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 June 30, 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 July 31, 1999.
<PAGE>
WEST ESSEX BANCORP, INC.
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
Page
PART I FINANCIAL INFORMATION Number
Item 1. Financial Statements 1
Consolidated Statements of Financial Condition at June
30, 1999 and December 31, 1998 (Unaudited)
2
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited) 4
Consolidated Statements of Cash Flows for the Three and
Six Months Ended June 30, 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 9-20
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>
WEST ESSEX BANCORP, INC.
PART I. FINANCIAL INFORMATION
June 30, 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 and six month periods ended June 30,
1999, are not necessarily indicative of the results to be expected for the
entire fiscal year.
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions .......... $ 1,678,439 $ 1,547,464
Interest-bearing deposits in other banks ................... 5,401,652 14,823,967
------------- -------------
Total cash and cash equivalents ...................... 7,080,091 16,371,431
Securities available for sale .............................. 3,000,940 8,282,450
Investment securities held to maturity ..................... 43,348,966 36,873,165
Mortgage-backed securities held to maturity ................ 125,367,113 110,376,072
Loans receivable ........................................... 150,707,549 140,272,203
Real estate owned .......................................... 774,201 582,138
Premises and equipment ..................................... 2,839,941 2,947,374
Federal Home Loan Bank of New York stock ................... 3,179,000 2,607,300
Accrued interest receivable ................................ 2,097,492 2,004,809
Excess of cost over assets acquired ........................ 4,939,732 5,236,116
Other assets ............................................... 3,233,345 3,055,825
------------- -------------
Total assets ......................................... $ 346,568,370 $ 328,608,883
============= =============
Liabilities and Stockholders' Equity
Liabilities
Deposits ................................................... $ 235,944,350 $ 238,312,941
Borrowed money ............................................. 61,009,699 42,009,880
Advance payments by borrowers for taxes and insurance ...... 1,034,195 921,958
Other liabilities .......................................... 738,715 610,050
------------- -------------
Total liabilities .................................... 298,726,959 281,854,829
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(continued)
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
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 ................................. 17,322,701 17,339,291
Retained earnings - substantially restricted ............... 31,727,588 30,507,475
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") ............................................ (1,252,553) (1,326,233)
Accumulated other comprehensive income - Unrealized
gain on securities available for sale, net of income taxes 1,703 191,549
------------- -------------
Total stockholders' equity ........................... 47,841,411 46,754,054
------------- -------------
Total liabilities and stockholders' equity ........... $ 346,568,370 $ 328,608,883
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans ....................................................... $ 2,703,672 $ 2,453,770 $ 5,514,759 $ 4,752,182
Mortgage-backed securities .................................. 2,016,636 2,045,050 3,800,926 4,162,976
Investment securities ....................................... 833,127 632,570 1,604,722 1,234,720
Other interest-earning assets ............................... 157,227 210,884 349,586 307,809
------------ ------------ ------------ ------------
Total interest income ............................... 5,710,662 5,342,274 11,269,993 10,457,687
------------ ------------ ------------ ------------
Interest expense:
Deposits .................................................... 2,152,753 2,433,730 4,324,253 4,867,077
Borrowed money .............................................. 851,409 683,632 1,504,752 1,120,260
------------ ------------ ------------ ------------
Total interest expense .............................. 3,004,162 3,117,362 5,829,005 5,987,337
------------ ------------ ------------ ------------
Net interest income .............................................. 2,706,500 2,224,912 5,440,988 4,470,350
Provision for (recapture of) loan losses ......................... -- (18,580) -- (40,630)
------------ ------------ ------------ ------------
Net interest income after provision for (recapture of) loan losses 2,706,500 2,243,492 5,440,988 4,510,980
------------ ------------ ------------ ------------
Non-interest income:
Fees and service charges .................................... 91,131 83,807 184,756 177,969
Gain on sale of securities available for sale ............... 34,515 -- 34,515 --
Other ....................................................... 48,022 36,909 111,171 82,658
------------ ------------ ------------ ------------
Total non-interest income ........................... 173,668 120,716 330,442 260,627
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------
(unaudited)
(continued)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Non-interest expenses:
Salaries and employee benefits .............................. 768,550 749,572 1,590,295 1,516,703
Net occupancy expense of premises ........................... 77,888 80,497 180,551 166,075
Equipment ................................................... 159,479 165,352 328,023 327,978
Loss on real estate owned ................................... 10,899 24,500 18,655 48,248
Amortization of intangibles ................................. 148,192 148,192 296,384 296,384
Other ....................................................... 572,404 456,587 1,039,460 906,011
------------ ------------ ------------ ------------
Total non-interest expenses ......................... 1,737,412 1,624,700 3,453,368 3,261,399
------------ ------------ ------------ ------------
Income before income taxes ....................................... 1,142,756 739,508 2,318,062 1,510,208
Income taxes ..................................................... 409,063 257,866 832,790 517,425
------------ ------------ ------------ ------------
Net income ....................................................... $ 733,693 $ 481,642 $ 1,485,272 $ 992,783
============ ============ ============ ============
Net income per common share - basic and diluted .................. $ 0.18 N/A (1) $ 0.37 N/A (1)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted ................................ 4,069,783 N/A (1) 4,067,936 N/A (1)
============ ============ ============ ============
</TABLE>
(1) West Essex Bank converted to stock form on October 2, 1998.
