<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-29770
WEST ESSEX BANCORP, INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 22-3597632
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
417 Bloomfield Avenue, Caldwell, New Jersey 07006
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 226-7911
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 1,847,112 shares of common
stock, par value $0.01 per share, were outstanding as of November 13, 1998.
<PAGE>
West Essex Bancorp, Inc.
Form 10-Q
For the Quarter Ended September 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Statements of Condition at
September 30, 1998 and December 31, 1997 (unaudited)...............1
Consolidated Statements of Income - For the Three and Nine
Months Ended September 30, 1998 and 1997 (unaudited)...............2
Consolidated Statements of Comprehensive Income - For the Three and
Nine Months Ended September 30, 1998 and 1997 (unaudited)..........3
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 1998 and 1997 (unaudited)..........4
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........20
PART II: OTHER INFORMATION.................................................20
Item 1. Legal Proceedings.................................................20
Item 2. Changes in Securities and Use of Proceeds.........................20
Item 3. Defaults Upon Senior Securities...................................20
Item 4. Submission of Matters to a Vote of Security Holders...............20
Item 5. Other Information.................................................20
Item 6. Exhibits and Reports on Form 8-K..................................21
SIGNATURES...................................................................
<PAGE>
PART I. FINANCIAL INFORMATION
WEST ESSEX BANCORP, INC.
SEPTEMBER 30, 1998
ITEM 1. FINANCIAL STATEMENTS OF WEST ESSEX BANK AND SUBSIDIARY.
------------------------------------------------------
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. On October 2, 1998, West Essex Bank (the
"Bank") was acquired by West Essex Bancorp, Inc. See Note 3 hereof. The Bank
believes that the disclosures presented as of September 30, 1998 are adequate to
assure that the information presented is not misleading in any material respect.
The results of operations for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results to be expected
for the entire fiscal year.
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
Assets
- - ------
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,832,548 $ 1,502,747
Interest-bearing deposits in other banks 6,863,570 18,404,550
------------ ------------
Total cash and cash equivalents 8,696,118 19,907,297
Term deposits -- 3,000,000
Securities available for sale 7,080,550 8,492,500
Investment securities held to maturity 22,928,866 37,058,776
Mortgage-backed securities held to maturity 130,174,291 119,179,896
Loans receivable 112,734,741 138,170,673
Real estate owned 1,214,840 672,138
Premises and equipment 3,122,584 2,976,469
Federal Home Loan Bank of New York stock 2,183,800 2,607,300
Accrued interest receivable 2,012,197 2,344,431
Excess of cost over assets acquired 5,828,884 5,384,308
Other assets 3,047,961 3,415,466
------------ ------------
Total assets $299,024,832 $343,209,254
============ ============
Liabilities and retained earnings
- - ---------------------------------
Liabilities
- - -----------
Deposits $238,192,141 $239,056,757
Borrowed money 30,300,000 51,527,871
Stock subscriptions payable -- 19,777,780
Advance payments by borrowers for taxes and insurance 772,429 836,704
Other liabilities 485,553 994,260
------------ ------------
Total liabilities 269,750,123 312,193,372
------------ ------------
Retained earnings
- - -----------------
Retained earnings - substantially restricted 29,210,175 30,689,443
Accumulated other comprehensive income - unrealized
gain on securities available for sale, net of taxes 64,534 326,439
------------ ------------
Total retained earnings 29,274,709 31,015,882
------------ ------------
Total liabilities and retained earnings $299,024,832 $343,209,254
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,100,371 $ 2,604,508 $ 5,656,785 $ 7,346,589
Mortgage-backed securities 1,949,623 1,952,138 5,854,165 6,125,308
Investment securities 436,788 733,525 1,394,809 1,968,152
Other interest-earning assets 59,694 169,307 251,030 477,116
------------ ------------ ------------ ------------
Total interest income 4,546,476 5,459,478 13,156,789 15,917,165
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,990,489 2,489,732 5,706,207 7,356,809
Borrowed money 474,255 725,883 1,169,858 1,846,143
------------ ------------ ------------ ------------
Total interest expense 2,464,744 3,215,615 6,876,065 9,202,952
------------ ------------ ------------ ------------
Net interest income 2,081,732 2,243,863 6,280,724 6,714,213
Provision for loan losses 248,000 (18,580) 490,000 (40,630)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,833,732 2,262,443 5,790,724 6,754,843
------------ ------------ ------------ ------------
Non-interest income:
Fees and service charges 54,364 95,576 185,031 273,545
(Loss) on sale of securities available for sale (20,245) -- (20,245) --
Other 24,746 37,943 103,292 120,601
------------ ------------ ------------ ------------
Total non-interest income 58,865 133,519 268,078 394,146
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits 686,810 743,405 2,031,649 2,260,107
Net occupancy expense of premises 58,263 80,619 186,448 246,694
Equipment 120,508 164,036 348,728 492,014
(Income) loss on real estate owned (59,148) 17,314 285,760 46,982
Amortization of intangible -- 148,192 -- 444,576
Other 380,588 478,248 1,035,370 1,384,260
------------ ------------ ------------ ------------
Total non-interest expenses 1,187,021 1,631,814 3,887,955 4,874,633
------------ ------------ ------------ ------------
Income before income taxes 705,576 764,148 2,170,847 2,274,356
Income taxes 261,787 277,663 781,289 795,088
------------ ------------ ------------ ------------
Net income $ 443,789 $ 486,485 $ 1,389,558 $ 1,479,268
============ ============ ============ ============
Net income per common share - basic/diluted (1) N/A N/A N/A N/A
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic/diluted (1) N/A N/A N/A N/A
============ ============ ============ ============
</TABLE>
(1) West Essex Bank converted to stock form on October 2, 1998.
