<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 March 31, 1999
-------------------------------------------------
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 Number)
417 Bloomfield Avenue, Caldwell, New Jersey 07006
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 973-226-7911
--------------------
Indicate by check X 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. (1) Yes X No _____
-----
(2) Yes X No _____
_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
4,197,233 shares of common stock, par value $0.01 par share, were outstanding
as of April 30, 1999.
<PAGE>
WEST ESSEX BANCORP, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Statements of Financial Condition at
March 31, 1999 and December 31, 1998 (Unaudited) 2
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17-18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
WEST ESSEX BANCORP, INC.
PART I. FINANCIAL INFORMATION
March 31, 1999
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
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. West Essex Bancorp, Inc. (the "Registrant"
or the "Company") believes that the disclosures presented are adequate to assure
that the information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
The results of operations for the three month period ended March 31, 1999, are
not necessarily indicative of the results to be expected for the entire fiscal
year.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
- - ------
Cash and amounts due from depository institutions $ 1,551,177 $ 1,547,464
Interest-bearing deposits in other banks 10,878,953 14,823,967
------------- -------------
Total cash and cash equivalents 12,430,130 16,371,431
Securities available for sale 8,174,370 8,282,450
Investment securities held to maturity 46,179,750 36,873,165
Mortgage-backed securities held to maturity 115,752,259 110,376,072
Loans receivable 140,689,838 140,272,203
Real estate owned 774,201 582,138
Premises and equipment 2,886,668 2,947,374
Federal Home Loan Bank of New York stock 2,607,300 2,607,300
Accrued interest receivable 2,078,635 2,004,809
Excess of cost over assets acquired 5,087,924 5,236,116
Other assets 3,208,926 3,055,825
------------- -------------
Total assets $ 339,870,001 $ 328,608,883
============= =============
Liabilities and Stockholders' Equity
- - ------------------------------------
Liabilities
- - -----------
Deposits $ 238,744,088 $ 238,312,941
Borrowed money 51,687,179 42,009,880
Advance payments by borrowers for taxes and insurance 995,977 921,958
Other liabilities 1,110,865 610,050
------------- -------------
Total liabilities 292,538,109 281,854,829
------------- -------------
Stockholders' Equity
- - --------------------
Preferred stock (par value $.01), 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock (par value $.01), 9,000,000 shares
authorized; 4,197,233 shares issued and outstanding 41,972 41,972
Additional paid-in capital 17,325,374 17,339,291
Retained earnings - substantially restricted 31,132,429 30,507,475
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (1,289,393) (1,326,233)
Accumulated other comprehensive income - Unrealized
gain on securities available for sale, net of income taxes 121,510 191,549
------------- -------------
Total stockholders' equity 47,331,892 46,754,054
------------- -------------
Total liabilities and stockholders' equity $ 339,870,001 $ 328,608,883
============= =============
</TABLE>
See notes to consolidated financial statements. 2.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIATED STATEMENTS OF INCOME
-----------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Interest income:
Loans $ 2,811,087 $ 2,298,412
Mortgage-backed securities 1,784,290 2,117,926
Investment securities 771,595 602,150
Other interest-earning assets 192,359 96,925
----------- -----------
Total interest income 5,559,331 5,115,413
----------- -----------
Interest expense:
Deposits 2,171,500 2,433,347
Borrowed money 653,343 436,628
----------- -----------
Total interest expense 2,824,843 2,869,975
----------- -----------
Net interest income 2,734,488 2,245,438
Provision for (recapture of) loan losses - (22,050)
----------- -----------
Net interest income after provision for (recapture of) loan losses 2,734,488 2,267,488
----------- -----------
Non-interest income:
Fees and service charges 93,625 94,162
Other 63,149 45,749
----------- -----------
Total non-interest income 156,774 139,911
----------- -----------
Non-interest expenses:
Salaries and employee benefits 821,745 767,131
Net occupancy expense of premises 102,663 85,578
Equipment 168,544 162,626
Loss on real estate owned 7,756 23,748
Amortization of intangibles 148,192 148,192
Other 467,056 449,424
----------- -----------
Total non-interest expenses $ 1,715,956 1,636,699
----------- -----------
Income before income taxes 1,175,306 770,700
Income taxes 423,727 259,559
----------- -----------
Net income $ 751,579 $ 511,141
=========== ===========
Net income per common share - basic and diluted $ 0.18 N/A (1)
=========== ===========
Weighted average number of common shares
outstanding - basic and diluted 4,066,089 N/A (1)
=========== ===========
</TABLE>
(1) West Essex Bank converted to stock form on October 2, 1998.