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income .................................................................. $ 733,693 $ 481,642
----------- -----------
Other comprehensive income -
Unrealized holding (losses) gains on securities available for sale,
net of income taxes of $54,915 and $(11,694) respectively ..... (97,711) 20,806
Reclassification adjustment for realized gains on securities
available for sale, net of income taxes of $12,418 in 1999 .... (22,096) --
----------- -----------
Total other comprehensive income ............................................ (119,807) 20,806
----------- -----------
Comprehensive income ........................................................ $ 613,886 $ 502,448
=========== ===========
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income .................................................................. $ 1,485,272 $ 992,783
----------- -----------
Other comprehensive income -
Unrealized holding (losses) gains on securities available for sale,
net of income taxes of $ $94,278 and $(20,263), respectively .. (167,750) 36,052
Reclassification adjustment for realized gains on securities
available for sale, net of income taxes of $12,418 in 1999 .... (22,096) --
----------- -----------
Total other comprehensive income ............................................ (189,846) 36,052
----------- -----------
Comprehensive income ........................................................ $ 1,295,426 $ 1,028,835
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------
(unaudited)
Six Months Ended June 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 1,485,272 $ 992,783
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment ................ 119,116 145,588
Net accretion of premiums, discounts and deferred loan fees ............ (64,228) (141,237)
Amortization of intangibles ............................................ 296,384 296,384
Recovery of loan losses ................................................ -- (40,630)
Provision for losses on real estate owned .............................. -- 40,630
(Gain) on sale of securities available for sale ........................ (34,515) --
(Gain) on sale of real estate owned .................................... -- (5,386)
(Increase) in accrued interest receivable .............................. (92,683) (101,845)
(Increase) in other assets ............................................. (70,824) (411,961)
Increase in interest payable ........................................... 24,503 60,417
Increase in other liabilities .......................................... 101,221 14,999
ESOP shares committed to be released ................................... 68,998 --
------------ ------------
Net cash provided by operating activities ......................... 1,833,244 849,742
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of term deposits .................................. -- 2,000,000
Purchase of term deposits .................................................. -- (5,000,000)
Proceeds from sales of seurities available for sale ........................ 5,021,875 --
Purchase of securities available for sale .................................. -- (1,000,000)
Proceeds from maturities and calls of investment securities held to maturity 13,000,000 3,000,000
Purchases of investment securities held to maturity ........................ (19,344,969) (12,622,629)
Principal repayments on mortgage-backed securities held to maturity ........ 21,194,105 16,682,350
Purchases of mortgage-backed securities held to maturity ................... (36,245,370) (9,111,005)
Purchase of loans receivable ............................................... (831,426) (61,000)
Net (increase) in loans receivable ......................................... (9,804,755) (19,111,446)
Proceeds from sales of real estate owned ................................... -- 503,458
Proceeds from other payments received on real estate owned ................. -- 4,000
Additions to premises and equipment ........................................ (11,683) (64,778)
Purchase of Federal Home Loan Bank of New York stock ....................... (571,700) (423,500)
------------ ------------
Net cash (used in) investing activities ........................... (27,593,923) (25,204,550)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------
(unaudited)
(continued)
Six Months Ended June 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits ........................................ (2,365,650) 1,310,113
Net change in short-term borrowed money .................................... 9,000,000 (10,600,000)
Proceeds of long-term borrowed money ....................................... 15,000,000 35,000,000
Repayment of long-term borrowed money ...................................... (5,000,181) (4,658,778)
Net increase in advance payments by borrowers for taxes and insurance ...... 112,237 140,477