See notes to consolidated financial statements.
2
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WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------- -----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 443,789 $ 486,485 $ 1,389,558 $ 1,479,268
----------- ----------- ----------- -----------
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) on
securities available for sale, net of income
taxes of $ - , $126,933, $ - , and $147,195 59,145 225,852 64,018 261,905
Reclassification adjustment for realized
losses on equity securities available for sale
(no income tax effect) (20,245) -- (20,245) --
----------- ----------- ----------- -----------
Other comprehensive income 38,900 225,852 43,773 261,905
----------- ----------- ----------- -----------
Comprehensive income $ 482,689 $ 712,337 $ 1,433,331 $ 1,741,173
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,389,558 $ 1,479,268
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment 158,463 214,299
Net accretion of premiums, discounts and deferred loan fees (79,691) (199,657)
Amortization of intangibles -- 444,576
Provision for loan losses 490,000 (40,630)
Provision for losses on real estate owned 270,000 40,630
Loss on sale of securities available for sale 20,245 --
(Gain) on sale of real estate owned (19,714) (5,386)
(Increase) in accrued interest receivable (316,824) (332,234)
(Increase) in other assets (133,672) (514,700)
Increase in interest payable on deposits 9,708 300
(Decrease) increase in other liabilities (2,613,154) 508,707
------------ ------------
Net cash (used in) provided by operating activities (825,081) 1,595,173
------------ ------------
Cash flows from investing activities:
Net increase in term deposits -- (3,000,000)
Proceeds from sales of securities available for sale 1,588,229 --
Proceeds from repayments on and calls of securities available for sale 115,272 --
Purchases of securities available for sale (7,033,784) (1,000,000)
Proceeds from maturities and calls of investment securities held to maturity 7,000,000 4,063,990
Purchases of investment securities held to maturity (4,399,678) (18,051,902)
Principal repayments on mortgage-backed securities held to maturity 14,935,777 28,119,475
Purchases of mortgage-backed securities held to maturity (15,831,542) (17,137,719)
Purchase of loans receivable -- (61,000)
Net (increase) in loans receivable (27,717,354) (25,266,854)
Proceeds from sales of real estate owned 300,003 503,458
Proceeds from other payments received on real estate owned 35,902 4,000
Capitalized cost of real estate owned (6,665) --
Additions to premises and equipment (184,028) (68,184)
Purchase of Federal Home Loan Bank of New York stock (513,400) (423,500)
------------ ------------
Net cash (used in) investing activities (31,711,268) (32,318,236)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 7,426,662 864,316
Net change in short-term borrowings 22,375,000 (10,600,000)
Proceeds of long-term borrowed money -- 36,800,000
Repayment of long-term borrowed money (2,350,000) (4,972,129)
Net increase in advance payments by borrowers for taxes and insurance 124,810 64,275
Proceeds from common stock subscriptions -- 19,777,780
------------ ------------
Net cash provided by financing activities 27,576,472 41,934,242
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,959,877) 11,211,179
Cash and cash equivalents - beginning 7,754,262 8,696,118
------------ ------------
Cash and cash equivalents - ending $ 2,794,385 $ 19,907,297
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1997 1998
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 785,078 $ 660,480
Interest 6,751,845 9,128,751
Supplemental schedule of noncash investing activities:
Unrealized gain on securities available for sale,
net of deferred income taxes 43,773 261,905
Loans receivable transferred to real estate owned 679,914 --
See notes to consolidated financial statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS, CONTINUED
-------------------------------
WEST ESSEX BANCORP, INC.
Notes to Consolidated Financial Statements
1. PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of West
Essex Bank (the "Bank") and its wholly owned subsidiary, West Essex Insurance
Agency, Inc. The Bank's business is conducted principally through the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and regulations S-X and
do not include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial statements have been included.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results which may be expected for the
entire fiscal year.
3. REORGANIZATION TO MUTUAL HOLDING COMPANY FORM OF ORGANIZATION
-------------------------------------------------------------
The Company is a business corporation formed at the direction of the
Bank under the laws of the United States on October 2, 1998. On October 2, 1998:
(i) the Bank reorganized from a federally chartered mutual savings bank to a
federally chartered stock savings bank in the mutual holding company form of
organization; (ii) the Bank issued all of its outstanding capital stock to the
Company; and (iii) the Company consummated its initial public offering of common
stock, par value $.01 per share (the "Common Stock"), by selling at a price of
$10.00 per share, 1,772,898 shares of Common Stock to certain eligible
accountholders of the Bank who had subscribed for such shares and by issuing
2,350,121 shares of Common Stock to West Essex Bancorp, M.H.C., a mutual holding
company formed at the direction of the Bank (collectively, the "Reorganization
and Offering") and by contributing 74,214 shares of Common Stock to West Essex
Bancorp Charitable Foundation (the "Foundation"). The Reorganization and
Offering resulted in net proceeds of $16.7 million, after expenses of $1.0
million. Net proceeds of $8.4 million were invested in the Bank to increase the
Bank's tangible capital to 10.0% of the Bank's total adjusted assets. The
Company also established the Foundation, dedicated to the communities served by
the Bank. In connection with the Reorganization and Offering, the Common Stock
contributed by the Company to the Foundation at a value of $742,140 was charged
to expense.
