under the ESOP but for the application of the limitations imposed by
the Code;
THEREFORE, by resolution of the Board of Directors, the Supplemental
Executive Retirement Plan has been adopted.
1
<PAGE>
ARTICLE I
Purpose of the Plan
--------------------
The purpose of the West Essex Bank Supplemental Executive Retirement Plan
("SERP") is to provide designated executives of the Bank with deferred benefits
to which they would otherwise be entitled under the terms of the ESOP, but for
limitations on benefits and includible compensation imposed by the Code. This
plan is intended to benefit only a select group of highly compensated employees.
The benefits under this SERP will be paid out of the Bank's general assets
exclusively.
ARTICLE II
Definitions
------------
Wherever appropriate to the purposes of the SERP, capitalized terms shall
have the meanings assigned to them under the ESOP. Notwithstanding the
preceding, the following definitions shall apply for the purposes of this SERP
unless a different meaning is clearly indicated by the context.
2.1 Bank means West Essex Bank having its principal office at 417
----
Bloomfield Avenue, Caldwell, New Jersey 07006 and its successors or
assigns.
2.2 Board means the Board of Directors of the Bank.
-----
2.3 Code means the Internal Revenue Code of 1986, as amended from time
----
to time (including the corresponding provisions of any succeeding law).
2.4 Eligible Employee means an Employee who is eligible for participation
-----------------
in the SERP in accordance with the provisions of Article III.
2.5 Employee means any person, including an officer, who is employed by
--------
the Bank.
2.6 ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time (including the corresponding provisions of any
succeeding law).
2.7 ESOP means the West Essex Bank Employee Stock Ownership Plan.
----
2.8 Former Participant means a person whose participation in the SERP
-------------------
has terminated as provided under Section 3.4.
2
<PAGE>
2.9 Non-qualified Plan means a plan of deferred compensation which does
------------------
not meet the requirements of Section 401(a) of the Code.
2.10 Participant means any person who is participating in the SERP in
------------
accordance with its terms.
2.11 Period of Participation means the period during which a person is a
-----------------------
Participant.
2.12 SERP means this West Essex Bank Supplemental Executive
----
Retirement Plan, as amended from time to time.
2.13 Supplemental ESOP Benefit means the benefit provided by this SERP
-------------------------
based on limitations, imposed by Sections 401(a)(17) and/or 415 of the
Code, on the benefits of a Participant under the ESOP.
2.14 Termination of Service means an Employee's separation from the
----------------------
service of the Bank, whether by resignation, discharge, death,
disability, retirement or otherwise.
ARTICLE III
------------
Participation
--------------
3.1 Eligibility for Participation.
------------------------------
Only Eligible Employees may be or may become Participants.
An Employee shall become an Eligible Employee for Supplemental ESOP
Benefits if:
(1) The Board, in its sole discretion, designates him as an Eligible
Employee; and
(2) He is a Participant in the ESOP and his benefits thereunder are
limited by the application of Sections 401(a)(17) and/or 415 of the
Code.
3.2 Supplemental ESOP Benefit Account
---------------------------------
A Participant's Supplemental ESOP Benefit under the Plan shall be equal to
the excess of (a) over (b), where:
(a) is annual contributions made by the Employer that would otherwise be
allocated to the accounts of the Participant under the ESOP for a
particular year if the provisions of the ESOP were administered
without regard to the limitations imposed by Sections 401(a)(17)
and/or 415 of the Code; and
3
<PAGE>
(b) is the annual contributions made by the Employer and that are actually
allocated to the accounts of the Participant under the provisions of
the ESOP for that particular year after giving effect to any reduction
of such allocation required by the limitations imposed by Sections
401(a)(17) and/or 415 of the Code.
3.3 Commencement of Participation.
-----------------------------
An Eligible Employee shall become a Participant on the date determined
by the Board. However, in no event will an Employee become a Participant prior
to January 1, 1998.
3.4 Termination of Participation.
----------------------------
Participation in the Plan shall cease on the:(a) date of the
Participant's Termination of Service; or (b) date on which he ceases to be an
Eligible Employee.
ARTICLE IV
-----------
Benefits to Participants
-------------------------
4.1 Supplemental Benefits.
---------------------
(a) A Participant who satisfies Section 3.1 of the SERP shall be entitled to
an unfunded, unsecured promise from the Bank of Supplemental ESOP Benefits.
(b) A Participant shall be vested in benefits payable under Section 3.1 of
this SERP in the same percentage that such Participant has a vested interest
in his account under the ESOP.
(f) The Supplemental ESOP Benefit provided for in Section 3.2 shall be paid
commencing upon Termination of Service to the Participant or his designated
beneficiary in the manner and for the period as the Participant shall have
elected with respect to his benefit under the ESOP.
4.2 Payment to Missing Person.
--------------------------
If the Bank is unable to effect delivery of any amount payable hereunder to
the person entitled thereto, or upon his death, to his personal representative,
it shall so advise the Board and the Board shall give written notice to such
person at his last known address as shown in such Participant's record of
employment. If such person or his personal representative does not present
himself to the Board after ninety days from the date of mailing such notice,
then the Board shall direct such amount, including any amount thereafter
becoming due to such person or his personal representative to be distributed in
the manner provided herein with respect to the death of a Participant. If there
is no valid designation of Beneficiary on file; or, if there can be
4
<PAGE>
no distribution under the foregoing provision, benefit shall be paid over to the
estate of the Participant.
4.3 Release from Liability.
-----------------------
Payment to any Participant, legal representative or Beneficiary, in
accordance with the provisions of this Plan, is deemed to be in full
satisfaction of all claims by the Participant, representative or Beneficiary
against this SERP, the Board, and the Bank. The Board may require such
Participant, legal representative, or Beneficiary as a condition precedent to
payment to execute a receipt and release in such form as shall be determined by
the Board.
ARTICLE V
---------
Administration
---------------
5.1 Duties of the Board.
-------------------
The Board shall have full responsibility for the management, operation,
interpretation and administration of the Plan in accordance with its terms, and
shall have such authority as is necessary or appropriate in carrying out its
responsibilities. Actions taken by the Board pursuant to this Section 5.1 shall
be conclusive and binding upon the Bank, Participants, Former Participants,
Beneficiaries, and other interested parties.
5.2 Liabilities of the Board.
-------------------------
Neither the Board nor its individual members shall be deemed to be a
fiduciary with respect to this Plan; nor shall any of the foregoing individuals
or entities be liable to any Participants, Former Participants or Beneficiaries
in connection with the management, operation, interpretation or administration
of the Plan, any such liability being solely that of the Bank.
5.3 Expenses.
--------
Any expenses incurred in the management, operation, interpretation or
administration of the Plan shall be paid by the Bank. In no event shall the
benefits otherwise payable under this Plan be reduced to offset the expenses
incurred in managing, operating, interpreting or administering the Plan.
5.4 Unfunded Character of Plan.
--------------------------
The SERP shall be unfunded. Neither the Bank nor the Board nor its
individual members shall segregate or otherwise identify specific assets to be
applied to the purposes of the Plan, nor shall any of them be deemed to be a
trustee of any amounts to be paid under the Plan.
5
<PAGE>
Any liability of the Bank to any person with respect to benefits payable under
the Plan shall be based solely upon such contractual obligations, if any, as
shall be created by the Plan, and shall give rise only to a claim against the
general assets of the Bank. No such liability shall he deemed to be secured by
any pledge or any other encumbrance on any specific property of the Bank.
ARTICLE VI
----------
Amendment and Termination
--------------------------
6.1 Amendment and Termination.
--------------------------
Subject to the provisions of Sections 6.2 and 6.3, the Board shall
have the right to amend or terminate the Plan, in whole or in part.
6.2 Vesting and Payment Upon Termination.
------------------------------------
(a) In the event of the termination or partial termination of this
SERP, the rights of all affected parties, if any, to any benefits
accrued to the date of such termination or partial termination, shall
become nonforfeitable.
(b) In the event of the termination of this SERP all benefit shall be
immediately payable to the Participant by the Bank in whatever form
the SERP otherwise provides, or in the discretion of the Board may be
paid in a lump sum payment of the present value as determined by the
Board in accordance with the assumptions and methodology of Section
7520 of the Code.
6.3 Preservation of Benefits on Amendment.
-------------------------------------
No amendment of this SERP shall reduce the vested and accrued
benefits, if any, of a Participant under this SERP.
ARTICLE VII
-----------
Miscellaneous Provisions
------------------------
7.1 Governing Law.
-------------
The SERP shall be construed, administered, and enforced according to laws of
the State of New Jersey, except to the extent that such laws are pre-empted by
the federal laws of the United States of America.
6
<PAGE>
7.2 No Right to Continued Employment.
--------------------------------
Neither the establishment of the SERP nor any provisions of the SERP, nor any
action of the Board shall be held or construed to confer upon any Employee the
right to a continuation of employment by the Bank. Subject to any employment
contract, the Bank reserves the right to dismiss any Employee or otherwise deal
with any Employee to the same extent as though the SERP had not been adopted.
7.3 Construction of Language.
------------------------
Wherever appropriate in the SERP, words used in the singular may be read in
the plural, words in the plural may be read in the singular, and words importing
the masculine gender shall be deemed equally to refer to the feminine and the
neuter. Any reference to any Article or Section shall be to an Article or
Section of this SERP, unless otherwise indicated.
7.4 Non-alienation of Benefits.
--------------------------
The right to receive a benefit under the SERP shall not be subject in any
manner to anticipation, alienation, or assignment, nor shall such right be
liable for or subject to debts, contracts, liabilities. Should any
Participants, Former Participants, Beneficiaries or other person attempt to
anticipate, alienate or assign his interest in or right to a benefit, or should
any person claiming against him seem to subject such interest or right to legal
or equitable process, all the interest or right of such Participants or Former
Participants, Beneficiaries or ocher person entitled to benefits under the SERP
shall cease, and in that event, such interest or right shall be held or applied,
at the direction of the Board, for or to the benefit of such Participants,
Former Participants, Beneficiaries or other person or his spouse, children or
other dependents in such manner and in such proportions as the Board may deem
proper.
7.5 Operation as Unfunded Non-qualified Plan.
----------------------------------------
The SERP is intended to be an unfunded, Non-qualified Plan maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The SERP is not intended to
comply with the requirements of Section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
7.6 Reliance Upon Information
-------------------------
The Board shall not be liable for any decision or action taken in good faith
in connection with the administration of the SERP. Without limiting the
generality of the foregoing, any such decision or action taken by the Board in
reliance upon any information supplied to them by an officer of the Bank, the
Bank's legal counsel, or the Bank's independent accountants in connection with
the administration of the SERP shall be deemed to have been taken in good faith.
7
<PAGE>
7.7 Required Regulatory Provisions.
------------------------------
(a) The Bank's board of directors may terminate the officer or employee's
employment at any time, but any termination by the Bank's board of directors
other than Termination for Cause, shall not prejudice the officer or employee's
right to compensation or other benefits under the Plan. The officer or employee
shall have no right to receive compensation or other benefits for any period
after Termination for Cause. Termination for Cause shall include termination
because of the officer or employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of the Plan.
(b) If the officer or employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1)) the Bank's obligations under the Plan shall be suspended
as of the date of service unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its discretion (i) pay the
officer or employee all or part of the compensation withheld while its Plan
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(c) If the officer or employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(4) or (g)(1)), all obligations of the Bank under the Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default (as defined in section 3(x)(1) of the Federal
Deposit Insurance Act), all obligations under the Plan shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
contracting parties: Provided, that this paragraph need not be included in the
Plan if prior written approval is secured from the Director or her designee.
(e) All obligations under the Plan shall be terminated, except to the extent
determined that continuation of the Plan is necessary for the continued
operation of the Bank:
(i) by the Director or her designee, at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or
(ii) by the Director or her designee, at the time the Director or her
designee approves a supervisory merger to resolve problems related to operation
of the association or when the association is determined by the Director to be
in an unsafe or unsound condition.
8
<PAGE>
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Participants pursuant to this Plan, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k),
12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
7.8 Effective Date
--------------
The SERP shall become effective January 1, 1998.