Cash dividends paid ........................................................ (277,067) --
------------ ------------
Net cash provided by financing activities ......................... 16,469,339 21,191,812
------------ ------------
Net (decrease) in cash and cash equivalents ...................................... (9,291,340) (3,162,996)
Cash and cash equivalents - beginning ............................................ 16,371,431 8,696,118
------------ ------------
Cash and cash equivalents - ending ............................................... $ 7,080,091 $ 5,533,122
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes ............................................................... $ 773,400 $ 385,030
============ ============
Interest ................................................................... $ 5,804,502 $ 5,926,920
============ ============
Supplemental schedule of noncash investing activities:
Unrealized (loss) gain on securities
available or sale, net of income taxes ................................ $ (189,846) $ 36,052
============ ============
Loans receivable transferred to real estate owned .......................... $ 192,063 $ --
============= ============
</TABLE>
See notes to consolidated financial statements.
<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 and six months ended June 30, 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 Reorganizaiton 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 June 30, 1999, there were no shares of Preferred
Stock issued.
<PAGE>
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CAPITAL TRANSACTIONS
- - -------------------------
On April 21, 1999, the Company's shareholders approved the West Essex Bancorp,
Inc. 1999 Stock-Based Incentive Plan (the "Plan"). Under the Plan, up to 73,884
shares of Company common stock may be awarded, and options to purchase up to
184,711 shares of Company common stock may be granted, to employees and
directors of the Company. Pursuant to the Plan, on April 30, 1999, 65,756 shares
of Company stock were awarded (47,286 shares to employees and 18,470 shares to
directors) and options to purchase 176,048 shares (129,193 options to employees
and 46,855 options to directors) at an exercise price of $9.50 per share (the
market value of a share of Company common stock at the grant date) were granted.
5. 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 potential common
shares, if dilutive, using the treasury stock method. During the three and six
months ended June 30, 1999, potentially dilutive securities including
outstanding stock options and unearned stock awards, neither of which were
dilutive during such periods.
<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 polices 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.
<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 $150.7 million at December 31, 1997, December 31,
1998 and June 30, 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.
<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 June 30, 1999, the Company had
$125.4 million or 36.2% of total assets in mortgage-backed securities classified
as held-to-maturity, and $46.3 million or 13.4% of total assets in investment
securities, of which $3.0 million or 0.9% of total assets were classified as
available-for-sale. At the same date, loans receivable, net, totalled $150.7
million or 43.5% of total assets.
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
Total assets were $346.6 million at June 30, 1999, compared to $328.6
million at December 31, 1998, an increase of $18.0 million, or 5.5%. The
increase in assets was funded primarily by an increase in Federal Home Loan Bank
of New York ("FHLB") borrowings of $19.0 million.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, decreased $9.3 million to $7.1 million at June 30, 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 $171.2
million at June 30, 1999, an increase of $15.7 million, or 10.1%, from $155.5
million at December 31, 1998. Such increase was funded by the aforementioned
$9.3 million decrease in cash and cash equivalents and $19.0 million increase in
borrowed money. Mortgage-backed securities, all of which are held to maturity,
increased $15.0 million due to purchases exceeding repayments. Investment
securities held to maturity increased $6.5 million, primarily due to purchases
exceeding maturities. Securities available for sale decreased by $5.3 million
primarily due to a $5.0 million sale.
Loans receivable increased by $10.4 million to $150.7 million at June
30, 1999 from $140.3 million at December 31, 1998 due primarily to originations
exceeding repayments. The increase in loans was funded by the aforementioned
increase in FHLB borrowings.
Deposits totalled $235.9 million at June 30, 1999, a decrease of $2.4
million or 1.0%, from the $238.3 million balance at December 31, 1998.
