SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- - ----------------------------------------------
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report.
AT DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- -------- ---------
(IN THOUSANDS)
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets(1)......................... $328,609 $299,025 $235,969 $223,165 $199,580
Loans receivable, net(2)................ 140,272 112,735 82,134 85,031 84,611
SECURITIES AVAILABLE-FOR-SALE(3):
Investment securities, net............. 8,282 7,081 1,647 1,932 1,857
SECURITIES HELD-TO-MATURITY(3):
Investment securities, net............. 36,873 22,929 22,476 18,482 7,498
Mortgage-backed securities, net........ 110,376 130,174 113,254 100,032 89,300
Deposits(1)............................. 238,313 238,192 179,946 178,392 164,181
Borrowed money.......................... 42,101 30,300 23,650 17,000 10,000
Total stockholders' equity.............. 46,754 29,275 28,452 26,856 24,477
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income .................. $21,315 $18,116 $16,467 $15,735 $13,235
Interest expense ................. 12,219 9,656 8,300 7,618 5,121
------- ------- ------- ------- -------
Net interest income ............. 9,096 8,460 8,167 8,117 8,114
Provision for (recapture of) loan
losses ......................... (131) 487 232 510 (247)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses ..... 9,227 7,973 7,935 7,607 8,361
Noninterest income ............... 529 373 476 332 32
Noninterest expense(4) ........... 7,607 7,173 5,919 4,446 4,648
------- ------- ------- ------- -------
Income before income taxes(4) .... 2,149 1,173 2,492 3,493 3,745
Income taxes(4) .................. 752 436 836 1,221 977
------- ------- ------- ------- -------
Net income ....................... $ 1,397 $ 737 $ 1,656 $ 2,272 $ 2,768
======= ======= ======= ======= =======
(continued on next page)
3
AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
--------- ------ ------- ------- -------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(5):
Return on average assets(4) ..................... 0.44% 0.29% 0.74% 1.07% 1.44%
Return on average stockholders' equity(4) ....... 4.10 2.51 5.95 8.84 11.98
Average stockholders' equity
/average assets ................................ 10.75 11.55 12.37 12.09 11.98
Interest rate spread(6) ......................... 2.48 2.87 3.15 3.34 3.92
Net interest margin(7) .......................... 3.01 3.44 3.74 3.93 4.33
Non-interest expenses to average assets(4) ...... 2.40 2.82 2.63 2.09 2.41
Stockholders' equity to assets .................. 14.23 9.79 12.06 12.03 12.26
Efficiency ratio(8) ............................. 71.41 57.04 56.58 52.86 50.37
REGULATORY CAPITAL RATIOS(5):
Tangible capital ................................ 10.44 7.98 12.06 12.02 12.26
Core capital .................................... 10.44 7.98 12.06 12.02 12.26
Risk-based capital .............................. 28.81 26.10 39.15 37.50 35.89
ASSET QUALITY RATIOS(5):
Non-performing loans to total assets ............ 0.67 0.84 1.26 0.96 1.55
Non-performing loans to total loans
receivable .................................... 1.46 2.16 3.51 2.46 3.52
Non-performing assets to total assets ........... 0.84 1.24 1.85 1.57 2.48
Allowance for loan losses to
non-performing loans ........................... 78.47 75.19 52.70 55.84 40.00
Average interest-earning assets to average
interest-bearing liabilities .................... 112.99 114.39 115.46 115.94 114.86
Net interest income after provision for
loan losses to non-interest expenses(4) ......... 121.30 111.15 134.06 171.10 179.88
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES ...................................... 8 8 5 5 5
____________________________
(1) The increase in assets in fiscal 1997 was due primarily to the purchase of
three branch offices from Summit Bank.
(2) The allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and
1994 was $1.7 million, $1.9 million, $1.6 million, $1.2 million and $1.2
million, respectively.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as of December 31, 1993.
(4) Includes, for the year ended December 31, 1996, the SAIF Special Assessment
of $1.1 million and the related income tax benefit of $395,000. If excluded,
return on average assets, return on average stockholders' equity, non-
interest expenses to average assets and net interest income after provision
for loan losses to non-interest expenses would be 1.05%, 8.47%, 2.14% and
164.59%, respectively for the year ended December 31, 1996. Includes, for
the year ended December 31, 1998 and 1997, amortization expense related to
the excess of cost over assets acquired from Summit Bank of $593,000 and
$1.7 million, respectively, and the related income tax benefit of $213,000
and $627,000, respectively. If excluded, return on average assets, return on
average stockholders' equity, non-interest expenses to average assets and
net interest income after provision for loan losses to non-interest expense
would be 0.56%, 5.21%, 2.21% and 131.55%, respectively, for the year ended
December 31, 1998 and 0.73%, 6.30%, 2.13% and 146.83%, respectively, for the
year ended December 31, 1997.
(5) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized where
appropriate.
(6) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents non-interest expenses, excluding the SAIF
Special Assessment, impairment loss and amortization relating to intangible
assets and loss on REO, divided by the sum of net interest and non-interest
income excluding income on REO and security gain/loss.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- - --------------------------------------------------------------------------
OPERATIONS
- - ----------
West Essex Bancorp, Inc. ("the Company"), is the stock holding company for
West Essex Bank ("the Bank"). The Company is headquartered in Caldwell, New
Jersey and its principal business currently consists of the operations of the
Bank. West Essex Bancorp, M.H.C., a mutual holding company formed in connection
with the Bank's conversion to stock form and reorganization into the holding
company form of organization, which was consummated October 2, 1998, owns a
majority of the Company's outstanding common stock. The Bank's results of
operations are dependent primarily on net interest income, which is the
difference between the income earned on its loan and investment portfolios and
its cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by the Bank's provision for loan losses
and fees and other service charges. The Bank's noninterest expense principally
consists of compensation and employee benefits, office occupancy and equipment
expense, federal deposit insurance premiums, the cost of foreclosed real estate
operations, data processing, advertising and business promotion and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact the
Bank.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not undertake -- and
specifically disclaims any obligation -- to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objectives of the Bank's interest rate risk management is to
evaluate the interest rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives; and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset/Liability Committee, which is responsible for reviewing
asset/liability policies and interest rate risk position. The Asset/Liability
Committee meets at least on a quarterly basis, reports trends and interest rate
risk position to the Board of Directors and reviews with
5
the Board its activities and strategies, the effect of those strategies on the
Bank's net interest margin, the market value of the portfolio, and the effect
the changes in interest rates will have on the Bank's portfolio and exposure
limits. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on the earnings of the Bank.
In recent years the Bank has used the following strategies to manage
interest rate risk: (i) emphasizing the origination of long-term mortgage loans,
and (ii) offsetting the effects of holding fixed-rate mortgage loans by
purchasing adjustable-rate mortgage-backed securities.
The Bank continues to seek opportunities to originate for its portfolio
one-to four-family residential mortgage loans, as well as other loans, in its
primary market area of Essex, Morris and Bergen Counties, New Jersey. The Bank's
total loan portfolio had decreased as a percent of the Bank's total assets from
1993 through 1996 when loan originations, primarily due to intense competition
in the Bank's market area for loan originations, began to decrease. Further, due
to the relatively low interest rate environment that has existed in recent
years, the Bank has originated primarily fixed-rate one- to four-family mortgage
loans. The Bank's purchase of adjustable-rate mortgage-backed securities, as
well as various debt obligations of federal, state and local governments, has
enabled the Bank to effectively manage its interest rate risk. At December 31,
1998, the Bank had $110.4 million or 33.6% of total assets in mortgage-backed
securities classified as held-to-maturity, and $45.2 million or 13.7% of total
assets in investment securities, of which $8.3 million or 2.5% of total assets
were classified as available-for-sale. At the same date, the Bank's loans
receivable, net, totalled $140.3 million or 42.7% of total assets.
NET PORTFOLIO VALUE. The Bank's interest rate sensitivity is monitored by
management through the use of the OTS model which estimates the change in the
Bank's NPV over a range of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The OTS
produces its analysis based upon data submitted on the Bank's quarterly Thrift
Financial Reports.
The following table sets forth the Bank's NPV as of December 31, 1998, as
calculated by the OTS.
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
------------------------------- ----------------------
IN BASIS POINTS $ % NPV
(RATE SHOCK) AMOUNT CHANGE CHANGE RATIO CHANGE (1)
- - --------------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
400 18,608 (22,631) (55)% 6.33% (632)
300 24,930 (16,310) (40) 8.25 (441)
200 30,976 (10,263) (25) 9.97 (268)
100 36,468 (4,771) (12) 11.45 (121)
Static 41,239 12.66
(100) 45,048 3,809 9 13.55 89
(200) 48,804 7,564 18 14.39 173
(300) 53,691 12,452 30 15.46 281
(400) 59,029 17,790 43 16.59 393
_________________________
(1) Expressed in basis points.
6
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
7
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company at December 31, 1998, and for the years ended December
31, 1998, 1997 and 1996. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or interest-
bearing liabilities, respectively, for the periods shown except where noted
otherwise and reflect annualized yields and costs. Average balances are derived
from average month-end balances except for the average balances of other
interest-earning assets and borrowed money, which are derived from average daily
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
AT DECEMBER 31, 1998
--------------------------
YIELD/
BALANCE COST
-------------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable .............................. $141,989 7.58%
Mortgage-backed securities .................... 110,376 6.63
Investment securities(1) ...................... 45,156 6.69
Other interest-earning assets ................. 17,431 4.88
--------
Total interest-earning assets ............... 314,952 6.99
Allowance for loan losses ..................... (1,717)
Non-interest-earning assets ................... 15,374
--------
Total assets ................................ $328,609
========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits ............................. $ 20,695 1.30
Savings and club accounts ................... 60,306 2.52
Certificates of deposit ..................... 141,169 5.26
--------
Total interest-bearing deposits ........... 222,170 4.15
Borrowed money ................................ 42,010 5.69
--------
Total interest-bearing liabilities .......... 264,180 4.39
Non-interest bearing deposits ................... 16,143
Other non-interest-bearing liabilities .......... 1,532
--------
Total liabilities ........................... 281,855
Retained earnings ............................... 46,754
--------
Total liabilities and retained earnings ....... $328,609
========
Interest rate spread ............................ 2.60%
====
Net interest-earning assets ..................... $ 50,772
========
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.19x
========
__________________
(1) Includes securities available for sale.