6
<PAGE>
In addition to the 9,000,000 authorized shares of Common Stock, the
Company authorized 1,000,000 shares of preferred stock with a par value of $0.01
per share (the "Preferred Stock"). The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares of
Preferred Stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restriction thereof. As of September 30, 1998,
there were no shares of Preferred Stock issued.
4. NET INCOME PER COMMON SHARE
---------------------------
Basic net income per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding, adjusted
for the unallocated portion of shares held by the ESOP in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 93-6. Diluted net income per share is calculated by adjusting the
weighted average number of shares of common stock outstanding to include the
effect of stock options, if dilutive, using the treasury stock method.
Net income per common share data for the three and nine months ended
September 30, 1998 is inapplicable as the Bank did not complete its
reorganization until October 2, 1998.
7
<PAGE>
PART I: FINANCIAL INFORMATION
WEST ESSEX BANCORP, INC.
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995, and is
including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission (the "SEC").
The Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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. The Company, the Bank and West Essex
Bancorp, M.H.C., a mutual holding company and majority owner of the Company are
regulated by the Office of Thrift Supervision (the "OTS"). The
8
<PAGE>
Bank's results of operations, which are the only operations discussed herein
since the Bank's reorganization was not completed until October 2, 1998, are
dependent primarily on net interest income, which is the difference between the
income earned on interest-earning assets, primarily its loan and investment
portfolios, and its cost of funds, consisting of interest paid on deposits and
borrowings. Results of operations are also affected by the Bank's provision for
loan losses and non-interest expense. The Bank's non-interest expense
principally consists of salaries and employee benefits, office occupancy and
equipment expense, amortization of intangibles, advertising, federal deposit
insurance premiums, expenses of real estate owned and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Management Strategy
The Bank's current strategic plan is to maintain profitability and its
well-capitalized position to take advantage of future expansion or growth
opportunities, while managing growth, maintaining asset quality, controlling
expenses and reducing exposure to credit and interest rate risk. Management
seeks to accomplish these goals by: (1) emphasizing its retail banking services
through its network of branch offices, which includes the origination of one- to
four-family mortgage loans, as well as commercial real estate, home equity,
multi-family, construction and development and consumer loans, in the
communities it serves as market conditions permit; (2) enhancing earnings and
offsetting the effects of the extreme competition for real estate loans in the
Bank's market area primarily through the purchase of adjustable-rate
mortgage-backed securities, which provide a source of liquidity, low credit risk
and low administrative cost as well as helping to manage interest rate risk; and
(3) continuing to monitor interest rate risk. Management has aggressively sought
to increase loan originations in recent years and was successful in increasing
loans receivable, net, from $82.1 million at December 31, 1996 to $112.7 million
and $138.2 million at December 31, 1997 and September 30, 1998, respectively.
Management was successful in increasing its loan originations primarily by
increasing the amount of advertising the Bank does in its primary market area,
paying fees to mortgage brokers who send loan applicants to the Bank to whom the
Bank originates loans and providing cash incentives to its mortgage origination
staff to increase loan originations. Competition, however, has remained intense
in the Bank's market area, which has resulted in the Bank's total securities
portfolio representing a greater percentage of total assets than its loan
portfolio in each of the last five years. Management believes that continuing to
seek lending opportunities, as well as investing in mortgage-backed securities,
the majority of which are adjustable-rate, enables the Bank to effectively
control its interest rate risk while at the same time enabling it to maintain a
balance of high quality, diversified investments, provide collateral for short
and long-term borrowings and lessen exposure to credit risk.
Management of Interest Rate Risk and Market Risk Analysis
The principal objectives of the Bank's interest rate risk management is
to evaluate the interest rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives; and manage the risk consistent with the Board of Directors' approved
guidelines.
9
<PAGE>
Through such management, the Bank seeks to reduce the vulnerability of its
operations to changes in interest rates. The Board of Directors has established
an Asset/Liability Committee, which is responsible for reviewing asset/liability
policies and interest rate risk position. The Asset/Liability Committee meets at
least on a quarterly basis, reports trends and interest rate risk position to
the Board of Directors and reviews with the Board its activities and strategies,
the effect of those strategies on the Bank's net interest margin, the market
value of the portfolio, and the effect the changes in interest rates will have
on the Bank's portfolio and exposure limits. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Bank.
In recent years the Bank has used the following strategies to manage
interest rate risk: (i) emphasizing the origination of long-term mortgage loans,
and (ii) offsetting the effects of holding fixed-rate mortgage loans by
purchasing adjustable-rate mortgage-backed securities.
