U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

              Annual report pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 2001
                          Commission File No.: 0-29770

                            WEST ESSEX BANCORP, INC.
                 (Name of small business issuer 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)                          (Zip Code)
 ----------------------------------------                          ----------

         Issuer'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)


     Check whether the issuer (1) 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 [ _ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. Yes [ X ] No [ _ ]

     The issuer's revenues for its most recent fiscal year ended December 31,
2001 were $24,152,950.

     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 $23,655,161 based upon the last sales price of $19.41 as
listed on The Nasdaq National Market for March 15, 2002. 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 15, 2002 was:
4,900,643.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the 2001 Annual Report to Shareholders and the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 21, 2002 are
incorporated herein by reference to Parts II and III, respectively, of this Form
10-KSB.


        Transitional Small Business Disclosure Format: Yes [ _ ] No [ X ]


                                 INDEX
                                                                           PAGE
                                PART I

Item 1. Description of Business...............................................2
Item 2. Description of Properties............................................34
Item 3. Legal Proceedings....................................................34
Item 4. Submission of Matters to a Vote of Security Holders..................34

                                     PART II

Item 5. Market for Common Equity and Related
        Stockholder Matters..................................................35
Item 6. Management's Discussion and Analysis or Plan of Operation............35
Item 7. Financial Statements.................................................35
Item 8. Changes in and Disagreements with Accountants
        on Accounting and Financial Disclosure...............................35

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance With Section 16(a) of the Exchange Act....................35
Item 10.Executive Compensation...............................................35
Item 11.Security Ownership of Certain Beneficial Owners and Management.......35
Item 12.Certain Relationships and Related Transactions.......................35
Item 13.Exhibits, List and Reports on Form 8-K...............................36

SIGNATURES





                                       1
<PAGE>


     This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on West Essex Bancorp, Inc.'s current
expectations regarding its business strategies, intended results and future
performance. Forward-looking statements are preceded by terms such as "expects,"
believes," "anticipates," "intends" and similar expressions.

     Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which West Essex Bancorp, Inc. operates, as well as nationwide, West Essex
Bancorp, Inc.'s ability to control costs and expenses, competitive products and
pricing, loan delinquency rates and changes in federal and state legislation and
regulation. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. West
Essex Bancorp, Inc. assumes no obligation to update any forward-looking
statements.

Item 1.  Description of 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 OTS, the Federal Deposit Insurance Corporation ("the FDIC")
and the Securities and Exchange Commission (the "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, 2001, the Company had total assets of $370.8 million,
total deposits of $240.9 million and total stockholders' equity of $50.9
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



                                       2
<PAGE>



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;
however, 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, 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 retail and 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.





                                       3
<PAGE>


     Loan Portfolio Analysis. 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,
                                              --------------------------------------------------------------
                                                      2001                 2000                 1999
                                              --------------------  -------------------  -------------------
                                                          Percent              Percent              Percent
                                               Amount    of Total    Amount    of Total   Amount    of Total
                                              ---------  ---------  ---------  --------  ---------  --------
<S>                                            <C>          <C>       <C>        <C>     <C>         <C>
Mortgage Loans:
  Residential:
    One- to four-family.....................   $125,313     73.72     $125,933   74.40   $122,680    78.54
    Multi-family............................      3,515      2.07        1,804    1.07      1,693     1.08
    Home equity loans and lines.............     16,919      9.95       16,663    9.84     14,382     9.21
  Commercial real estate....................     14,167      8.33       13,522    7.99     12,965     8.30
  Construction and development..............      9,524      5.60       10,587    6.25      3,819     2.45
                                               --------     -----     --------   -----   --------    -----
      Total mortgage loans..................    169,438     99.67      168,509   99.55    155,539    99.58
                                               --------     -----     --------   -----   --------    -----
Commercial loans............................         30      0.02           35    0.02         40     0.02
                                               --------     -----     --------   -----   --------    -----
Consumer Loans:
    Passbook or certificate.................        298      0.18          454    0.27        341     0.22
    Other...................................        224      0.13          267    0.16        276     0.18
                                               --------     -----     --------   -----   --------    -----
      Total consumer loans..................        522      0.31          721    0.43        617     0.40
                                               --------     -----     --------   -----   --------    -----
  Total loans receivable....................    169,990    100.00      169,265  100.00    156,196   100.00
                                                           ======               ======              ======
  Less:
    Construction loans in process...........     (3,078)                (4,219)            (1,886)
    Allowance for loan losses...............     (1,363)                (1,363)            (1,400)
    Deferred loan fees, net.................        387                    355                366
                                               --------               --------           --------
  Loans receivable, net.....................   $165,936               $164,038           $153,276
                                               ========               ========           ========


<CAPTION>

                                                          At December 31,
                                              ----------------------------------------
                                                      1998                 1997
                                              --------------------  ------------------
                                                          Percent             Percent
                                                Amount    of Total   Amount   of Total
                                              ----------  --------  --------  --------
<S>                                            <C>           <C>    <C>          <C>
Mortgage Loans:
  Residential:
    One- to four-family.....................   $114,690     80.20   $ 87,489     75.34
    Multi-family............................      1,943      1.36      2,004      1.73
    Home equity loans and lines.............      9,631      6.73      8,554      7.37
  Commercial real estate....................     11,589      8.11     10,695      9.21
  Construction and development..............      4,394      3.07      6,485      5.58
                                               --------      ----   --------     -----
      Total mortgage loans..................    142,247     99.47    115,227     99.23
                                               --------      ----   --------     -----
Commercial loans............................         49      0.04         59      0.05
                                               --------      ----   --------     -----
Consumer Loans:
    Passbook or certificate.................        401      0.28       550      0.47
    Other...................................        305      0.21       291      0.25
                                               --------      ----   --------     -----
      Total consumer loans..................        706      0.49       841      0.72
                                               --------      ----   --------     -----
  Total loans receivable....................    143,002    100.00   116,127    100.00
                                                           ======              ======
  Less:
    Construction loans in process...........     (1,311)             (1,437)
    Allowance for loan losses...............     (1,717)             (1,885)
    Deferred loan fees, net.................        298                 (70)
                                               --------             --------
  Loans receivable, net.....................   $140,272         $   112,735
                                               ========         ===========



</TABLE>







                                       4
<PAGE>

     Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at December 31, 2001. The table does not include the effect
of future principal repayments or prepayments.