8
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ---------------------------
AVERAG AVERAG AVERAG
AVERAGE E AVERAGE E AVERAGE E
BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/
COST COST COST
-------- -------- ------ -------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable....................... $129,416 $10,083 7.79% $ 97,277 $ 7,908 8.13% $ 85,973 $ 7,268 8.45%
Mortgage-backed securities............. 121,346 7,853 6.47 114,996 7,909 6.88 101,196 6,983 6.90
Investment securities(1)............... 39,195 2,695 6.88 26,774 1,897 7.09 23,035 1,701 7.38
Other interest-earning assets.......... 12,419 684 5.51 7,019 401 5.71 8,130 515 6.33
-------- ------- -------- ------- -------- -------
Total interest-earning assets........ 302,376 21,315 7.05 246,016 18,115 7.36 218,334 16,467 7.54
------- ------- -------
Allowance for loan losses.............. (1,832) (1,739) (1,354)
Other non-interest-earning assets...... 16,503 10,422 8,126
-------- -------- --------
Total assets......................... $317,047 $254,699 $225,106
======== ======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand................................. $ 20,412 339 1.66% $ 16,360 293 1.79% $ 14,736 269 1.83%
Savings and club....................... 62,120 1,672 2.69 53,221 1,357 2.55 51,138 1,278 2.50
Certificates of deposit................ 142,714 7,736 5.42 119,272 6,439 5.40 105,141 5,602 5.33
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits............................ 225,246 9,747 4.33 188,853 8,089 4.28 171,015 7,149 4.18
Borrowed money........................... 42,364 2,472 5.84 26,223 1,566 5.97 18,092 1,151 6.36
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........................... 267,610 12,219 4.57 215,076 9,655 4.49 189,107 8,300 4.39
------- ------- -------
Non-interest-bearing deposits.............. 13,219 8,503 6,943
Other non-interest bearing
liabilities............................... 2,121 1,711 1,203
-------- -------- --------
Total liabilities...................... 282,950 225,290 197,253
Stockholders' equity....................... 34,097 29,409 27,853
-------- -------- --------
Total liabilities and retained
earnings.............................. $317,047 $254,699 $225,106
======== ======== ========
Net interest income/interest rate
spread.................................... $ 9,096 2.48% $ 8,460 2.87% $ 8,167 3.15%
======= ==== ======= ==== ======= ====
Net interest-earning assets/net
yield on interest-earning assets.......... $ 34,766 3.01% $ 30,940 3.44% $ 29,227 3.74%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities.............. 1.13x 1.14x 1.15x
======== ======== ========
_____________________________________
(1) Includes securities available for sale.
9
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated on a proportional basis between changes in rate and volume.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ -------- -------- ------- --------
(IN THOUSANDS)
Interest income:
Loans receivable........................... $2,518 $(343) $2,175 $ 923 $(283) $ 640
Mortgage-backed securities................. 427 (483) (56) 946 (20) 926
Investment securities...................... 856 (58) 798 265 (69) 196
Other interest-earning assets.............. 298 (15) 283 (66) (48) (114)
------ ----- ------ ------ ----- ------
Total....................................... 4,098 (898) 3,200 2,068 (420) 1,648
------ ----- ------ ------ ----- ------
Interest expense:
Demand deposits(1)......................... 69 (23) 46 30 (6) 24
Savings and club accounts.................. 237 78 315 53 26 79
Certificates of deposit.................... 1,273 24 1,297 762 75 837
Borrowed money............................. 941 (35) 906 489 (74) 415
------ ----- ------ ------ ----- ------
Total....................................... 2,520 44 2,564 1,334 21 1,355
------ ----- ------ ------ ----- ------
Net change in net interest income........... $1,578 $(942) $ 636 $ 734 $(441) $ 293
====== ===== ====== ====== ===== ======
________________________
(1) Includes NOW and Money Market accounts.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets were $328.6 million at December 31, 1998, compared to $299.0
million at December 31, 1997, an increase of $29.6 million, or 9.9%. The
increase in assets was funded primarily by an increase in FHLB borrowings of
$11.7 million and net proceeds of $16.6 million from the initial public stock
offering.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, increased $7.7 million to $16.4 million at December 31, 1998 from $8.7
million at December 31, 1997. The increase in cash and cash equivalents was
funded primarily by the increase in borrowed money and serves to increase the
Bank's liquidity position.
10
In the aggregate, mortgage-backed securities and investment securities,
including available-for-sale and held-to-maturity issues, totalled $155.5
million at December 31, 1998, a decrease of $4.7 million from $160.2 million at
December 31, 1997. Such decrease was used to help fund increased lending.
Mortgage-backed securities, all of which are held-to-maturity, decreased $19.8
million due to repayments. Investment securities held-to-maturity increased
$13.9 million, primarily due to security purchases and investment securities
available-for-sale increased $1.2 million, primarily due to security purchases.
At December 31, 1998, 75.0% of the investment securities, including available-
for-sale and held-to-maturity, consisted of U.S. Government and Agency
obligations, while 95.7% of the mortgage-backed securities portfolio consisted
of Fannie Mae ("FNMA"), Freddie Mac ("FHLMC") and Ginnie Mae ("GNMA") issues.
Investment securities available for sale included $7.3 million of U.S. Treasury
notes and $1.0 million of U.S. Government Agency notes while investment
securities held-to-maturity consisted of $1.5 million of U.S. Treasury notes,
$24.1 million of U.S. Government Agency notes, $10.9 million in trust preferred
securities and $388,000 in municipal bond anticipation notes.
Loans receivable increased $27.6 million to $140.3 million at December 31,
1998 from $112.7 million at December 31, 1997. The increase was primarily in
the one- to four-family mortgage loan category, which increased $27.2 million.
At December 31, 1998, 88.6% of the outstanding balance of loans in the portfolio
consisted of one- to four-family loans, compared to 87.3% at December 31, 1997.
Deposits totaled $238.3 million at December 31, 1998, an increase of
$121,000 or 0.05%, over the $238.2 million balance at December 31, 1997.
Borrowed money increased $11.7 million to $42.0 million at December 31,
1998, as compared to $30.3 million at December 31, 1997. Based on the lower
cost of wholesale funds as compared to comparable maturity retail deposits,
management chose to fund the asset growth discussed above with additional FHLB
borrowings. During the year ended December 31, 1998, short-term borrowings
totalling $18.0 million and current maturities of long-term borrowings of $7.4
million were repaid, while $37.1 million in borrowings with three to ten year
maturities and an average interest rate of 5.57% were incurred.
Stockholders' equity increased $17.5 million or 59.7%, to $46.8 million,
primarily due to $16.6 million of net proceeds from the initial public stock
offering and the retention of net income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. Net income for 1998 was $1.40 million, an increase of $660,000
from $737,000 in 1997. The increase was primarily the result of four factors.
The amortization of the excess of cost over assets acquired in connection with
the October 1997 purchase of deposits from Summit Bank totalled $593,000 in
1998, or $1.15 million less than the comparable 1997 figure of $1.74 million,
which included a $1.59 million loss upon the reassessment of the carrying value
of this asset at the end of 1997. Charitable contribution expense totalled
$863,000 in 1998, an increase of $849,000 over the 1997 amount of $14,000.
$842,000 of the 1998 charitable contribution expense related to the initial
funding of the West Essex Bancorp Charitable Foundation, a charitable foundation
established in connection with the Company's initial public stock offering, with
a $100,000 cash contribution and a contribution by the Company of 74,214 shares
of Company common stock. In 1998, a $131,000 recapture of provision for loan
losses represented an improvement of $618,000 over the provision of $487,000
recorded in 1997. Finally, loss on real estate owned decreased by $240,000 to
$140,000 in 1998 as compared to $380,000 in 1997. The aforementioned four
factors combined to increase income before income taxes and net income by $1.16
million and $742,000, respectively. The remaining decrease of $82,000 in net
income
11
was the result of increased non-interest expenses, exclusive of those discussed
above, partially offset by increased non-interest income, and the income tax
effect thereon.
INTEREST INCOME. Total interest income increased 17.7% to $21.3 million
for 1998 as compared to $18.1 million for 1997. The increase was due to a $56.4
million or 22.9% increase in average interest-earning assets during 1998, which
more than offset a drop of 31 basis points in the yield earned thereon to 7.05%
in 1998 from 7.36% in 1997. Increased average balances and decreased yield were
experienced in all categories of interest-earning assets. The increased average
balances of earning assets were the result of increased loan originations and
securities purchases funded by the $16.6 million net proceeds of the Company's
1998 initial public stock offering, the Summit deposit purchase of late 1997 and
increased FHLB borrowings.
Interest income on loans during 1998 increased by $2.2 million, or 27.5%,
to $10.1 million when compared to $7.9 million during 1997. During the years
ended December 31, 1998 and 1997, the yield earned on the loan portfolio was
7.79% and 8.13%, respectively. The average balance of loans outstanding during
the years ended December 31, 1998 and 1997 totalled $129.4 million and $97.3
million, respectively. The decreased yield is the result of the lower market
interest rates prevailing during 1998. The increased average balance during
1998 is the result of the continued increase in loan origination efforts,
including the use of outside mortgage brokers, which began in 1997.
Originations were $50.5 million in 1998, up from $47.1 million in 1997.
Interest on mortgage-backed securities, all of which are held-to-maturity,
decreased $56,000 or 0.7%, during 1998 to $7.91 million compared to $7.85
million for 1997. During the year ended December 31, 1998, the average balance
of mortgage-backed securities outstanding increased $6.3 million, or 5.5%, to
$121.3 million when compared to $115.0 million for 1997. The yield earned on
the mortgage-backed securities portfolio decreased to 6.47% in 1998 from 6.88%
in 1997. The decrease in the average yield on mortgage-backed securities during
1998 resulted primarily from lower market interest rates.
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, increased by $798,000, or 42.1%, to $2.7 million
for 1998, when compared to $1.9 million for 1997. The increase resulted from an
increase of $12.4 million, or 46.4%, in the average balance of the investment
securities portfolio, which more than offset a decrease of 21 basis points in
the yield earned on the investment securities portfolio to 6.88% in 1997 from
7.09% in 1997. The increased average balance is the result of purchases during
1998 while the decreased yield is due to the lower market rates available
thereon.
Interest on other interest-earning assets totalled $684,000 and $401,000
during 1998 and 1997, respectively. The yield earned on other interest-earning
assets decreased to 5.51% in 1998 from 5.71% in 1997, which partially offset an
increase of $5.4 million, or 76.9%, in the average balance of other interest-
earning assets outstanding. The increased average balance in 1998 is due to the
temporary investment of net proceeds of the initial public stock offering in
overnight deposits.
INTEREST EXPENSE. Interest expense on deposits increased $1.7 million,
or 13.1% to $9.74 million during 1998 compared to $8.09 million for 1997. The
increase during 1998 was attributable to an increase of five basis points in the
average cost of interest-bearing deposits to 4.33% for 1998 from 4.28% or 1997,
along with an increase of $36.4 million, or 19.3%, in the average balance of
interest-bearing deposits outstanding. The increased average balance of
interest-bearing deposits primarily reflects the purchase of deposits from
Summit during October 1997.
12
Interest expense on borrowed money increased $906,000, or 57.9%, to $2.5
million during 1998 compared to $1.6 million for 1997. The increase during 1998
was attributable to an increase of $16.1 million in the average balance of
borrowings outstanding, partially offset by a decrease of 13 basis points in the
cost of borrowings to 5.84% for 1998 from 5.97% for 1997. The increased average
balance reflects management's increased use of borrowed funds to leverage the
balance sheet. The decreased interest rate on borrowings resulted from the
paydown of older debt having higher interest rates as well as the lower interest
rates available on new borrowings obtained in 1998.
NET INTEREST INCOME. Net interest income for 1998 increased $636,000, or
7.5%, to $9.1 million in 1998 from $8.5 million in 1997. The net interest rate
spread decreased to 2.48% in 1998 from 2.87% in 1997 and the interest rate
margin decreased to 3.01% in 1998 from 3.44% in 1997. These decreases primarily
resulted from a 31 basis point decrease in the yield earned on interest-earning
assets to 7.05% in 1998 from 7.36% in 1997 coupled with an eight basis point
increase in the cost of average interest-bearing liabilities to 4.57% in 1998
from 4.49% in 1997. Despite the decreases in interest rate spread and margin,
the Company was able to improve net interest income by increasing net interest-
earning assets by $3.8 million and by leveraging the balance sheet through
increased borrowings.