Borrowed money increased $19.0 million to $61.0 million at June 30,
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 six months ended June 30, 1999, $15.0 million in
borrowings with five to ten year maturities and an average interest rate of
5.54% were incurred.
Stockholders' equity increased $1.1 million, or 2.3%, to $47.8 million,
primarily due to the retention of net income.
<PAGE>
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
1998
Net Income. Net income increased $252,000 or 52.3% to $734,000 for the
three months ended June 30, 1999 compared with $482,000 for the same 1998
period. The increase in net income during the 1999 period resulted primarily
from a $482,000 increase in net interest income, which was partially offset by
increases in non-interest expenses and income taxes of $113,000 and $151,000,
respectively.
Interest Income. Total interest income increased $368,000 or 6.9% to
$5.7 million for the three months ended June 30, 1999 from $5.3 million for the
same 1998 period. The increase was the result of a $30.6 million, or 10.1%,
increase in average interest-earning assets between the periods, which more than
offset a 20 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 June 30,
1998.
Interest income on loans increased by $250,000 or 10.2% to $2.7 million
during the three months ended June 30, 1999 when compared with $2.5 million for
the same 1998 period. The increase during the 1999 period resulted from an
increase of $21.2 million, or 16.8%, in the average balance of loans
outstanding, which was sufficient to offset a 44 basis point decrease to 7.34%
in the yield earned on the loan portfolio. The increased average balance was the
result of strong 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, decreased $28,000 or 1.4%, to $2.02 million during the three
months ended June 30, 1999 when compared with $2.05 million for the same 1998
period. The decrease during the 1999 period resulted from a decrease of $1.4
million, or 1.1%, in the average balance of mortgage-backed securities and 2
basis points, to 6.58%, in yield. The decreased average balance is the result of
repayments of mortgage-backed securities exceeding purchases.
Interest earned on investment securities, including both
available-for-sale and held-to-maturity issues, increased by $200,000, or 31.6%,
to $833,000 during the three months ended June 30, 1999, when compared to
$633,000 during the same 1998 period, primarily due to an increase of $13.7
million, or 36.9%, in the average balance of such assets, which more than offset
a 26 basis point decrease to 6.54% 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 June 30, 1999, $27.9 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 decreased $54,000, or 25.6%,
to $157,000 during the three months ended June 30, 1999 as compared to $211,000
for the same 1998 period. The decrease was due to decreases of 36 basis points,
to 5.37%, in yield and $3.0 million, or 20.5%, in the average balance of such
assets.
<PAGE>
Interest Expense. Interest expense on deposits decreased $281,000, or
11.5%, to $2.2 million during the three months ended June 30, 1999 when compared
to $2.4 million during the same 1998 period. Such decrease was primarily
attributable to a decrease of 42 basis points, to 3.87%, in the cost of
interest-bearing deposits, along with a $4.9 million, or 2.2%, 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 was 5.00% for the
three months ended June 30, 1999 as compared to 5.44% for the same 1998 period.
The average cost of non-certificate deposits decreased to 1.87 % for the three
months ended June 30, 1999 as compared to 2.31% for the same prior year period.
Interest expense on borrowed money increased by $167,000, or 24.4%, to
$851,000 during the three months ended June 30, 1999 when compared with $684,000
during the same 1998 period, primarily due to an increase of $12.9 million, or
27.6%, in the average balance of borrowings outstanding from the FHLB, which was
sufficient to offset a 14 basis point decrease to 5.72% in the cost of borrowed
money. During the three months ended June 30, 1999, the Bank repaid $4.7 million
in borrowings having an average interest rate of 6.47% and obtained $5.0 million
in borrowings with five to ten year maturities with an average interest rate of
5.69% and $9.0 in short-term borrowings with an average interest rate of 5.29%.
Net Interest Income. Net interest income increased $482,000 or 21.7%
during the three months ended June 30, 1999, when compared with the same 1998
period. Such increase was due to an increase in total interest income of
$368,000, along with a decrease in total interest expense of $114,000. The
Bank's net interest rate spread increased to 2.61% in 1999 from 2.53% in 1998.
The increase in the interest rate spread resulted from a decrease of 28 basis
points in the cost of interest-bearing liabilities, which more than offset a 20
basis point decrease in the yield on interest-earning assets. Additionally, net
interest income improved due to the additional income generated by a $30.6
million increase in average interest-earning assets, which more than offset the
additional cost incurred by a $7.9 million increase in average interest-bearing
liabilities.