<TABLE>
<CAPTION>

                                                                              At December 31, 2001
                                          ------------------------------------------------------------------------------------------
                                           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                      $     221   $    --     $     291   $     270    $   8,502    $   --      $   281 $   9,565
                                      ---------   -------     ---------   ---------    ---------    -------     ------- ---------
After one year:
   More than one year to three years      1,020       288           624         758        1,022        --           78     3,790
   More than three years to five years      770        --         1,410         181           --        --           28     2,389
   More than five years to ten years      5,278        --         3,801       3,905           --        --           53    13,037
   More than 10 years to 20 years        21,312     1,961        10,693       8,623           --        30           82    42,701
   More than 20 years                    96,712     1,266           100         430           --        --           --    98,508
                                      ---------   -------     ---------   ---------    ---------    -------     ------- ---------

Total due after one year                125,092     3,515        16,628      13,897        1,022        30          241   160,425
                                      ---------   -------     ---------   ---------    ---------    -------     ------- ---------

Total due                               125,313     3,515        16,919      14,167        9,524        30          522   169,990
      Less:
          Loans in process                   --        --            --          --       (3,078)       --           --    (3,078)
          Deferred loan (fees) costs        355        --            --          40           (8)       --           --       387
          Allowance for loan losses        (709)      (64)         (210)       (181)        (195)       --           (4)   (1,363)
                                      ---------   -------     ---------   ---------    ---------    -------     ------- ---------

   Loans receivable, net              $ 124,959   $ 3,451     $  16,709   $  14,026    $   6,243    $   30      $   518 $ 165,936
                                      =========   =======     =========   =========    =========    ======      ======= =========


</TABLE>


                                       5
<PAGE>



     The following table sets forth, at December 31, 2001, the dollar amount of
loans contractually due after December 31, 2002, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>


                                                   Due After December 31, 2002
                                                  Fixed    Adjustable  Total
                                                --------   --------   --------
                                                       (In thousands)
<S>                                              <C>        <C>       <C>
Mortgage loans:
   One- to four-family......................     $85,592    $39,500   $125,092
   Multi-family.............................       3,515          -      3,515
   Equity loans and lines...................      10,804      5,824     16,628
   Commercial real estate...................      13,897          -     13,897
   Construction and development.............          22      1,000      1,022
                                                --------    -------   --------
     Total mortgage loans...................     113,830     46,324    160,154
Commercial loans............................          30          -         30
Consumer loans..............................         188         53        241
                                                --------    -------   --------
       Total loans .........................    $114,048    $46,377   $160,425
                                                ========    =======   ========

</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. To that end, the Bank pays its retail and mortgage loan origination
staff cash incentives based upon loan originations and also works with mortgage
brokers, paying them fees for loans closed and purchased by the Bank.

     Based upon the Bank's investment needs and market opportunities, the Bank
has, on occasion, participated in loans, primarily multi-family loans through
the Thrift Institutions Community Investment Corporation of New Jersey
("TICIC"). At December 31, 2001, the Bank had 13 loan participations through
TICIC totaling $3.7 million. The Bank has in its loan portfolio loans generated
by third-party mortgage companies which were underwritten pursuant to the Bank's
policies, and closed in the name of the Bank.







                                       6
<PAGE>


     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,
                                           ------------------------------------
                                              2001        2000         1999
                                           ----------- -----------  -----------
<S>                                        <C>         <C>         <C>
Beginning balance ......................   $ 169,265   $ 156,196   $ 143,002
                                           ---------   ---------   ---------
  Loans purchased:
    One- to four-family mortgage .......       1,944       3,297       2,040
    Multi-family mortgage ..............          80         235         970
    Construction and land development ..         892       1,525          --
                                           ---------   ---------   ---------
       Total ...........................       2,916       5,057       3,010
                                           ---------   ---------   ---------
  Loans originated:
    Mortgage  loans:
       One- to four-family .............      26,766      13,875      23,400
       Multi-family ....................          --          --         455
       Home equity lines ...............       4,467       7,070       9,022
       Commercial real estate ..........       2,272       2,055       2,485
       Construction and land development       5,296       6,526       4,803
                                           ---------   ---------   ---------
           Total mortgage loans ........      38,801      29,526      40,165
                                           ---------   ---------   ---------
    Consumer loans:
       Passbook loans ..................         541         621         725
       Automobile ......................          21         107         116
       Credit lines ....................          84         161         141
                                           ---------   ---------   ---------
           Total consumer loans ........         646         889         982
                                           ---------   ---------   ---------
          Total originations ..........       39,447      30,415      41,147
                                           ---------   ---------   ---------
  Loans transferred to real estate owned          --        (165)       (309)
                                           ---------   ---------   ---------
    Principal repayments and other, net      (41,638)    (21,349)    (30,654)
                                           ---------   ---------   ---------
 Ending balance ........................   $ 169,990   $ 169,265   $ 156,196
                                           =========   =========   =========

</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 retail and loan origination staff, 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.

     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 with interest
rates which adjust periodically. 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.




                                       7
<PAGE>

     The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's interest rate
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 a 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 preferred interest rates.
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. Loans in
excess of $150,000 may be made at the discretion of the Chief Lending Officer.
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 may 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%. 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%. The underwriting standards employed by
the Bank for home equity loans and lines of credit include a determination of
the applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration. The Bank's home
equity loans and lines of credit are secured by first or second liens on one- to
four-family residences 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 apartment units 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



                                       8
<PAGE>

limit which at December 31, 2001 was $6.8 million. The Bank currently originates
multi-family and commercial real estate loans, generally with terms of up to 20
years and has developed a variety of programs, including balloon-type and
adjustable 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 1.15. 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. 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.
     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 also originates construction and development loans for
the development of commercial properties. 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 may 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.

     Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment.

     Consumer Lending. Consumer loans at December 31, 2001 consisted primarily
of $298,000 in loans secured by deposit accounts and $118,000 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



                                       9
<PAGE>

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, 2001, the Bank had $30,000 in commercial
loans.

     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 less than or equal to $1.0 million may be approved by the
Bank's Chief Lending Officer. All approved loans are reported to the Board of
Directors or the Lending Committee. 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. Upon
receipt of a completed loan application from a prospective borrower, a credit
report is ordered and certain other information is verified by an independent
credit agency. If necessary, additional financial information may be required.
An appraisal of real estate intended to secure a proposed loan generally is
required to be performed by outside appraisers approved by the Bank. The Board
annually approves independent appraisers used by the Bank and approves the
Bank's appraisal policy. The Bank's policy is to obtain title and hazard
insurance on all mortgage loans and flood insurance when necessary and the Bank
generally requires borrowers to make payments to a mortgage escrow account for
the payment of property taxes. No title or flood insurance is required, however,
for home equity loans.

Delinquent Loans, Classified Assets and Real Estate Owned

     Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management at least once 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
REO.