PROVISION FOR LOAN LOSSES. During 1998, the Bank recorded a recapture of
$131,000 from the allowance for loan losses as a credit to provision for loan
losses. During 1997, the Bank provided $487,000 for loan losses. The
recaptured allowance of $131,000 in 1998 represented 6.9% of the allowance for
loan loses at the end of 1997 and reflected the $405,000 or 16.3% decrease in
loans delinquent ninety days or more and the reduced uncertainty involving
circumstances discussed in the third succeeding paragraph. At December 31, 1998
and 1997, the Bank's loan portfolio included loans totalling $2.1 million and
$2.5 million, respectively, which were delinquent ninety days or more. The Bank
maintains an allowance for loan losses based on management's evaluation of the
risks inherent in its loan portfolio which gives due consideration to changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The allowance for loan loses amounted to $1.72 million at December
31, 1998, representing 1.20% of total loans and 82.4% of loans delinquent ninety
days or more compared to an allowance of $1.89 million at December 31, 1997,
representing 1.62% of total loans and 75.7% of loans delinquent ninety days or
more. During 1998 and 1997, the Bank charged off loans aggregating $37,000 and
$166,000, respectively. The Bank monitors its loan portfolio and intends to
continue to provide for loan losses based on its ongoing periodic review of the
loan portfolio and general market conditions.
The Bank has established a standardized process to assess the adequacy of
the allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and non-performing loan portfolios, and other risks inherent in the loan
portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
13
The allowance for loan losses includes specific, general and unallocated
allowances of $492,000, $817,000 and $408,000, respectively, at December 31,
1998, as compared to $605,000, $761,000 and $518,000, respectively, at December
31, 1997. The decrease in the specific allowance primarily reflects the
continuing resolution of loans related to a large condominium project which has
been in default since 1993 and is presently subject to bankruptcy proceedings
and a lawsuit. The uncertainty in regard to these credits is also accounted for
in the unallocated allowance in amounts which decrease as the ability to clearly
quantify the specific losses increases. Another factor included in the
unallocated allowance at December 31, 1998 and 1997 is the large volume of loan
originations generated by the Bank by outside mortgage brokers during 1998 and
1997 as compared to no such loans in prior years. The Company believes the use
of outside brokers increases the inherent risks in the loan portfolio. The
general allowance increased primarily due to the $26.9 million increase in the
loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $156,000, or 41.8%
to $529,000 during 1998 as compared to $373,000 for 1997. The increase in non-
interest income during 1998 resulted primarily from a $20,000 loss on sale of
securities available for sale during 1997 compared to none in 1998, and
increases in fees and service charges of $93,000 and miscellaneous income of
$43,000. The increase during the 1998 period in fees and service charges
resulted primarily from the increased number of deposit accounts services since
the October 1997 Summit Bank deposit purchase.
NON-INTEREST EXPENSES. Non-interest expenses increased $434,000, or 6.1%
to $7.6 million during 1998 compared to $7.2 million for 1997. During 1997, in
conjunction with the purchase of three branches and related deposit liabilities
from Summit Bank, the Bank recorded $7.6 million in excess of cost over assets
acquired. The amortization of the excess of cost over assets acquired in
connection with the October 1997 purchase of deposits from Summit Bank totalled
$593,000 in 1998, or $1.15 million less than the comparable 1997 figure of $1.74
million, which included a $1.59 million loss upon the reassessment of the
carrying value of this asset at the end of 1997. Charitable contribution
expense totalled $863,000 in 1998, an increase of $849,000 over the 1997 amount
of $14,000. $842,000 of the 1998 charitable contribution expense related to the
initial funding of the West Essex Bancorp Charitable Foundation, a charitable
foundation established in connection with the Company's initial public stock
offering, with a $100,000 cash contribution and a contribution by the Company of
74,214 shares of Company common stock. Loss on real estate owned decreased by
$240,000 to $140,000 in 1998 as compared to $380,000 in 1997, due to a reduction
in loss provisions recorded to $131,000 in 1998 from $373,000 in 1997.
Excluding the aforementioned factors, non-interest expenses were $6.0 million in
1998, or $974,000 higher than the $5.0 million comparable amount or 1997. This
increase of 19.3% is attributable to the growth of the Company, which is
reflected by a 24.5% growth in average total assets and an increase in business
locations from five to eight effective October 1997. In accordance with the
foregoing, salaries and employee benefits increased $255,000 or 9.0%, occupancy
and equipment expenses increased $253,000 or 34.1% and miscellaneous expenses
increased $445,000 or 33.4%. Included in miscellaneous expenses, among other
things, are legal fees, accounting and auditing fees, director fees, FHLB demand
deposit charges, insurance costs, telephone expenses and stationery and supplies
expenses and expenses associated with Year 2000 compliance issues.
INCOME TAXES. Income tax expense totalled $752,000 and $436,000 during
1998 and 1997, respectively. The increase in 1998 resulted primarily from an
increase in pre-tax income of $976,000 and from the purchase, in 1998, of trust
preferred securities which are afforded favorable income tax treatment under the
internal revenue code. The Bank's effective income tax rate was 35.0% in 1998
and 37.2% in 1997.
14
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME. Net income for 1997 was $737,000, a decrease of $919,000 from
$1.7 million in 1996. The primary factors in the decrease of net income were a
$1.74 million amortization expense, which primarily related to a $1.6 million
loss recorded, on the excess of the cost over assets acquired in connection with
the purchase of deposits from Summit in 1997, the $1.1 million one-time special
assessment in 1996 to recapitalize the SAIF, and a $380,000 loss on REO in 1997
versus income of $21,000 on REO in 1996. The combined effect of these three
factors was to decrease income before income taxes and net income by $1.05
million and $670,000, respectively. The remaining $249,000 decrease in net
income was the result of increases in provisions for loan losses and non-
interest expense, along with a decrease in non-interest income, which more than
offset an increase in net interest income and a decrease in income taxes.
INTEREST INCOME. Total interest income increased 10.0% to $18.1 million
for 1997 as compared to $16.5 million for 1996. The increase was due to a $27.7
million or 12.7% increase in average interest-earning assets during 1997, which
more than offset a drop of 18 basis points in the yield earned thereon to 7.36%
in 1997 from 7.54% in 1996. Increased average balances and decreased yield were
experienced in all categories of interest-earning assets. The increased average
balances of earning assets were the result of increased loan originations and
securities purchases funded by the Summit deposit purchase and increased FHLB
borrowings.
Interest income on loans during 1997 increased by $640,000, or 8.8%, to
$7.9 million when compared to $7.3 million during 1996. During the years ended
December 31, 1997 and 1996, the yield earned on the loan portfolio was 8.13% and
8.45%, respectively. The average balance of loans outstanding during the years
ended December 31, 1997 and 1996, totalled $97.3 million and $86.0 million,
respectively. The decreased yield is the result of the lower market interest
rates prevailing during 1997. The increased average balance during 1997 is the
result of increased loan origination efforts, including the use of outside
mortgage brokers. Originations rose to $47.1 million in 1997 from $15.1 million
in 1996.
Interest on mortgage-backed securities, all of which are held-to-maturity,
increased $926,000 or 13.3%, during 1997 to $7.9 million compared to $7.0
million for 1996. During the year ended December 31, 1997, the average balance
of mortgage-backed securities outstanding increased $13.8 million, or 13.6%, to
$115.0 million when compared to $101.2 million for 1996. The yield earned on
the mortgage-backed securities portfolio decreased marginally to 6.88% in 1997
from 6.90% in 1996. The increase in the average balance of mortgage-backed
securities during 1997 resulted primarily from purchases of mortgage-backed
securities which more than offset principal repayments.
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, increased by $196,000, or 11.5%, to $1.9 million
for 1997, when compared to $1.7 million for 1996. The increase resulted from an
increase of $3.7 million, or 16.2%, in the average balance of the investment
securities portfolio, which more than offset a decrease of 29 basis points in
the yield earned on the investment securities portfolio to 7.09% in 1997 from
7.38% in 1996. The increased average balance and decreased yield were both the
result of the purchase during 1997 of $7.0 million in U.S. Government securities
available-for-sale yielding 6.08%.
Interest on other interest-earning assets totalled $401,000 and $515,000
during 1997 and 1996, respectively. The yield earned on other interest-earning
assets decreased to 5.71% in 1997 from
15
6.33% in 1996, which augmented a decrease of $1.1 million, or 13.7%, in the
average balance of other interest-earning assets outstanding.
INTEREST EXPENSE. Interest expense on deposits increased $940,000, or
13.1% to $8.1 million during 1997 compared to $7.1 million for 1996. The
increase during 1997 was attributable to an increase of ten basis points in the
Bank's average cost of interest-bearing deposits to 4.28% for 1997 from 4.18%
for 1996, along with an increase of $17.8 million, or 10.4%, in the average
balance of interest-bearing deposits outstanding. The increased cost reflects a
seven basis point increase in the cost of certificates of deposit as well as the
increase of such certificates to 63.2% of average interest-bearing deposits in
1997 from 61.5% during 1996. The increased average balance of interest-bearing
deposits primarily reflects the purchase of deposits from Summit during 1997.
Interest expense on borrowed money increased $415,000, or 36.1%, to $1.6
million during 1997 compared to $1.2 million for 1996. The increase during 1997
was attributable to an increase of $8.1 million in the average balance of
borrowings outstanding, partially offset by a decrease of 39 basis points in the
Bank's cost of borrowings to 5.97% for 1997 from 6.36% for 1996. The increased
average balance reflects management's increased use of borrowed funds to
leverage the balance sheet. The decreased interest rate on borrowings resulted
from the paydown of older debt having higher interest rates as well as the lower
interest rates available on new borrowings obtained in 1997.
NET INTEREST INCOME. Net interest income for 1997 increased $293,000, or
3.6%, to $8.5 million in 1997 from $8.2 million in 1996. The Bank's net
interest rate spread decreased to 2.87% in 1997 from 3.15% in 1996 and its
interest rate margin decreased to 3.44% in 1997 from 3.74% in 1996. These
decreases primarily resulted from an 18 basis point decrease in the yield earned
on interest-earning assets to 7.36% in 1997 from 7.54% in 1996 coupled with a
ten basis point increase in the cost of average interest-bearing liabilities to
4.49% in 1997 from 4.39% in 1996. Despite the decreases in interest rate spread
and margin, the Bank was able to improve net income by increasing net interest-
earning assets by $1.7 million and by leveraging the balance sheet through a
deposit purchase and increased borrowings.