Having been adopted by the West Essex Bank Board of Directors on June 8, 1998,
this Plan is executed by a designee of the Board and duly attested, on this
___________ day of February, 1999.
ATTEST: WEST ESSEX BANK
By:
- - ------------------------------ ----------------------------------
Leopold W. Montanaro
For the Entire Board of Directors
9
<PAGE>
WEST ESSEX BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I................................................. 1
Purpose of the Plan.................................... 1
ARTICLE II................................................ 2
Definitions............................................ 2
2.1 Bank...................................... 2
----
2.2 Board of Directors........................ 2
------------------
2.3 Change in Control......................... 2
-----------------
2.4 Code...................................... 2
----
2.5 Committee................................. 3
---------
2.6 Company................................... 3
-------
2.7 Company Stock............................. 3
-------------
2.8 Eligible Employee......................... 3
-----------------
2.9 Employee.................................. 3
--------
2.10 ERISA..................................... 3
-----
2.11 ESOP...................................... 3
----
2.12 Nonqualified Plan......................... 3
-----------------
2.13 Participant............................... 3
-----------
2.14 SERP Benefit.............................. 3
------------
2.15 SERP...................................... 3
----
2.16 Termination for Cause..................... 3
---------------------
2.17 Termination of Service.................... 3
----------------------
ARTICLE III............................................... 4
Participation.......................................... 4
3.1 Eligibility for Participation............. 4
-----------------------------
3.2 Commencement of Participation............. 4
-----------------------------
3.3 Vesting................................... 4
-------
3.4 Termination of Participation.............. 5
----------------------------
ARTICLE IV................................................ 5
Benefits to Participants............................... 5
4.1 SERP Benefits............................. 5
-------------
4.2 Form of Benefits.......................... 6
----------------
ARTICLE V................................................. 6
Administration......................................... 6
5.1 The Committee............................. 6
-------------
5.2 Duties of the Committee................... 6
-----------------------
5.3 Liability of the Committee................ 7
--------------------------
5.4 Expenses.................................. 7
--------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VI................................................ 8
Amendment and Termination.............................. 8
6.1 Amendment and Termination................. 8
-------------------------
ARTICLE VII............................................... 8
Miscellaneous Provisions............................... 8
7.1 No Right to Continual Employment.......... 8
--------------------------------
7.2 Non-Alienation of Benefits................ 8
--------------------------
7.3 Payment if Participant is Incompetent..... 9
-------------------------------------
7.4 Termination for Cause..................... 9
---------------------
7.5 The Bank Sole Source of Benefits.......... 9
--------------------------------
7.6 Lost Participants......................... 9
-----------------
7.7 Withholding............................... 9
-----------
7.8 Governing Law............................. 10
-------------
7.9 Operation as Unfunded Nonqualified Plan... 10
---------------------------------------
7.10 Required Regulatory Provisions............ 11
------------------------------
</TABLE>
(iii)
<PAGE>
WEST ESSEX BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective January 1, 1998
WHEREAS, West Essex Bank (the "Bank") adopted the West Essex Bank Employee
Stock Ownership Plan (the "ESOP"), a tax-qualified employee stock ownership plan
effective January 1, 1998; and
WHEREAS, the ESOP is leveraged with a 10-year exempt loan used to acquire
shares of Company Stock; and
WHEREAS, the final payment with respect to the ESOP loan is scheduled to be
made by the ESOP trustee on December 31, 2008; and
WHEREAS, the Bank expects that certain key management employees will retire
from the employ of the Bank prior to final payment of the ESOP loan and the
final allocation of Company Stock acquired with the proceeds of the ESOP loan;
and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
desires to implement a plan to provide certain key management employees with
benefits to replace the benefits to which they would have otherwise been
entitled under the ESOP had they remained in the employ of the Bank until the
complete repayment of the ESOP loan and the final allocation of Company Stock
acquired with the proceeds of the ESOP loan;
NOW, THEREFORE, by resolution of the Board of Directors of the Bank, the
West Essex Bank Management Supplemental Executive Retirement Plan (the "SERP")
has been established.
ARTICLE I
---------
Purpose of the Plan
The purpose of the SERP is to provide certain key management employees of
the Bank who retire prior to complete repayment of the ESOP loan and the final
allocation of Company Stock acquired with the proceeds of the ESOP loan with
benefits to make up lost benefits to which they would otherwise have been
entitled under the terms of the ESOP had they continued their employment with
the Bank until complete repayment of the ESOP loan.
<PAGE>
ARTICLE II
----------
Definitions
The following definitions shall apply for the purposes of this SERP unless
a different meaning is clearly indicated by the context.
2.1 Bank means West Essex Bank, having its principal office at 417
----
Bloomfield Avenue, Caldwell, New Jersey 07006 and its successors or assigns.
The term "Bank" shall include any other employee affiliated with the Bank which
adopts the SERP with the consent of the Bank, in which case the provisions of
the SERP shall be interpreted accordingly with respect to such Employer.
2.2 Board of Directors means the Board of Directors of the Bank, as duly
------------------
constituted from time to time.
2.3 Change in Control shall mean an event of a nature that: (i) would be
-----------------
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act or
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency) as in effect on the date hereof (provided
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity.
2.4 Code means the Internal Revenue Code of 1986, as amended from time to
----
time (including the corresponding provisions of any succeeding law).
2
<PAGE>
2.5 Committee means the administrative committee appointed by the Board
---------
to administer the SERP pursuant to the terms of Article V hereof.
2.6 Company means West Essex Bancorp, Inc., the holding company of the
-------
Bank.
2.7 Company Stock means the common stock of the Company.
-------------
2.8 Eligible Employee means an Employee who is eligible for participation
-----------------
in the SERP pursuant to the provisions of Article III hereof.
2.9 Employee means any person, including an officer, who is employed by
--------
the Bank.
2.10 ERISA means the Employee Retirement Income Security Act of 1974,
-----
as amended from time to time (including the corresponding provisions of any
succeeding law).
2.11 ESOP means the West Essex Bank Employee Stock Ownership Plan.
----
2.12 Nonqualified Plan means a plan of deferred compensation which does
-----------------
not meet the requirements of Section 401(a) of the Code.
2.13 Participant means any person who participates in the SERP in
-----------
accordance with its terms.
2.14 SERP Benefit means the benefit payable to a Participant pursuant
------------
to the terms of the SERP.
2.15 SERP means the West Essex Bank Management Supplemental Executive
----
Retirement Plan, as set forth herein, and as amended from time to time.
2.16 Termination for Cause means termination of employment because of
---------------------
the Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or violation of any final cease-and-desist
order, or material breach of a provision of the plan. The basis for any
Employee's Termination for Cause shall be determined by the Board of Directors
in its sole discretion.
2.17 Termination of Service means an Employee's separation from the
----------------------
service of the Bank, whether by resignation, discharge, death, disability,
retirement or otherwise.
3
<PAGE>
ARTICLE III
-----------
Participation
3.1 Eligibility for Participation.
-----------------------------
Only Eligible Employees may be or become Participants. An Employee shall
become an Eligible Employee for SERP Benefits if:
(a) He is a participant in the ESOP, and
(b) The Board of Directors, in its sole discretion, designates him as
an Eligible Employee.
3.2 Commencement of Participation.
-----------------------------
An Eligible Employee shall become a Participant in the SERP on the date
determined by the Board of Directors.
3.3 Vesting.
-------
A Participant shall vest in his SERP Benefit according to the following
schedule:
<TABLE>
<CAPTION>
Years of Service with the Bank Vested Percentage
------------------------------ -----------------
<S> <C>
1/st/ 20%
2/nd/ 40%
3/rd/ 60%
4/th/ 80%
5/th/ 100%
</TABLE>
Notwithstanding the preceding, a Participant shall receive his vested SERP
Benefit upon the occurrence of a Change in Control of the Bank or the Company.
4
<PAGE>
3.4 Termination of Participation.
----------------------------
A Participant's participation in the SERP shall cease on the earlier of
(a) the date of the Participant's Termination of Service, or
(b) the date on which the Participant ceases to be an Eligible
Employee.
ARTICLE IV
----------
Benefits to Participants
4.1 SERP Benefits.
-------------
(a) An individual who satisfies the eligibility requirements of Section
3.1 of the SERP and becomes a Participant pursuant to Section 3.2 of the SERP
shall be entitled to an unfunded, unsecured promise from the Bank to receive a
SERP Benefit upon Termination of Service as a result of his attainment of
"Normal Retirement Age" (as defined in the ESOP) under the terms of ESOP.
(b) The SERP Benefit shall be determined by:
(i) projecting the total number of shares of Company Stock that
would have been allocated to the Participant's account under the ESOP
had the Participant continued in the employ of the Bank, measured
from the date the Participant was first eligible to participate in
the ESOP until the ESOP loan would have been repaid in full and the
final allocation of shares of Company Stock acquired with the ESOP
loan would have been made; and then
(ii) reducing the number of shares projected in (i), above, by the
actual number of shares of Company Stock allocated to the
Participant's account under the terms of the ESOP as of the last day
of the final Plan Year in which the Participant was an "Active
Participant" (as defined in the ESOP) in the ESOP; and then
(iii) multiplying the number of shares of Company Stock determined
after application of (ii), above, by the average fair market value of
the Company Stock for the five-year period immediately preceding the
Participant's Termination of Service (or the number of years the
Participant has participated in the SERP if such number is fewer than
five).
5
<PAGE>
The projection of shares required by (i), above, shall be performed by a public
accountant based on assumptions which the Board of Directors has approved as
reasonable at the time the calculation for the SERP Benefit is performed.
4.2 Form of Benefits.
----------------
(a) SERP Benefits shall be payable in a lump sum payment as soon as
practicable after the Participant's Termination of Service. However, the
Committee reserves the right to make payments in a series of periodic payments.
(b) SERP Benefits, at the discretion of the Committee, shall be paid in
cash, Company Stock or some combination thereof.
ARTICLE V
---------
Administration
5.1 The Committee.
-------------
Except for the functions reserved to the Bank or the Board of Directors,
the administration of the SERP shall be the responsibility of the Committee.
The Committee shall consist of three (3) or more persons designated by the Board
of Directors. Members of the Committee shall serve for such terms as the Board
of Directors shall determine and until their successors are designated and
qualified. Any member of the Committee may resign upon at least sixty (60) days
written notice to the Board, or may be removed from office by the Board of
Directors for failure or inability to carry out his responsibilities in an
effective manner.
5.2 Duties of the Committee.
-----------------------
The Committee shall have the power and the duty to take all actions and to
make all decisions necessary or proper to carry out the purpose of the SERP.
The determination of the Committee as to any question involving the general
administration and interpretation of the SERP shall be final, conclusive and
binding. Any discretionary actions to be taken under the SERP by the Committee
shall be uniform in their nature and applicable to all persons similarly
situated. Without limiting the generality of the foregoing, the Committee shall
have the following powers and duties:
(a) the duty to furnish to all Participants, upon request, copies of
the SERP and to require any person to furnish such information as it may request
for the purpose of the proper administration of the SERP as a condition to
receiving any benefits under the SERP;
(b) the duty to make and enforce such rules and regulations and
prescribe the use of such forms as it shall deem necessary for the efficient
administration of the SERP;
6
<PAGE>
(c) the duty to interpret the SERP, and to resolve ambiguities,
inconsistencies and omissions, which findings shall be binding, final and
conclusive;
(d) the duty to decide on questions concerning the SERP in accordance
with the provisions of the SERP;
(e) the duty to determine the amount of benefits which shall be
payable to any person in accordance with the provisions of the SERP and to
provide a full and fair review to any Participant whose claim for benefits has
been denied in whole or in part;
(f) the power to designate a person who may or may not be a member of
the Committee as SERP "Administrator." If the Committee does not so designate
an Administrator, the Bank shall be the SERP Administrator;
(g) the power to allocate any such powers and duties to or among
individual members of the Committee; and
(h) the power to designate persons other than Committee members to
carry out any duty or power which would otherwise be a responsibility of the
Committee or Administrator, under the terms of the SERP.
5.3 Liability of the Committee.
--------------------------
To the extent permitted by law, the Committee and any person to whom it may
delegate any duty or power in connection with administering the SERP, the Bank,
any Employer, and the officers and directors thereof, shall be entitled to rely
conclusively upon, and shall be fully protected in any action taken or suffered
by them in good faith in the reliance upon, any actuary, counsel, accountant,
other specialist, or other person selected by the Committee, or in reliance upon
any tables, valuations, certificates, opinions or reports which shall be
furnished by any of them. Further, to the extent permitted by law, no member of
the Committee, nor the Bank, any Employer, nor the officers or directors
thereof, shall be liable for any neglect, omission or wrongdoing of any other
members of the Committee, agent, officer or employee of the Bank or any
Employer. Any person claiming benefits under the SERP shall look solely to the
Bank for redress.
5.4 Expenses.
--------
All expenses incurred prior to the termination of the SERP that shall arise
in connection with the administration of the SERP (including, but not limited to
administrative expenses, proper charges and disbursements, compensation and
other expenses and charges of any actuary, counsel, accountant, specialist, or
other person who shall be retained or employed by the Committee in connection
with the administration of the SERP), shall be paid by the Bank.
7
<PAGE>
ARTICLE VI
----------
Amendment and Termination
6.1 Amendment and Termination.
-------------------------
The Board of Directors shall have the power to suspend or terminate the
SERP in whole or in part at any time, and from time to time to extend, modify,
amend or revise the SERP in such respects as the Board of Directors, by
resolution, may deem advisable; provided, however, that no such extension,
modification, amendment, revision, or termination shall deprive a Participant or
any beneficiary of any benefit payable under the SERP at the time of such
extension, modification, amendment, revision, or termination.
ARTICLE VII
-----------
Miscellaneous Provisions
7.1 No Right to Continual Employment.
--------------------------------
The SERP shall not be deemed to constitute a contract of employment between
the Bank and any Employee or other person, whether or not in the employ of the
Bank, nor shall anything herein contained be deemed to give any Employee or
other person, whether or not in the employ of the Bank, any right to be retained
in the employ of the Bank, or to interfere with the right of the Bank to
discharge any Employee at any time and to treat such Employee without any regard
to the effect which such treatment might have upon such Employee as a
Participant of the SERP.
7.2 Non-Alienation of Benefits.
--------------------------
Except as may otherwise be required by law, no distribution or payment
under the SERP to any Participant or beneficiary shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, whether voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; nor shall any such distribution or payment be in any way liable for or
subject to the debts, contracts, liabilities, engagements or torts of any person
entitled to such distribution or payment. If any Participant or beneficiary is
adjudicated bankrupt or purports to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge any such distribution or payment, voluntarily
or involuntarily, the Committee, in its sole discretion, may cancel such
distribution or payment or may hold or cause to be held or applied such
distribution or payment, or any part thereof, to or for the benefit of such
Participant or beneficiary, in such manner as the Committee shall direct.