     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



                                       10
<PAGE>

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 (ii) establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
impaired loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type and estimated fair value of collateral
and financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information. General
loan loss allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management's judgment. Although management
believes that adequate loan loss allowances are established, actual losses are
dependent upon future events and, as such, further additions to the level of the
allowance for loan losses may be necessary.

     A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.

     The Board reviews classified assets reports prepared by management and
classifies its assets on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At December 31, 2001,
the Bank had $452,000, or 0.12% of total assets, of assets designated as
"Substandard," consisting of two one- to four-family mortgage loans, totaling
$222,000, and a multi-family mortgage loan totaling $230,000. At December 31,
2001, the largest loan designated as "Substandard" had a carrying balance of
$230,000, and was a multi-family mortgage loan. At December 31, 2001, 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, 2001
                                    -----------------------------------------------------------
                                            60-89 Days                   90 Days or More
                                    ---------------------------     ---------------------------
                                                     Principal                       Principal
                                       Number        Balance         Number          Balance
                                      of Loans       of Loans       of Loans         of Loans
                                    ------------     ----------     -----------     ----------
<S>                                           <C>        <C>                  <C>         <C>
Loans:                                               (Dollars in thousands)
   Residential Mortgage.........              15         $1,127               6           $575
   Commercial Mortgage..........               1             35               -              -
   Construction and land
      development...............               -              -               -              -
   Consumer loans...............               -              -               5              3
                                            ----           ----            ----           ----
     Total loans................              16         $1,162              11           $578
                                            ====         ======            ====           ====
Delinquent loans to total
    loans.......................            1.11%          0.68%           0.76%          0.34%
                                            ====         ======            ====           ====

<CAPTION>

                                                      At December 31, 2000
                                    ---------------------------------------------------------
                                            60-89 Days                  90 Days or More
                                    --------------------------     --------------------------
                                                     Principal                      Principal
                                      Number         Balance         Number         Balance
                                     of Loans        of Loans       of Loans        of Loans
                                    -----------     ----------     -----------     ----------
<S>                                      <C>            <C>             <C>            <C>
Loans:                                                 (Dollars in thousands)
   Residential Mortgage.........            5           $443               3           $109
   Commercial Mortgage..........            -              -               -              -
   Construction and land
      development...............            -              -               -              -
   Consumer loans...............            1             14               3              2
                                         ----           ----            ----           ----
     Total loans................            6           $457               6           $111
                                         ====           ====            ====           ====
Delinquent loans to total
    loans.......................         0.40%          0.27%           0.40%          0.07%
                                         ====           ====            ====           ====

<CAPTION>

                                                           At December 31, 1999
                                    ----------------------------------------------------------
                                            60-89 Days                    90 Days or More
                                    ---------------------------      -------------------------
                                                      Principal                      Principal
                                       Number         Balance         Number         Balance
                                      of Loans        of Loans       of Loans        of Loans
                                    ------------     ----------     -----------     ----------
<S>                                      <C>            <C>             <C>          <C>
Loans:                                                  (Dollars in thousands)
   Residential Mortgage.........             7           $369              11           $792
   Commercial Mortgage..........             -              -               -              -
   Construction and land
      development...............             -              -               -              -
   Consumer loans...............             -              -               -              -
                                          ----           ----            ----           ----
     Total loans................             7           $369              11           $792
                                          ====           ====            ====           ====
Delinquent loans to total
  loans.........................          0.51%          0.24%           0.79%          0.51%
                                          ====           ====            ====           ====

</TABLE>



                                       12
<PAGE>

     Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding nonaccrual loans and REO. At December 31, 2001, REO
totaled $209,000 and consisted of two properties owned by the Company which are
being held for possible future use in operations. 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,
2001 and 2000, 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 $25,000 and $8,000, respectively. At
December 31, 2001 and 2000 and during the year ended December 31, 2001, there
were no loans classified as impaired.

<TABLE>
<CAPTION>


                                                                 At December 31,
                                             -------------------------------------------------------
                                               2001       2000       1999       1998       1997
                                             ---------  ---------  ---------  ---------  ---------
                                                            (Dollars in thousands)
<S>                                           <C>        <C>         <C>       <C>         <C>
Nonaccrual loans:
   Residential Mortgages ...............      $  575     $  109      $  792    $1,201      $1,576
   Commercial Mortgages ................          --         --          --       158         119
   Construction and land development ...          --         --          --       725         718
   Consumer ............................           3         --          --        --          --
                                              ------     ------      ------    ------      ------
     Total nonaccrual loans ............         578        109         792     2,084       2,413

Delinquent 90 or more days and accruing:
   Consumer ............................          --          2          --        --          --

Restructured loans:
   Residential Mortgages ...............          --         90          92        94          94
                                              ------     ------      ------    ------      ------
     Total non-performing loans ........         578        201         884     2,188       2,507
Real estate owned, net(1) ..............         209        602         900       582       1,215
                                              ------     ------      ------    ------      ------
     Total non-performing assets .......      $  787     $  803      $1,784    $2,770      $3,722
                                              ======     ======      ======    ======      ======

Non-performing loans as a
   percent of total loans(2) ...........        0.34%      0.12%       0.57%     1.46%       2.16%
                                                ====       ====        ====      ====        ====
Non-performing assets as
   a percent of total assets(3).........        0.21%      0.22%       0.51%     0.84%       1.24%
                                                ====       ====        ====      ====        ====
</TABLE>
-------------------

(1)  REO balances are shown net of related valuation allowances. At all period
     ends, 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.


     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, 2001 and 2000, the Bank's allowance for loan
losses was 0.80% and 0.81%, respectively, of total loans receivable and 235.8%
and 1251.7%, respectively, of nonaccrual loans. The Bank had non-accrual loans
of $578,000 and $109,000 at December 31, 2001 and 2000, 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



                                       13
<PAGE>

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.