See notes to consolidated financial statements. 3.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
Net income $ 751,579 $ 511,141
Other comprehensive income -
Unrealized holding (losses) gains on securities available for sale,
net of income taxes of $39,363 and $(8,569), respectively (70,039) 15,246
---------- ---------
Comprehensive income $ 681,540 $ 526,387
========== =========
</TABLE>
See notes to consolidated financial statements. 4.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 751,579 $ 511,141
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 60,706 74,659
Net accretion of premiums, discounts and deferred loan fees (10,544) (79,971)
Amortization of intangibles 148,192 148,192
Provision for loan losses - (22,050)
Provision for losses on real estate owned - 22,050
(Gain) on sale of real estate owned - (5,386)
(Increase) in accrued interest receivable (73,826) (59,698)
(Increase) in other assets (113,738) (77,541)
Increase (decrease) in interest payable 17,623 (934)
Increase in other liabilities 470,127 19,480
ESOP shares committed to be released 34,831 -
------------ ------------
Net cash provided by operating activities 1,284,950 529,942
------------ ------------
Cash flows from investing activities:
Purchase of term deposits - (5,000,000)
Proceeds from maturities and calls of investment securities held to maturity 10,000,000 -
Purchases of investment securities held to maturity (19,244,969) (5,789,660)
Principal repayments on mortgage-backed securities held to maturity 11,323,919 7,534,184
Purchases of mortgage-backed securities held to maturity (16,740,957) -
Purchase of loans receivable (529,692) (61,000)
Net (increase) in loans receivable (91,549) (1,448,057)
Proceeds from sales of real estate owned - 73,979
Proceeds from other payments received on real estate owned - 4,000
Additions to premises and equipment - (64,778)
Purchase of Federal Home Loan Bank of New York stock - (97,700)
------------ ------------
Net cash (used in) investing activities (15,283,248) (4,849,032)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 444,212 929,279
Proceeds of borrowed money 10,000,000 30,000,000
Repayment of borrowed money (322,701) (18,000,000)
Net increase in advance payments by borrowers for taxes and insurance 74,019 22,748
Cash dividends paid (138,533) -
------------ ------------
Net cash provided by financing activities 10,056,997 12,952,027
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,941,301) 8,632,937
Cash and cash equivalents - beginning 16,371,431 8,696,118
------------ ------------
Cash and cash equivalents - ending $ 12,430,130 $ 17,329,055
============ ============
</TABLE>
See notes to consolidated financial statements. 5.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ - $ 110,480
============ ===========
Interest $ 2,807,220 $ 2,865,550
============ ===========
Supplemental schedule of noncash investing activities:
Unrealized (loss) gain on securities
available or sale, net of income taxes $ (70,039) $ 15,246
============ ===========
Loans receivable transferred to real estate owned $ 192,063 $ -
============ ===========
</TABLE>
See notes to consolidated financial statements. 6.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
- - -------------------------------
The consolidated financial statements include the accounts of West Essex
Bancorp, Inc. (the "Company"), the Company's wholly owned subsidiary, West Essex
Bank (the "Bank") and the Bank's wholly owned subsidiary, West Essex Insurance
Agency, Inc. The Company'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 months ended March 31, 1999 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.
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 March 31, 1999, there were no shares of Preferred
Stock issued.
7.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 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. As of and for the quarter ended March
31, 1999, there were no potentially dilutive securities.
8.