8
<PAGE>
7.3 Payment if Participant is Incompetent.
-------------------------------------
If the Bank determines that any person entitled to payments under the SERP
is incompetent by reason of physical or mental disability, it may cause all
payments thereafter becoming due to such person to be made to any other person
for the benefit of the incompetent person, without responsibility to follow
application of amounts so paid. Payments made pursuant to this provision shall
completely discharge the SERP, the Bank and the Committee.
7.4 Termination for Cause.
---------------------
If any Participant entitled to payments under the SERP separates from
service as a result of Termination for Cause, the Bank shall cause all payments
thereafter becoming due to such Participant to be forfeited under the SERP.
7.5 The Bank Sole Source of Benefits.
--------------------------------
The Bank shall be the sole source of benefits under the SERP, and each
Employee, Participant, beneficiary, or any other person who shall claim the
right to any payment or benefit under the SERP shall be entitled to look solely
to the Bank for payment of benefits.
7.6 Lost Participants.
-----------------
If the Bank is unable to make payment to any Participant, beneficiary, or
any other person to whom a payment is due under the SERP, because it cannot
ascertain the identity or whereabouts of such Participant, beneficiary, or other
person after reasonable efforts have been made to identify or locate such person
(including a notice of the payment so due mailed to the last known address of
such Participant, beneficiary, or other person shown on the records of the
Bank), such payment and all subsequent payments otherwise due to such
Participant, beneficiary or other person shall be forfeited six (6) months after
the date such payment first became due; provided, however, that such payment and
any subsequent payments shall be reinstated, retroactively, no later than sixty
(60) days after the date on which the Participant, beneficiary, or other person
is identified or located.
7.7 Withholding.
-----------
If upon the payment of any benefits under the SERP, the Bank shall be
required to withhold any amounts with respect to such payment by reason of any
federal, state or local tax laws, rules or regulations, then the Bank shall be
entitled to deduct and withhold such amounts from any such payments. In any
event, such person shall make available to the Bank, promptly when requested by
the Bank, sufficient funds or other property to meet the requirements of such
withholding. Furthermore, the Bank shall be entitled to take and authorize such
steps as it may deem advisable in order to have the amounts required to be
withheld made available to the Bank
9
<PAGE>
out of any funds or property due to become due to such person, whether under the
SERP or otherwise.
7.8 Governing Law.
-------------
The provisions of the SERP shall be construed, administered and governed
under applicable federal laws and the laws of the State of New Jersey.
7.9 Operation as Unfunded Nonqualified Plan.
---------------------------------------
The SERP is intended to be an unfunded, Nonqualified Plan maintained
"primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees" as that phrase is used for
purposes of Sections 201, 301 and 401 of ERISA. The SERP is not intended to
comply with the requirements of section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
7.10 Required Regulatory Provisions.
------------------------------
(a) The Bank's board of directors may terminate the officer or employee's
employment at any time, but any termination by the Bank's board of directors
other than Termination for Cause, shall not prejudice the officer or employee's
right to compensation or other benefits under the Plan. The officer or employee
shall have no right to receive compensation or other benefits for any period
after Termination for Cause. Termination for Cause shall include termination
because of the officer or employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of the Plan.
(b) If the officer or employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1)) the Bank's obligations under the Plan shall be suspended
as of the date of service unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its discretion (i) pay the
officer or employee all or part of the compensation withheld while its Plan
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(c) If the officer or employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(4) or (g)(1)), all obligations of the Bank under the Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10
<PAGE>
(d) If the Bank is in default (as defined in section 3(x)(1) of the Federal
Deposit Insurance Act), all obligations under the Plan shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
contracting parties: Provided, that this paragraph need not be included in the
Plan if prior written approval is secured from the Director or her designee.
(e) All obligations under the Plan shall be terminated, except to the
extent determined that continuation of the Plan is necessary for the continued
operation of the Bank:
(i) by the Director or her designee, at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or
(ii) by the Director or her designee, at the time the Director or her
designee approves a supervisory merger to resolve problems related to operation
of the association or when the association is determined by the Director to be
in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Participants pursuant to this Plan, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k),
12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
11
<PAGE>
Having been adopted by the West Essex Bank Board of Directors on June 8, 1998,
this Plan is executed by a designee of the Board and duly attested, on this
8th day of February, 1999.
ATTEST: WEST ESSEX BANK
/s/ Dennis A. Petrello By: /s/ Leopold W. Montanaro
- - ---------------------------- ----------------------------------
Leopold W. Montanaro
For the Entire Board of Directors
12
<PAGE>
EXHIBIT 11.0
WEST ESSEX BANCORP, INC.
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE FOR THE YEAR ENDED
December 31, 1998
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Calendar Year
----------------------
1998 1997
------------ --------
Basic:
<S> <C> <C>
Net income.................................. $1,397,300 $736,840
Net income applicable to common stock....... 1,397,300 736,840
Average common shares
outstanding-basic........................ 4,062,395 N/A
Basic earnings per share(1)................. $ 0.34 N/A
Diluted:
Net income.................................. $1,397,300 $736,840
----------
Average common shares outstanding-basic..... 4,062,395 N/A
Effect of dilutive securities............... -- N/A
----------
Average common shares outstanding-diluted... 4,062,395 N/A
==========
Diluted earnings per share(1)................. $ 0.34 N/A
==========
</TABLE>
_____________________
(1) The registrant's initial public stock offering took place on October 2,
1998. Earnings per share is calculated based on net income for 1998 and
the weighted average shares outstanding since October 2, 1998 as if such
shares had been outstanding the entire fiscal year.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- - ----------------------------------------------
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets(1)......................... $328,609 $299,025 $235,969 $223,165 $199,580
Loans receivable, net(2)................ 140,272 112,735 82,134 85,031 84,611
SECURITIES AVAILABLE-FOR-SALE(3):
Investment securities, net............. 8,282 7,081 1,647 1,932 1,857
SECURITIES HELD-TO-MATURITY(3):
Investment securities, net............. 36,873 22,929 22,476 18,482 7,498
Mortgage-backed securities, net........ 110,376 130,174 113,254 100,032 89,300
Deposits(1)............................. 238,313 238,192 179,946 178,392 164,181
Borrowed money.......................... 42,101 30,300 23,650 17,000 10,000
Total stockholders' equity.............. 46,754 29,275 28,452 26,856 24,477
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income .................. $21,315 $18,116 $16,467 $15,735 $13,235
Interest expense ................. 12,219 9,656 8,300 7,618 5,121
------- ------- ------- ------- -------
Net interest income ............. 9,096 8,460 8,167 8,117 8,114
Provision for (recapture of) loan
losses ......................... (131) 487 232 510 (247)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses ..... 9,227 7,973 7,935 7,607 8,361
Noninterest income ............... 529 373 476 332 32
Noninterest expense(4) ........... 7,607 7,173 5,919 4,446 4,648
------- ------- ------- ------- -------
Income before income taxes(4) .... 2,149 1,173 2,492 3,493 3,745
Income taxes(4) .................. 752 436 836 1,221 977
------- ------- ------- ------- -------
Net income ....................... $ 1,397 $ 737 $ 1,656 $ 2,272 $ 2,768
======= ======= ======= ======= =======
</TABLE>
(continued on next page)
3
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
--------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(5):
Return on average assets(4) ..................... 0.44% 0.29% 0.74% 1.07% 1.44%
Return on average stockholders' equity(4) ....... 4.10 2.51 5.95 8.84 11.98
Average stockholders' equity
/average assets ................................ 10.75 11.55 12.37 12.09 11.98
Interest rate spread(6) ......................... 2.48 2.87 3.15 3.34 3.92
Net interest margin(7) .......................... 3.01 3.44 3.74 3.93 4.33
Non-interest expenses to average assets(4) ...... 2.40 2.82 2.63 2.09 2.41
Stockholders' equity to assets .................. 14.23 9.79 12.06 12.03 12.26
Efficiency ratio(8) ............................. 71.41 57.04 56.58 52.86 50.37
REGULATORY CAPITAL RATIOS(5):
Tangible capital ................................ 10.44 7.98 12.06 12.02 12.26
Core capital .................................... 10.44 7.98 12.06 12.02 12.26
Risk-based capital .............................. 28.81 26.10 39.15 37.50 35.89
ASSET QUALITY RATIOS(5):
Non-performing loans to total assets ............ 0.67 0.84 1.26 0.96 1.55
Non-performing loans to total loans
receivable .................................... 1.46 2.16 3.51 2.46 3.52
Non-performing assets to total assets ........... 0.84 1.24 1.85 1.57 2.48
Allowance for loan losses to
non-performing loans ........................... 78.47 75.19 52.70 55.84 40.00
Average interest-earning assets to average
interest-bearing liabilities .................... 112.99 114.39 115.46 115.94 114.86
Net interest income after provision for
loan losses to non-interest expenses(4) ......... 121.30 111.15 134.06 171.10 179.88
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES ...................................... 8 8 5 5 5
</TABLE>
____________________________
(1) The increase in assets in fiscal 1997 was due primarily to the purchase of
three branch offices from Summit Bank.
(2) The allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and
1994 was $1.7 million, $1.9 million, $1.6 million, $1.2 million and $1.2
million, respectively.
(3) 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.
(4) 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 stockholders' equity, 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 year ended December 31, 1998 and 1997, amortization expense related to
the excess of cost over assets acquired from Summit Bank of $593,000 and
$1.7 million, respectively, and the related income tax benefit of $213,000
and $627,000, respectively. If excluded, return on average assets, return on
average stockholders' equity, non-interest expenses to average assets and
net interest income after provision for loan losses to non-interest expense
would be 0.56%, 5.21%, 2.21% and 131.55%, respectively, for the year ended
December 31, 1998 and 0.73%, 6.30%, 2.13% and 146.83%, respectively, for the
year ended December 31, 1997.
(5) 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.
(6) 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.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) 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.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- - --------------------------------------------------------------------------
OPERATIONS
- - ----------
West Essex Bancorp, Inc. ("the Company"), is the stock holding company for
West Essex Bank ("the Bank"). The Company is headquartered in Caldwell, New
Jersey and its principal business currently consists of the operations of the
Bank. West Essex Bancorp, M.H.C., a mutual holding company formed in connection
with the Bank's conversion to stock form and reorganization into the holding
company form of organization, which was consummated October 2, 1998, owns a
majority of the Company's outstanding common stock. The Bank's results of
operations are dependent primarily on net interest income, which is the
difference between the income earned on its loan and investment portfolios and
its cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by the Bank's provision for loan losses
and fees and other service charges. The Bank's noninterest expense principally
consists of compensation and employee benefits, office occupancy and equipment
expense, federal deposit insurance premiums, the cost of foreclosed real estate
operations, data processing, advertising and business promotion 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. Future changes in
applicable law, regulations or government policies may materially impact the
Bank.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not undertake -- and
specifically disclaims any obligation -- to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objectives 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
5
<PAGE>
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
limits. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on the earnings of the Bank.
In recent years the Bank has used the following strategies to manage
interest rate risk: (i) emphasizing 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.
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, primarily due to intense competition
in the Bank's market area for loan originations, began to decrease. 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 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 December 31,
1998, the Bank had $110.4 million or 33.6% of total assets in mortgage-backed
securities classified as held-to-maturity, and $45.2 million or 13.7% of total
assets in investment securities, of which $8.3 million or 2.5% of total assets
were classified as available-for-sale. At the same date, the Bank's loans
receivable, net, totalled $140.3 million or 42.7% 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.
The following table sets forth the Bank's NPV as of December 31, 1998, as
calculated by the OTS.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
------------------------------- ----------------------
IN BASIS POINTS $ % NPV
(RATE SHOCK) AMOUNT CHANGE CHANGE RATIO CHANGE (1)
- - --------------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 18,608 (22,631) (55)% 6.33% (632)
300 24,930 (16,310) (40) 8.25 (441)
200 30,976 (10,263) (25) 9.97 (268)
100 36,468 (4,771) (12) 11.45 (121)
Static 41,239 12.66
(100) 45,048 3,809 9 13.55 89
(200) 48,804 7,564 18 14.39 173
(300) 53,691 12,452 30 15.46 281
(400) 59,029 17,790 43 16.59 393
</TABLE>
_________________________
(1) Expressed in basis points.
6
<PAGE>
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 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.
7
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company at December 31, 1998, and for the years ended December
31, 1998, 1997 and 1996. 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>
AT DECEMBER 31, 1998
--------------------------
YIELD/
BALANCE COST
-------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable .............................. $141,989 7.58%
Mortgage-backed securities .................... 110,376 6.63
Investment securities(1) ...................... 45,156 6.69
Other interest-earning assets ................. 17,431 4.88
--------
Total interest-earning assets ............... 314,952 6.99
Allowance for loan losses ..................... (1,717)
Non-interest-earning assets ................... 15,374
--------
Total assets ................................ $328,609
========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits ............................. $ 20,695 1.30
Savings and club accounts ................... 60,306 2.52
Certificates of deposit ..................... 141,169 5.26
--------
Total interest-bearing deposits ........... 222,170 4.15
Borrowed money ................................ 42,010 5.69
--------
Total interest-bearing liabilities .......... 264,180 4.39
Non-interest bearing deposits ................... 16,143
Other non-interest-bearing liabilities .......... 1,532
--------
Total liabilities ........................... 281,855
Retained earnings ............................... 46,754
--------
Total liabilities and retained earnings ....... $328,609
========
Interest rate spread ............................ 2.60%
====
Net interest-earning assets ..................... $ 50,772
========
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.19x
========
</TABLE>
__________________
(1) Includes securities available for sale.