     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,
                                                -----------------------------------------------------------------
                                                  2001         2000          1999          1998           1997
                                                --------     ---------     ---------     ---------     ----------
                                                                    (Dollars in thousands)
<S>                                           <C>            <C>           <C>             <C>            <C>
Balance at beginning of period .........      $   1,363      $   1,400     $   1,717       $ 1,885        $ 1,564
                                              ---------      ---------     ---------       -------        -------
Provision for (recapture of) loan losses             --             --            --          (131)           487
                                              ---------      ---------     ---------       -------        -------
Charge-offs:
   Mortgage loans:
      One- to four-family ..............             --             37            --            37             60
      Multi-family .....................             --             --            --            --             --
   Commercial real estate ..............             --             --            --            --            106
   Construction and land development ...             --             --           317            --             --
                                              ---------      ---------     ---------       -------        -------
      Total mortgage loans .............             --             37           317            37            166
                                              ---------      ---------     ---------       -------        -------
Recoveries:
   Construction and land development ...             --             --            --            --             --
                                              ---------      ---------     ---------       -------        -------
Balance at end of period ...............      $   1,363      $   1,363     $   1,400       $ 1,717        $ 1,885
                                              =========      =========     =========       =======        =======
Ratio of net charge-offs during
  the period to average gross loans
  during the period ....................           0.00%          0.02%         0.21%         0.03%          0.17%
                                              =========      =========     =========       =======        =======
Allowance for loan losses as a
   percent of total loans ..............           0.80%          0.81%         0.90%         1.20%          1.62%
                                              =========      =========     =========       =======        =======
Allowance for loan losses as a
   percent of non-performing loans..........     235.82%        677.75%       158.37%        78.47%         75.19%
                                              =========      =========     =========       =======        =======

</TABLE>




                                       14
<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, 2001
                                                                     Percent of
                                                                     Loans in
                                                       Percent of    Each
                                                       Allowance     Category
                                                       to Total      to Total
                                            Amount     Allowance     Loans
                                           --------   -----------   -----------
                                                  (Dollars in thousands)
<S>                                         <C>           <C>           <C>
Mortgage loans:
  Residential...........................    $   786         57.67%        85.74
  Commercial real estate................        145         10.64          8.33
  Construction and land development.....        156         11.44          5.60
                                             ------        ------        ------
    Total mortgage loans................      1,087         79.75         99.67
Commercial loans........................         --            --          0.02
Consumer loans..........................          3          0.22          0.31
                                             ------        ------        ------
                                              1,090         79.97        100.00%
Unallocated.............................        273         20.03        ======
                                             ------        ------
    Total allowance for loan losses.....     $1,363        100.00%
                                             ======        ======

<CAPTION>


                                                        At December 31,
                             ------------------------------------------------------------------
                                          2000                             1999
                             --------------------------------- --------------------------------
                                                    Percent of                           Percent
                                                    Loans in                            of Loans
                                       Percent of      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.............    $694        50.92%      85.31%   $   735        52.50%      88.83%
   Commercial real
     estate................     149        10.93        7.99        141        10.07        8.30
   Construction and
      land development.....     129         9.46        6.25         46         3.29        2.45
                               ----        -----       -----    -------        -----       -----
      Total mortgage
        loans..............     972        71.31       99.55        922        65.86       99.58
Commercial loans...........      --           --        0.02         --           --        0.02
Consumer loans.............       5         0.37        0.43          6         0.43        0.40
                               ----        -----       -----    -------        -----       -----
                                977        71.68      100.00%       928        66.29      100.00%
                                                      ======                              ======
Unallocated................     386        28.32                    472        33.71
                               ----        -----                -------       ------
   Total...................  $1,363       100.00%                $1,400       100.00%
                             ======       ======                 ======       ======

<CAPTION>


                                                        At December 31,
                            ----------------------------------------------------------------
                                         1998                             1997
                             ------------------------------- --------------------------------
                                                   Percent                          Percent
                                                  of Loans                         of Loans
                                     Percent of    in Each            Percent of    in Each
                                     Allowance    Category            Allowance    Category
                                      to Total    to Total             to Total    to Total
                            Amount   Allowance     Loans     Amount   Allowance     Loans
                            ------- ------------ ---------- -------- ------------ ----------
                                                     (Dollars in thousands)
<S>                         <C>            <C>        <C>     <C>           <C>        <C>
Mortgage loans:
   Residential............. $   763        44.44%     88.29%  $  621        32.94%     84.44%
   Commercial real
     estate................     122         7.11       8.11      112         5.94       9.21
   Construction and
      land development.....     418        24.34       3.07      628        33.32       5.58
                            -------        -----      -----   ------        -----      -----
      Total mortgage
        loans..............   1,303        75.89      99.47    1,361        72.20      99.23
Commercial loans...........      --           --       0.04       --           --       0.05
Consumer loans.............       6         0.35       0.49        6         0.32       0.72
                            -------        -----      -----   ------        -----      -----
                              1,309        76.24     100.00%   1,367        72.52     100.00%
                                                     ======                           ======
Unallocated................     408        23.76                 518        27.48
                            -------        -----              ------        -----
   Total...................  $1,717       100.00%             $1,885       100.00%
                             ======       ======              ======       ======

</TABLE>



                                       15
<PAGE>

     Real Estate Owned. At December 31, 2001, the Company and the Bank had
$209,000 of real estate owned consisting of two properties, neither of which
were acquired through foreclosure. When a property is acquired 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, a specific valuation allowance is
provided via a charge to operations for the diminution in value. It is the
policy of the Company and the Bank to have obtained an appraisal on all real
estate subject to foreclosure proceedings prior to the time of foreclosure, to
require appraisals on a periodic basis on foreclosed properties and to conduct
inspections on foreclosed properties.

Investment Activities

     The Company can invest in common and preferred stocks, limited partnerships
and all investments in which the Bank is permitted to invest. Anything else
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 Company'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 Company's policies permit
investments in mortgage-backed securities, including securities issued and
guaranteed by FNMA, FHLMC and GNMA. The Company'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, 2001, the Company had $170.5 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.

     Mortgage-Backed Securities. The Company 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 Company. The Company has
primarily invested in mortgage-backed securities issued or sponsored by FNMA,
FHLMC and GNMA and private issuers. The mortgage-backed securities portfolio had
coupon rates ranging from 3.63% to 15.00% and had a weighted average yield of
6.20% at December 31, 2001.

     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 Company 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,



                                       16
<PAGE>

including FNMA, FHLMC and GNMA) pool and resell the participation interests in
the form of securities to investors such as the Company 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 Company.
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 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 Company 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
Company's $137.3 million mortgage-backed securities portfolio at December 31,
2001, $384,000 with a weighted average yield of 8.07% had contractual maturities
within five years and $136.9 million with a weighted average yield of 6.19% 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 Company may be subject to reinvestment
risk because, to the extent that the Company's mortgage-backed securities prepay
faster than anticipated, the Company 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, 2001, the U.S. Government and Agency securities
portfolio totaled $22.6 million, or 6.1% of total assets, all of which were
classified as held-to-maturity. In addition, the Company held $584,000 in
obligations of New Jersey municipal subdivisions.

     Trust Preferred Securities. At December 31, 2001, the investment portfolio
included $10.0 million, or 2.7% 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 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 one 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 of $10,000,000. The Bank's conclusion was that these
investments had a place on the balance sheet and, during 1998, $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 $8.9
million of such securities owned by the Bank, the Company owns one trust
preferred security which is carried at $1.1 million.