Provision for Loan Losses. During the three months ended June 30, 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 June 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
$1.84 million at June 30, 1998 from $1.89 million at December 31, 1997. During
the three months ended June 30, 1999, there was a $316,000 charge-off related to
the final resolution of a $694,000 construction loan and no loan recoveries.
There were no loan charge-offs or recoveries during the three months ended June
30, 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 June
30, 1999 and 1998, loans delinquent ninety days or more totalled $847,000 and
$2.1 million, respectively, representing 0.55% and 1.57%, respectively, of total
loans. At June 30, 1999, the allowance for loan losses stood at $1.4 million,
representing 0.92% of total loans and 165.4% 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 June 30, 1998, the allowance for loan losses stood at $1.84
million, representing 1.36% of total loans and 87.6% 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.
<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 $115,000, $894,000 and $391,000, respectively, at June
30, 1999, as compared to $492,000, $817,000 and $408,000, respectively, at
December 31, 1998. The $377,000 decrease in the specific allowance from December
31, 1998, is the result of the final resolution of the aforementioned $694,000
impaired construction loan, which was assigned a specific allowance of $347,000
at December 31, 1998.
Non-Interest Income. Non-interest income increased $53,000, or 43.8%,
to $174,000 during the three months ended June 30, 1999 from $121,000 during the
same 1998 period. The 1999 amount includes a $35,000 gain on the sale of a
security available for sale.
Non-Interest Expenses. Non-interest expenses increased by $113,000, or
7.0%, to $1.74 million during the three months ended June 30, 1999 when compared
with $1.62 million during the same 1998 period. Salaries and employee benefits,
the largest component of non-interest expenses, increased $19,000, or 2.5%, to
$769,000 during the three months ended June 30, 1999 from $750,000 during the
prior year quarter. Other expenses increased $115,000, or 25.1%, to $572,000
during the three months ended June 30, 1999 from $457,000 during the prior year
quarter due primarily to the additional costs incurred as a result of being a
public company. All other elements of non-interest expense remained little
changed at $396,000 and $419,000 during the three months ended June 30, 1999 and
1998, respectively.
<PAGE>
Income Taxes. Income tax expense totalled $409,000, or 35.8% of income
before income taxes, during the three months ended June 30, 1999 as compared to
$258,000, or 34.9% of income before income taxes, during the comparable 1998
period.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
Net Income. Net income increased $492,000 or 49.6% to $1.5 million for
the six months ended June 30, 1999 compared with $993,000 for the same 1998
period. The increase in net income during the 1999 period resulted primarily
from a $971,000 increase in net interest income, which was partially offset by
increases in non-interest expenses and income taxes of $192,000 and $315,000,
respectively.
Interest Income. Total interest income increased $812,000, or 7.8%, to
$11.3 million for the six months ended June 30, 1999 from $10.5 million for the
same 1998 period. The increase was the result of a $34.0 million, or 11.6%,
increase in average interest-earning assets between the periods, which more than
offset a 25 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 June 30,
1998.
Interest income on loans increased by $763,000, or 16.1%, to $5.5
million during the six months ended June 30, 1999 when compared with $4.8
million for the same 1998 period. The increase during the 1999 period resulted
from an increase of $24.6 million, or 20.4%, in the average balance of loans
outstanding, which was sufficient to offset a 28 basis point decrease to 7.59%
in the yield earned on the loan portfolio. The increased average balance was the
result of strong 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, decreased $362,000 or 8.7%, to $3.8 million during the six
months ended June 30, 1999 when compared with $4.2 million for the same 1998
period. The decrease during the 1999 period resulted from decreases of $7.4
million, or 5.9%, in the average balance of mortgage-backed securities and 20
basis points, to 6.45%, 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 June 30, 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 $370,000, or 30.0%,
to $1.6 million during the six months ended June 30, 1999, when compared to $1.2
million during the same 1998 period, primarily due to an increase of $13.3
million, or 37.9%, in the average balance of such assets, which more than offset
a 41 basis point decrease to 6.64% 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 June 30, 1999, $27.9 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.