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ---------------------------
AVERAG AVERAG AVERAG
AVERAGE E AVERAGE E AVERAGE E
BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/
COST COST COST
-------- -------- ------ -------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable....................... $129,416 $10,083 7.79% $ 97,277 $ 7,908 8.13% $ 85,973 $ 7,268 8.45%
Mortgage-backed securities............. 121,346 7,853 6.47 114,996 7,909 6.88 101,196 6,983 6.90
Investment securities(1)............... 39,195 2,695 6.88 26,774 1,897 7.09 23,035 1,701 7.38
Other interest-earning assets.......... 12,419 684 5.51 7,019 401 5.71 8,130 515 6.33
-------- ------- -------- ------- -------- -------
Total interest-earning assets........ 302,376 21,315 7.05 246,016 18,115 7.36 218,334 16,467 7.54
------- ------- -------
Allowance for loan losses.............. (1,832) (1,739) (1,354)
Other non-interest-earning assets...... 16,503 10,422 8,126
-------- -------- --------
Total assets......................... $317,047 $254,699 $225,106
======== ======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand................................. $ 20,412 339 1.66% $ 16,360 293 1.79% $ 14,736 269 1.83%
Savings and club....................... 62,120 1,672 2.69 53,221 1,357 2.55 51,138 1,278 2.50
Certificates of deposit................ 142,714 7,736 5.42 119,272 6,439 5.40 105,141 5,602 5.33
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits............................ 225,246 9,747 4.33 188,853 8,089 4.28 171,015 7,149 4.18
Borrowed money........................... 42,364 2,472 5.84 26,223 1,566 5.97 18,092 1,151 6.36
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........................... 267,610 12,219 4.57 215,076 9,655 4.49 189,107 8,300 4.39
------- ------- -------
Non-interest-bearing deposits.............. 13,219 8,503 6,943
Other non-interest bearing
liabilities............................... 2,121 1,711 1,203
-------- -------- --------
Total liabilities...................... 282,950 225,290 197,253
Stockholders' equity....................... 34,097 29,409 27,853
-------- -------- --------
Total liabilities and retained
earnings.............................. $317,047 $254,699 $225,106
======== ======== ========
Net interest income/interest rate
spread.................................... $ 9,096 2.48% $ 8,460 2.87% $ 8,167 3.15%
======= ==== ======= ==== ======= ====
Net interest-earning assets/net
yield on interest-earning assets.......... $ 34,766 3.01% $ 30,940 3.44% $ 29,227 3.74%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities.............. 1.13x 1.14x 1.15x
======== ======== ========
</TABLE>
_____________________________________
(1) Includes securities available for sale.
9
<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 Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in 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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 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........................... $2,518 $(343) $2,175 $ 923 $(283) $ 640
Mortgage-backed securities................. 427 (483) (56) 946 (20) 926
Investment securities...................... 856 (58) 798 265 (69) 196
Other interest-earning assets.............. 298 (15) 283 (66) (48) (114)
------ ----- ------ ------ ----- ------
Total....................................... 4,098 (898) 3,200 2,068 (420) 1,648
------ ----- ------ ------ ----- ------
Interest expense:
Demand deposits(1)......................... 69 (23) 46 30 (6) 24
Savings and club accounts.................. 237 78 315 53 26 79
Certificates of deposit.................... 1,273 24 1,297 762 75 837
Borrowed money............................. 941 (35) 906 489 (74) 415
------ ----- ------ ------ ----- ------
Total....................................... 2,520 44 2,564 1,334 21 1,355
------ ----- ------ ------ ----- ------
Net change in net interest income........... $1,578 $(942) $ 636 $ 734 $(441) $ 293
====== ===== ====== ====== ===== ======
</TABLE>
________________________
(1) Includes NOW and Money Market accounts.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets were $328.6 million at December 31, 1998, compared to $299.0
million at December 31, 1997, an increase of $29.6 million, or 9.9%. The
increase in assets was funded primarily by an increase in FHLB borrowings of
$11.7 million and net proceeds of $16.6 million from the initial public stock
offering.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, increased $7.7 million to $16.4 million at December 31, 1998 from $8.7
million at December 31, 1997. The increase in cash and cash equivalents was
funded primarily by the increase in borrowed money and serves to increase the
Bank's liquidity position.
10
<PAGE>
In the aggregate, mortgage-backed securities and investment securities,
including available-for-sale and held-to-maturity issues, totalled $155.5
million at December 31, 1998, a decrease of $4.7 million from $160.2 million at
December 31, 1997. Such decrease was used to help fund increased lending.
Mortgage-backed securities, all of which are held-to-maturity, decreased $19.8
million due to repayments. Investment securities held-to-maturity increased
$13.9 million, primarily due to security purchases and investment securities
available-for-sale increased $1.2 million, primarily due to security purchases.
At December 31, 1998, 75.0% of the investment securities, including available-
for-sale and held-to-maturity, consisted of U.S. Government and Agency
obligations, while 95.7% of the mortgage-backed securities portfolio consisted
of Fannie Mae ("FNMA"), Freddie Mac ("FHLMC") and Ginnie Mae ("GNMA") issues.
Investment securities available for sale included $7.3 million of U.S. Treasury
notes and $1.0 million of U.S. Government Agency notes while investment
securities held-to-maturity consisted of $1.5 million of U.S. Treasury notes,
$24.1 million of U.S. Government Agency notes, $10.9 million in trust preferred
securities and $388,000 in municipal bond anticipation notes.
Loans receivable increased $27.6 million to $140.3 million at December 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 $27.2 million.
At December 31, 1998, 88.6% of the outstanding balance of loans in the portfolio
consisted of one- to four-family loans, compared to 87.3% at December 31, 1997.
Deposits totaled $238.3 million at December 31, 1998, an increase of
$121,000 or 0.05%, over the $238.2 million balance at December 31, 1997.
Borrowed money increased $11.7 million to $42.0 million at December 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 year ended December 31, 1998, short-term borrowings
totalling $18.0 million and current maturities of long-term borrowings of $7.4
million were repaid, while $37.1 million in borrowings with three to ten year
maturities and an average interest rate of 5.57% were incurred.
Stockholders' equity increased $17.5 million or 59.7%, to $46.8 million,
primarily due to $16.6 million of net proceeds from the initial public stock
offering and the retention of net income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. Net income for 1998 was $1.40 million, an increase of $660,000
from $737,000 in 1997. The increase was primarily the result of four factors.
The amortization of the excess of cost over assets acquired in connection with
the October 1997 purchase of deposits from Summit Bank totalled $593,000 in
1998, or $1.15 million less than the comparable 1997 figure of $1.74 million,
which included a $1.59 million loss upon the reassessment of the carrying value
of this asset at the end of 1997. Charitable contribution expense totalled
$863,000 in 1998, an increase of $849,000 over the 1997 amount of $14,000.
$842,000 of the 1998 charitable contribution expense related to the initial
funding of the West Essex Bancorp Charitable Foundation, a charitable foundation
established in connection with the Company's initial public stock offering, with
a $100,000 cash contribution and a contribution by the Company of 74,214 shares
of Company common stock. In 1998, a $131,000 recapture of provision for loan
losses represented an improvement of $618,000 over the provision of $487,000
recorded in 1997. Finally, loss on real estate owned decreased by $240,000 to
$140,000 in 1998 as compared to $380,000 in 1997. The aforementioned four
factors combined to increase income before income taxes and net income by $1.16
million and $742,000, respectively. The remaining decrease of $82,000 in net
income
11
<PAGE>
was the result of increased non-interest expenses, exclusive of those discussed
above, partially offset by increased non-interest income, and the income tax
effect thereon.
INTEREST INCOME. Total interest income increased 17.7% to $21.3 million
for 1998 as compared to $18.1 million for 1997. The increase was due to a $56.4
million or 22.9% increase in average interest-earning assets during 1998, which
more than offset a drop of 31 basis points in the yield earned thereon to 7.05%
in 1998 from 7.36% in 1997. 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 $16.6 million net proceeds of the Company's
1998 initial public stock offering, the Summit deposit purchase of late 1997 and
increased FHLB borrowings.
Interest income on loans during 1998 increased by $2.2 million, or 27.5%,
to $10.1 million when compared to $7.9 million during 1997. During the years
ended December 31, 1998 and 1997, the yield earned on the loan portfolio was
7.79% and 8.13%, respectively. The average balance of loans outstanding during
the years ended December 31, 1998 and 1997 totalled $129.4 million and $97.3
million, respectively. The decreased yield is the result of the lower market
interest rates prevailing during 1998. The increased average balance during
1998 is the result of the continued increase in loan origination efforts,
including the use of outside mortgage brokers, which began in 1997.
Originations were $50.5 million in 1998, up from $47.1 million in 1997.
Interest on mortgage-backed securities, all of which are held-to-maturity,
decreased $56,000 or 0.7%, during 1998 to $7.91 million compared to $7.85
million for 1997. During the year ended December 31, 1998, the average balance
of mortgage-backed securities outstanding increased $6.3 million, or 5.5%, to
$121.3 million when compared to $115.0 million for 1997. The yield earned on
the mortgage-backed securities portfolio decreased to 6.47% in 1998 from 6.88%
in 1997. The decrease in the average yield on mortgage-backed securities during
1998 resulted primarily from lower market interest rates.
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, increased by $798,000, or 42.1%, to $2.7 million
for 1998, when compared to $1.9 million for 1997. The increase resulted from an
increase of $12.4 million, or 46.4%, in the average balance of the investment
securities portfolio, which more than offset a decrease of 21 basis points in
the yield earned on the investment securities portfolio to 6.88% in 1997 from
7.09% in 1997. The increased average balance is the result of purchases during
1998 while the decreased yield is due to the lower market rates available
thereon.
Interest on other interest-earning assets totalled $684,000 and $401,000
during 1998 and 1997, respectively. The yield earned on other interest-earning
assets decreased to 5.51% in 1998 from 5.71% in 1997, which partially offset an
increase of $5.4 million, or 76.9%, in the average balance of other interest-
earning assets outstanding. The increased average balance in 1998 is due to the
temporary investment of net proceeds of the initial public stock offering in
overnight deposits.
INTEREST EXPENSE. Interest expense on deposits increased $1.7 million,
or 13.1% to $9.74 million during 1998 compared to $8.09 million for 1997. The
increase during 1998 was attributable to an increase of five basis points in the
average cost of interest-bearing deposits to 4.33% for 1998 from 4.28% or 1997,
along with an increase of $36.4 million, or 19.3%, in the average balance of
interest-bearing deposits outstanding. The increased average balance of
interest-bearing deposits primarily reflects the purchase of deposits from
Summit during October 1997.
12
<PAGE>
Interest expense on borrowed money increased $906,000, or 57.9%, to $2.5
million during 1998 compared to $1.6 million for 1997. The increase during 1998
was attributable to an increase of $16.1 million in the average balance of
borrowings outstanding, partially offset by a decrease of 13 basis points in the
cost of borrowings to 5.84% for 1998 from 5.97% for 1997. 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 1998.
NET INTEREST INCOME. Net interest income for 1998 increased $636,000, or
7.5%, to $9.1 million in 1998 from $8.5 million in 1997. The net interest rate
spread decreased to 2.48% in 1998 from 2.87% in 1997 and the interest rate
margin decreased to 3.01% in 1998 from 3.44% in 1997. These decreases primarily
resulted from a 31 basis point decrease in the yield earned on interest-earning
assets to 7.05% in 1998 from 7.36% in 1997 coupled with an eight basis point
increase in the cost of average interest-bearing liabilities to 4.57% in 1998
from 4.49% in 1997. Despite the decreases in interest rate spread and margin,
the Company was able to improve net interest income by increasing net interest-
earning assets by $3.8 million and by leveraging the balance sheet through
increased borrowings.
PROVISION FOR LOAN LOSSES. During 1998, the Bank recorded a recapture of
$131,000 from the allowance for loan losses as a credit to provision for loan
losses. During 1997, the Bank provided $487,000 for loan losses. The
recaptured allowance of $131,000 in 1998 represented 6.9% of the allowance for
loan loses at the end of 1997 and reflected the $405,000 or 16.3% decrease in
loans delinquent ninety days or more and the reduced uncertainty involving
circumstances discussed in the third succeeding paragraph. At December 31, 1998
and 1997, the Bank's loan portfolio included loans totalling $2.1 million and
$2.5 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 loses amounted to $1.72 million at December
31, 1998, representing 1.20% of total loans and 82.4% of loans delinquent ninety
days or more compared to an allowance of $1.89 million at December 31, 1997,
representing 1.62% of total loans and 75.7% of loans delinquent ninety days or
more. During 1998 and 1997, the Bank charged off loans aggregating $37,000 and
$166,000, respectively. 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 non-performing 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.
13
<PAGE>
The allowance for loan losses includes specific, general and unallocated
allowances of $492,000, $817,000 and $408,000, respectively, at December 31,
1998, as compared to $605,000, $761,000 and $518,000, respectively, at December
31, 1997. The decrease 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, 1998 and 1997 is the large volume of loan
originations generated by the Bank by outside mortgage brokers during 1998 and
1997 as compared to no such loans in prior years. The Company believes the use
of outside brokers increases the inherent risks in the loan portfolio. The
general allowance increased primarily due to the $26.9 million increase in the
loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $156,000, or 41.8%
to $529,000 during 1998 as compared to $373,000 for 1997. The increase in non-
interest income during 1998 resulted primarily from a $20,000 loss on sale of
securities available for sale during 1997 compared to none in 1998, and
increases in fees and service charges of $93,000 and miscellaneous income of
$43,000. The increase during the 1998 period in fees and service charges
resulted primarily from the increased number of deposit accounts services since
the October 1997 Summit Bank deposit purchase.