The Bank continues to seek opportunities to originate for its portfolio
one- to four-family residential mortgage loans, as well as other loans, in its
primary market area of Essex, Morris and Bergen Counties, New Jersey. The Bank's
total loan portfolio had decreased as a percent of the Bank's total assets from
1993 through 1996 when loan originations, primarily due to intense competition
in the Bank's market area for loan originations, began to decrease. Further, due
to the relatively low interest rate environment that has existed in recent
years, the Bank has originated primarily fixed-rate one- to four-family mortgage
loans. The Bank's purchase of adjustable-rate mortgage-backed securities, as
well as various debt obligations of federal, state and local governments, has
enabled the Bank to effectively manage its interest rate risk. At September 30,
1998, the Bank had $119.2 million or 34.7% of total assets in mortgage-backed
securities classified as held-to-maturity, and $45.6 million or 13.3% of total
assets in investment securities, of which $8.5 million or 2.5% of total assets
were classified as available-for-sale. At the same date, the Bank's total loans
receivable, net, totalled $138.2 million or 40.3% of total assets.
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Total assets were $343.2 million at September 30, 1998, compared to
$299.0 million at December 31, 1997, an increase of $44.2 million, or 14.8%. The
increase in assets was funded primarily by an increase in FHLB borrowings of
$21.2 million and $19.8 million in common stock subscriptions received in
contemplation of the Company's initial public stock offering.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, increased $11.2 million to $19.9 million at September 30, 1998 from $8.7
million at December 31, 1997. Additionally, the Bank invested in term deposits
with the FHLB totalling $3.0 million. These term deposits have initial periods
to maturity of between three and seven months. The overall increase of $14.2
million in cash and cash equivalents and term deposits was funded primarily by
the $19.8 million in common stock subscriptions referred to above.
10
<PAGE>
In the aggregate, mortgage-backed securities and investment securities,
including available-for-sale and held-to-maturity issues, totalled $164.7
million at September 30, 1998, an increase of $4.5 million from $160.2 million
at December 31, 1997. Such increase was funded by portfolio income.
Mortgage-backed securities, all of which are held-to-maturity, decreased $11.0
million due to repayments. Investment securities held-to-maturity increased
$14.1 million, primarily due to security purchases and investment securities
available-for-sale increased $1.4 million, due to a security purchase and an
increase in unrealized gains. At September 30, 1998, 77.7% of the Bank's
investment securities, including available-for-sale and held-to-maturity,
consisted of U.S. Government and Agency obligations, while virtually all of the
mortgage-backed securities portfolio consisted of Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC") and Ginnie Mae ("GNMA") issues.
Loans receivable increased $25.4 million to $138.2 million at September
30, 1998 from $112.7 million at December 31, 1997. The increase was primarily in
the one- to four-family mortgage loan category. The increased loan portfolio was
funded by the $21.2 million increase in borrowed money and income earned on the
loan portfolio.
Deposits totaled $239.1 million at September 30, 1998, an increase of
$865,000, or 0.4%, over the $238.2 million balance at December 31, 1997.
Borrowed money increased $21.2 million to $51.5 million at September
30, 1998, as compared to $30.3 million at December 31, 1997. Based on the lower
cost of wholesale funds as compared to comparable maturity retail deposits,
management chose to fund the loan growth discussed above with additional FHLB
borrowings. During the nine months ended September 30, 1998, short-term
borrowings totalling $10.6 million were repaid, while $36.8 million in
borrowings with one to ten year maturities were incurred.
Retained earnings increased $1.7 million, or 5.9%, to $31.0 million,
primarily due to the retention of net income.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
1997
Net Income. Net income increased $90,000 or 6.5% to $1.5 million for
the nine months ended September 30, 1998 compared with $1.4 million for the same
1997 period. The increase in net income during the 1998 period resulted from
increases in total interest income and non-interest income and a decrease in the
provision for loan losses, which were partially offset by increases in total
interest expenses, non-interest expenses and income taxes.
Interest Income. Total interest income increased $2.76 million or 21.0%
to $15.92 million for the nine months ended September 30, 1998 from $13.16
million for the same 1997 period. The increase was the result of a 26.7%
increase in average interest-earning assets between the periods, which more than
offset a 34 basis point decline in yield. The increase in the average balance
was the result of increased loan originations and securities purchased funded by
cash received in connection with the three branches and related deposits
purchased from Summit Bank ("Summit")
11
<PAGE>
in October, 1997 and increased borrowings. The decrease in yield was the result
of lower rates obtained on loans originated and mortgage-backed securities
purchased since September 30, 1997.
Interest income on loans increased by $1.69 million or 29.9% to $7.35
million during the nine months ended September 30, 1998 when compared with $5.66
million for the same 1997 period. The increase during the 1998 period resulted
from an increase of $33.4 million or 36.3% in the average balance of loans
outstanding, which was sufficient to offset a 39 basis point decrease in the
yield earned on the loan portfolio. The increased average balance was the result
of increased lending volume. The decreased yield is the result of lower rates
obtained on originations as well as downward interest rate adjustments on the
Bank's adjustable-rate mortgage loans.