<PAGE>
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 21F of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). West Essex Bancorp, Inc. (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 its 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 results 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
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 Company's and the Bank's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on interest-earning assets, primarily the loan and investment
portfolios, and the cost of funds, consisting of interest paid on deposits and
borrowings. Results of operations are also affected by the provision for loan
losses and non-interest expense. 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.
9.
<PAGE>
MANAGEMENT STRATEGY
The Company'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, $140.3 million and $140.7 million at December 31, 1997, December 31,
1998 and March 31, 1999, 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 Company'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 Company 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 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 Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives; and
manage the risk consistent with the Board of Directors' approved guidelines.
Through such management, the Company 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 net interest margin, the market value of the
portfolio, and the effect the changes in interest rates will have on the
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 Company.
In recent years the Company 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.
10.
<PAGE>
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 total
loan portfolio had decreased as a percent of the 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
purchase of adjustable-rate mortgage-backed securities, as well as various debt
obligations of federal, state and local governments, has enabled the Company to
effectively manage its interest rate risk. At March 31, 1999, the Company had
$115.8 million or 34.1% of total assets in mortgage-backed securities classified
as held-to-maturity, and $54.4 million or 16.0% of total assets in investment
securities, of which $8.2 million or 2.4% of total assets were classified as
available-for-sale. At the same date, loans receivable, net, totalled $140.7
million or 41.4% of total assets.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets were $339.9 million at March 31, 1999, compared to $328.6
million at December 31, 1998, an increase of $11.3 million, or 3.4%. The
increase in assets was funded primarily by an increase in Federal Home Loan Bank
of New York ("FHLB") borrowings of $9.7 million.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, decreased $4.0 million to $12.4 million at March 31, 1999 from $16.4
million at December 31, 1998. The decrease in cash and cash equivalents was used
to fund additional investments in securities.
In the aggregate, mortgage-backed securities and investment securities,
including available for sale and held to maturity issues, totalled $170.1
million at March 31, 1999, an increase of $14.6 million, or 9.4%, from $155.5
million at December 31, 1998. Such increase was largely funded by the
aforementioned $4.0 million decrease in cash and cash equivalents and $9.7
million increase in borrowed money. Mortgage-backed securities, all of which are
held to maturity, increased $5.4 million due to purchases exceeding repayments.
Investment securities held to maturity increased $9.3 million, primarily due to
security purchases. Securities available for sale decreased marginally by
$108,000.
Loans receivable increased marginally by $418,000 to $140.7 million at
March 31, 1999 from $140.3 million at December 31, 1998.
Deposits totalled $238.7 million at March 31, 1999, an increase of
$431,000, or 0.2%, over the $238.3 million balance at December 31, 1998.
Borrowed money increased $9.7 million to $51.7 million at March 31, 1999,
as compared to $42.0 million at December 31, 1998. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits, management
chose to fund the asset growth discussed above with additional FHLB borrowings.
During the quarter ended March 31, 1999, $10.0 million in borrowings with five
to ten year maturities and an average interest rate of 5.46 % were incurred.
Stockholders' equity increased $578,000, or 1.2%, to $47.3 million,
primarily due to the retention of net income.
11.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 1998
Net Income. Net income increased $241,000 or 47.2% to $752,000 for the three
months ended March 31, 1999 compared with $511,000 for the same 1998 period. The
increase in net income during the 1999 period resulted primarily from a $489,000
increase in net interest income, which was partially offset by increases in non-
interest expenses and income taxes of $79,000 and $164,000, respectively.
Interest Income. Total interest income increased $444,000 or 8.7% to $5.6
million for the three months ended March 31, 1999 from $5.1 million for the same
1998 period. The increase was the result of a $39.7 million, or 14.0%, 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 loan originations and securities purchased during the past twelve
months funded by the net proceeds of the Company's initial public stock offering
and increased borrowed money. The decrease in yield was the result of lower
rates obtained on loans originated and securities purchased since March 31,
1998.