NON-INTEREST EXPENSES. Non-interest expenses increased $434,000, or 6.1%
to $7.6 million during 1998 compared to $7.2 million for 1997. During 1997, in
conjunction with the purchase of three branches and related deposit liabilities
from Summit Bank, the Bank recorded $7.6 million in excess of cost over assets
acquired. The amortization of the excess of cost over assets acquired in
connection with the October 1997 purchase of deposits from Summit Bank totalled
$593,000 in 1998, or $1.15 million less than the comparable 1997 figure of $1.74
million, which included a $1.59 million loss upon the reassessment of the
carrying value of this asset at the end of 1997. Charitable contribution
expense totalled $863,000 in 1998, an increase of $849,000 over the 1997 amount
of $14,000. $842,000 of the 1998 charitable contribution expense related to the
initial funding of the West Essex Bancorp Charitable Foundation, a charitable
foundation established in connection with the Company's initial public stock
offering, with a $100,000 cash contribution and a contribution by the Company of
74,214 shares of Company common stock. Loss on real estate owned decreased by
$240,000 to $140,000 in 1998 as compared to $380,000 in 1997, due to a reduction
in loss provisions recorded to $131,000 in 1998 from $373,000 in 1997.
Excluding the aforementioned factors, non-interest expenses were $6.0 million in
1998, or $974,000 higher than the $5.0 million comparable amount or 1997. This
increase of 19.3% is attributable to the growth of the Company, which is
reflected by a 24.5% growth in average total assets and an increase in business
locations from five to eight effective October 1997. In accordance with the
foregoing, salaries and employee benefits increased $255,000 or 9.0%, occupancy
and equipment expenses increased $253,000 or 34.1% and miscellaneous expenses
increased $445,000 or 33.4%. 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 stationery and supplies
expenses and expenses associated with Year 2000 compliance issues.
INCOME TAXES. Income tax expense totalled $752,000 and $436,000 during
1998 and 1997, respectively. The increase in 1998 resulted primarily from an
increase in pre-tax income of $976,000 and from the purchase, in 1998, of trust
preferred securities which are afforded favorable income tax treatment under the
internal revenue code. The Bank's effective income tax rate was 35.0% in 1998
and 37.2% in 1997.
14
<PAGE>
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
loss recorded, 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 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 $97.3 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
15
<PAGE>
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 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
16
<PAGE>
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 non-performing 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 Company believes 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%,
to $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 a 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
17
<PAGE>
other things, are legal fees, accounting and auditing fees, director fees, FHLB
demand deposit charges, insurance costs, telephone expenses and stationery and
supplies expenses.
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 benefit,
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.
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 December 31, 1998, 1997, 1996, 1995 and 1994, the Bank's
regulatory liquidity ratios were 7.38%, 9.44%, 10.96%, 13.04% and 11.89%,
respectively.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $33.0 million, or 10.4%, of total
adjusted assets, which is above the required level of $4.7 million, or 1.5%;
core capital of $33.0 million, or 10.4%, of total adjusted assets, which is
above the required level of $12.6 million, or 4%; and risk-based capital of
$34.5 million, or 28.8%, of risk-weighted assets, which is above the required
level of $9.6 million, or 8%.
The most liquid assets are cash and cash equivalents and investment
securities available for sale. The levels of these assets are dependent on
operating, financing, lending and investing activities during any given period.
At December 31, 1998, cash and cash equivalents and investment securities
available for sale totalled $24.7 million, or 7.5% of total assets.
18
<PAGE>
The Company and the Bank have other sources of liquidity if a need for
additional funds arises, including FHLB borrowings. At December 31, 1998, the
Bank had $42.0 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.
At December 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 $13.6 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
December 31, 1998, totalled $118.3 million. The Bank expects that substantially
all of the maturing certificate accounts will be retained by the Bank at
maturity.
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. The Company 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 the Company'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 March 31, 1999 and anticipates that all of its
major vendors also will have resolved any Year 2000 problems in their software
by March 31, 1999. All Year 2000 issues for the Bank, including proxy testing,
are expected to be addressed by March 31, 1999 and any problems would be
remedied by June 30, 1999. The Bank is in the process of preparing a
contingency plan which it intends to have completed by June, 30, 1999, as
federal regulations require. The plan will detail what steps the Bank will
follow should major system interruptions such as lack of electrical power, no
telecommunications, no heating system and the like should manifest itself at the
turn of the century. The Bank believes that its costs related to Year 2000 will
be approximately $185,000. To date, the Bank has spent in excess of $100,000 of
this amount on various hardware and software upgrades. 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 the Company's
systems are not fully Year 2000 compliant, there can be no assurances that
potential systems interruptions or the cost necessary to update software would
not have a material adverse effect on the Company'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 also plans to work with its customers to address
any potential Year 2000 problems. In this area, the Bank has mailed a written
survey to its commercial loan customers to help it determine the extent, if any,
that Year 2000 may have on their business or their ability to make any loan
payments. To date, all surveys have been returned and any problems noted are
being addressed. Additionally, as a related matter, the Bank will carefully
consider whether a potential commercial loan applicant is Year 2000 compliant by
requiring the applicant to complete the survey as part of its underwriting
criteria.
19
<PAGE>
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 Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company'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
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 Company'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, does 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. SFAS No. 132 was
implemented in 1998 and the required disclosure provided in the consolidated
financial statements for all applicable periods.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 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 SFAS No. 133, 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 into 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. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
the Company and the Bank, which do not intend to adopt SFAS No. 133 earlier than
required.
20
<PAGE>
R RADICS & CO., LLC
- - --------------------------------------------------------------------------------
Established Certified Public Accountants & Consultants
1993
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Board of Directors and Stockholders
West Essex Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of West Essex Bancorp, Inc. (the "Bancorp") and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Bancorp'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 Bancorp, Inc. and Subsidiaries as of December
31, 1998 and 1997, and the results of their operations and cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Radics & Co, LLC
February 5, 1999
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
973-575-9696 Fax: 973-575-9695
Internet: www.radics.com
21
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
Assets Note(s) 1998 1997
- - ------ ---------------- --------------- --------------
<S> <C> <C> <C>
Cash and amounts due from depository institutions $ 1,547,464 $ 1,832,548
Interest-bearing deposits in other banks 14,823,967 6,863,570
-------------- --------------
Total cash and cash equivalents 1 and 18 16,371,431 8,696,118
Securities available for sale 1, 3 and 18 8,282,450 7,080,550
Investment securities held to maturity 1, 4 and 18 36,873,165 22,928,866
Mortgage-backed securities held to maturity 1, 5, 12 and 18 110,376,072 130,174,291
Loans receivable 1, 6 and 18 140,272,203 112,734,741
Real estate owned 1 and 7 582,138 1,214,840
Premises and equipment 1 and 8 2,947,374 3,122,584
Federal Home Loan Bank of New York stock 12 2,607,300 2,183,800
Accrued interest receivable 1, 9 and 18 2,004,809 2,012,197
Excess of cost over assets acquired 1 and 10 5,236,116 5,828,884
Other assets 15 3,055,825 3,047,961
-------------- --------------
Total assets $ 328,608,883 $ 299,024,832
============== ==============
Liabilities and Stockholders' Equity
- - ------------------------------------
Liabilities
- - -----------
Deposits 11 and 18 $ 238,312,941 $ 238,192,141
Borrowed money 12 and 18 42,009,880 30,300,000
Advance payments by borrowers for taxes and insurance 921,958 772,429
Other liabilities 14 and 15 610,050 485,553
-------------- --------------
Total liabilities 281,854,829 269,750,123
-------------- --------------
- -
Commitments and contingencies 16 and 18
Stockholders' Equity 1, 2, 13, 14 and 15
- - --------------------
Preferred stock (par value $.01), 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock (par value $.01), 9,000,000 shares
authorized; 4,197,233 shares issued and outstanding 41,972 -
Additional paid-in capital 17,339,291 -
Retained earnings - substantially restricted 30,507,475 29,210,175
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (1,326,233) -
Accumulated other comprehensive income - Unrealized
gain on securities available for sale, net of income taxes 191,549 64,534
-------------- --------------
Total stockholders' equity 46,754,054 29,274,709
-------------- --------------
Total liabilities and stockholders' equity $ 328,608,883 $ 299,024,832
============== ==============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
WEST ESSEX BANCORP, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
Note(s) 1998 1997 1996
--------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Loans 1 and 6 $ 10,082,633 $ 7,908,541 $ 7,268,237
Mortgage-backed securities 1 7,852,565 7,908,940 6,982,443
Investment securities 1 2,216,231 1,661,624 1,598,858
Securities available for sale 1 478,981 235,529 101,961
Other interest-earning assets 684,273 400,842 515,475
------------ ----------- -----------
Total interest income 21,314,683 18,115,476 16,466,974
------------ ----------- -----------
Interest expense:
Deposits 11 9,747,271 8,089,473 7,148,794
Borrowed money 2,471,538 1,566,165 1,151,419
------------ ----------- -----------
Total interest expense 12,218,809 9,655,638 8,300,213
------------ ----------- -----------
Net interest income 9,095,874 8,459,838 8,166,761
Provision for (recapture of) loan losses 6 (130,630) 487,015 232,103
------------ ----------- -----------
Net interest income after provision for (recapture of) loan losses 9,226,504 7,972,823 7,934,658
------------ ----------- -----------
Non-interest income:
Fees and service charges 366,319 273,443 210,286
(Loss) gain on sale of securities available for sale 1 and 3 - (20,245) 102,752
Income on real estate owned 1 and 7 - - 20,563
Other 163,331 120,039 141,996
------------ ----------- -----------
Total non-interest income 529,650 373,237 475,597
------------ ----------- -----------
Non-interest expenses:
Salaries and employee benefits 14 3,103,230 2,847,886 2,621,753
Net occupancy expense of premises 1 and 17 334,699 245,879 228,411
Equipment 1 659,998 495,742 426,179
Loss on real estate owned 1 and 7 140,277 379,870 -
Charitable contributions 2 863,434 14,401 13,947
Federal insurance premium 17 136,025 114,755 1,478,029
Amortization of intangibles 10 592,768 1,743,062 -
Other 1,776,386 1,331,346 1,149,977
------------ ----------- -----------
Total non-interest expenses 7,606,817 7,172,941 5,918,296
------------ ----------- -----------
Income before income taxes 2,149,337 1,173,119 2,491,959
Income taxes 1 and 15 752,037 436,279 835,951
------------ ----------- -----------
Net income $ 1,397,300 $ 736,840 $ 1,656,008
============ =========== ===========
Net income per common share - basic and diluted 1 $ 0.34 (1) N/A (1) N/A (1)
============= =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 1 4,062,395 (1) N/A (1) N/A (1)
============= =========== ===========
</TABLE>
See notes to consolidated financial statements.
(1) West Essex Bank converted to stock form on October 2, 1998.