PROVISION FOR LOAN LOSSES. During 1997 and 1996, the Bank provided
$487,000 and $232,000, respectively, for loan losses. The increased provision
was primarily due to the growth in the loan portfolio, which increased $31.6
million during 1997 as compared to a $2.8 million decline during 1996. In
addition, an unexpected recovery of $132,000 related to a loan charged off in
1995 was received. The crediting of this amount to the allowance reduced the
level of provisions for loss needed in 1996. At December 31, 1997 and 1996, the
Bank's loan portfolio included loans totalling $2.5 million and $2.9 million,
respectively, which were delinquent ninety days or more. The Bank maintains an
allowance for loan losses based on management's evaluation of the risks inherent
in its loan portfolio which gives due consideration to changes in general market
conditions and in the nature and volume of the Bank's loan activity. The
allowance for loan losses amounted to $1.9 million at December 31, 1997,
representing 1.62% of total loans and 75.7% of loans delinquent ninety days or
more compared to an allowance of $1.6 million at December 31, 1996, representing
1.85% of total loans and 54.5% of loans delinquent ninety days or more. During
1997, the Bank charged off loans aggregating $166,000. During 1996, no loans
were charged off. The Bank monitors its loan portfolio and intends to continue
to provide for loan losses based on its ongoing periodic review of the loan
portfolio and general market conditions.
The Bank has established a standardized process to assess the adequacy of
the allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit
16
reviews and gives consideration to areas of exposure such as concentrations of
credit, local economic conditions, trends in delinquencies, collateral coverage,
the composition of the performing and non-performing loan portfolios, and other
risks inherent in the loan portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge-off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
The allowance for loan losses includes specific, general and unallocated
allowances of $605,000, $761,000 and $518,000, respectively, at December 31,
1997, as compared to $555,000, $493,000 and $516,000, respectively, at December
31, 1996. The increase in the specific allowance primarily reflects the
continuing resolution of loans related to a large condominium project which has
been in default since 1993 and is presently subject to bankruptcy proceedings
and a lawsuit. The uncertainty in regard to these credits is also accounted for
in the unallocated allowance in amounts which decrease as the ability to clearly
quantify the specific losses increases. Another factor included in the
unallocated allowance at December 31, 1997 is the large volume of loan
originations generated for the Bank by outside mortgage brokers during 1997 as
compared to no such loans in prior years. The Company believes the use of
outside brokers increases the inherent risk in the loan portfolio. The general
allowance increased primarily due to the $31.6 million increase in the loan
portfolio.
NON-INTEREST INCOME. Non-interest income decreased by $103,000, or 21.6%,
to $373,000 during 1997 as compared to $476,000 for 1996. The decrease in non-
interest income during 1997 resulted primarily from a $20,000 loss on sales of
securities available for sale during 1997 as compared to a $103,000 gain in
1996, $21,000 in income on REO recorded in 1996 compared to none in 1997, and a
decrease in miscellaneous income of $22,000, which was partially offset by
increases in fees and service charges of $63,000. The increase during the 1997
period in the fees and service charges resulted from a revised service fee
schedule on various depository services.
NON-INTEREST EXPENSES. Non-interest expenses increased $1.3 million, or
21.2%, to $7.2 million during 1997 compared to $5.9 million for 1996. During
1997, in conjunction with the purchase of three branches and related deposit
liabilities from Summit, the Bank recorded $7.6 million in excess of cost over
assets acquired. Amortization expense of $1.7 million, including a loss of $1.6
million, as previously noted, was recorded during 1997 on this asset.
Additionally, on September 30, 1996, legislation was enacted which, among other
things, imposed a one-time special assessment on SAIF member institutions,
including the Bank. The special assessment levied amounted to 65.7 basis points
on SAIF assessable deposits held as of March 31, 1995. The Bank, during the
1996 period, took a charge of $1.1 million as a result of such assessment. Non-
interest expenses, excluding the above-mentioned amortization expense on excess
of cost over assets acquired and the one-time SAIF assessment, increased
$610,000, or 12.7%, to $5.4 million during 1997 compared to $4.8 million for
1996.
Salaries and employee benefits increased $226,000 or 8.6%, occupancy and
equipment expenses increased $87,000 or 13.2% and miscellaneous expenses
increased $132,000 or 12.2%. The combined $445,000 increase in these areas is
largely attributable to the three branches acquired from Summit during 1997 and
the related increase in operating costs. Included in miscellaneous expenses,
among
17
other things, are legal fees, accounting and auditing fees, director fees, FHLB
demand deposit charges, insurance costs, telephone expenses and stationery and
supplies expenses.
Loss on REO totalled $380,000 in 1997 compared to income of $21,000
recorded in 1996, which resulted primarily from an increase of $328,000 in loss
provisions recorded on properties in the REO portfolio, to $373,000 in 1997 from
$45,000 in 1996, and an $87,000 decrease in gain on sales of properties to
$30,000 in 1997 from $117,000 in 1996. $264,000 of the $373,000 in loss
provisions recorded in 1997 relates to one commercial property and was based
upon a market price opinion given in October 1997 by a major realtor.
Advertising expense increased to $128,000 in 1997 compared to $78,000 in
1996 as increased advertising was utilized in regard to the acquisition of the
three Summit branches, as well as to advertise the Bank's mortgage products.
Partially offsetting the increases in salaries and employee benefit,
occupancy and equipment expenses, miscellaneous expenses and loss on real estate
owned was a $265,000 decrease in federal deposit insurance premium related to
the reduction of the deposit insurance assessment rate.
INCOME TAXES. Income tax expense totalled $436,000 and $836,000 during
1997 and 1996, respectively. The increase in 1997 resulted primarily from an
increase in pre-tax income of $1.3 million and from the utilization, in 1996, of
a $103,000 capital loss carryforward. The Bank's effective income tax rate was
37.2% in 1997 and 33.5% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, mortgage-backed and
investment securities and FHLB borrowings. The Bank uses the funds generated
to support its lending and investment activities as well as any other demands
for liquidity such as deposit outflows. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows, mortgage
prepayments and the exercise of call features are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.0%. At December 31, 1998, 1997, 1996, 1995 and 1994, the Bank's
regulatory liquidity ratios were 7.38%, 9.44%, 10.96%, 13.04% and 11.89%,
respectively.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $33.0 million, or 10.4%, of total
adjusted assets, which is above the required level of $4.7 million, or 1.5%;
core capital of $33.0 million, or 10.4%, of total adjusted assets, which is
above the required level of $12.6 million, or 4%; and risk-based capital of
$34.5 million, or 28.8%, of risk-weighted assets, which is above the required
level of $9.6 million, or 8%.
The most liquid assets are cash and cash equivalents and investment
securities available for sale. The levels of these assets are dependent on
operating, financing, lending and investing activities during any given period.
At December 31, 1998, cash and cash equivalents and investment securities
available for sale totalled $24.7 million, or 7.5% of total assets.
18
The Company and the Bank have other sources of liquidity if a need for
additional funds arises, including FHLB borrowings. At December 31, 1998, the
Bank had $42.0 million in borrowings outstanding from the FHLB. Depending on
market conditions, the pricing of deposit products and FHLB borrowings, the Bank
may continue to rely on FHLB borrowing to fund asset growth.
At December 31, 1998, the Bank had commitments to originate and purchase
loans and fund unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $13.6 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including Individual Retirement Account
("IRA") accounts, which are scheduled to mature in less than one year from
December 31, 1998, totalled $118.3 million. The Bank expects that substantially
all of the maturing certificate accounts will be retained by the Bank at
maturity.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system and represents 1998. The Company has been identifying potential problems
associated with the "Year 2000" issue and has implemented a plan designated to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems in their software by March 31, 1999 and anticipates that all of its
major vendors also will have resolved any Year 2000 problems in their software
by March 31, 1999. All Year 2000 issues for the Bank, including proxy testing,
are expected to be addressed by March 31, 1999 and any problems would be
remedied by June 30, 1999. The Bank is in the process of preparing a
contingency plan which it intends to have completed by June, 30, 1999, as
federal regulations require. The plan will detail what steps the Bank will
follow should major system interruptions such as lack of electrical power, no
telecommunications, no heating system and the like should manifest itself at the
turn of the century. The Bank believes that its costs related to Year 2000 will
be approximately $185,000. To date, the Bank has spent in excess of $100,000 of
this amount on various hardware and software upgrades. There can be no
assurances, however, that such plan or the performance by the Bank's vendors
will be effective to remedy all potential problems. To the extent the Company's
systems are not fully Year 2000 compliant, there can be no assurances that
potential systems interruptions or the cost necessary to update software would
not have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. Further, any Year 2000
failure on the part of the Bank's customers could result in additional expense
or loss to the Bank. The Bank also plans to work with its customers to address
any potential Year 2000 problems. In this area, the Bank has mailed a written
survey to its commercial loan customers to help it determine the extent, if any,
that Year 2000 may have on their business or their ability to make any loan
payments. To date, all surveys have been returned and any problems noted are
being addressed. Additionally, as a related matter, the Bank will carefully
consider whether a potential commercial loan applicant is Year 2000 compliant by
requiring the applicant to complete the survey as part of its underwriting
criteria.
19
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. Management has determined that this statement does not currently have
any impact on the Company's information reporting.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement supersedes the
disclosure requirements in FASB statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement addresses disclosures only. It does not address measurement or
recognition and, as such, does not have any impact on consolidated financial
condition or operations. The disclosure requirements of SFAS No. 132 are
effective for fiscal years beginning after December 15, 1997. SFAS No. 132 was
implemented in 1998 and the required disclosure provided in the consolidated
financial statements for all applicable periods.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
addition, certain provisions of this statement will permit, at the date of
initial adoption of SFAS No. 133, the transfer of any held-to-maturity security
into either the available-for-sale or trading category and the transfer of any
available-for-sale security into the trading category. Transfers from the held-
to-maturity portfolio at the date of initial adoption will not call into
question the entity's intent to hold other debt securities to maturity in the
future. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
the Company and the Bank, which do not intend to adopt SFAS No. 133 earlier than
required.
20
R RADICS & CO., LLC
- - --------------------------------------------------------------------------------
Established Certified Public Accountants & Consultants
1993
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Board of Directors and Stockholders
West Essex Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of West Essex Bancorp, Inc. (the "Bancorp") and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of West Essex Bancorp, Inc. and Subsidiaries as of December
31, 1998 and 1997, and the results of their operations and cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Radics & Co, LLC
February 5, 1999
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
973-575-9696 Fax: 973-575-9695
Internet: www.radics.com
21
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
December 31,
------------------------------------
Assets Note(s) 1998 1997
- - ------ ---------------- --------------- --------------
Cash and amounts due from depository institutions $ 1,547,464 $ 1,832,548
Interest-bearing deposits in other banks 14,823,967 6,863,570
-------------- --------------
Total cash and cash equivalents 1 and 18 16,371,431 8,696,118
Securities available for sale 1, 3 and 18 8,282,450 7,080,550
Investment securities held to maturity 1, 4 and 18 36,873,165 22,928,866
Mortgage-backed securities held to maturity 1, 5, 12 and 18 110,376,072 130,174,291
Loans receivable 1, 6 and 18 140,272,203 112,734,741
Real estate owned 1 and 7 582,138 1,214,840
Premises and equipment 1 and 8 2,947,374 3,122,584
Federal Home Loan Bank of New York stock 12 2,607,300 2,183,800
Accrued interest receivable 1, 9 and 18 2,004,809 2,012,197
Excess of cost over assets acquired 1 and 10 5,236,116 5,828,884
Other assets 15 3,055,825 3,047,961
-------------- --------------
Total assets $ 328,608,883 $ 299,024,832
============== ==============
Liabilities and Stockholders' Equity
- - ------------------------------------
Liabilities
- - -----------
Deposits 11 and 18 $ 238,312,941 $ 238,192,141
Borrowed money 12 and 18 42,009,880 30,300,000
Advance payments by borrowers for taxes and insurance 921,958 772,429
Other liabilities 14 and 15 610,050 485,553
-------------- --------------
Total liabilities 281,854,829 269,750,123
-------------- --------------
- -
Commitments and contingencies 16 and 18
Stockholders' Equity 1, 2, 13, 14 and 15
- - --------------------
Preferred stock (par value $.01), 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock (par value $.01), 9,000,000 shares
authorized; 4,197,233 shares issued and outstanding 41,972 -
Additional paid-in capital 17,339,291 -
Retained earnings - substantially restricted 30,507,475 29,210,175
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (1,326,233) -
Accumulated other comprehensive income - Unrealized
gain on securities available for sale, net of income taxes 191,549 64,534
-------------- --------------
Total stockholders' equity 46,754,054 29,274,709
-------------- --------------
Total liabilities and stockholders' equity $ 328,608,883 $ 299,024,832
============== ==============
See notes to consolidated financial statements.