Interest on mortgage-backed securities, all of which are held-to-
maturity, increased $271,000 or 4.6% to $6.13 million during the nine months
ended September 30, 1998 when compared with $5.85 million for the same 1997
period. The increase during the 1998 period resulted from an $11.0 million or
9.8% increase in the average balance of mortgage-backed securities, which was
more than sufficient to offset a 33 basis point decline in yield. The increased
average balance is the result of purchases of mortgage-backed securities
exceeding repayments. The decrease in yield is the result of lower interest
rates obtained on securities purchased since September 30, 1997, many of which
were adjustable rate issues with customarily low initial interest rates.
Interest earned on investment securities, including both available-for-
sale and held-to-maturity issues, increased by $573,000 or 41.1% to $1.97
million during the nine months ended September 30, 1998, when compared to $1.39
million during the same 1997 period, primarily due to an increase of $12.1
million in the average balance of such assets, which was more than sufficient to
offset a 26 basis point decrease in the yield earned. The increase in average
balance was the result of purchases exceeding maturities, while the decrease in
yield reflected lower rates obtained on securities purchased.
Interest on other interest-earning assets increased $226,000 or 90.0%
to $477,000 during the nine months ended September 30, 1998 as compared to
$251,000 for the same 1997 period. The increase was primarily due to a $6.5
million or 105.8% increase in the average balance of such assets, which more
than offset a decline of 41 basis points in yield.
Interest Expense. Interest expense on deposits increased $1.65 million
or 28.9% to $7.36 million during the nine months ended September 30, 1998 when
compared to $5.71 million during the same 1997 period. Such increase was
primarily attributable to an increase of $52.3 million in the average balance of
interest-bearing deposits which more than offset a two basis point decrease in
the cost of interest-bearing deposits. The increased average balance is the
result of the purchase of $51.0 million in deposits from Summit in October 1997.
Interest expense on borrowed money increased by $677,000 or 57.9% to
$1.85 million during the nine months ended September 30, 1998 when compared with
$1.17 million during the same 1997 period, primarily due to an increase of $15.7
million in the average balance of borrowings outstanding from the FHLB, which
was sufficient to offset a 4 basis point decrease in the cost of
12
<PAGE>
borrowed money. During 1998, the Bank has, due to the lower level of funding
rates available, chosen to increase its reliance on borrowed money with
maturities in the one to ten year range. As such, short-term borrowings have
been reduced by $10.6 million and one to ten year borrowings have been increased
by $31.8 million.
Net Interest Income. Net interest income increased $433,000 or 6.9%
during the nine months ended September 30, 1998 when compared with the same 1997
period. Such increase was due to an increase in total interest income of $2.76
million, which was sufficient to offset an increase in total interest expense of
$2.33 million. The Bank's net interest rate spread decreased to 2.57% in 1998
from 3.13% in 1997. The decrease in the interest rate spread resulted from a
decrease of 34 basis points in the yield earned on interest-earning assets along
with a 22 basis point increase in the cost of interest-bearing liabilities.
Despite the decline in interest rate spread, the Bank improved net interest
income due to the additional income generated by the $63.1 million increase in
average interest-earning assets, which more than offset the additional cost
incurred by the $58.0 million increase in average interest-bearing liabilities.
Provision for Loan Losses. During the nine months ended September 30,
1998, the Bank recorded a recapture of the provision for loan losses of $40,000.
The recapture was the result of the adjustment of the balance of the allowance
for loan losses, based upon management's quarterly analysis, to $1.844 million
at September 30, 1998 from $1.885 million at December 31, 1997. There were no
loan charge-offs or recoveries during the nine months ended September 30, 1998.
During the nine months ended September 30, 1997, the Bank provided $490,000 as a
provision for loan losses and recorded $166,000 in loan charge-offs. The
allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio and gives due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. At
September 30, 1998 and 1997, loans delinquent ninety days or more totalled $2.0
million and $2.4 million, respectively, representing 1.42% and 2.16%,
respectively, of total loans. At September 30, 1998, the allowance for loan
losses stood at $1.844 million, representing 1.31% of total loans and 91.7% of
loans delinquent ninety days or more. At December 31, 1997, the allowance for
loan losses stood at $1.885 million, representing 1.62% of total loans and 75.2%
of loans delinquent ninety days or more. At September 30, 1997, the allowance
for loan losses stood at $1.888 million, representing 1.68% of total loans and
77.5% of loans delinquent ninety days or more. The Bank monitors its loan
portfolio on a continuing basis and intends to continue to provide for loan
losses based on its ongoing review of the loan portfolio and general market
conditions.
The Bank has established a standardized process to assess the adequacy
of the allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and non-performing loan portfolios, and other risks inherent in the loan
portfolio.
13
<PAGE>
Specific allocations of the allowance for loan losses are identified by
individual loans 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.
Non-Interest Income. Non-interest income increased $126,000 or 47.0% to
$394,000 during the nine months ended September 30, 1998 from $268,000 during
the same 1997 period. The increase resulted primarily from increased fees and
service charges and the inclusion of a $20,000 loss on the sale of an available
for sale security in the 1997 period.