23
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income $1,397,300 $ 736,840 $1,656,008
---------- ---------- ----------
Other comprehensive income, net of income taxes:
Unrealized holding gains on securities
available for sale, net of income taxes
of $71,384, $36,269, and $ -0-, respectively 127,015 65,387 20,679
Reclassification adjustment
for realized losses (gains) on securities
available for sale, net of income taxes
of $ -0-, $ -0- and $21,939, respectively - 20,245 (80,813)
---------- ---------- ----------
Other comprehensive income 127,015 85,632 (60,134)
---------- ---------- ----------
Comprehensive income $1,524,315 $ 822,472 $1,595,874
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Retained
Additional Earnings -
Common Paid-In Substantially
Stock Capital Restricted
---------------- ------------------ ------------------
<S> <C> <C> <C>
Balance - December 31, 1995 $ - $ - $ 26,817,327
Net income for the year ended December 31, 1996 - - 1,656,008
Unrealized loss on securities available
for sale, net of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1996 - - 28,473,335
Net income for the year ended December 31, 1997 - - 736,840
Unrealized gain on securities available
for sale, net of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1997 - - 29,210,175
Net income for the year ended December 31, 1998 - - 1,397,300
Net proceeds from initial public stock offering 41,972 17,340,088 -
Common stock acquired by ESOP - - -
ESOP shares committed to be released - (797) -
Initial capitalization of mutual holding company - - (100,000)
Unrealized gain on securities available for sale, net
of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1998 $ 41,972 $ 17,339,291 $ 30,507,475
================ ================== ==================
<CAPTION>
Accumulated
Common Stock Other Total
Acquired by Comprehensive Stockholders'
ESOP Income Equity
-------------------- -------------------- ----------------
<S> <C> <C> <C>
Balance - December 31, 1995 $ - $ 39,036 $ 26,856,363
Net income for the year ended December 31, 1996 - - 1,656,008
Unrealized loss on securities available
for sale, net of income taxes - (60,134) (60,134)
Balance - December 31, 1996 - (21,098) 28,452,237
Net income for the year ended December 31, 1997 - - 736,840
Unrealized gain on securities available
for sale, net of income taxes - 85,632 85,632
-------------------- -------------------- ----------------
Balance - December 31, 1997 - 64,534 29,274,709
Net income for the year ended December 31, 1998 - - 1,397,300
Net proceeds from initial public stock offering - - 17,382,060
Common stock acquired by ESOP (1,473,584) - (1,473,584)
ESOP shares committed to be released 147,351 - 146,554
Initial capitalization of mutual holding company - - (100,000)
Unrealized gain on securities available for sale, net
of income taxes - 127,015 127,015
-------------------- -------------------- ----------------
Balance - December 31, 1998 $ (1,326,233) $ 191,549 $ 46,754,054
==================== ==================== ================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,397,300 $ 736,840 $ 1,656,008
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 278,355 230,524 207,456
Net accretion of premiums, discounts and deferred loan fees (245,904) (127,373) (137,517)
Amortization of intangibles 592,768 1,743,062 -
Provision for (recapture of) loan losses (130,630) 487,015 232,103
Provision for losses on real estate owned 130,630 372,985 45,000
Loss (gain) on sale of securities available for sale - 20,245 (102,752)
(Gain) on sale of real estate owned (5,386) (30,080) (117,201)
(Gain) on trade-in of automobile (16,401) - -
Deferred income tax (benefit) (11,944) (725,335) (36,609)
Decrease (increase) in accrued interest receivable 7,388 (360,770) 1,946
(Increase) in other assets (67,304) (11,726) (3,327)
(Decrease) increase in interest payable on deposits (29,160) 90,624 24,530
Increase (decrease) in other liabilities 124,497 (2,815,465) 3,009,284
Contribution of common stock 742,140 - -
ESOP shares committed to be released 146,554 - -
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,912,903 (389,454) 4,778,921
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale - - 100,000
Proceeds from sales of securities available for sale - 1,588,229 202,752
Proceeds from repayments on and calls of securities available for sale - 115,272 91,875
Purchases of securities available for sale (1,000,000) (7,033,784) (88,202)
Proceeds from maturities and calls of investment securities held to maturity 9,889,845 10,000,000 7,000,000
Purchases of investment securities held to maturity (23,640,389) (10,399,678) (10,997,500)
Principal repayments on mortgage-backed securities held to maturity 41,586,542 20,084,461 17,384,271
Purchases of mortgage-backed securities held to maturity (21,891,969) (37,026,167) (30,569,541)
Purchase of loans receivable (280,707) - (1,621,000)
Net (increase) decrease in loans receivable (26,973,831) (31,617,835) 4,010,899
Proceeds from sales of real estate owned 503,458 483,300 392,228
Proceeds from other payments received on real estate owned 4,000 39,602 15,500
Capitalized cost of real estate owned - (6,665) -
Additions to premises and equipment (86,744) (352,753) (332,949)
Purchase of Federal Home Loan Bank of New York stock (423,500) (513,400) (161,400)
------------ ------------ ------------
Net cash (used in) investing activities (22,313,295) (54,639,418) (14,573,067)
------------ ------------- ------------
Cash flows from financing activities:
Net proceeds from initial public stock offering 16,639,920 - -
Initial capitalization of mutual holding company (100,000) - -
Common stock acquired by ESOP (1,473,584) - -
Net increase in deposits 149,960 7,148,632 1,528,768
Net (decrease) increase in short-term borrowed money (18,000,000) 12,000,000 6,000,000
Proceeds of long-term borrowed money 38,000,000 3,000,000 9,000,000
Repayment of long-term borrowed money (8,290,120) (8,350,000) (8,350,000)
Net increase (decrease) in
advance payments by borrowers for taxes and insurance 149,529 150,239 (4,102)
Cash received in connection with branch purchases - 42,021,857 -
------------ ------------- ------------
Net cash provided by financing activities 27,075,705 55,970,728 8,174,666
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 7,675,313 941,856 (1,619,480)
Cash and cash equivalents - beginning 8,696,118 7,754,262 9,373,742
------------ ------------- ------------
Cash and cash equivalents - ending $ 16,371,431 $ 8,696,118 $ 7,754,262
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
----------------- ---------------- ---------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 860,000 $ 1,035,078 $ 1,023,150
============= ============= ===========
Interest $ 12,241,337 $ 9,501,814 $ 8,171,056
============= ============= ===========
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on securities
available or sale, net of income taxes $ 127,015 $ 85,632 $ (60,134)
============= ============= ===========
Loans receivable transferred to real estate owned $ - $ 679,914 $ 377,285
============= ============= ===========
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.
27
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
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 West Essex
Bancorp, Inc. ("Bancorp"), the Bancorp's wholly owned subsidiary, West
Essex Bank ("Bank") and the Bank's 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 over which there exists 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 stockholders' equity.
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.
28
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
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 net deferred loan (costs) 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 a method which approximates 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.
29
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
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.
30
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
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 Bancorp and Subsidiaries 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.
31
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- - ---------------------------------------------
Net income per share
--------------------
Basic and diluted net income per share were computed in 1998 by dividing
net income for the year ended December 31, 1998 by the weighted average
number of shares of common stock outstanding, adjusted for unearned shares
of the ESOP. Such amounts were calculated based upon income for the entire
year 1998, although the Bank converted to Stock form on October 2, 1998,
and the weighted average number of shares outstanding since October 2, 1998
as if such shares were outstanding during all of 1998. Diluted net income
per share did not differ from basic net income per share as there were no
contracts or securities excercisable or which could be converted into
common stock which would have a diluted effect.
Reclassification
----------------
Certain amounts as of and for the year ended December 31, 1997 and 1996
have been reclassified to conform with the current year's presentation.
2. REORGANIZATION TO MUTUAL HOLDING COMPANY FORM OF ORGANIZATION
- - ----------------------------------------------------------------
The Bancorp is a business corporation formed at the direction of the Bank under
the laws of the United States on October 2, 1998. On October 2, 1998: (i) the
Bank reorganized from a federally chartered mutual savings bank to a federally
chartered stock savings bank in the mutual holding company form of organization;
(ii) the Bank issued all of its outstanding capital stock to the Company; and
(iii) the Company consummated its initial public offering of common stock, par
value $.01 per share (the "Common Stock"), by selling at a price of $10.00 per
share, 1,772,898 of common stock to certain eligible account holders of the Bank
who had subscribed for such shares, by issuing 2,350,121 shares of Common Stock
to West Essex Bancorp, M.H.C. ("MHC"), a mutual holding company formed at the
direction of the Bank (collectively, the "Reorganization and Offering") and by
contributing 74,214 shares of Common Stock to West Essex Bancorp Charitable
Foundation (the "Foundation"). The MHC was initially funded with $100,000
received from the Bank. The Reorganization and Offering resulted in net proceeds
of $16.6 million, after expenses of $1.1 million. The Bancorp also established
the Foundation, which is dedicated to the communities served by the Bank. In
connection with the Reorganization and Offering, the Common Stock contributed by
the Bancorp to the Foundation at a value of $742,140, along with $100,000 in
cash, was charged to charitable contribution expense.
In addition to the 9,000,000 authorized shares of Common Stock, the Bancorp
authorized 1,000,000 shares of preferred stock with a par value of $0.01 per
share (the "Preferred Stock"). The Board of Directors is authorized, subject to
any limitations by law, to provide for the issuance of the shares of Preferred
Stock in series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restriction thereof. As of December 31, 1998, there were no shares of
Preferred Stock issued.
32
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. SECURITIES AVAILABLE FOR SALE
- - ----------------------------------
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------------
Cost Gains Losses Value
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
United States Government obligations:
Due after one year through five years $ 6,983,248 $ 300,452 $ - $7,283,700
Due after ten years 1,000,000 - 1,250 998,750
----------- --------- ----------- ----------
$ 7,983,248 $ 300,452 $ 1,250 $8,282,450
=========== ========= ========== ==========
<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>
The following table presents details of sales of securities available for sale:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Sales proceeds $ - $ 1,588,229 $ 202,752
Gross gains - - 102,752
Gross losses - 20,245 -
</TABLE>
33
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES HELD TO MATURITY
- - -------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due in one year or less $ 999,854 $ 8,896 $ - $ 1,008,750
After one year through five years 2,000,000 1,250 - 2,001,250
After five years through ten years 14,000,000 67,341 - 14,067,341
After ten years 8,582,551 287,313 63,067 8,806,797
------------ --------- ---------- ------------
25,582,405 364,800 63,067 25,884,138
------------ --------- ---------- ------------
Obligations of states and municipalities:
Due in one year or less 150,000 - - 150,000
After ten years 237,859 - 11 237,848
------------ --------- ---------- ------------
387,859 - 11 387,848
------------ --------- ---------- ------------
Trust preferred securities due after ten years 10,902,901 - 284,151 10,618,750
------------ --------- ---------- ------------
$ 36,873,165 $ 364,800 $ 347,229 $ 36,890,736
============ ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
-------------- ------------- -------------- ---------------
<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>
There were no sales of investment securities held to maturity during the years
ended December 31, 1998, 1997 and 1996.
34
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- - ------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
---------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 58,815,923 $ 684,197 $ - $ 59,500,120
Federal Home Loan Mortgage Corporation 26,698,689 323,089 3,333 27,018,445
Federal National Mortgage Association 20,100,956 167,237 1,375 20,266,818
Collateralized mortgage obligations 4,754,425 4,325 37,500 4,721,250
Other 6,079 - - 6,079
-------------- ----------- ------------ --------------
$ 110,376,072 $ 1,178,848 $ 42,208 $ 111,512,712
============== =========== ============ ==============
<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>
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1998, 1997 and 1996.
35
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE
- - ---------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Real estate mortgage:
Conventional $ 127,710,491 $ 99,474,155
FHA insured 358,942 257,285
VA guaranteed 152,725 457,155
------------- -------------
128,222,158 100,188,595
------------- -------------
Agency for International Development 48,510 58,875
------------- -------------
Construction and land development 4,393,956 6,484,920
------------- -------------
Consumer:
Passbook or certificate 401,484 550,169
Equity 9,631,219 8,491,437
Second mortgage - 62,595
Automobile 273,888 259,097
Credit reserve 31,053 31,480
------------- -------------
10,337,644 9,394,778
------------- -------------
Total loans 143,002,268 116,127,168
------------- -------------
Less: Loans in process 1,311,520 1,437,016
Allowance for loan losses 1,716,790 1,885,021
Net deferred loan (costs) fees (298,245) 70,390
------------- -------------
2,730,065 3,392,427
------------- -------------
$ 140,272,203 $ 112,734,741
============= =============
</TABLE>
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
$1,549,000 and $1,200,000 at December 31, 1998 and 1997, respectively. During
the year ended December 31, 1998, new loans granted and repayments totalled
$382,000 and $33,000, respectively.
At December 31, 1998, 1997 and 1996, loans serviced for the benefit of others
totalled approximately $27,000, $53,000 and $72,000, respectively.
36
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. 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 renegotiated loans is accrued to
interest income.
Nonperforming loans were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Nonaccrual $ 2,084 $ 2,413 $ 2,869
Renegotiated 94 94 99
---------- --------- --------
$ 2,178 $ 2,507 $ 2,968
========== ========= ========
The impact of nonperforming loans on interest income is as follows:
Year Ended December 31,
-------------------------------------------
1998 1997 1996
---------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Interest income if performing in accordance with original terms $ 191 $ 234 $ 278
Interest income actually recorded 29 57 74
--------- --------- --------
Interest income lost $ 162 $ 177 $ 204
========== ========= ========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
------------- -------------- ----------------
<S> <C> <C> <C>
Balance - beginning $ 1,885,021 $ 1,563,991 $ 1,199,888
Provision (credited) charged to operations (130,630) 487,015 232,103
Loans charged off to allowance (37,451) (165,985) -
Recovery of loan previously charged off - - 132,000
----------- ----------- -----------
$ 1,716,940 $ 1,885,021 $ 1,563,991
=========== =========== ============
</TABLE>
37
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
- - -------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997 1996
-------------- -------------- ---------
(In Thousands)
<S> <C> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $ 1,159 $ 1,344 $ 1,505
Without recorded allowances 303 304 304
---------- ------- ---------
Total impaired loans 1,462 1,648 1,809
Related allowance for loan losses 442 580 435
---------- ------- ---------
Net impaired loans $ 1,020 $ 1,068 $ 1,374
========== ======== =========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the average recorded
investment in impaired loans totalled $1,537,000 , $1,916,000 and $1,567,000,
respectively. During the years ended December 31, 1998 and 1997, no interest
income was recognized on such loans during the time each loan was impaired.
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.