<PAGE>
Interest on other interest-earning assets increased $42,000 or 13.6% to
$350,000 during the six months ended June 30, 1999 as compared to $308,000 for
the same 1998 period. The increase was due to an increase of $3.5 million, or
30.6%, in the average balance of such assets, which was more than sufficient to
offset a 69 basis point decline in yield.
Interest Expense. Interest expense on deposits decreased $543,000 or
11.2% to $4.3 million during the six months ended June 30, 1999 when compared to
$4.9 million during the same 1998 period. Such decrease was primarily
attributable to a decrease of 39 basis points, to 3.89%, in the cost of
interest-bearing deposits, along with a $4.9 million, or 2.2%, 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 was 5.01% for the
six months ended June 30, 1999 as compared to 5.43% for the same 1998 period.
The average cost of non-certificate deposits decreased to 1.91 % for the six
months ended June 30, 1999 as compared to 2.34% for the same prior year period.
Interest expense on borrowed money increased by $384,000, or 34.3%, to
$1.5 million during the six months ended June 30, 1999 when compared with $1.1
million during the same 1998 period, primarily due to an increase of $15.1
million, or 39.4%, in the average balance of borrowings outstanding from the
FHLB, which was sufficient to offset a 21 basis point decrease to 5.62% in the
cost of borrowed money. During the six months ended June 30, 1999, the Bank
repaid $5.0 million in borrowings having an average interest rate of 5.54% and
obtained $15.0 million in borrowings with five to ten year maturities with an
average interest rate of 5.54% and $9.0 million in short-term borrowings with an
average rate of 5.29%.
Net Interest Income. Net interest income increased $971,000, or 21.7%,
during the six months ended June 30, 1999, when compared with the same 1998
period. Such increase was due to an increase in total interest income of
$812,000, along with a decrease in total interest expense of $159,000. The
Bank's net interest rate spread increased to 2.68% in 1999 from 2.65% in 1998.
The increase in the interest rate spread resulted from a decrease of 28 basis
points in the cost of interest-bearing liabilities which more than offset a 25
basis point decrease in the yield on interest-earning assets. Additionally, net
interest income improved due to the additional income generated by a $34.0
million increase in average interest-earning assets, which more than offset the
additional cost incurred by a $10.2 million increase in average interest-bearing
liabilities.
Provision for Loan Losses. During the six months ended June 30, 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 six months
ended June 30, 1998, the Bank recorded a recapture of the provision for loan
losses of $41,000. The recapture was the result of the adjustment of the balance
of the allowance for loan losses, based upon management's quarterly analysis, to
$1.84 million at June 30, 1998 from $1.89 million at December 31, 1997. During
the six months ended June 30, 1999, there was a $316,000 charge-off related to
the final resolution of a $694,000 construction loan and no loan recoveries.
There were no loan charge-offs or recoveries during the six months ended June
30, 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
<PAGE>
loan activity. The Bank intends to continue to provide for loan losses based on
its periodic review of the loan portfolio and general market conditions. At June
30, 1999 and 1998, loans delinquent ninety days or more totalled $847,000 and
$2.1 million, respectively, representing 0.55% and 1.57%, respectively, of total
loans. At June 30, 1999, the allowance for loan losses stood at $1.4 million,
representing 0.92% of total loans and 165.4% 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 June 30, 1998, the allowance for loan losses stood at $1.84
million, representing 1.36% of total loans and 87.6% 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 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 $115,000, $894,000 and $391,000, respectively, at June
30, 1999, as compared to $492,000, $817,000 and $408,000, respectively, at
December 31, 1998. The $377,000 decrease in the specific allowance from December
31, 1998, is the result of the final resolution of the aforementioned $694,000
impaired construction loan, which was assigned a specific allowance of $347,000
at December 31, 1998.
<PAGE>
Non-Interest Income. Non-interest income increased $69,000 or 26.4% to
$330,000 during the six months ended June 30, 1999 from $261,000 during the same
1998 period. The 1999 amount includes a $35,000 gain on the sale of a security
available for sale.