                                       17
<PAGE>

     During 1999, the OTS reviewed these securities and concluded that, in its
opinion, three of the five investments were not of a type suitable for the Bank.
Accordingly, the OTS mandated that the Bank liquidate these issues as soon as
possible without incurring a loss. The Company determined that these three
securities should be retained and thus the Bank may transfer them to the Company
over a period of time. One of the three issues was transferred during the fourth
quarter of 1999.

     The $10.0 million in trust preferred securities is a combination of $6.8
million in floating rate (spread to Libor) investments and $3.2 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 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,
                                             -----------------------------------------------------------
                                                      2001               2000                1999
                                             -------------------- ------------------- ------------------
                                               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 and Agency
        obligations................              $    --  $    --   $  2,999  $  2,994  $  2,998 $ 2,924
                                                 -------  -------   -------   -------   -------  -------
Investment securities held-to-maturity (1):
   U.S. Government and
     Agency obligations............               22,600   22,342    31,155    30,577    30,856   28,904
   Trust preferred securities......                9,985    8,457     9,989     8,768     9,993    9,286
   Obligations of states and
     municipal subdivisions........                  584      576       584       580      733       679
                                                 -------  -------   -------   -------   -------  -------
                                                  33,169   31,375    41,728    39,925    41,582   38,869
                                                 -------  -------   -------   -------   -------  -------
Federal Home Loan Bank of
   New York stock (2)..............                3,843    3,843     3,558     3,558     3,273    3,273
                                                 -------  -------   -------   -------   -------  -------
     Total.........................              $37,012  $35,218   $48,285   $46,477   $47,853  $45,066
                                                 =======  =======   =======   =======   =======  =======
</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.





                                       18
<PAGE>

The following table sets forth investment securities activities for the periods
indicated.

<TABLE>
<CAPTION>

                                                        At December 31,
                                                 ------------------------------
                                                   2001       2000      1999
                                                 ---------  --------  ---------
                                                         (In thousands)
<S>                                                <C>       <C>        <C>
Investment securities:
Investment securities, beginning of period(1)...   $44,722   $44,506    $45,156
                                                   -------   -------    -------
Purchases:
   Investment securities-held-to-maturity.......    14,000        --     21,045
   Investment securities-available-for-sale.....        --        --          -
Calls:
   Investment securities-held-to-maturity.......   (22,848)       --    (14,550)
   Investment securities-available-for-sale.....    (1,000)       --         --
Maturities:
   Investment securities-held-to-maturity.......        --      (150)    (1,150)
   Investment securities-available-for-sale.....        --        --         --
Sales:
   Investment securities-held-to-maturity.......        --        --       (908)
   Investment securities-available-for-sale.....    (2,000)       --     (4,987)
Amortization of premiums and discounts..........       290       297        274
Unrealized gain (loss)..........................         5        69       (374)
                                                   -------   -------    -------
   Net increase in investment securities........   (11,553)      216       (650)
                                                   -------   -------    -------
Investment securities, end of period............   $33,169   $44,722    $44,506
                                                   =======   =======    =======
</TABLE>

(1)  Includes investment securities available-for-sale.





                                       19
<PAGE>


     The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities, all of which
are held-to-maturity, at the dates indicated.


<TABLE>
<CAPTION>
                                                                  At December 31,
                             -----------------------------------------------------------------------------------------
                                         2001                           2000                          1999
                             -----------------------------  ----------------------------  ----------------------------

                                          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....................   $  56,909    41.44%  $  57,689  $  56,873    43.54%  $57,226  $  51,616    42.58%   $  51,762
   FHLMC...................      29,269    21.31      30,025     31,052    23.77    31,176     18,781    15.49       18,576
   FNMA....................      27,132    19.76      27,108     17,243    13.20    17,259     16,894    13.94       16,787
   Other...................      24,018    17.49      24,513     25,460    19.49    24,524     33,932    27.99       31,682
                               --------   ------    --------   --------   ------  --------   --------   ------     --------
      Total mortgage-backed
         securities (1)(2).    $137,328   100.00%   $139,335   $130,628   100.00% $130,185   $121,223   100.00%    $118,807
                               ========   ======    ========   ========   ======  ========   ========   ======     ========
By Coupon Type:
   Adjustable-rate.........    $ 71,991    52.42%  $  72,973  $  78,092    59.78%$  78,446  $  59,667    49.22%   $  59,764
   Fixed-rate..............      65,337    47.58      66,362     52,536    40.22    51,739     61,556    50.78       59,043
                               --------   ------    --------   --------   ------  --------   --------   ------     --------
      Total mortgage-backed
         securities (1)(2).    $137,328   100.00%   $139,335   $130,628   100.00% $130,185   $121,223   100.00%    $118,807
                               ========   ======    ========   ========   ======  ========   ========   ======     ========

</TABLE>

(1)  Based on amortized cost.

(2)  Includes net unamortized (discounts) premiums of $106, $(35) and $(37) at
     December 31, 2001, 2000 and 1999, respectively.


The following table sets forth the Company's mortgage-backed securities
activities for the periods indicated.


                                                    For the Years
                                                 Ended December 31,
                                       ----------------------------------------
                                         2001          2000            1999
                                       ----------   -----------    ------------
                                                       (In thousands)
Beginning balance .....................  $130,628      $121,223        $110,376
   Purchases...........................    47,112        32,016          46,531
   Principal repayments................   (40,383)      (22,699)        (35,580)
   Net amortization and accretion of
      discounts and premiums...........       (29)          (88)           (104)
                                         --------      --------        --------
Ending balance.........................  $137,328      $130,628        $121,223
                                         ========      ========        ========




                                       20
<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, 2001.
<TABLE>
<CAPTION>