Non-Interest Expenses. Non-interest expenses increased by $987,000 or
25.4% to $4.87 million during the nine months ended September 30, 1998 when
compared with $3.89 million during the same 1997 period. Salaries and employee
benefits, net occupancy expense, equipment, and other expense increased in the
aggregate by $781,000, or 21.7%, to $4.38 million during the nine months ended
September 30, 1998 from $3.60 million during the same prior year period due
primarily to the purchase of three branches from Summit. Such purchase in
October 1997 increased the Bank's number of office locations from 5 to 8 and
resulted in increases in the aforementioned expenses. Included in other
expenses, among other things, are legal fees, accounting and auditing fees,
director fees, advertising expenses, FHLB demand deposit charges, insurance
costs, telephone expenses and stationery and supplies expenses. Loss on real
estate owned ("REO") decreased $239,000 to $47,000 during the nine months ended
September 30, 1998 from $286,000 during the same prior year period due primarily
to a $229,000 reduction in loss provisions recorded during the two periods.
During the nine month period ended September 30, 1998, amortization expense of
$445,000 was recorded in connection with the acquisition of deposits from Summit
in October 1997. No comparable expense was recorded during the same 1997 period.
Income Taxes. Income tax expense totalled $795,000, or 35.0% of income
before income taxes, during the nine months ended September 30, 1998 as compared
to $781,000, or 36.0% of income before income taxes, during the comparable 1997
period.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997
Net Income. Net income increased $42,000 or 9.6% to $486,000 for the
three months ended September 30, 1998 compared with $444,000 for the same 1997
period. The increase in net income during the 1998 period resulted from
increases in total interest income and non-interest income and a decrease in the
provisions for loan losses, which were partially offset by increases in total
interest expense, non-interest expense and income taxes.
14
<PAGE>
Interest Income. Total interest income increased $913,000 or 20.1% to
$5.46 million for the three months ended September 30, 1998 from $4.55 million
for the same 1997 period. The increase was the result of a 27.8% increase in
average interest-earning assets between the periods, which more than offset a 45
basis point decline in yield. The increase in the average balance was the result
of increased loan originations and securities purchased funded by cash received
in connection with the deposits purchased from Summit in October 1997 and from
increases in borrowed money. The decrease in yield was the result of lower rates
obtained on loans originated and securities purchased since September 30, 1997.
Interest income on loans increased by $504,000 or 24.0% to $2.60
million during the three months ended September 30, 1998 when compared with
$2.10 million for the same 1997 period. The increase during the 1998 period
resulted from an increase of $32.7 million or 31.4% in the average balance of
loans outstanding, which was sufficient to offset a 45 basis point decrease in
the yield earned on the loan portfolio. The increased average balance was the
result of increased lending volume. The decreased yield is the result of lower
rates obtained on originations as well as downward interest rate adjustments on
the Bank's adjustable-rate mortgage loans.
Interest on mortgage-backed securities, all of which are
held-to-maturity, increased $3,000 or 0.2% to $1.952 million during the three
months ended September 30, 1998 when compared with $1.949 million for the same
1997 period. The increase during the 1998 period resulted from an $8.3 million
or 7.3% increase in the average balance of mortgage-backed securities, which was
more than sufficient to offset a 46 basis point decline in yield. The increased
average balance is the result of purchases of mortgage-backed securities
exceeding repayments. The decrease in yield is the result of lower interest
rates obtained on securities purchased since September 30, 1997, many of which
were adjustable rate issues with customarily low initial interest rates.
Interest earned on investment securities, including both
available-for-sale and held-to-maturity issues, increased by $297,000 or 68.0%
to $734,000 during the three months ended September 30, 1998, when compared to
$437,000 during the same 1997 period, primarily due to an increase of $18.0
million in the average balance of such assets, which more than offset a 13 basis
point decrease in the yield earned. The increase in average balance was the
result of purchases exceeding maturities.
Interest on other interest-earning assets increased $109,000 or 181.7%
to $169,000 during the three months ended September 30, 1998 as compared to
$60,000 for the same 1997 period. The increase was primarily due to the average
balance of such assets increasing by $9.7 million or 226.3%.
Interest Expense. Interest expense on deposits increased $499,000 or
25.1% to $2.49 million during the three months ended September 30, 1998 when
compared to $1.99 million during the same 1997 period. Such increase was
primarily attributable to an increase of $54.1 million in the average balance of
interest-bearing deposits, which more than offset a decline of 17 basis points
in the cost of interest-bearing deposits. The increased average balance is the
result of the purchase
15
<PAGE>
of $51.0 million in deposits from Summit in October 1997. The decrease in cost
is due to lower interest rates paid on certificates of deposit.
Interest expense on borrowed money increased by $252,000 or 53.2% to
$726,000 during the three months ended September 30, 1998 when compared with
$474,000 during the same 1997 period, primarily due to an increase of $17.2
million in the average balance of borrowings outstanding from the FHLB, along
with an 8 basis point increase in the cost of borrowed money. The increased
average balance reflects management's decision, based upon interest rate market
conditions, to utilize borrowed funds, largely with one to ten year maturities,
to finance loan originations.