Interest income on loans increased by $513,000 or 22.3% to $2.8 million
during the three months ended March 31, 1999 when compared with $2.3 million for
the same 1998 period. The increase during the 1999 period resulted from an
increase of $27.1 million, or 23.5%, in the average balance of loans
outstanding, which was sufficient to offset an 8 basis point decrease to 7.89%
in the yield earned on the loan portfolio. The increased average balance was the
result of increased lending volume during the last nine months of 1998. 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,
decreased $334,000, or 15.8%, to $1.8 million during the three months ended
March 31, 1999 when compared with $2.1 million for the same 1998 period. The
decrease during the 1999 period resulted from decreases of $12.2 million, or
9.7%, in the average balance of mortgage-backed securities and 45 basis points,
to 6.25%, in yield. The decreased average balance is the result of repayments of
mortgage-backed securities exceeding purchases. The decrease in yield is the
result of repayments on higher yielding securities and the lower interest rates
obtained on securities purchased since March 31, 1998, 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 $170,000 or 28.2% to $772,000 during
the three months ended March 31, 1999, when compared to $602,000 during the same
1998 period, primarily due to an increase of $17.5 million, or 53.1%, in the
average balance of such assets, which more than offset a 119 basis point
decrease to 6.13% in the yield earned. The increase in average balance was the
result of purchases of securities exceeding calls and maturities thereof. During
the twelve months ended March 31, 1999, $17.9 million of investment securities,
which carried above-market interest rates, were called in advance of their
stated maturities. The decrease in yield was the result of the lower rates
available on securities purchased and the calls of higher yielding issues.
Interest on other interest-earning assets increased $95,000 or 98.5% to
$192,000 during the three months ended March 31, 1999 as compared to $97,000 for
the same 1998 period. The increase was due to increases of 20 basis points, to
4.96%, in yield and $7.3 million, or 89.8%, in the average balance of such
assets.
12.
<PAGE>
Interest Expense. Interest expense on deposits decreased $262,000 or 10.8%
to $2.2 million during the three months ended March 31, 1999 when compared to
$2.4 million during the same 1998 period. Such decrease was primarily
attributable to a decrease of 37 basis points, to 3.91%, in the cost of
interest-bearing deposits, along with a $4.7 million, or 2.1%, decrease in the
average balance thereof. The decrease in cost is due to lower interest rates
paid on deposits. The average cost of certificates of deposit averaged 5.03% for
the three months ended March 31, 1999 as compared to 5.41% for the same 1998
period. The average cost of non-certificate deposits decreased to 1.94% for the
three months ended March 31, 1999 as compared to 2.37% for the same prior year
period.
Interest expense on borrowed money increased by $216,000 or 49.4% to
$653,000 during the three months ended March 31, 1999 when compared with
$437,000 during the same 1998 period, primarily due to an increase of $17.8
million, or 59.2%, in the average balance of borrowings outstanding from the
FHLB, which was sufficient to offset a 36 basis point decrease to 5.44% in the
cost of borrowed money. During the three months ended March 31, 1999, the Bank
repaid $323,000 in borrowings having an average interest rate of 5.93% and
obtained $10.0 million in borrowings with five to ten year maturities with an
average interest rate of 5.46%.
Net Interest Income. Net interest income increased $489,000 or 21.8% during
the three months ended March 31, 1999, when compared with the same 1998 period.
Such increase was due to an increase in total interest income of $444,000, along
with a decrease in total interest expense of $45,000. The Bank's net interest
rate spread decreased to 2.71% in 1999 from 2.77% in 1998. The decrease in the
interest rate spread resulted from a decrease of 34 basis points in the yield on
interest-earning assets which more than offset a 28 basis point decrease in the
cost of interest-bearing liabilities. Despite the decrease in the net interest
rate spread, net interest income improved due to the additional income generated
by a $39.7 million increase in average interest-earning assets, which more than
offset the additional cost incurred by a $13.1 million increase in average
interest-bearing liabilities.