                                                                                At December 31, 2001
                                                        ------------------------------------------------------------------
                                                                                   More than One        More than Five
                                                          One Year or Less       Year to Five Years   Years to Ten Years
                                                       -----------------------  -------------------- ---------------------
                                                                    Weighted               Weighted               Weighted
                                                        Carrying     Average     Carrying   Average    Carrying    Average
                                                         Value        Yield       Value      Yield      Value       Yield
                                                       ----------  -----------   --------  --------  ----------  --------
                                                                                  (Dollars in thousands)
<S>                                                        <C>            <C>        <C>       <C>      <C>          <C>
Investment securities held-to-maturity:
          U.S. Treasury and Government
             agency obligations.......................     $   --           --     $  --         --    $  4,000      5.68%
          Municipal obligations (1)...................         --           --        --         --         100      6.14%
          Trust preferred securities..................         --           --        --         --          --        --
                                                           ------                    ----               -------
              Total investment securities held
                to maturity ..........................     $   --           --     $  --         --    $  4,100      5.69%
                                                           ======                    ====               =======
Mortgage-backed securities held-to-maturity:
          Adjustable-rate:
              GNMA ...................................     $   --           --     $  --         --    $     --        --
              FHLMC ..................................         --           --        --         --          --        --
              FNMA ...................................         --           --        --         --          --        --
              Other ..................................         --           --        --         --          --        --
                                                           ------                                       -------
                          Total.......................         --           --        --         --          --        --
                                                           ------                                       -------
          Fixed-rate:
              GNMA ...................................         --           --        361      8.01%      3,346      7.34%
              FHLMC ..................................          1         9.00%        22      9.00%      6,897      6.77%
              FNMA ...................................         --           --         --        --       5,856      6.30%
              Other ..................................         --           --         --        --           4     11.00%
                                                           ------                    ----               -------
                      Total ..........................          1         9.00%       383      8.07%     16,103      6.72%
                                                           ------                    ----               -------
   Total mortgage-backed securities
          held-to-maturity............................     $    1         9.00%      $383      8.07%    $16,103      6.72%
                                                           ======                    ====               =======


<CAPTION>


                                                                   At December 31, 2001
                                                     --------------------------------------------
                                                       More than Ten Years           Total
                                                                   Weighted               Weighted
                                                       Carrying    Average    Carrying    Average
                                                         Value      Yield       Value      Yield
                                                      -----------  --------  -----------  --------

<S>                                                     <C>            <C>      <C>           <C>
Investment securities held-to-maturity:
          U.S. Treasury and Government
             agency obligations.......................  $  18,600      6.59%    $ 22,600      6.43%
          Municipal obligations (1)...................        484      6.42%         584      6.37%
          Trust preferred securities..................      9,985      4.32%       9,985      4.32%
                                                         --------               --------
              Total investment securities held
                to maturity ..........................  $  29,069      5.81%    $ 33,169      5.79%
                                                         ========               ========
Mortgage-backed securities held-to-maturity:
          Adjustable-rate:
              GNMA ...................................  $  52,411      5.58%    $ 52,411      5.58%
              FHLMC ..................................     16,917      6.84%      16,917      6.84%
              FNMA ...................................      1,287      6.44%       1,287      6.44%
              Other ..................................      1,600      3.63%       1,600      3.63%
                                                         --------               --------
                          Total.......................     72,215      5.84%      72,215      5.84%
                                                         --------               --------
          Fixed-rate:
              GNMA ...................................        792      8.52%       4,499      7.60%
              FHLMC ..................................      5,432      6.69%      12,352      6.74%
              FNMA ...................................     19,989      6.15%      25,845      6.18%
              Other ..................................     22,413      6.78%      22,417      6.78%
                                                         --------               --------
                      Total ..........................     48,626      6.54%      65,113      6.59%
                                                         --------               --------
   Total mortgage-backed securities
          held-to-maturity............................   $120,841      6.12%    $137,328      6.20%
                                                         ========               ========


</TABLE>
-----------------------


(1)  Weighted average yield for municipal securities is based on a tax
     equivalent basis on an assumed tax rate of 34%.




                                       21
<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 and club accounts, certificate of deposit
accounts and Individual Retirement Accounts. For the year ended December 31,
2001, average core deposits, which include all non-certificate deposits,
represented 38.2% 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, 2001, 85.6% of the Bank's
certificate of deposit accounts had remaining 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,
                                                 --------------------------------------
                                                    2001          2000          1999
                                                  --------      --------      --------
                                                            (In thousands)
<S>                                               <C>           <C>           <C>
Beginning balance..........................       $237,956      $234,978      $238,313
                                                  --------      --------      --------
   Net deposits (withdrawals)..............         (6,140)       (6,378)      (11,919)
   Interest credited.......................          9,048         9,356         8,584
                                                  --------      --------      --------
Increase (decrease) in deposit accounts....          2,908         2,978        (3,335)
                                                  --------      --------      --------
Ending balance.............................       $240,864      $237,956      $234,978
                                                  ========      ========      ========
</TABLE>

     At December 31, 2001, the Bank had $25.9 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........................  $  8,619           4.59%
Over 3 through 6 months.....................     5,421           4.22
Over 6 through 12 months....................     8,119           4.27
Over 12 months..............................     3,726           5.37
                                              --------
Total.......................................  $ 25,885           4.53
                                              ========

</TABLE>


                                       22
<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,
                                          ---------------------------------------------------------------
                                                       2001                            2000
                                          ------------------------------  ------------------------------
                                                      Percent                         Percent
                                                     of Total    Weighted             of Total  Weighted
                                           Average    Average    Average   Average    Average   Average
                                           Balance   Deposits     Rate     Balance   Deposits    Rate
                                          ---------- ---------  --------  ---------  ---------  --------
                                                                 (Dollars in thousands)
<S>                                        <C>           <C>       <C>    <C>            <C>        <C>
Demand accounts..........................  $  36,245     15.22%     0.68% $  36,536      15.48%     0.75%
Savings and Club accounts................     54,585     22.93      2.02     54,218      22.97      2.05
Certificates of deposit..................    147,240     61.85      5.23    145,253      61.55      5.49
                                             -------    ------             ---------    ------
         Total...........................   $238,070    100.00%     3.80   $236,007     100.00%     3.96
                                            ========    ======             ========     ======

Certificate accounts(1):
   Less than six months..................  $  80,272     55.25%     4.41% $  79,969      53.65%     5.59%
   Over six through 12 months............     44,158     30.39      4.00     41,539      27.87      5.95
   Over 12 months through 36 months......     18,523     12.75      4.98     24,274      16.29      5.95
   Over 36 months........................      2,333      1.61      5.15      3,269       2.19      5.92
                                             -------    ------             ---------    ------
         Total certificate accounts......   $145,286    100.00%     4.37   $149,051     100.00%     5.76
                                            ========    ======             ========     ======


<CAPTION>
                                          For the Years Ended December 31,
                                          ------------------------------
                                                       1999
                                          ------------------------------
                                                      Percent
                                                     of Total   Weighted
                                           Average    Average   Average
                                           Balance   Deposits     Rate
                                          ---------- ---------  --------
                                               (Dollars in thousands)
<S>                                        <C>           <C>        <C>
Demand accounts..........................  $  36,308     15.35%     0.78%
Savings and Club accounts................     58,727     24.84      2.06
Certificates of deposit..................    141,432     59.81      5.01
                                             -------     -----
         Total...........................   $236,467    100.00%     3.63
                                            ========    ======

Certificate accounts(1):
   Less than six months..................  $  71,619     51.11%     4.84%
   Over six through 12 months............     40,181     28.67      5.11
   Over 12 months through 36 months......     24,400     17.41      5.49
   Over 36 months........................       3,940     2.81      5.81
        --                                      -----     ----
         Total certificate accounts......   $140,140    100.00%     5.05
                                            ========    ======



</TABLE>

(1)  Based on remaining maturity of certificates calculated as of the end of the
     period.