Net Interest Income. Net interest income increased $162,000 or 7.8%
during the three months ended September 30, 1998 when compared with the same
1997 period. Such increase was due to an increase in total interest income of
$913,000, which was sufficient to offset an increase in total interest expense
of $751,000. The Bank's net interest rate spread decreased to 2.42% in 1998 from
2.77% in 1997. The decrease in the interest rate spread resulted from a decrease
of 45 basis points in the yield earned on interest-earning assets, which more
than offset a 10 basis point decrease in the cost of interest-bearing
liabilities. Despite the decline in interest rate spread, the Bank improved net
interest income due to the additional income generated by the $68.6 million
increase in average interest-earning assets, which more than offset the
additional cost incurred by the $71.2 million increase in average
interest-bearing liabilities.
Provision for Loan Losses. During the three months ended September 30,
1998, the Bank recorded a recapture of the provision for loan losses of $19,000.
The recapture was the result of the adjustment of the balance of the allowance
for loan losses, based upon management's quarterly analysis, to $1.844 million
at September 30, 1998 from $1.862 million at June 30, 1998. There were no loan
charge-offs or recoveries during the three months ended September 30, 1998.
During the three months ended September 30, 1997, the Bank provided $248,000 as
a provision for loan losses and recorded no loan charge-offs or recoveries. The
allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio and gives due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. At
September 30, 1998 and 1997, loans delinquent ninety days or more totalled $2.0
million and $2.4 million, respectively, representing 1.42% and 2.16%,
respectively, of total loans. At September 30, 1998, the allowance for loan
losses stood at $1.844 million, representing 1.31% of total loans and 91.7% of
loans delinquent ninety days or more. At December 31, 1997, the allowance for
loan losses stood at $1.885 million, representing 1.62% of total loans and 75.2%
of loans delinquent ninety days or more. At September 30, 1997, the allowance
for loan losses stood at $1.888 million, representing 1.68% of total loans and
77.5% of loans delinquent ninety days or more. The Bank monitors its loan
portfolio on a continuing basis and intends to continue to provide for loan
losses based on its ongoing review of the loan portfolio and general market
conditions.
16
<PAGE>
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 loans 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.
Non-Interest Income. Non-interest income increased $75,000 or 27.1 to
$134,000 during the three months ended September 30, 1998 from $59,000 during
the same 1997 period. The increase resulted from increased fees and service
charges and the inclusion of a $20,000 loss on the sale of an available for sale
security in the 1997 period.
Non-Interest Expenses. Non-interest expenses increased by $445,000 or
37.5% to $1.63 million during the three months ended September 30, 1998 when
compared with $1.19 million during the same 1997 period. Salaries and employee
benefits, net occupancy expense, equipment and other expense increased in the
aggregate by $220,000, or 17.7%, to $1.47 million during the three months ended
September 30, 1998 from $1.25 million during the same prior year period due
primarily to the purchase of three branches from Summit. Such purchase in
October 1997 increased the Bank's number of office locations from 5 to 8 and
resulted in increases in the aforementioned expenses. Included in other
expenses, among other things, are legal fees, accounting and auditing fees,
director fees, advertising expenses, FHLB demand deposit charges, insurance
costs, telephone expenses and stationery and supplies expenses. Loss on REO
increased $76,000 to $17,000 during the three months ended September 30, 1998
from income of $59,000 during the same prior year period due primarily to a
reduction in loss provisions recorded during the two periods. During the three
month period ended September 30, 1998, amortization expense of $148,000 was
recorded in connection with the acquisition of deposits from Summit in October
1997. No comparable expense was recorded during the same 1997 period.
Income Taxes. Income tax expense totalled $278,000, or 36.3% of income
before income taxes, during the three months ended September 30, 1998 as
compared to $262,000, or 37.1% of income before income taxes, during the
comparable 1997 period.
17
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds on a long-term and short-term basis
are deposits, principal and interest payments on loans, mortgage-backed and
investment securities and FHLB borrowings. The Bank uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows, mortgage prepayments
and the exercise of call features are greatly influenced by general interest
rates, economic conditions and competition. The Bank has continued to maintain
the required levels of liquid assets as defined by OTS regulations. This
requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.0%. At September 30, 1998, December 31, 1997 and September 30, 1997,
the Bank's regulatory liquidity ratios were 14.50%, 9.44% and 6.03%,
respectively.
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $25.3 million, or 7.50%, of total
adjusted assets, which is above the required level of $5.1 million, or 1.5%;
core capital of $25.3 million, or 7.50%, of total adjusted assets, which is
above the required level of $13.5 million, or 4.0%; and risk-based capital of
$26.9 million, or 21.62%, of risk-weighted assets, which is above the required
level of $9.9 million, or 8.0%.
The Bank's most liquid assets are cash and cash equivalents and its
investment securities available for sale. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. At September 30, 1998, cash and cash equivalents and
investment securities available for sale totalled $28.4 million, or 8.3% of
total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB borrowings. At September 30, 1998, the Bank had $51.5
million in borrowings outstanding from the FHLB. Depending on market conditions,
the pricing of deposit products and FHLB borrowings, the Bank may continue to
rely on FHLB borrowing to fund asset growth.