Provision for Loan Losses. During the three months ended March 31, 1999,
the Bank did not record a provision for loan losses as the existing balance of
the allowance for loan losses was considered adequate. During the three months
ended March 31, 1998, the Bank recorded a recapture of the provision for loan
losses of $22,000. The recapture was the result of the adjustment of the balance
of the allowance for loan losses, based upon management's quarterly analysis, to
$1.86 million at March 31, 1998 from $1.89 million at December 31, 1997. During
the three months ended March 31, 1999, loan charge-offs totalled less than
$1,000 and there were no loan recoveries. There were no loan charge-offs or
recoveries during the three months ended March 31, 1998. The allowance for loan
losses is based on management's evaluation of the risk inherent in its loan
portfolio and gives due consideration to the changes in general market
conditions and in the nature and volume of the Bank's loan activity. The Bank
intends to continue to provide for loan losses based on its periodic review of
the loan portfolio and general market conditions. At March 31, 1999 and 1998,
loans delinquent ninety days or more totalled $1.3 million and $2.3 million,
respectively, representing 0.91% and 1.93%, respectively, of total loans. At
March 31, 1999, the allowance for loan losses stood at $1.72 million,
representing 1.19% of total loans and 130.7% of loans delinquent ninety days or
more. At December 31, 1998, the allowance for loan losses stood at $1.72
million, representing 1.20% of total loans and 82.4% of loans delinquent ninety
days or more. At March 31, 1998, the allowance for loan losses stood at $1.86
million, representing 1.58% of total loans and 84.1% 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.
13.
<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 give 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.
Management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the loan
portfolio at this time. However, no assurance can be given that the level of the
allowance for loan losses will be sufficient to cover future possible loan
losses 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 considered by management to determine the current
level of the allowance for loan losses. Management may in the future increase
the level of the allowance for loan losses as a percentage of total loans and
non-performing loans in the event it increases the level of commercial real
estate, multifamily, or consumer lending as a percentage of the total loan
portfolio. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require the Bank to provide additions to the allowance based
upon judgments different from those of management.
The allowance for loan losses includes specific, general and unallocated
allowances of $492,000, $877,000 and $347,000, respectively, at March 31, 1999,
as compared to $492,000, $817,000 and $408,000, respectively, at December 31,
1998.
Non-Interest Income. Non-interest income increased $17,000 or 12.1% to
$157,000 during the three months ended March 31, 1999 from $140,000 during the
same 1998 period.
Non-Interest Expenses. Non-interest expenses increased by $79,000 or 4.8%
to $1.72 million during the three months ended March 31, 1999 when compared with
$1.64 million during the same 1998 period. Salaries and employee benefits, the
largest component of non-interest expenses, increased $55,000 or 7.2% to
$822,000 during the three months ended March 31, 1999 from $767,000 during the
prior year quarter. This increase was due to a $35,000 expense related to the
ESOP implemented in October 1998 and routine salary adjustments. Occupancy and
equipment expenses increased $23,000 or 9.3% to $271,000 during the three months
ended March 31, 1999 as compared to $248,000 during the prior year quarter, due
to increased building maintenance and outside computer processing costs. All
other elements of non-interest expense remained little changed at $623,000 and
$621,000 during the three months ended March 31, 1999 and 1998, respectively.
Income Taxes. Income tax expense totalled $424,000, or 36.1% of income
before income taxes, during the three months ended March 31, 1999 as compared to
$260,000, or 33.7% of income before income taxes, during the comparable 1998
period.
14.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's and 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 on debt securities are greatly
influenced by general interest rates, economic conditions and competition. The
Bank has continued to maintain the required levels of liquid assets as defined
by OTS regulations. This requirement of the OTS, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The Bank's
currently required liquidity ratio is 4.0%. At March 31, 1999, December 31, 1998
and December 31, 1997, the Bank's regulatory liquidity ratios were 6.38%, 7.38%
and 9.44%, respectively.
At March 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $33.9 million, or 10.3%, of total
adjusted assets, which is above the required level of $4.9 million, or 1.5%;
core capital of $33.9 million, or 10.3%, of total adjusted assets, which is
above the required level of $13.1 million, or 4.0%; and risk-based capital of
$35.4 million, or 28.3%, of risk-weighted assets, which is above the required
level of $10.0 million, or 8.0%.