                                       23
<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, 2001.

<TABLE>
<CAPTION>

                                          Period to Maturity from December 31, 2001
                          -------------------------------------------------------------------------
                           Less than     One to      Two to     Three to     Four to       After
                           One Year    Two years   Three years Four years   Five years  Five Years
                          -----------  ----------  ----------- -----------  ----------  -----------
                                                               (In thousands)
<S>                          <C>         <C>           <C>         <C>            <C>         <C>
Certificate accounts:
   2.00% and below........   $   4,410   $     17      $    --     $    --        $ --        $  55
   2.01% to 3.00%.........     18,358       2,041          233           5           1           --
   3.01 to 4.00%..........     30,072       2,309          500          44         202          259
   4.01 to 5.00%..........     46,089       3,868        1,062         202         621            1
   5.01 to 6.00%..........     10,914       2,107        1,279         420          21            3
   6.01 to 7.00%..........     13,642       3,924          946         428          --           --
   7.01 to 8.00%..........        285         237           --          70          --           --
   Over 9.00%.............         --         --            --          --          --           --
                             --------     -------       ------      ------        ----         ----
                             $123,770     $14,503       $4,020      $1,169        $845         $318
                             ========     =======       ======      ======        ====         ====

</TABLE>

Accrued interest payable

<TABLE>
<CAPTION>
                                        At December 31,
                            -------------------------------------

                                2001        2000          1999
                           ----------   -----------   -----------
<S>                        <C>          <C>           <C>
Certificate accounts:
   2.00% and below........ $    4,482   $        --   $        --
   2.01% to 3.00%.........     20,638            --            --
   3.01 to 4.00%..........     33,386         3,603         2,808
   4.01 to 5.00%..........     51,843        34,193        66,049
   5.01 to 6.00%..........     14,744        32,323        60,282
   6.01 to 7.00%..........     18,940        76,074        10,303
   7.01 to 8.00%..........        592         2,289           424
   Over 9.00%.............         --            --            21
                             --------      --------      --------
                              144,625       148,482       139,887
Accrued interest payable..        661           569           253
                             --------      --------      --------
   Total..................   $145,286      $149,051      $140,140
                             ========      ========      ========
</TABLE>









                                       24
<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,
2001, the Bank had $76.9 million in outstanding FHLB borrowings, compared to
$62.3 million at December 31, 2000.

     The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.


                                                    At or For the Years
                                                     Ended December 31,
                                          --------------------------------------
                                              2001          2000          1999
                                          ------------  ------------  ----------
                                                   (Dollars in thousands)

Average balance outstanding...............  $66,532       $65,592       $57,756
Maximum amount outstanding at any
    month-end during the period...........   76,856        69,167        65,453
Balance outstanding at end of period......   76,856        62,290        64,340
Weighted average interest rate
   during the period......................     5.61%         5.85%         5.67%
Weighted average interest rate at
   end of period..........................     5.08%         5.78%         5.66%


Subsidiary Activities

     The Company is the parent corporation of two wholly owned subsidiaries, the
Bank and West Essex Property Company ("West Essex Property"). West Essex
Property was formed in April 1999 to purchase a parcel of land located in Sussex
County, New Jersey from the Company. Upon the purchase of this parcel of land,
West Essex Property was to have entered into an arrangement to lease the
property to a restaurant chain. As of December 31, 2001, West Essex Property has
neither purchased the parcel of land nor entered into a lease arrangement. As of
December 31, 2001 and for the year then ended, West Essex Property had no
operations, assets, liabilities or equity. 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 totaled $777,000 for the year ended
December 31, 2001. 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, 2001, the Company 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 Bank considers its
relationship with its employees to be good.




                                       25
<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 Savings Association Insurance Fund ("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 banks are governed
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.

     Loans-to-One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At December
31, 2001, the Bank's limit on loans to one borrower was $6.8 million, and the
Bank's largest aggregate outstanding balance of loans to one borrower was $2.8
million.

     QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue 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 securities) in at least 9 months
out of each 12 month period.

     A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 2001, the Bank maintained 88.8% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.



                                       26
<PAGE>

Recent legislation has expanded the extent to which education loans, credit card
loans and small business loans may be considered "qualified thrift investments."

     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. Under the regulations, an application
to and the prior approval of the OTS is 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 if, like the Bank, it is a subsidiary of a holding company. 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.

     Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed 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 fiscal year
ended December 31, 2001 totaled $79,000.

     Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited 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 federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non- affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.

     Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
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



                                       27
<PAGE>

range from the issuance of a capital directive or cease and desist order to
removal of officers and/or directors to institution of receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or even $1 million
per day in especially egregious cases. The FDIC has the authority to recommend
to the Director of the OTS that enforcement action to 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 law also
establishes criminal penalties for certain violations.

     Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.

     Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS examination rating system) 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 CAMELS 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, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. 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 capital charge. At December 31, 2001, the Bank met
each of its capital requirements.




                                       28
<PAGE>

The following table presents the Bank's capital position at December 31, 2001.

<TABLE>
<CAPTION>


                                                             Excess                      Capital
                                                                            ---------------------------------
                         Actual           Required        (Deficiency)          Actual           Required
                         Capital           Capital           Amount            Percent            Percent
                    -----------------   -------------   -----------------   --------------    ---------------
                                                     (Dollars in thousands)

<S>                           <C>              <C>                <C>             <C>                 <C>
Tangible............          $44,281          $5,487             $38,794         12.11%              1.50%
Core (Leverage).....           44,281          14,632              29,649         12.11               4.00
Risk-based..........           45,644          11,286              34,358         32.35               8.00
</TABLE>


     Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 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 OTS 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 a savings institution 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 become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
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. The Bank is a member of 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
semi-annually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.

     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 Bank. Management cannot
predict what insurance assessment rates will be in the future.

     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 2001,
FICO payments for SAIF members approximated 1.9 basis points.




                                       29
<PAGE>

     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. 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 Bank's latest CRA rating received from the
OTS was "Satisfactory."