7. REAL ESTATE OWNED
- - --------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Acquired in settlement of loans $ 582,138 $ 1,388,840
Allowance for losses - 174,000
---------- -----------
$ 582,138 $ 1,214,840
========== ===========
</TABLE>
The following is an analysis of the allowance for losses:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ -------------- -----------
<S> <C> <C> <C>
Balance - beginning $ 174,000 $ 98,000 $ 98,000
Provisions charged to operations 130,630 372,985 45,000
Losses charged to allowance (304,630) (296,985) (45,000)
---------- ----------- ------------
Balance - ending $ - $ 174,000 $ 98,000
========== =========== ============
</TABLE>
38
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. REAL ESTATE OWNED (Cont'd)
- - ----------------------
The following is an analysis of the (loss) income on real estate owned:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------- -------------- ---------------
<S> <C> <C> <C>
Gain on sale, net $ 5,386 $ 30,080 $ 117,201
Carrying costs, net of rental income (15,033) (36,965) (51,638)
Provision for losses (130,630) (372,985) (45,000)
---------- --------- ---------
$ (140,277) $(379,870) $ 20,563
========== ========= =========
</TABLE>
8. PREMISES AND EQUIPMENT
- - ---------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Land $ 979,315 $ 979,315
----------- -----------
Buildings and improvements 2,171,300 2,159,938
Less accumulated depreciation 858,469 778,047
----------- -----------
1,312,831 1,381,891
----------- -----------
Leasehold improvements 112,754 112,754
Less accumulated amortization 111,077 110,017
----------- -----------
1,677 2,737
----------- -----------
Furnishings and equipment 2,654,522 2,575,464
Less accumulated depreciation 2,000,971 1,816,823
----------- -----------
653,551 758,641
----------- -----------
$ 2,947,374 $ 3,122,584
=========== ===========
</TABLE>
39
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. ACCRUED INTEREST RECEIVABLE
- - ------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
Loans $ 736,133 $ 690,706
Mortgage-backed securities 661,895 852,519
Investments and other 620,352 479,574
------------ -----------
2,018,380 2,022,799
Less allowance for uncollected interest on loans 13,571 10,602
------------ -----------
$ 2,004,809 $ 2,012,197
============ ===========
</TABLE>
10. 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 intangibles" in the
consolidated statement of income for the year ended December 31, 1997.
11. DEPOSITS
- - ------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
------------ ----------------- ---------- ------------ ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest-bearing 0.00% $ 16,142,250 6.77 0.00% $ 11,371,513 4.78
Interest-bearing 1.30% 20,695,238 8.69 1.84% 21,662,441 9.09
-------------- ------- -------------- -------
0.73% 36,837,488 15.46 1.18% 33,033,954 13.87
Savings and club accounts 2.52% 60,306,242 25.30 2.60% 62,834,205 26.38
Certificates of deposit 5.26% 141,169,211 59.24 5.51% 142,323,982 59.75
-------------- ------- -------------- -------
3.87% $ 238,312,941 100.00 4.14% $ 238,192,141 100.00
============== ======= ============== =======
</TABLE>
The amount of certificates of deposit with balances of $100,000 or more at
December 31, 1998 and 1997 were approximately $17,656,000 and $19,327,000,
respectively.
40
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. DEPOSITS (Cont'd.)
- - -----------------------
The scheduled maturities of certificates of deposit are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
One year or less $ 118,317 $ 114,233
After one to three years 19,572 25,309
After three years 3,280 2,782
--------- ---------
$ 141,169 $ 142,324
========= =========
</TABLE>
A summary of interest on deposits is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Demand accounts $ 339 $ 293 $ 269
Savings and club accounts 1,672 1,357 1,278
Certificates of deposit 7,736 6,439 5,602
-------- -------- --------
$ 9,747 $ 8,089 $ 7,149
======== ======== ========
</TABLE>
41
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BORROWED MONEY
- - --------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997
----------------------------------- --------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Securities sold under agreements to
to repurchase maturing within three months -% $ - 5.82% $18,000,000
Convertible advances (a):
due May 14, 2001 5.55% 2,000,000 -% -
due March 24, 2008 5.33% 10,000,000 -% -
due March 25, 2008 5.59% 10,000,000 -% -
due May 12, 2008 5.23% 3,000,000 -% -
Monthly amortizing advances:
Payable in forty-nine monthly principal
and interest installments of $96,286 and
a final payment of $192,818 on
February 24, 2003 5.84% 4,339,572 -% -
Payable in 109 monthly principal
and interest installments of $55,591 and
a final payment of $111,347 on
February 25, 2008 6.03% 4,720,308 -% -
Term advances maturing during:
1998 -% - 6.38% 7,350,000
1999 6.50% 4,350,000 6.50% 4,350,000
2000 6.99% 600,000 6.95% 600,000
2008 5.58% 3,000,000 -% -
-------------- ------------
5.69% $ 42,009,880 6.08% $ 30,300,000
============== ============
</TABLE>
(a) Convertible at lender option to replacement funding at then current rates on
February 12, 1999, March 24, 2001, March 25, 2003 and May 12, 1999,
respectively, and quarterly thereafter.
Certain information concerning borrowed money is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
Average balance outstanding $42,364,000 $26,223,000 $18,092,000
Maximum month-end balance outstanding 52,145,000 43,675,000 23,650,000
Average interest rate 5.84% 5.97% 6.36%
</TABLE>
42
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BORROWED MONEY (Cont'd.)
- - --------------------
At December 31, 1998 and 1997, the borrowings were secured by pledges of the
Bank's investment in the capital stock of the FHLB totalling $2,607,300 and
$2,183,800, respectively, and mortgage-backed securities held to maturity with
an aggregate carrying value of $53,785,000 and $39,870,000, respectively.
13. 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 adjusted total 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>
December 31,
--------------------------
1998 1997
----------- -----------
(In Thousands)
<S> <C> <C>
GAAP capital $ 38,428 $ 29,275
Less: excess of cost over assets acquired (5,236) (5,829)
Less: unrealized gain on debt securities (192) (65)
----------- -----------
Core and tangible capital 33,000 23,381
Add: loan valuation allowance, as limited 1,500 1,185
----------- -----------
Total regulatory capital $ 34,500 $ 24,566
=========== ===========
</TABLE>
43
<PAGE>
WEST ESSEX BANCORP, INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. REGULATORY CAPITAL (Cont'd)
- - -----------------------
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------------
To Be Well
Capitalized
Under prompt
Minimum Capital 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) $ 34,500 28.81% $ 9,580 8.00% $ 11,975 10.00%
Tier 1 Capital
(to risk-weighted assets) 33,000 27.56% - - 7,185 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 33,000 10.44% 12,649 4.00% 15,811 5.00%
Tangible Capital
(to adjusted total assets) 33,000 10.44% 4,743 1.50% - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------------------------------------
To Be Well
Capitalized
Under prompt
Minimum Capital 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% 11,726 4.00% 14,657 5.00%
Tangible Capital
(to adjusted total assets) 23,381 8.00% 4,397 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.
44
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. BENEFIT PLANS
-------------
Pension 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.
The following table sets forth the plan's funded status:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation, including
vested benefits of $2,977,510 and $2,658,587, respectively. $ 3,016,288 $ 2,709,212
=========== ===========
Projected benefit obligation - beginning $ 3,257,644 $ 2,789,153
Service cost 116,891 109,752
Interest cost 217,015 206,416
Actuarial loss 132,101 237,865
Benefits paid (97,951) (84,989)
Settlements (3,233) (553)
----------- -----------
Projected benefit obligation - ending 3,622,467 3,257,644
----------- -----------
Plan assets at fair value - beginning 2,984,086 2,534,416
Actual return on assets 367,471 361,720
Employer's contributions 142,827 173,492
Benefits paid (97,951) (84,989)
Settlements (3,233) (553)
----------- -----------
Plan assets at fair value - ending 3,393,200 2,984,086
----------- -----------
Projected benefit obligation in excess of plan assets 229,267 273,558
Unrecognized net transition obligation (158,227) (189,872)
Unrecognized past service cost (70,937) (80,492)
Unrecognized net gain 156,686 131,598
----------- -----------
Accrued pension cost included in other liabilities $ 156,789 $ 134,792
=========== ===========
</TABLE>
The following table sets forth the components of net perodic pension cost:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
---------------- ----------------- --------------
<S> <C> <C> <C>
Net periodic pension cost included the following components:
Service cost $ 116,891 $ 109,752 $ 130,573
Interest cost 217,015 206,416 187,634
Expected return on plan assets (210,282) (180,400) (155,308)
Amortization of net transition obligation 31,645 31,645 31,645
Amortization of past service cost 9,553 9,553 9,553
------------ ---------- ---------
Net periodic pension cost
included in salaries and employee benefits $ 164,822 $ 176,966 $ 204,097
=========== ========== =========
</TABLE>
-45-
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. BENEFIT PLANS
- - -------------------
Pension Plan (Cont'd.)
-----------------------
Assumptions used to develop the net periodic pension cost were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
---------------- ----------------- --------------
<S> <C> <C> <C>
Discount rate 6.75% 7.50% 7.00%
Expected long-term rate of return 7.00% 7.00% 7.00%
Rate of increase in compensation levels 4.50% 5.50% 5.00%
</TABLE>
ESOP
- - ----
Effective upon the consummation of the Bank's reorganization, an ESOP was
established for all eligible employees who had completed a twelve-month period
of employment with the Bank and at least 1,000 hours of service and had attained
the age of 21. The ESOP used $1,473,854 in proceeds from a term loan obtained
from the Bancorp to purchase 147,768 shares of Bancorp common stock in the open
market. The term loan principal is payable over ten equal annual installments
through December 31, 2007. Interest on the term loan is fixed at a rate of
8.25%. Each year, the Bank intends to make discretionary contributions to the
ESOP which will be equal to principal and interest payments required on the term
loan. The loan is further paid down by the amount of dividends paid, if any, on
the common stock owned by the ESOP.
Shares purchased with the loan proceeds were initially pledged as collateral for
the term loan and are held in a suspense account for future allocation among
participants. Contributions to the ESOP and shares released from the suspense
account will be allocated among the participants on the basis of compensation,
as described by the Plan, in the year of allocation.
The ESOP is accounted for in accordance with Statement of Position 93-6
"Accounting for Employee Stock Ownership Plans", which was issued by the
American Institute of Certified Public Accountants in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Bank reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for basic net income per common share computations. ESOP
compensation expense was $146,554 for the year ended December 31, 1998.
The ESOP shares at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 14,777
Shares committed to be released -
Unreleased shares 132,991
----------
Total ESOP shares 147,768
==========
Fair value of unreleased shares $1,255,103
==========
</TABLE>
46
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. 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 Bank may
use either the experience method or the specific charge off method. See Note 16
to consolidated financial statements. Retained earnings at December 31, 1998,
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>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Current tax expense:
Federal income $ 676,231 $ 1,066,590 $ 801,976
State income 87,750 95,024 70,584
------------ ------------ -----------
763,981 1,161,614 872,560
------------ ------------ -----------
Deferred tax (benefit) expense:
Federal income (6,746) (664,857) (33,554)
State income (5,198) (60,478) (3,055)
------------ ------------ -----------
(11,944) (725,335) (36,609)
------------ ------------ -----------
$ 752,037 $ 436,279 $ 835,591
============ ============ ===========
</TABLE>
47
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. INCOME TAXES (Cont'd.)
- - ---------------------------
The components of the net deferred income tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 650,010 $ 777,563
Benefit plans 49,569 24,535
Goodwill 610,762 581,747
Charitable contribution carryforward 209,717 -
Other 19,142 16,538
------------- -------------
Total deferred tax assets 1,539,200 1,400,383
------------- -------------
Deferred tax liabilities:
Deferred loan origination fees, net 162,415 36,940
Unrealized gain on securities available for sale 107,653 36,269
Other 1,398 -
------------- -------------
Total deferred tax liabilities 271,466 73,209
------------- -------------
Net deferred tax asset included in other assets $ 1,267,734 $ 1,327,174
============= =============
</TABLE>
Refundable income taxes totalling $129,079 and $88,904 are included in other
assets at December 31, 1998 and 1997, respectively. Income taxes payable
totalling $1,754 and $39,069 are included in other liabilities at December 31,
1998 and 1997, 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>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Federal income tax $ 730,775 $ 398,860 $ 847,266
Increases (reductions) in taxes resulting from:
Non-deductible capital loss - 6,883 -
Utilization of capital loss carryforward - - (34,936)
New Jersey savings institution tax,
net of federal income tax effect 54,484 22,800 44,569
Other items, net (33,222) 7,736 (20,948)
----------- ------------ ------------
Effective income tax $ 752,037 $ 436,279 $ 835,951
=========== ============ ============
</TABLE>
48
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. 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 December 31, 1998 and 1997, the Bank had $7,209,000 and $1,324,000,
respectively, in outstanding commitments to originate and purchase loans. The
outstanding commitments at December 31, 1998 include $3,204,000 for fixed rate
mortgage loans with interest rates ranging from 6.625% to 8.00%, $495,000 for
adjustable rate mortgage loans with an initial rate of 6.75%, $2,128,000 for
construction loans at fixed rates ranging from 8.25% to 8.50%, $107,000 for home
equity loans at fixed rates ranging from 7.25% to 7.375%, $225,000 for floating
rate equity lines of credit with initial rates of 7.25% to 7.50% and $1,050,000
for the purchase of loan participations consisting of adjustable rate loans on
which the initial rates will be fixed at funding for five years at either 1.60%
or 2.00% above the Federal Home Loan Bank CIP advance rate and will adjust every
fifth year thereafter.
At December 31, 1998 and 1997, undisbursed funds from approved lines of credit
under a homeowners' equity lending program amounted to approximately $4,970,000
and $4,137,000, 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 ranges from 0.50% below to 1.75% above the prime
rate published in The Wall Street Journal on the last day of the preceding
month.
At December 31, 1998 and 1997 undisbursed funds from approved unsecured lines of
credit under the Credit Reserve program totalled $75,000 and $99,000,
respectively. Funds drawn on these lines are assessed interest at a rate of
15.00%.
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.
At December 31, 1998, the Bank was committed to purchase a $2,000,000 Federal
Home Loan Mortgage Corporation bond at par. This security carries a 6.75% fixed
interest rate and matures in January 2014, though it may be called, at par, as
early as April 1999. In addition, the Bank is committed to purchase a $500,000
participation in a Federal National Mortgage Association mortgage-backed
security, the terms of which have not yet been determined.