The Company's most liquid assets are cash and cash equivalents and
securities available for sale. The levels of these assets are dependent on
operating, financing, lending and investing activities during any given period.
At March 31, 1999, cash and cash equivalents and securities available for sale
totalled $20.6 million, or 6.1% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB borrowings. At March 31, 1999, the Bank had $51.7 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 borrowings to fund asset growth.
At March 31, 1999, the Bank had commitments to originate and purchase loans
and fund unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totalling $17.7 million and commitments to purchase
securities totalling $5.0 million. The Bank anticipates that it will have
sufficient funds available to meet its current commitments. Certificate
accounts, including Individual Retirement Account accounts, which are scheduled
to mature in less than one year from March 31, 1999, totalled $120.5 million.
The Bank expects that substantially all of the maturing certificate accounts
will be retained by the Bank.
The initial impact of the Reorganization and Offering on the liquidity and
capital resources of the Company was to substantially increase the liquid assets
of the Company and the capital base on which the Company operates. Subsequently,
a substantial majority of the Offering proceeds was invested in readily
marketable investment grade securities. The additional capital resulting from
the offerings increased the capital bases of the Company and the Bank. At March
31, 1999, the Company and the Bank had total equity, determined in accordance
with generally accepted accounting principles, of $47.3 million and $39.1
million, respectively, or 13.9% and 11.7%, respectively, of total assets. The
Bank's regulatory tangible capital at that date, which excludes intangible
assets of $5.1 million and unrealized securities gains, net of deferred income
taxes, of $122,000, was $33.9 million, or 10.3%, of adjusted total assets. An
institution with a ratio of tangible capital to adjusted total assets of greater
than or equal to 5.0% is considered to be "well-capitalized" pursuant to OTS
regulations.
15.
<PAGE>
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 and remediating
potential problems which are associated with the "Year 2000" issues since early
1998. The Company has fully remedied its in house accounting system, loan
tracking system and other software programs identified as mission critical by
the Company. All of the hardware associated with these systems has been checked
by the Company internally, as well as by an independent computer company, and
found to be Year 2000 compliant.
The Company also realizes that its ability to be Year 2000 compliant is
dependent upon the cooperation of its vendors. The Company has received
representations from its primary third party vendors that they have or are in
the process of resolving any Year 2000 problems in their software and
anticipates that all of its major vendors will have resolved any Year 2000
problems in their software within the next three months. The Bank has completed
its end to end testing with its primary third party service bureau. The testing
was completed on two consecutive Sundays in March of this year. All offices and
departments of the Bank were present to test their respective areas. All of the
testing was completed by each office and area without a problem. In addition,
all of the ATM machines owned by the Bank will have their software upgraded by
May 31, 1999 and will then be Year 2000 compliant. The Bank is in the process of
preparing a contingency plan, which it intends to have completed by June 30,
1999, as federal regulations require. The plan will detail what steps the Bank
will follow should major system interruptions, such as lack of electrical power,
no telecommunications, no heating system and the like, should occur. The Company
believes that its costs related to Year 2000 remediation will be approximately
$185,000. To date, the Company has spent approximately $110,000 of this amount
on various hardware and software upgrades. There can be no assurances, however,
that internal actions or the performance by third-party 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
Company. The Bank also plans to work with its customers to address any potential
Year 2000 problems. In this area, the Bank has mailed a written survey to its
commercial loan customers to help it determine the extent, if any, that Year
2000 may have on their business or their ability to make any loan payments. To
date, a majority of the surveys have been returned and any problems noted are
being addressed. Additionally, as a related matter, the Bank will carefully
consider whether a potential commercial loan applicant is Year 2000 compliant by
requiring the applicant to complete the survey as part of internal loan
underwriting criteria.
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 December 31, 1998, in the Company's Annual Report on Form 10-K, to March 31,
1999.
16.
<PAGE>
WEST ESSEX BANCORP, INC.