Federal Home Loan Bank System

     The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to 1.0% 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 Federal Home Loan Bank, whichever is greater.

     The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.

Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve ratio is assessed on net transaction accounts up to and including
$41.3 million; a 10% reserve ratio is applied above $41.3 million. The first
$5.7 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The amounts
are adjusted annually. The Bank complies with the foregoing requirements.

Holding Company Regulation

     General. The Company is a federal savings and loan holding company within
the meaning of the HOLA. As such, the Company is registered with the OTS and is
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company



                                       30
<PAGE>

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 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 and (iv) any activity approved by the Federal Reserve
Board for a bank holding company or financial holding company. Recent
legislation, which authorized MHCs to engage in activities permitted financial
holding companies, expanded the authorized activities. Financial holding
companies may engage in a broad array of financial service activities including
insurance and securities.

     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. 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
reasons.




                                       31
<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.

     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 loan loss 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



                                       32
<PAGE>

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.

     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 100% of dividends received from the Bank. The MHC may exclude
from its income 80% of dividends received from the Company as long as it
maintains ownership in the Company of at least 20%. In addition, the MHC waived
dividends from the Company during the year ended December 31, 2001 and 2000.

     Audits. The Bank was last audited by the IRS in 1994. The Bank was not
audited by the New Jersey Department of Revenue ("DOR") in the past five years.

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 (7.5% is the rate if taxable
income is less than $100,000).



                                       33
<PAGE>

Item 2.  Description of 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.


                                        Original    Net Book Value
                                          Year      of Property or
                             Leased      Leased        Leasehold
                               or          or       Improvements at
Location                      Owned     Acquired    December 31, 2001
---------                   ----------  ----------  ----------------
                                                    (In thousands)
Administrative/Corporate/
Branch Office:
417 Bloomfield Avenue         Owned       1962           $346
Caldwell, NJ 07006
Branch Offices:
216 Main Street               Owned       1987            140
West Orange, NJ 07052
487 Pleasant Valley Way       Owned       1987            174
West Orange, NJ 07052
574 Franklin Avenue          Leased       1978              0
Franklin Lakes, NJ 07417
653 Westwood Avenue           Owned       1997            454
River Vale, NJ 07675
267 Changebridge Road         Owned       1974            223
Pine Brook, NJ 07058
207 Old Tappan Road           Owned       1997            463
Old Tappan, NJ 07675
119 Paris Avenue              Owned       1997            301
Northvale, NJ 07647


Item 3.   Legal Proceedings.
----------------------------

     Neither the Company nor the Bank is involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, including a recent lawsuit filed by a former employee
related to a claim filed by that employee under the Workers' Compensation Law of
the State of New Jersey. Such routine legal proceedings in the aggregate, are
believed by management to be immaterial to the financial condition and results
of operations of the Company.

Item 4.   Submission of Matters to a Vote of Security Holders.
--------------------------------------------------------------

         None.








                                       34
<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.
------------------------------------------------------------------

     Information regarding the market for the Company's common equity and
related stockholder matters appears on the inside front cover of the 2001 Annual
Report under the caption "Investor and Corporate Information" and is
incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation.
-------------------------------------------------------------------

     Information regarding management's discussion and analysis of financial
condition and results of operations appears in the 2001 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 7.  Financial Statements.
------------------------------

     Information regarding the financial statements and the Independent
Auditors' Report appears in the 2001 Annual Report and is incorporated herein by
this reference.

Item 8. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
     Financial Disclosure.
     ---------------------

         None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
--------------------------------------------------------------------------------
     With Section 16(a) of the Exchange Act.
     ---------------------------------------

     The information relating to Directors and Executive Officers of the
Registrant and compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference to the Registrant's Proxy Statement for the 2002 Annual
Meeting of Stockholders, sections entitled "Proposal 1- Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."

Item 10.  Executive Compensation.
---------------------------------

     The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the 2002 Annual Meeting of Stockholders, sections entitled
"Proposal 1 - Election of Directors - Directors' Compensation" and "Executive
Compensation."

Item 11.  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 2002 Annual Meeting of Stockholders, section entitled "Stock
Ownership."

Item 12.  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
2002 Annual Meeting of Stockholders, section entitled "Transactions with
Management."



                                       35
<PAGE>

Item 13.  Exhibits, List and Reports on Form 8-K.
-------------------------------------------------

(a)

(1)  The following are filed as a part of this report by means of incorporation
     to the Company's 2001 Annual Report to Stockholders:

                    o    Independent Auditors Report

                    o    Consolidated Statements of Financial Condition as of
                         December 31, 2001 and December 31, 2000

                    o    Consolidated Statements of Income for the Years Ended
                         December 31, 2001 and December 31, 2000

                    o    Consolidated Statements of Comprehensive Income for the
                         Years Ended December 31, 2001 and 2000

                    o    Consolidated Statements of Changes in Stockholders'
                         Equity for the Years Ended December 31, 2001 and
                         December 31, 2000

                    o    Consolidated Statements of Cash Flows for the Years
                         Ended December 31, 2001 and December 31, 2000

                    o    Notes to Consolidated Financial Statements

(2)  All financial statement 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)  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 Agreement between West Essex Bank and Charles
     E. Filippo**

10.9 Three Year Change in Control Agreement between 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*




                                       36
<PAGE>


10.18 West Essex Bancorp, Inc. 1999 Stock Based Incentive Plan, as amended and
     restated***

11.0 Computation of Earnings Per Share

13.0 Portions of the 2001 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

(b)  Reports on Form 8-K

         None.
__________________________________

*    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.

**   Incorporated herein by reference into this document from the Exhibits to
     the Form 10-K, filed on March 31, 1999.

***Incorporated herein by reference into this document from the definitive Proxy
     Statement dated March 27, 2000.



                                       37
<PAGE>

                                   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
                              Chairman of the Board,
                              President and Chief Executive Officer

                              Date:    March 27, 2002

     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. Montanar     Chairman of the Board             March 27, 2002
---------------------------
Leopold W. Montanaro           President and Chief Executive
                               Officer
                               (principal executive officer)


/s/     Dennis A. Petrello     Senior Executive Vice President   March 27, 2002
---------------------------
Dennis A. Petrello             and Chief Financial Officer
                               (principal accounting and
                               financial officer)


/s/ William J. Foody           Director                          March 28, 2002
---------------------------
William J. Foody



/s/    David F. Brandley       Director                          March 27, 2002
---------------------------
David F. Brandley



/s/     Everett N. Leonard     Director                          March 27, 2002
---------------------------
Everett N. Leonard



/s/     John J. Burke          Director                          March 27, 2002
---------------------------
John J. Burke



                                       38