49
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- - -------------------------------------------
Rentals under a long-term operating lease for a branch office amounted to
approximately $49,000, $50,000 and $50,000 for the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998, the minimum rental
commitment under this noncancellable lease expiring in October, 2003 is
$269,082, consisting of $55,672 for each of the years 1999 through 2002 and
$46,394 for 2003.
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 the Bank halted financing on 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 Superior Court of New Jersey
denied the Bank's motion to dismiss the contract claims, but granted the Bank's
motion required 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
amoung 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 liablility that may result upon adjudication has been
recognized in the 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 Bancorp.
17. 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.
50
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. LEGISLATIVE MATTERS (Cont'd.)
- - ---------------------------------
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.
18. 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.
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.
51
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- - -----------------------------------------------------------
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>
December 31,
----------------------------------------------------
1998 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Financial assets
----------------
Cash and cash equivalents $ 16,371 $ 16,371 $ 8,696 $ 8,696
Securities available for sale 8,282 8,282 7,081 7,081
Investment securities held to maturity 36,873 36,891 22,929 23,339
Mortgage-baked securities held to maturity 110,376 111,513 130,174 131,681
Loans receivable 140,272 145,855 112,735 114,021
Accrued interest receivable 2,005 2,005 2,012 2,012
Financial liabilities
---------------------
Deposits 238,313 239,702 238,192 239,241
Borrowed money 42,010 41,843 30,300 30,337
Commitments
-----------
Loan origination and purchase 7,209 7,209 1,324 1,324
Unused lines of credit 5,045 5,045 4,236 4,236
Security purchase 2,500 2,500 - -
</TABLE>
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.
52
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- - -----------------------------------------------------------
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.
19. PARENT ONLY FINANCIAL INFORMATION
- - -------------------------------------
West Essex Bancorp, Inc. operates its wholly owned subsidiary, West Essex Bank.
The earnings of the subsidiary are recognized by the holding company using the
equity method of accounting. Accordingly, earnings of the subsidiary are
recorded as increases in the investment in the subsidiary. The following are
the condensed financial statements for West Essex Bancorp, Inc. (Parent company
only) as of December 31, 1998 and for the period from October 2, 1998
(inception) to December 31, 1998.
53
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - -----------------------------------------------
STATEMENT OF CONDITION
----------------------
<TABLE>
<CAPTION>
December 31,
1998
-------------
<S> <C>
Assets:
Cash and due from banks $ 95,743
Interest-bearing deposits 5,855,678
Securities held to maturity 907,315
Loan receivable from the Bank 1,294,464
Investment in subsidiaries 38,427,846
Other assets 213,911
-------------
Total assets $ 46,794,957
=============
Liabilities:
Due to subsidiaries $ 39,149
Other liabilities 1,754
-------------
40,903
Stockholders' equity 46,754,054
-------------
Total liabilities and stockholders' equity $ 46,794,957
=============
</TABLE>
54
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - -----------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
From Inception
October 2, 1998
to December 31,
1998
---------------
<S> <C>
Dividend from the Bank $ 100,000
Interest income 73,912
---------
Total income 173,912
---------
Charitable contributions 842,140
Other expenses 4,259
---------
Total expenses 846,399
---------
Loss before income tax (benefit) and equity in
undistributed earnings of subsidiaries (672,487)
Income tax (benefit) (261,251)
---------
Loss before equity in undistributed
earnings of subsidiaries (411,236)
Equity in undistributed
earnings of subsidiaries 329,268
---------
Net loss $ (81,968)
=========
</TABLE>
55
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - ----------------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
From Inception
October 2, 1998
to December 31,
1998
-------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (81,968)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Accretion of discount (525)
Contribution of common stock to foundation 742,140
Other, net (173,008)
Equity in undistributed earnings of subsidiaries (329,268)
------------
Net cash provided by operating activities 157,371
------------
Cash flows from investing activities:
Purchase of securities held to maturity (906,790)
Increase in loan receivable from Bank (1,294,464)
------------
Net cash (used in) investing activities (2,201,254)
------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 7,995,304
------------
Net cash provided by financing activities 7,995,304
------------
Net increase in cash and cash equivalents 5,951,421
Cash and cash equivalents - beginning -
------------
Cash and cash equivalents - ending $ 5,951,421
============
</TABLE>
56
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- ------------- ----------------- ----------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Total interest income $ 5,115 $ 5,342 $ 5,460 $ 5,398
Total interest expense 2,870 3,117 3,216 3,016
-------- --------- --------- ---------
Net interest income 2,245 2,225 2,244 2,382
Provision for (recapture of) loan losses (22) - (19) (90)
Non-interest income 140 121 133 135
Non-interest expenses 1,636 1,607 1,632 2,732
Income taxes 260 257 278 (43)
-------- --------- --------- ---------
Net income (loss) $ 511 $ 482 $ 486 $ (82)
======== ========= ========= =========
Net income (loss) per share - basic
and diluted N/A (1) N/A (1) N/A (1) $ (0.02)
======== ========= ========= =========
Weighted average number of
common shares outstanding -
basic and diluted N/A (1) N/A (1) N/A (1) 4,062 (1)
======== ========= ======== =========
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------------- ------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Total interest income $ 4,252 $ 4,358 $ 4,547 $ 4,958
Total interest expense 2,152 2,259 2,465 2,779
-------- --------- --------- ---------
Net interest income 2,100 2,099 2,082 2,179
Provision for (recapture of) loan losses 55 187 248 (3)
Non-interest income 113 96 59 105
Non-interest expenses 1,351 1,350 1,187 3,285
Income taxes (benefit) 284 235 262 (345)
-------- --------- --------- ---------
Net income (loss) $ 523 $ 423 $ 444 $ (653)
======== ========= ======== =========
Net income (loss) per share N/A (1) N/A (1) N/A (1) N/A (1)
======== ========= ======== =========
Weighted average number of
common shares outstanding N/A (1) N/A (1) N/A (1) N/A (1)
======== ========= ======== =========
</TABLE>
(1) Converted to stock form on October 2, 1998.
57
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
21. IMPACT OF NEW ACCOUNTING STANDARDS
- - ----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
At the date of initial application of SFAS No. 133, an entity may transfer any
held-to-maturity security into the available-for-sale category or the trading
category. An entity will then be able in the future to designate a security
transferred into the available-for-sale category as the hedged item, or its
variable interest payments as the cash flow hedged transactions, in a hedge of
the exposure to changes in market interest rates, changes in foreign currency
exchange rates, or changes in the overall fair value. (SFAS No. 133 precludes a
held-to-maturity security from being designated as the hedged item in a fair
value hedge of market interest rate risk or the risk of changes in its overall
fair value and precludes the variable cash flows of a held-to-maturity security
from being designated as the hedged transaction in a cash flow hedge of market
interest rate risk). SFAS No. 133 provides that such transfers from the held-
to-maturity category at the date of initial adoption shall not call into
question an entity's intent to hold other debt securities to maturity in the
future.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999, the quarter ended March 31, 2000 for the Bancorp and
subsidiaries. Initial application shall be as of the beginning of an entity's
fiscal quarter. Earlier application of all of the provisions of SFAS No. 133
is permitted only as of the beginning of a fiscal quarter. Earlier application
of selected provisions or retroactive application of provisions of SFAS No. 133
are not permitted.
Management of the Bancorp and subsidiaries has not yet determined when SFAS No.
133 will be implemented, but does not believe the ultimate implementation of
SFAS No. 133 will have a material impact on their consolidated financial
position or results of operations.
58
<PAGE>
DIRECTORS AND OFFICERS
----------------------
<TABLE>
<CAPTION>
Directors of
West Essex Bancorp, Inc. Principal Officers of Principal Officers of
and West Essex Bank West Essex Bancorp, Inc. West Essex Bank
- - ------------------------ ------------------------ ---------------------
<S> <C> <C>
William J. Foody Leopold W. Montanaro Leopold W. Montanaro
Chairman of Board President and Chief President & Chief
Managing Partner, Executive Officer Executive Officer
Trammell Crow Dennis A. Petrello Dennis A. Petrello
Leopold W. Montanaro Executive Vice President Executive Vice President
President & CEO and Chief Financial Officer and Chief Financial Officer
West Essex Bank Charles E. Filippo Charles E. Filippo
Everett N. Leonard Executive Vice President Executive Vice President
Retired, Craig L. Montanaro and Chief Lending Officer
Verona Boro Administrator Senior Vice President Craig L. Montanaro
John J. Burke and Secretary and Treasurer Senior Vice President
President and Secretary and Treasurer
JJ Burke & Associates Michael T. Sterrazza
David F. Brandley, Esq. Vice President and Controller
Partner in the law Firm of Lisa A. Mulligan
Brandley & Kleppe Vice President & Personnel Officer
James P. Vreeland Donna Duess
Retired New Jersey Vice President
State Senator John E. Gerasimow
Vice President
</TABLE>
INVESTOR AND CORPORATE INFORMATION
- - ----------------------------------
CORPORATE HEADQUARTERS
West Essex Bancorp, Inc.
417 Bloomfield Avenue, Caldwell, New Jersey 07006
(973) 226-7911
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m. on Wednesday,
April 21, 1999 at the Radisson Hotel, Route 46 East, Fairfield, New Jersey
07006. Shareholders are encouraged to attend.
ANNUAL REPORT ON FORM 10-K
A copy of West Essex Bancorp, Inc's annual report on Form 10-K without exhibits
is available without charge to shareholders upon written request. Requests
should be sent to Mr. Dominic Tangredi, Compliance Officer.
STOCK TRANSFER/REGISTER
Questions regarding the transfer of stock, lost certificates, address changes,
account consolidation and cash dividends should be addressed to Registrar and
Transfer Company, 10 Commerce, Cranford, New Jersey 07203 (908) 241-9880. Allow
three weeks for a reply.
SPECIAL COUNSEL
Muldoon, Murphy and Faueette LLP, 5101 Wisconsin Avenue, NW, Washington, DC
20016.
INDEPENDENT ACCOUNTANTS
Radics & Co., L.L.C. Route 46 East, Pine Brook, New Jersey, 07058.
INQUIRIES
Security analysts, retail brokers and shareholders seeking financial information
should contact Dennis A. Petrello, Executive Vice President and Chief Financial
Officer, Requests for written materials can be forwarded to the attention of Mr.
Dominic Tangredi, Investor Relations Department.
STOCK INFORMATION
West Essex Bancorp, Inc., is traded on the NASDAQ National Market under the
ticker symbol "WEBK." As of December 31, 1998, West Essex Bancorp, Inc. had
4,197,233 shares of common stock outstanding and approximately 614 shareholders
of record.
STOCK PRICE
1998
QUARTER HIGH LOW
------- ---- ---
4/th/ Quarter $10,125 $9.25
The following table illustrates West
Essex Bancorp, Inc.'s high and low
closing stock prices on the NASDAQ
National Market during 1998.
<PAGE>
WEST ESSEX BANCORP, INC.
CORPORATE HEADQUARTERS
417 Bloomfield Avenue
Caldwell, New Jersey 07006
(973) 226-7911
BANK OFFICES
MONTVILLE
267 Changebridge Road
Pine Brook, NJ 07058
(973) 575-7080
FRANKLIN LAKES
574 Franklin Avenue
Franklin Lakes, NJ 07417
(201) 891-5500
PLEASANT VALLEY WAY
487 Pleasant Valley Way
West Orange, NJ 07052
(973) 731-4630
TORY CORNER
216 Main Street
West Orange, NJ 07052
(973) 325-1230
OLD TAPPAN
207 Old Tappan Road
Old Tappan, NJ 07675
(201) 767-0007
NORTHVALE
119 Paris Avenue
Northvale, NJ 07647
(201) 768-7800
RIVER VALE
653 Westwood Avenue
River Vale, NJ 07675
(201) 664-3700
<PAGE>
Exhibit 23.0
Consent of Radics & Co., LLC
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-8 of West Essex Bancorp, Inc. (the "Company") of our report
dated February 5, 1999, in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
/s/ Radics & Co., LLC
--------------------------
Radics & Co., LLC
March 29, 1999
Pine Brook, New Jersey
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,547,464
<INT-BEARING-DEPOSITS> 14,823,967
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,282,450
<INVESTMENTS-CARRYING> 147,249,237
<INVESTMENTS-MARKET> 148,403,448
<LOANS> 141,988,993
<ALLOWANCE> 1,716,790
<TOTAL-ASSETS> 328,608,883
<DEPOSITS> 238,312,941
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,532,008
<LONG-TERM> 42,009,880
0
0
<COMMON> 41,972
<OTHER-SE> 46,712,082
<TOTAL-LIABILITIES-AND-EQUITY> 328,608,883
<INTEREST-LOAN> 10,082,633
<INTEREST-INVEST> 10,547,777
<INTEREST-OTHER> 684,273
<INTEREST-TOTAL> 21,314,683
<INTEREST-DEPOSIT> 9,747,271
<INTEREST-EXPENSE> 12,218,809
<INTEREST-INCOME-NET> 9,095,874
<LOAN-LOSSES> (130,630)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,606,817
<INCOME-PRETAX> 2,149,337
<INCOME-PRE-EXTRAORDINARY> 2,149,337
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,397,300
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.05
<LOANS-NON> 2,084,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 94,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,885,021
<CHARGE-OFFS> 37,451
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,716,940
<ALLOWANCE-DOMESTIC> 1,716,940
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