PART II . OTHER INFORMATION
March 31, 1999
ITEM 1. Legal Proceedings
-----------------
The Company and the Bank are parties to various litigation which arises
primarily in the ordinary course of business. Included in this
litigation is a case before the Superior Court of New Jersey related to
condominium construction loans. Currently, the plaintiffs have three
loans with the Bank totalling $264,581.12 in the aggregate, two of which
are delinquent. Two other plaintiffs defaulted on their loans and the
properties have been foreclosed on by the Bank and are currently held as
Real Estate Owned. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on the
consolidated financial position or operations of the Company.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 1999 Annual Meeting of Stockholders was held on April 21, 1999. The
following matters were submitted to the stockholders:
1. Election of two directors:
A. Directors elected at the meeting for terms to expire in
2002:
<TABLE>
<CAPTION>
Number of Shares
-------------------------
For Withheld
------------ -----------
<S> <C> <C>
Mr. David F. Brandly 3,919,124 149,317
Mr. Everett N. Leonard 3,900,885 167,556
</TABLE>
The following directors' terms of office as a director
continued after the meeting:
(i) Mr. William J. Foody
(ii) Mr. Leopold W. Montanaro
(iii) Mr. James P. Vreeland
(iv) Mr. John J. Burke
17.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders (Cont'd.)
---------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------------------------------------
For Against Abstained Non-Vote
---------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
2. The approval of the West Essex Bancorp, Inc.
1999 Stock-Based Incentive Plan. 948,785 290,087 58,227 2,771,342
3. The ratification of Radics & Co., LLC
as independent auditors of the
Company for the fiscal year
ending December 31, 1999. 3,959,275 85,866 23,300 -
</TABLE>
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
3.1 Charter of West Essex Bancorp, Inc.*
3.2 Bylaws of West Essex Bancorp, Inc.*
11.0 Statement regarding computation of per share earnings.
27.0 Financial Data Schedule
* 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
18.
<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, thereunto duly authorized.
WEST ESSEX BANCORP, INC.
Date: May 14, 1999 By: /s/ Leopold W. Montanaro
-------------------------- ------------------------------------
Leopold W. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ Dennis A. Petrello
-------------------------- ------------------------------------
Dennis A. Petrello
Executive Vice President and
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19.
<PAGE>
EXHIBIT 11
WEST ESSEX BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Net income $ 751,579 $ 511,141
Weighted average number of common shares outstanding 4,066,089 N/A
Common stock equivalents due to dilutive effect
of stock options -- N/A
Total weighted average number of common shares
and common share equivalents outstanding 4,066,089 N/A
Basic earnings per common share $ 0.18 N/A
Diluted earnings per common share $ 0.18 N/A
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE UNAUDITED FINANCIAL STATEMENTS CONTAINED THEREIN.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,551,177
<INT-BEARING-DEPOSITS> 10,878,953
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,174,370
<INVESTMENTS-CARRYING> 161,932,009
<INVESTMENTS-MARKET> 162,607,341
<LOANS> 142,405,918
<ALLOWANCE> 1,716,080
<TOTAL-ASSETS> 339,870,001
<DEPOSITS> 238,744,088
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,106,842
<LONG-TERM> 51,687,179
0
0
<COMMON> 41,972
<OTHER-SE> 47,289,920
<TOTAL-LIABILITIES-AND-EQUITY> 339,870,001
<INTEREST-LOAN> 2,811,087
<INTEREST-INVEST> 2,555,885
<INTEREST-OTHER> 192,359
<INTEREST-TOTAL> 5,559,331
<INTEREST-DEPOSIT> 2,171,500
<INTEREST-EXPENSE> 2,824,843
<INTEREST-INCOME-NET> 2,734,488
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,715,956
<INCOME-PRETAX> 1,175,306
<INCOME-PRE-EXTRAORDINARY> 751,579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751,579
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 3.39
<LOANS-NON> 1,312,663
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,716,790
<CHARGE-OFFS> 710
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,716,080
<ALLOWANCE-DOMESTIC> 1,369,080
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 347,000
</TABLE>