22
WEST ESSEX BANCORP, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Ended December 31,
--------------------------------------------------------
Note(s) 1998 1997 1996
--------- ---------------- ---------------- ---------------
Interest income:
Loans 1 and 6 $ 10,082,633 $ 7,908,541 $ 7,268,237
Mortgage-backed securities 1 7,852,565 7,908,940 6,982,443
Investment securities 1 2,216,231 1,661,624 1,598,858
Securities available for sale 1 478,981 235,529 101,961
Other interest-earning assets 684,273 400,842 515,475
------------ ----------- -----------
Total interest income 21,314,683 18,115,476 16,466,974
------------ ----------- -----------
Interest expense:
Deposits 11 9,747,271 8,089,473 7,148,794
Borrowed money 2,471,538 1,566,165 1,151,419
------------ ----------- -----------
Total interest expense 12,218,809 9,655,638 8,300,213
------------ ----------- -----------
Net interest income 9,095,874 8,459,838 8,166,761
Provision for (recapture of) loan losses 6 (130,630) 487,015 232,103
------------ ----------- -----------
Net interest income after provision for (recapture of) loan losses 9,226,504 7,972,823 7,934,658
------------ ----------- -----------
Non-interest income:
Fees and service charges 366,319 273,443 210,286
(Loss) gain on sale of securities available for sale 1 and 3 - (20,245) 102,752
Income on real estate owned 1 and 7 - - 20,563
Other 163,331 120,039 141,996
------------ ----------- -----------
Total non-interest income 529,650 373,237 475,597
------------ ----------- -----------
Non-interest expenses:
Salaries and employee benefits 14 3,103,230 2,847,886 2,621,753
Net occupancy expense of premises 1 and 17 334,699 245,879 228,411
Equipment 1 659,998 495,742 426,179
Loss on real estate owned 1 and 7 140,277 379,870 -
Charitable contributions 2 863,434 14,401 13,947
Federal insurance premium 17 136,025 114,755 1,478,029
Amortization of intangibles 10 592,768 1,743,062 -
Other 1,776,386 1,331,346 1,149,977
------------ ----------- -----------
Total non-interest expenses 7,606,817 7,172,941 5,918,296
------------ ----------- -----------
Income before income taxes 2,149,337 1,173,119 2,491,959
Income taxes 1 and 15 752,037 436,279 835,951
------------ ----------- -----------
Net income $ 1,397,300 $ 736,840 $ 1,656,008
============ =========== ===========
Net income per common share - basic and diluted 1 $ 0.34 (1) N/A (1) N/A (1)
============= =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 1 4,062,395 (1) N/A (1) N/A (1)
============= =========== ===========
See notes to consolidated financial statements.
(1) West Essex Bank converted to stock form on October 2, 1998.
23
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Net income $1,397,300 $ 736,840 $1,656,008
---------- ---------- ----------
Other comprehensive income, net of income taxes:
Unrealized holding gains on securities
available for sale, net of income taxes
of $71,384, $36,269, and $ -0-, respectively 127,015 65,387 20,679
Reclassification adjustment
for realized losses (gains) on securities
available for sale, net of income taxes
of $ -0-, $ -0- and $21,939, respectively - 20,245 (80,813)
---------- ---------- ----------
Other comprehensive income 127,015 85,632 (60,134)
---------- ---------- ----------
Comprehensive income $1,524,315 $ 822,472 $1,595,874
========== ========== ==========
See notes to consolidated financial statements.
24
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Retained
Additional Earnings -
Common Paid-In Substantially
Stock Capital Restricted
---------------- ------------------ ------------------
Balance - December 31, 1995 $ - $ - $ 26,817,327
Net income for the year ended December 31, 1996 - - 1,656,008
Unrealized loss on securities available
for sale, net of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1996 - - 28,473,335
Net income for the year ended December 31, 1997 - - 736,840
Unrealized gain on securities available
for sale, net of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1997 - - 29,210,175
Net income for the year ended December 31, 1998 - - 1,397,300
Net proceeds from initial public stock offering 41,972 17,340,088 -
Common stock acquired by ESOP - - -
ESOP shares committed to be released - (797) -
Initial capitalization of mutual holding company - - (100,000)
Unrealized gain on securities available for sale, net
of income taxes - - -
---------------- ------------------ ------------------
Balance - December 31, 1998 $ 41,972 $ 17,339,291 $ 30,507,475
================ ================== ==================
Accumulated
Common Stock Other Total
Acquired by Comprehensive Stockholders'
ESOP Income Equity
-------------------- -------------------- ----------------
Balance - December 31, 1995 $ - $ 39,036 $ 26,856,363
Net income for the year ended December 31, 1996 - - 1,656,008
Unrealized loss on securities available
for sale, net of income taxes - (60,134) (60,134)
Balance - December 31, 1996 - (21,098) 28,452,237
Net income for the year ended December 31, 1997 - - 736,840
Unrealized gain on securities available
for sale, net of income taxes - 85,632 85,632
-------------------- -------------------- ----------------
Balance - December 31, 1997 - 64,534 29,274,709
Net income for the year ended December 31, 1998 - - 1,397,300
Net proceeds from initial public stock offering - - 17,382,060
Common stock acquired by ESOP (1,473,584) - (1,473,584)
ESOP shares committed to be released 147,351 - 146,554
Initial capitalization of mutual holding company - - (100,000)
Unrealized gain on securities available for sale, net
of income taxes - 127,015 127,015
-------------------- -------------------- ----------------
Balance - December 31, 1998 $ (1,326,233) $ 191,549 $ 46,754,054
==================== ==================== ================
See notes to consolidated financial statements.
25
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------------- ---------------- ---------------
Cash flows from operating activities:
Net income $ 1,397,300 $ 736,840 $ 1,656,008
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 278,355 230,524 207,456
Net accretion of premiums, discounts and deferred loan fees (245,904) (127,373) (137,517)
Amortization of intangibles 592,768 1,743,062 -
Provision for (recapture of) loan losses (130,630) 487,015 232,103
Provision for losses on real estate owned 130,630 372,985 45,000
Loss (gain) on sale of securities available for sale - 20,245 (102,752)
(Gain) on sale of real estate owned (5,386) (30,080) (117,201)
(Gain) on trade-in of automobile (16,401) - -
Deferred income tax (benefit) (11,944) (725,335) (36,609)
Decrease (increase) in accrued interest receivable 7,388 (360,770) 1,946
(Increase) in other assets (67,304) (11,726) (3,327)
(Decrease) increase in interest payable on deposits (29,160) 90,624 24,530
Increase (decrease) in other liabilities 124,497 (2,815,465) 3,009,284
Contribution of common stock 742,140 - -
ESOP shares committed to be released 146,554 - -
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,912,903 (389,454) 4,778,921
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale - - 100,000
Proceeds from sales of securities available for sale - 1,588,229 202,752
Proceeds from repayments on and calls of securities available for sale - 115,272 91,875
Purchases of securities available for sale (1,000,000) (7,033,784) (88,202)
Proceeds from maturities and calls of investment securities held to maturity 9,889,845 10,000,000 7,000,000
Purchases of investment securities held to maturity (23,640,389) (10,399,678) (10,997,500)
Principal repayments on mortgage-backed securities held to maturity 41,586,542 20,084,461 17,384,271
Purchases of mortgage-backed securities held to maturity (21,891,969) (37,026,167) (30,569,541)
Purchase of loans receivable (280,707) - (1,621,000)
Net (increase) decrease in loans receivable (26,973,831) (31,617,835) 4,010,899
Proceeds from sales of real estate owned 503,458 483,300 392,228
Proceeds from other payments received on real estate owned 4,000 39,602 15,500
Capitalized cost of real estate owned - (6,665) -
Additions to premises and equipment (86,744) (352,753) (332,949)
Purchase of Federal Home Loan Bank of New York stock (423,500) (513,400) (161,400)
------------ ------------ ------------
Net cash (used in) investing activities (22,313,295) (54,639,418) (14,573,067)
------------ ------------- ------------
Cash flows from financing activities:
Net proceeds from initial public stock offering 16,639,920 - -
Initial capitalization of mutual holding company (100,000) - -
Common stock acquired by ESOP (1,473,584) - -
Net increase in deposits 149,960 7,148,632 1,528,768
Net (decrease) increase in short-term borrowed money (18,000,000) 12,000,000 6,000,000
Proceeds of long-term borrowed money 38,000,000 3,000,000 9,000,000
Repayment of long-term borrowed money (8,290,120) (8,350,000) (8,350,000)
Net increase (decrease) in
advance payments by borrowers for taxes and insurance 149,529 150,239 (4,102)
Cash received in connection with branch purchases - 42,021,857 -
------------ ------------- ------------
Net cash provided by financing activities 27,075,705 55,970,728 8,174,666
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 7,675,313 941,856 (1,619,480)
Cash and cash equivalents - beginning 8,696,118 7,754,262 9,373,742
------------ ------------- ------------
Cash and cash equivalents - ending $ 16,371,431 $ 8,696,118 $ 7,754,262
============ ============= ============
See notes to consolidated financial statements.
26
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
----------------- ---------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 860,000 $ 1,035,078 $ 1,023,150
============= ============= ===========
Interest $ 12,241,337 $ 9,501,814 $ 8,171,056
============= ============= ===========
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on securities
available or sale, net of income taxes $ 127,015 $ 85,632 $ (60,134)
============= ============= ===========
Loans receivable transferred to real estate owned $ - $ 679,914 $ 377,285
============= ============= ===========
Assets acquired in connection with branch purchases:
Loans receivable $ - $ 54,693 $ -
Premises and equipment - 1,360,000 -
Excess of cost over assets acquired - 7,571,946 -
Other assets - 457 -
------------- ------------- -----------
$ - $ 8,987,096 $ -
============= ============= ===========
Liabilities acquired in connection with branch purchases:
Deposits $ - $ 51,007,382 $ -
Other liabilities - 1,571 -
------------- ------------- -----------
$ - $ 51,008,953 $ -
============= ============ ===========
See notes to consolidated financial statements.