At September 30, 1998, the Bank had commitments to originate and
purchase loans and fund unused outstanding lines of credit and undisbursed
proceeds of construction mortgages totaling $14.7 million. The Bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including Individual Retirement
Account ("IRA") accounts, which are scheduled to mature in less than one year
from September 30, 1998, totalled $118.6 million. The Bank expects that
substantially all of the maturing certificate accounts will be retained by the
Bank at maturity.
The initial impact of the Reorganization and the Offering on the
liquidity and capital resources of the Company will be significant as it will
substantially increase the liquid assets of the Company and the capital base on
which the Company operates. Additionally, the Company expects the substantial
majority of the Offering proceeds will initially be invested in readily
marketable investment grade securities which, if liquidity needs developed,
could be sold by the Company to
18
<PAGE>
provide additional liquidity. Further, the additional capital resulting from the
offerings is expected to increase the capital base of the Company. At September
30, 1998, the Bank had total equity, determined in accordance with generally
accepted accounting principles ("GAAP"), of $31.0 million, or 9.04% of total
assets. The Bank's regulatory tangible capital at that date, which excludes
intangible assets of $5.4 million and unrealized securities gains, net of
deferred income taxes, of $326,000, was 7.50%. An institution with a ratio of
tangible capital to total assets of greater than or equal to 5.0% is considered
to be "well-capitalized" pursuant to OTS regulations.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system and represents 1998. The Company has been identifying potential problems
associated with the "Year 2000" issue and has implemented a plan designated to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems in their software by December 31, 1998 and anticipates that all of its
major vendors also will have resolved any Year 2000 problems in their software
by March 31, 1999. All Year 2000 issues for the Bank, including proxy testing,
are expected to be addressed by December 31, 1998 and any problems would be
remedied by March 31, 1999. The Bank is in the process of preparing a
contingency plan which it intends to have completed by December 31, 1998. The
plan will detail what steps the Bank will follow should major system
interruptions such as lack of electrical power, no telecommunications, no
heating system and the like should manifest itself at the turn of the century.
The Bank believes that its costs related to Year 2000 will be approximately
$175,000. To date, the Bank has spent $93,000 of the amount on various hardware
and software upgrades. There can be no assurances, however, that such plan or
the performance by the Bank's vendors will be effective to remedy all potential
problems. To the extent the Company's systems are not fully Year 2000 compliant,
there can be no assurances that potential systems interruptions or the cost
necessary to update software would not have a material adverse effect on the
Company's business, financial condition, results of operations and business
prospects. Further, any Year 2000 failure on the part of the Bank's customers
could result in additional expense or loss to the Bank. The Bank also plans to
work with its customers to address any potential Year 2000 problems. In this
area, the Bank has begun to mail a written survey to its commercial loan
customers to help it determine the extent, if any, that Year 2000 may have on
their business or their ability to make any loan payments. Additionally, as a
related matter, the Bank will carefully consider whether a potential commercial
loan applicant is Year 2000 compliant by requiring the applicant to complete the
survey as part of its underwriting criteria.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
There have been no material changes in information regarding
quantitative and qualitative disclosures about market risk from the information
presented as of March 31, 1998, the Company's Registration Statement on Form
S-1, to September 30, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------------------
The Bank is a party to various litigation which arises primarily in the
ordinary course of business. Included in such litigation is a case before the
Superior Court of New Jersey related to a condominium construction project.
Currently, the plaintiffs have four loans with the Bank totalling $393,469 in
the aggregate; two of which are delinquent. Another plaintiff defaulted on his
loan, and the property has been foreclosed on by the Bank and is currently held
as REO. In the opinion of management, the ultimate disposition of such
litigation should not have a material effect on the consolidated financial
position or operations of the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
None.
ITEM 5. OTHER INFORMATION.
------------------
None.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ((S)249.308 OF THIS CHAPTER).
--------------------------------------------------------------
(a) Exhibits
3.1 Charter of West Essex Bancorp, Inc.*
3.2 Bylaws of West Essex Bancorp, Inc.*
4.0 Stock Certificate of West Essex Bancorp, Inc.*
11.0 Statement regarding Computation of Per Share Earnings (not
applicable. No stock was issued until October 2, 1998)
27.0 Financial Data Schedule (filed via EDGAR only)
- - -------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement and any amendments thereto,Registration
No. 333-56729.
(b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WEST ESSEX BANCORP, INC.
Dated: November 13, 1998 By: /s/ Leopold W. Montanaro
------------------------
Leopold W. Montanaro
President and Chief Executive Officer
(principal executive officer)
Dated: November 13, 1998 By: /s/ Dennis A. Petrello
----------------------
Dennis A. Petrello
Executive Vice President and Chief Financial
Officer
(principal financial and accounting officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE UNAUDITED FINANCIAL
STATEMENTS CONTAINED THEREIN.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 0
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>West Essex Bancorp, Inc. is a recently formed savings and loan holding
company formed for the purpose of acquiring all of the common stock of West
Essex Bank concurrent with its mutual holding company reorganization. At
September 30, 1998, West Essex Bancorp, Inc. was a shell corporation with no
business activities and no assets.
</FN>
</TABLE>