Non-Interest Expenses. Non-interest expenses increased by $192,000, or
5.9%, to $3.45 million during the six months ended June 30, 1999 when compared
with $3.26 million during the same 1998 period. Salaries and employee benefits,
the largest component of non-interest expenses, increased $74,000, or 4.9%, to
$1.6 million during the six months ended June 30, 1999 from $1.5 million during
the prior year period. Other expenses increased $133,000, or 14.7%, to $1.04
million during the six months ended June 30, 1999, from $906,000 during the
comparable prior year period, primarily due to the additional costs incurred as
the result of being a public company. All other elements of non-interest expense
remained little changed at $824,000 and $839,000 during the six months ended
June 30, 1999 and 1998, respectively.
Income Taxes. Income tax expense totalled $833,000, or 35.9% of income
before income taxes, during the six months ended June 30, 1999 as compared to
$517,000, or 34.3% of income before income taxes, during the comparable 1998
period.
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 June 30, 1999,
December 31, 1998 and December 31, 1997, the Bank's regulatory liquidity ratios
were 5.83%, 7.38% and 9.44%, respectively.
At June 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $34.8 million, or 10.3%, of total
adjusted assets, which is above the required level of $5.2 million, or 1.5%;
core capital of $34.8 million, or 10.3%, of total adjusted assets, which is
above the required level of $13.6 million, or 4.0%; and risk-based capital of
$36.2 million, or 27.4%, of risk-weighted assets, which is above the required
level of $10.6 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 June 30, 1999, cash and cash equivalents and securities available for sale
totalled $10.1 million, or 2.9% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB borrowings. At June 30, 1999, the Bank had $61.0 million
in borrowings outstanding from the FHLB. Depending on market conditions, the
pricing of deposit products and FHLB borrowings, the Bank may continue to rely
on FHLB borrowings to fund asset growth.
<PAGE>
On August 3, 1999, the Company announced that it had received
regulatory approval to repurchase up to 277,067 shares of its outstanding common
stock from shareholders other than West Essex Bancorp, MHC. This repurchase
would represent 15% of the shares sold in the minority stock offering.
At June 30, 1999, the Bank had commitments to originate and purchase
loans and fund unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totalling $11.2 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 June 30, 1999, totalled
$121.3 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
June 30, 1999, the Company and the Bank had total equity, determined in
accordance with generally accepted accounting principles, of $47.8 million and
$39.7 million, respectively, or 13.8% and 11.6%, respectively, of total assets.
The Bank's regulatory tangible capital at that date, which excludes intangible
assets of $4.9 million and unrealized securities gains, net of deferred income
taxes, of $2,000, was $34.8 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.
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 use
two-digit date fields to designate a year. As the century date change occurs,
date sensitive systems may recognize the Year 2000 as 1900 or not at all. This
inability to recognize or properly treat the Year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
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 Company 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 Company were present to test their respective
areas. All of the testing was completed by each office and area without a
problem. The Company has also received certification from its primary third
party service bureau that it has passed end to end testing. In addition, all of
the ATM machines owned by the Company have had their software upgraded and are
now also Year 2000 compliant.
<PAGE>
Year 2000 Plan Costs
The Company believes that its costs related to Year 2000 remediation
will be approximately $185,000. To date, the Company has spent approximately
$112,000 of this amount on various hardware and software upgrades. There can be
no assurances, however, that the Company's 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 affected by third party vendors, there can
be no assurance 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 Company's customers or third
party vendors could result in additional expense or loss to the Company.
Year 2000 Risks and Contingency Plan
Because the Company depends substantially on its computer systems and
those of third parties, the failure of these systems to be Year 2000 compliant
could cause substantial disruption of the Company's business and could have a
material adverse financial impact on the Company. Failure to resolve Year 2000
issues presents the following risks to the Company, which it believes reflects
its most reasonably likely worst-case scenario: the Company could lose customers
to other financial institutions, resulting in a loss of revenue, if the
Company's third-party service bureau is unable to properly process customer
transactions; governmental agencies, such as the Federal Home Loan Bank of New
York, and correspondent institutions could fail to provide funds to the Company,
which could materially impair the Company's liquidity and affect the Company's
ability to fund loans and deposit withdrawals; concern on the part of depositors
that Year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows before December 31,
1999; and the Company could incur increased personnel costs if additional staff
is required to perform functions that inoperative systems would have otherwise
performed.
Management believes that it is impossible to estimate the potential
lost revenue due to the Year 2000 issue, as the extent and longevity of any
potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of loans to individuals rather than commercial
enterprises, management believes that Year 2000 issues will not impair
materially the ability of the Company's borrowers to repay their debt.