27
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ---------------------------------------------
Basis of consolidated financial statement presentation
------------------------------------------------------
The consolidated financial statements include the accounts of West Essex
Bancorp, Inc. ("Bancorp"), the Bancorp's wholly owned subsidiary, West
Essex Bank ("Bank") and the Bank's wholly owned subsidiary, West Essex
Insurance Agency, Inc. ("Subsidiary"), and have been prepared in conformity
with generally accepted accounting principles. All significant intercompany
accounts and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the consolidated statements of
financial condition and revenues and expenses for the periods then ended.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes relate
to the determination of the allowance for loan losses, the valuation of
real estate owned and the recoverability of excess of cost over assets
acquired. Management believes that the allowance for loan losses is
adequate and that real estate owned and excess of cost over assets acquired
are appropriately valued. While management uses available information to
recognize losses on loans and real estate owned and to assess the
recoverability of excess of cost over assets acquired, future additions to
the allowance for loan losses or further writedowns of real estate owned
and excess of cost over assets acquired may be necessary based on changes
in economic and market conditions in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and real estate owned valuations. Such agencies may require the Bank
to recognize additions to the allowance or additional writedowns based on
their judgments about information available to them at the time of their
examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks with original
maturities of three months or less.
Investments and mortgage-backed securities
------------------------------------------
Debt securities over which there exists positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized holding
gains and losses included in earnings. Debt and equity securities not
classified as trading securities nor as held-to-maturity securities are
classified as available for sale securities and reported at fair value,
with unrealized holding gains or losses, net of deferred income taxes,
reported in a separate component of stockholders' equity.
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of
an identified security sold or called is used for determining security
gains and losses recognized in the consolidated statements of income.
28
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- - ---------------------------------------------
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and net deferred loan (costs) fees. Interest is calculated
by the use of the actuarial method.
The Bank defers loan origination fees and certain direct loan origination
costs and amortizes such amounts, using a method which approximates the
level-yield method, as an adjustment of yield over the contractual lives of
the related loans.
Uncollectible interest on loans that are contractually delinquent ninety
days or more is charged off and the related loans placed on nonaccrual
status, or, alternatively, an allowance for uncollectible interest is
established by a charge to interest income equal to all interest previously
accrued. Under either method, income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is
probable, in which case the loan is returned to an accrual status.
Allowance for loan losses
-------------------------
An allowance for loan losses is maintained at a level considered adequate
to absorb loan losses. Management of the Bank, in determining the allowance
for loan losses, considers the risks inherent in its loan portfolio and
changes in the nature and volume of its loan activities, along with the
general economic and real estate market conditions.
The Bank utilizes a two tier approach: (1) identification of impaired loans
and the establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its loan
portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among other
things, delinquency status, size of loans, type and estimated fair value of
collateral and financial condition of the borrowers. Specific loan loss
allowances are established for identified loans based on a review of such
information. General loan loss allowances are based upon a combination of
factors including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate loan loss
allowances are established, actual losses are dependent upon future events
and, as such, further additions to the level of the allowance for loan
losses may be necessary.
29
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- - ---------------------------------------------
Allowance for loan losses (Cont'd)
-------------------------
A loan evaluated for impairment is deemed to be impaired when based on
current information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. The amount of loan impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. All loans identified as impaired are evaluated independently.
The Bank does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to interest receivable and
then to principal.
Real estate owned
-----------------
Real estate owned consists of real estate acquired by foreclosure or deed
in lieu of foreclosure. Real estate owned is recorded at the lower of cost
or fair value at date of acquisition and thereafter carried at the lower of
such initially recorded amount or fair value less estimated selling costs.
Costs incurred in developing or preparing properties for sale are
capitalized. Income and expense related to the holding and operating of
properties are recorded in operations. Gains and losses from sales of such
properties are recognized as incurred.
Concentration of risk
---------------------
The Bank's real estate and lending activity is concentrated in real estate
and loans secured by real estate located in the State of New Jersey
Premises and equipment
----------------------
Premises and equipment are comprised of land, at cost, and buildings and
improvements, leasehold improvements and furnishings and equipment, at cost
less accumulated depreciation and amortization. Depreciation and
amortization charges are computed on the straight-line method over the
following estimated useful lives.
Buildings and improvements 10 to 50 years
Leasehold improvements Shorter of useful life
or term of lease
Furnishing and equipment 3 to 10 years
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the
year incurred. Rental income is netted against occupancy costs in the
consolidated statements of income.
30
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- - ---------------------------------------------
Excess of cost over assets acquired
-----------------------------------
The cost in excess of the fair value of net assets acquired was recorded on
October 17, 1997 in conjunction with the acquisition of certain assets and
assumption of certain liabilities of three branch offices of another
financial institution. This asset primarily consists of core deposit
intangibles, which represent the intangible value of depositor
relationships assumed in the transaction, and is being amortized to expense
over a ten-year period by use of the straight-line method.
On a periodic basis, management reviews the excess of cost over assets
acquired and evaluates events or changes in circumstances that may indicate
impairment in the carrying amount of such asset. In such instances,
impairment, if any, is measured on a discounted estimated cash flow basis.
Interest-rate risk
------------------
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings and
other funds, to purchase securities and to make loans secured by real
estate. The potential for interest-rate risk exists as a result of the
generally shorter duration of the Bank's interest-sensitive liabilities
compared to the generally longer duration of its interest-sensitive assets.
In a rising interest rate environment, liabilities will reprice faster than
assets, thereby reducing net interest income. For this reason, management
regularly monitors the maturity structure of the Bank's interest-earning
assets and interest-bearing liabilities in order to measure its level of
interest-rate risk and to plan for future volatility.
Income taxes
------------
The Bancorp and Subsidiaries file a consolidated federal income tax return.
Income taxes are allocated based on the contribution of income to the
consolidated income tax return. Separate state income tax returns are
filed.
Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the income tax returns differ from these
provisions due principally to temporary differences in the reporting of
certain items for financial reporting and tax reporting purposes. The
income tax effect of these temporary differences is accounted for as
deferred income taxes applicable to future periods.
31
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- - ---------------------------------------------
Net income per share
--------------------
Basic and diluted net income per share were computed in 1998 by dividing
net income for the year ended December 31, 1998 by the weighted average
number of shares of common stock outstanding, adjusted for unearned shares
of the ESOP. Such amounts were calculated based upon income for the entire
year 1998, although the Bank converted to Stock form on October 2, 1998,
and the weighted average number of shares outstanding since October 2, 1998
as if such shares were outstanding during all of 1998. Diluted net income
per share did not differ from basic net income per share as there were no
contracts or securities excercisable or which could be converted into
common stock which would have a diluted effect.
Reclassification
----------------
Certain amounts as of and for the year ended December 31, 1997 and 1996
have been reclassified to conform with the current year's presentation.
2. REORGANIZATION TO MUTUAL HOLDING COMPANY FORM OF ORGANIZATION
- - ----------------------------------------------------------------
The Bancorp is a business corporation formed at the direction of the Bank under
the laws of the United States on October 2, 1998. On October 2, 1998: (i) the
Bank reorganized from a federally chartered mutual savings bank to a federally
chartered stock savings bank in the mutual holding company form of organization;
(ii) the Bank issued all of its outstanding capital stock to the Company; and
(iii) the Company consummated its initial public offering of common stock, par
value $.01 per share (the "Common Stock"), by selling at a price of $10.00 per
share, 1,772,898 of common stock to certain eligible account holders of the Bank
who had subscribed for such shares, by issuing 2,350,121 shares of Common Stock
to West Essex Bancorp, M.H.C. ("MHC"), a mutual holding company formed at the
direction of the Bank (collectively, the "Reorganization and Offering") and by
contributing 74,214 shares of Common Stock to West Essex Bancorp Charitable
Foundation (the "Foundation"). The MHC was initially funded with $100,000
received from the Bank. The Reorganization and Offering resulted in net proceeds
of $16.6 million, after expenses of $1.1 million. The Bancorp also established
the Foundation, which is dedicated to the communities served by the Bank. In
connection with the Reorganization and Offering, the Common Stock contributed by
the Bancorp to the Foundation at a value of $742,140, along with $100,000 in
cash, was charged to charitable contribution expense.
In addition to the 9,000,000 authorized shares of Common Stock, the Bancorp
authorized 1,000,000 shares of preferred stock with a par value of $0.01 per
share (the "Preferred Stock"). The Board of Directors is authorized, subject to
any limitations by law, to provide for the issuance of the shares of Preferred
Stock in series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restriction thereof. As of December 31, 1998, there were no shares of
Preferred Stock issued.
32
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. SECURITIES AVAILABLE FOR SALE
- - ----------------------------------
December 31, 1998
----------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------------
Cost Gains Losses Value
--------------- --------- ----------- -----------
United States Government obligations:
Due after one year through five years $ 6,983,248 $ 300,452 $ - $7,283,700
Due after ten years 1,000,000 - 1,250 998,750
----------- --------- ----------- ----------
$ 7,983,248 $ 300,452 $ 1,250 $8,282,450
=========== ========= ========== ==========
December 31, 1997
----------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------------
Cost Gains Losses Value
--------------- --------- ----------- -----------
United States Government obligations:
Due after one year through five years $ 6,979,747 $ 100,803 $ - $7,080,550
=========== ========= =========== ==========
The following table presents details of sales of securities available for sale:
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------- -------------
Sales proceeds $ - $ 1,588,229 $ 202,752
Gross gains - - 102,752
Gross losses - 20,245 -
33
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES HELD TO MATURITY
- - -------------------------------------------
December 31, 1998
-----------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
-------------- ------------- -------------- ---------------
U.S. Government (including agencies):
Due in one year or less $ 999,854 $ 8,896 $ - $ 1,008,750
After one year through five years 2,000,000 1,250 - 2,001,250
After five years through ten years 14,000,000 67,341 - 14,067,341
After ten years 8,582,551 287,313 63,067 8,806,797
------------ --------- ---------- ------------
25,582,405 364,800 63,067 25,884,138
------------ --------- ---------- ------------
Obligations of states and municipalities:
Due in one year or less 150,000 - - 150,000
After ten years 237,859 - 11 237,848
------------ --------- ---------- ------------
387,859 - 11 387,848
------------ --------- ---------- ------------
Trust preferred securities due after ten years 10,902,901 - 284,151 10,618,750
------------ --------- ---------- ------------
$ 36,873,165 $ 364,800 $ 347,229 $ 36,890,736
============ ========= ========== ============
December 31, 1997
-----------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
-------------- ------------- -------------- ---------------
U.S. Government (including agencies):
Due in one year or less $ 2,000,150 $ 59,850 $ - $ 2,060,000
After one year through five years 3,999,622 11,315 - 4,010,937
After five years through ten years 12,000,000 116,247 - 12,116,247
After ten years 4,929,094 222,270 - 5,151,364
------------ --------- --------- ------------
$ 22,928,866 $ 409,682 $ - $ 23,338,548
============ ========= ========= ============
There were no sales of investment securities held to maturity during the years
ended December 31, 1998, 1997 and 1996.
34
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- - ------------------------------------------------
December 31, 1998
-----------------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
---------------- -------------- ------------ -----------------
Government National Mortgage Association $ 58,815,923 $ 684,197 $ - $ 59,500,120
Federal Home Loan Mortgage Corporation 26,698,689 323,089 3,333 27,018,445
Federal National Mortgage Association 20,100,956 167,237 1,375 20,266,818
Collateralized mortgage obligations 4,754,425 4,325 37,500 4,721,250
Other 6,079 - - 6,079
-------------- ----------- ------------ --------------
$ 110,376,072 $ 1,178,848 $ 42,208 $ 111,512,712
============== =========== ============ ==============
December 31, 1997
-----------------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
---------------- -------------- ------------ -----------------
Government National Mortgage Association $ 78,657,282 $ 1,158,307 $ 40,774 $ 79,774,815
Federal Home Loan Mortgage Corporation 26,551,191 275,562 77,959 26,748,794
Federal National Mortgage Association 24,958,646 191,719 - 25,150,365
Other 7,172 - - 7,172
-------------- ----------- ------------ --------------
$ 130,174,291 $ 1,625,588 $ 118,733 $ 131,681,146
============== =========== ============ ==============
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1998, 1997 and 1996.
35
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE
- - ---------------------
December 31,
-------------------------------------
1998 1997
--------------- --------------
Real estate mortgage:
Conventional $ 127,710,491 $ 99,474,155
FHA insured 358,942 257,285
VA guaranteed 152,725 457,155
------------- -------------
128,222,158 100,188,595
------------- -------------
Agency for International Development 48,510 58,875
------------- -------------
Construction and land development 4,393,956 6,484,920
------------- -------------
Consumer:
Passbook or certificate 401,484 550,169
Equity 9,631,219 8,491,437
Second mortgage - 62,595
Automobile 273,888 259,097
Credit reserve 31,053 31,480
------------- -------------
10,337,644 9,394,778
------------- -------------
Total loans 143,002,268 116,127,168
------------- -------------
Less: Loans in process 1,311,520 1,437,016
Allowance for loan losses 1,716,790 1,885,021
Net deferred loan (costs) fees (298,245) 70,390
------------- -------------
2,730,065 3,392,427
------------- -------------
$ 140,272,203 $ 112,734,741
============= =============
The Bank has granted loans to officers and directors of the Bank and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$1,549,000 and $1,200,000 at December 31, 1998 and 1997, respectively. During
the year ended December 31, 1998, new loans granted and repayments totalled
$382,000 and $33,000, respectively.
At December 31, 1998, 1997 and 1996, loans serviced for the benefit of others
totalled approximately $27,000, $53,000 and $72,000, respectively.
36
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
- - -------------------
Nonperforming loans consist of nonaccrual and renegotiated loans. Nonaccrual
loans are those on which income under the accrual method has been discontinued
with subsequent interest payments credited to interest income when received, or
if ultimate collectibility of principal is in doubt, applied as principal
reductions. Renegotiated loans are loans whose contractual interest rates have
been reduced or where other significant concessions have been made due to a
borrower's financial difficulties. Interest on renegotiated loans is accrued to
interest income.
Nonperforming loans were as follows:
December 31,
-----------------------------------------
1998 1997 1996
---------- -------- --------
(In Thousands)
Nonaccrual $ 2,084 $ 2,413 $ 2,869
Renegotiated 94 94 99
---------- --------- --------
$ 2,178 $ 2,507 $ 2,968
========== ========= ========
The impact of nonperforming loans on interest income is as follows:
Year Ended December 31,
-------------------------------------------
1998 1997 1996
---------- --------- --------
(In Thousands)
Interest income if performing in accordance with original terms $ 191 $ 234 $ 278
Interest income actually recorded 29 57 74
--------- --------- --------
Interest income lost $ 162 $ 177 $ 204
========== ========= ========
The following is an analysis of the allowance for loan losses:
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
------------- -------------- ----------------
Balance - beginning $ 1,885,021 $ 1,563,991 $ 1,199,888
Provision (credited) charged to operations (130,630) 487,015 232,103
Loans charged off to allowance (37,451) (165,985) -
Recovery of loan previously charged off - - 132,000
----------- ----------- -----------
$ 1,716,940 $ 1,885,021 $ 1,563,991
=========== =========== ============
37
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
- - -------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
December 31,
------------------------------------------
1998 1997 1996
-------------- -------------- ---------
(In Thousands)
Recorded investment in impaired loans:
With recorded allowances $ 1,159 $ 1,344 $ 1,505
Without recorded allowances 303 304 304
---------- ------- ---------
Total impaired loans 1,462 1,648 1,809
Related allowance for loan losses 442 580 435
---------- ------- ---------
Net impaired loans $ 1,020 $ 1,068 $ 1,374
========== ======== =========
For the years ended December 31, 1998, 1997 and 1996, the average recorded
investment in impaired loans totalled $1,537,000 , $1,916,000 and $1,567,000,
respectively. During the years ended December 31, 1998 and 1997, no interest
income was recognized on such loans during the time each loan was impaired.
During the year ended December 31, 1996, interest income of $11,000, all on the
cash basis, was recognized on such loans during the time each loan was impaired.
7. REAL ESTATE OWNED
- - --------------------
December 31,
------------------------------
1998 1997
------------ -------------
Acquired in settlement of loans $ 582,138 $ 1,388,840
Allowance for losses - 174,000
---------- -----------
$ 582,138 $ 1,214,840
========== ===========
The following is an analysis of the allowance for losses:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ -------------- -----------
Balance - beginning $ 174,000 $ 98,000 $ 98,000
Provisions charged to operations 130,630 372,985 45,000
Losses charged to allowance (304,630) (296,985) (45,000)
---------- ----------- ------------
Balance - ending $ - $ 174,000 $ 98,000
========== =========== ============
38
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. REAL ESTATE OWNED (Cont'd)
- - ----------------------
The following is an analysis of the (loss) income on real estate owned:
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------- -------------- ---------------
Gain on sale, net $ 5,386 $ 30,080 $ 117,201
Carrying costs, net of rental income (15,033) (36,965) (51,638)
Provision for losses (130,630) (372,985) (45,000)
---------- --------- ---------
$ (140,277) $(379,870) $ 20,563
========== ========= =========
8. PREMISES AND EQUIPMENT
- - ---------------------------
December 31,
--------------------------------
1998 1997
-------------- ---------------
Land $ 979,315 $ 979,315
----------- -----------
Buildings and improvements 2,171,300 2,159,938
Less accumulated depreciation 858,469 778,047
----------- -----------
1,312,831 1,381,891
----------- -----------
Leasehold improvements 112,754 112,754
Less accumulated amortization 111,077 110,017
----------- -----------
1,677 2,737
----------- -----------
Furnishings and equipment 2,654,522 2,575,464
Less accumulated depreciation 2,000,971 1,816,823
----------- -----------
653,551 758,641
----------- -----------
$ 2,947,374 $ 3,122,584
=========== ===========
39
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. ACCRUED INTEREST RECEIVABLE
- - ------------------------------
December 31,
---------------------------
1998 1997
------------- -----------
Loans $ 736,133 $ 690,706
Mortgage-backed securities 661,895 852,519
Investments and other 620,352 479,574
------------ -----------
2,018,380 2,022,799
Less allowance for uncollected interest on loans 13,571 10,602
------------ -----------
$ 2,004,809 $ 2,012,197
============ ===========
10. EXCESS OF COST OVER ASSETS ACQUIRED
- - ---------------------------------------
On October 17, 1997, the Bank acquired three branch locations from another
financial institution. The amounts related to the transaction are reflected
separately in the consolidated statement of cash flows for the year ended
December 31, 1997. The $7,571,946 excess of cost over assets acquired initially
recorded was based upon the amount of deposits the Bank had acquired. The
deposits purchased declined at a rate significantly in excess of that expected
before stabilizing by December 31, 1997. Management performed a reassessment of
the carrying value of this asset and, as a result, a loss of $1,585,313 was
recorded. Such loss is included in "Amortization of intangibles" in the
consolidated statement of income for the year ended December 31, 1997.
11. DEPOSITS
- - ------------
December 31,
-------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
------------ ----------------- ---------- ------------ ----------------- ----------
Demand accounts:
Non-interest-bearing 0.00% $ 16,142,250 6.77 0.00% $ 11,371,513 4.78
Interest-bearing 1.30% 20,695,238 8.69 1.84% 21,662,441 9.09
-------------- ------- -------------- -------
0.73% 36,837,488 15.46 1.18% 33,033,954 13.87
Savings and club accounts 2.52% 60,306,242 25.30 2.60% 62,834,205 26.38
Certificates of deposit 5.26% 141,169,211 59.24 5.51% 142,323,982 59.75
-------------- ------- -------------- -------
3.87% $ 238,312,941 100.00 4.14% $ 238,192,141 100.00
============== ======= ============== =======
The amount of certificates of deposit with balances of $100,000 or more at
December 31, 1998 and 1997 were approximately $17,656,000 and $19,327,000,
respectively.
40
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. DEPOSITS (Cont'd.)
- - -----------------------
The scheduled maturities of certificates of deposit are as follows (in
thousands):
December 31,
------------------------------
1998 1997
------------- -------------
One year or less $ 118,317 $ 114,233
After one to three years 19,572 25,309
After three years 3,280 2,782
--------- ---------
$ 141,169 $ 142,324
========= =========
A summary of interest on deposits is as follows (in thousands):
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- -------
Demand accounts $ 339 $ 293 $ 269
Savings and club accounts 1,672 1,357 1,278
Certificates of deposit 7,736 6,439 5,602
-------- -------- --------
$ 9,747 $ 8,089 $ 7,149
======== ======== ========
41
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BORROWED MONEY
- - --------------------
December 31,
-----------------------------------------------------------------------
1998 1997
----------------------------------- --------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
--------------- -------------- --------------- ------------
Securities sold under agreements to
to repurchase maturing within three months -% $ - 5.82% $18,000,000
Convertible advances (a):
due May 14, 2001 5.55% 2,000,000 -% -
due March 24, 2008 5.33% 10,000,000 -% -
due March 25, 2008 5.59% 10,000,000 -% -
due May 12, 2008 5.23% 3,000,000 -% -
Monthly amortizing advances:
Payable in forty-nine monthly principal
and interest installments of $96,286 and
a final payment of $192,818 on
February 24, 2003 5.84% 4,339,572 -% -
Payable in 109 monthly principal
and interest installments of $55,591 and
a final payment of $111,347 on
February 25, 2008 6.03% 4,720,308 -% -
Term advances maturing during:
1998 -% - 6.38% 7,350,000
1999 6.50% 4,350,000 6.50% 4,350,000
2000 6.99% 600,000 6.95% 600,000
2008 5.58% 3,000,000 -% -
-------------- ------------
5.69% $ 42,009,880 6.08% $ 30,300,000
============== ============
(a) Convertible at lender option to replacement funding at then current rates on
February 12, 1999, March 24, 2001, March 25, 2003 and May 12, 1999,
respectively, and quarterly thereafter.
Certain information concerning borrowed money is summarized as follows:
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996
---------------- --------------- ----------------
Average balance outstanding $42,364,000 $26,223,000 $18,092,000
Maximum month-end balance outstanding 52,145,000 43,675,000 23,650,000
Average interest rate 5.84% 5.97% 6.36%
42
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BORROWED MONEY (Cont'd.)
- - --------------------
At December 31, 1998 and 1997, the borrowings were secured by pledges of the
Bank's investment in the capital stock of the FHLB totalling $2,607,300 and
$2,183,800, respectively, and mortgage-backed securities held to maturity with
an aggregate carrying value of $53,785,000 and $39,870,000, respectively.