There can be no assurances that the Company's Year 2000 plan will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of the Company or its third-party vendors and service
providers to be Year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company has a business resumption contingency plan for Year 2000
compliance that calls for the Company to resort to manual processing of
transactions until the computer systems resume operation. Internally, the
Company will continue to make changes to its contingency plan as circumstances
may warrant.
<PAGE>
Year 2000 Liquidity Concerns
The Company will make every effort to maintain an ample reserve of
currency to accommodate the needs of its customers at year-end. This may
necessitate the utilization of short-term investments which will mature late in
the fourth quarter of the year. Excess funds may also be placed in various types
of overnight investments which will allow the Company immediate access to these
funds. The utilization of short-term investments including overnight investments
during the late third and fourth quarters may have an adverse effect on the
financial operations of the Company.
Year 2000 Legal Concerns
The Company may also face a legal risk in the form of contingent
liability in conjunction with Year 2000 issues. The likelihood and severity of
this risk is materially dependent on both the Company's own efforts and on the
actions of other parties over which the Company has little or no control
including the telecommunication and electric power industries. The likelihood
and severity of the Company's contingent Year 2000 liability are also materially
dependent on the extent and success of the timely remediation and testing
efforts of a large number of third parties. Whether the Company may incur a Year
2000 liability is at this time an unknown. The Company is attempting to purchase
Year 2000 liability coverage in hopes of protecting itself against the potential
of litigation.
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 June 30, 1999.
<PAGE>
WEST ESSEX BANCORP, INC.
PART II . OTHER INFORMATION
June 30, 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 $262,497 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 AND USE OF PROCEEDS
-----------------------------------------
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
results of the matters submitted to the stockholders are incorporated
herein by reference from Part II, Item 4 of the Form 10-Q for the
quarter ended March 31, 1999 filed on May 17, 1999.
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. *
4.0 Form of Common Stock Certificate *
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
<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: August 13, 1999 By /s/Leopold W. Montanaro
-----------------------
Leopold W. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/Dennis A. Petrello
---------------------
Dennis A. Petrello
Executive Vice President and
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE>
<CAPTION>
Exhibit 11
WEST ESSEX BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net income ......................................... $ 733,693 $ 481,642 $1,485,272 $ 992,783
Weighted average number of common shares outstanding 4,069,783 N/A 4,067,936 N/A
Common stock equivalents due to dilutive effect
of stock options ................................. -- N/A -- N/A
Total weighted average number of common shares
and common share equivalents outstanding ......... 4,069,783 N/A 4,067,936 N/A
Basic earnings per common share .................... $ 0.18 N/A $ 0.37 N/A
Diluted earnings per common share .................. $ 0.18 N/A $ 0.37 N/A
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE UNAUDITED FINANCIAL STATEMENTS CONTAINED THEREIN.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,678,349
<INT-BEARING-DEPOSITS> 5,401,652
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,000,940
<INVESTMENTS-CARRYING> 168,716,079
<INVESTMENTS-MARKET> 166,495,236
<LOANS> 152,107,915
<ALLOWANCE> 1,400,366
<TOTAL-ASSETS> 346,568,370
<DEPOSITS> 235,944,350
<SHORT-TERM> 9,600,000
<LIABILITIES-OTHER> 1,772,910
<LONG-TERM> 51,409,699
0
0
<COMMON> 41,972
<OTHER-SE> 47,799,439
<TOTAL-LIABILITIES-AND-EQUITY> 346,568,370
<INTEREST-LOAN> 5,514,759
<INTEREST-INVEST> 5,405,648
<INTEREST-OTHER> 349,586
<INTEREST-TOTAL> 11,269,993
<INTEREST-DEPOSIT> 4,324,253
<INTEREST-EXPENSE> 5,829,005
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 34,515
<EXPENSE-OTHER> 3,453,368
<INCOME-PRETAX> 2,318,062
<INCOME-PRE-EXTRAORDINARY> 1,485,272
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,485,272
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 3.33
<LOANS-NON> 846,601
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,716,790
<CHARGE-OFFS> 316,424
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,400,366
<ALLOWANCE-DOMESTIC> 1,009,366
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 391,000
</TABLE>