13. REGULATORY CAPITAL
- - ------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Bank.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per generally accepted accounting
principles ("GAAP") and regulatory capital and information as to the Bank's
capital levels at the dates presented:
December 31,
--------------------------
1998 1997
----------- -----------
(In Thousands)
GAAP capital $ 38,428 $ 29,275
Less: excess of cost over assets acquired (5,236) (5,829)
Less: unrealized gain on debt securities (192) (65)
----------- -----------
Core and tangible capital 33,000 23,381
Add: loan valuation allowance, as limited 1,500 1,185
----------- -----------
Total regulatory capital $ 34,500 $ 24,566
=========== ===========
43
WEST ESSEX BANCORP, INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. REGULATORY CAPITAL (Cont'd)
- - -----------------------
As of December 31, 1998
------------------------------------------------------------------------------
To Be Well
Capitalized
Under prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------ -----------
(Dollars in Thousands)
Total Capital
(to risk-weighted assets) $ 34,500 28.81% $ 9,580 8.00% $ 11,975 10.00%
Tier 1 Capital
(to risk-weighted assets) 33,000 27.56% - - 7,185 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 33,000 10.44% 12,649 4.00% 15,811 5.00%
Tangible Capital
(to adjusted total assets) 33,000 10.44% 4,743 1.50% - -
As of December 31, 1997
------------------------------------------------------------------------------
To Be Well
Capitalized
Under prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------ -----------
(Dollars in Thousands)
Total Capital
(to risk-weighted assets) $ 24,566 26.10% $ 7,530 8.00% $ 9,412 10.00%
Tier 1 Capital
(to risk-weighted assets) 23,381 24.84% - - 5,647 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 23,381 7.98% 11,726 4.00% 14,657 5.00%
Tangible Capital
(to adjusted total assets) 23,381 8.00% 4,397 1.50% - -
As of December 4, 1997, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions existing or events which have
occurred since notification that management believes have changed the
institution's category.
44
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. BENEFIT PLANS
-------------
Pension Plan
------------
The Bank has a non-contributory pension plan covering all eligible
employee. The plan is a defined benefit plan which provides
benefits based on a participant's years of service and
compensation. The Bank's funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax
purposes.
The following table sets forth the plan's funded status:
December 31,
----------------------------
1998 1997
----------- ----------
Actuarial present value of benefit obligation, including
vested benefits of $2,977,510 and $2,658,587, respectively. $ 3,016,288 $ 2,709,212
=========== ===========
Projected benefit obligation - beginning $ 3,257,644 $ 2,789,153
Service cost 116,891 109,752
Interest cost 217,015 206,416
Actuarial loss 132,101 237,865
Benefits paid (97,951) (84,989)
Settlements (3,233) (553)
----------- -----------
Projected benefit obligation - ending 3,622,467 3,257,644
----------- -----------
Plan assets at fair value - beginning 2,984,086 2,534,416
Actual return on assets 367,471 361,720
Employer's contributions 142,827 173,492
Benefits paid (97,951) (84,989)
Settlements (3,233) (553)
----------- -----------
Plan assets at fair value - ending 3,393,200 2,984,086
----------- -----------
Projected benefit obligation in excess of plan assets 229,267 273,558
Unrecognized net transition obligation (158,227) (189,872)
Unrecognized past service cost (70,937) (80,492)
Unrecognized net gain 156,686 131,598
----------- -----------
Accrued pension cost included in other liabilities $ 156,789 $ 134,792
=========== ===========
The following table sets forth the components of net perodic pension cost:
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
---------------- ----------------- --------------
Net periodic pension cost included the following components:
Service cost $ 116,891 $ 109,752 $ 130,573
Interest cost 217,015 206,416 187,634
Expected return on plan assets (210,282) (180,400) (155,308)
Amortization of net transition obligation 31,645 31,645 31,645
Amortization of past service cost 9,553 9,553 9,553
------------ ---------- ---------
Net periodic pension cost
included in salaries and employee benefits $ 164,822 $ 176,966 $ 204,097
=========== ========== =========
-45-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. BENEFIT PLANS
- - -------------------
Pension Plan (Cont'd.)
-----------------------
Assumptions used to develop the net periodic pension cost were as follows:
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
---------------- ----------------- --------------
Discount rate 6.75% 7.50% 7.00%
Expected long-term rate of return 7.00% 7.00% 7.00%
Rate of increase in compensation levels 4.50% 5.50% 5.00%
ESOP
- - ----
Effective upon the consummation of the Bank's reorganization, an ESOP was
established for all eligible employees who had completed a twelve-month period
of employment with the Bank and at least 1,000 hours of service and had attained
the age of 21. The ESOP used $1,473,854 in proceeds from a term loan obtained
from the Bancorp to purchase 147,768 shares of Bancorp common stock in the open
market. The term loan principal is payable over ten equal annual installments
through December 31, 2007. Interest on the term loan is fixed at a rate of
8.25%. Each year, the Bank intends to make discretionary contributions to the
ESOP which will be equal to principal and interest payments required on the term
loan. The loan is further paid down by the amount of dividends paid, if any, on
the common stock owned by the ESOP.
Shares purchased with the loan proceeds were initially pledged as collateral for
the term loan and are held in a suspense account for future allocation among
participants. Contributions to the ESOP and shares released from the suspense
account will be allocated among the participants on the basis of compensation,
as described by the Plan, in the year of allocation.
The ESOP is accounted for in accordance with Statement of Position 93-6
"Accounting for Employee Stock Ownership Plans", which was issued by the
American Institute of Certified Public Accountants in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Bank reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for basic net income per common share computations. ESOP
compensation expense was $146,554 for the year ended December 31, 1998.
The ESOP shares at December 31, 1998 were as follows:
Allocated shares 14,777
Shares committed to be released -
Unreleased shares 132,991
----------
Total ESOP shares 147,768
==========
Fair value of unreleased shares $1,255,103
==========
46
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. INCOME TAXES
- - ------------------
The Bank qualifies as a Savings Institution under the provisions of the Internal
Revenue Code and, therefore, was permitted, prior to January 1, 1996, to deduct
from taxable income an allowance for bad debts based upon the more favorable of:
(i) a method based on the Bank's actual loss experience (the "experience"
method); or (ii) a method based on eight percent of taxable income before such
deduction, less certain adjustments and subject to certain limitations (the
"percentage of taxable income" method). Effective January 1, 1996, the Bank may
use either the experience method or the specific charge off method. See Note 16
to consolidated financial statements. Retained earnings at December 31, 1998,
include approximately $6.8 million of such bad debt allowance for which federal
income taxes have not been provided.
The components of income taxes are summarized as follows:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ -----------
Current tax expense:
Federal income $ 676,231 $ 1,066,590 $ 801,976
State income 87,750 95,024 70,584
------------ ------------ -----------
763,981 1,161,614 872,560
------------ ------------ -----------
Deferred tax (benefit) expense:
Federal income (6,746) (664,857) (33,554)
State income (5,198) (60,478) (3,055)
------------ ------------ -----------
(11,944) (725,335) (36,609)
------------ ------------ -----------
$ 752,037 $ 436,279 $ 835,591
============ ============ ===========
47
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. INCOME TAXES (Cont'd.)
- - ---------------------------
The components of the net deferred income tax asset are as follows:
December 31,
-------------------------------
1998 1997
-------------- --------------
Deferred tax assets:
Allowance for loan losses $ 650,010 $ 777,563
Benefit plans 49,569 24,535
Goodwill 610,762 581,747
Charitable contribution carryforward 209,717 -
Other 19,142 16,538
------------- -------------
Total deferred tax assets 1,539,200 1,400,383
------------- -------------
Deferred tax liabilities:
Deferred loan origination fees, net 162,415 36,940
Unrealized gain on securities available for sale 107,653 36,269
Other 1,398 -
------------- -------------
Total deferred tax liabilities 271,466 73,209
------------- -------------
Net deferred tax asset included in other assets $ 1,267,734 $ 1,327,174
============= =============
Refundable income taxes totalling $129,079 and $88,904 are included in other
assets at December 31, 1998 and 1997, respectively. Income taxes payable
totalling $1,754 and $39,069 are included in other liabilities at December 31,
1998 and 1997, respectively.
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Federal income tax $ 730,775 $ 398,860 $ 847,266
Increases (reductions) in taxes resulting from:
Non-deductible capital loss - 6,883 -
Utilization of capital loss carryforward - - (34,936)
New Jersey savings institution tax,
net of federal income tax effect 54,484 22,800 44,569
Other items, net (33,222) 7,736 (20,948)
----------- ------------ ------------
Effective income tax $ 752,037 $ 436,279 $ 835,951
=========== ============ ============
48
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
- - ----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments primarily include commitments to extend credit. Such instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated statements of financial condition.
The contractual amounts of these instruments reflect the extent of involvement
the Bank has in those particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
At December 31, 1998 and 1997, the Bank had $7,209,000 and $1,324,000,
respectively, in outstanding commitments to originate and purchase loans. The
outstanding commitments at December 31, 1998 include $3,204,000 for fixed rate
mortgage loans with interest rates ranging from 6.625% to 8.00%, $495,000 for
adjustable rate mortgage loans with an initial rate of 6.75%, $2,128,000 for
construction loans at fixed rates ranging from 8.25% to 8.50%, $107,000 for home
equity loans at fixed rates ranging from 7.25% to 7.375%, $225,000 for floating
rate equity lines of credit with initial rates of 7.25% to 7.50% and $1,050,000
for the purchase of loan participations consisting of adjustable rate loans on
which the initial rates will be fixed at funding for five years at either 1.60%
or 2.00% above the Federal Home Loan Bank CIP advance rate and will adjust every
fifth year thereafter.
At December 31, 1998 and 1997, undisbursed funds from approved lines of credit
under a homeowners' equity lending program amounted to approximately $4,970,000
and $4,137,000, respectively. Unless they are specifically cancelled by notice
from the Bank, these funds represent firm commitments available to the
respective borrowers on demand. The interest rate charged for any month on funds
disbursed under the program ranges from 0.50% below to 1.75% above the prime
rate published in The Wall Street Journal on the last day of the preceding
month.
At December 31, 1998 and 1997 undisbursed funds from approved unsecured lines of
credit under the Credit Reserve program totalled $75,000 and $99,000,
respectively. Funds drawn on these lines are assessed interest at a rate of
15.00%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but primarily
includes commercial and residential real estate.
At December 31, 1998, the Bank was committed to purchase a $2,000,000 Federal
Home Loan Mortgage Corporation bond at par. This security carries a 6.75% fixed
interest rate and matures in January 2014, though it may be called, at par, as
early as April 1999. In addition, the Bank is committed to purchase a $500,000
participation in a Federal National Mortgage Association mortgage-backed
security, the terms of which have not yet been determined.
49
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- - -------------------------------------------
Rentals under a long-term operating lease for a branch office amounted to
approximately $49,000, $50,000 and $50,000 for the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998, the minimum rental
commitment under this noncancellable lease expiring in October, 2003 is
$269,082, consisting of $55,672 for each of the years 1999 through 2002 and
$46,394 for 2003.
The Bank also has, in the normal course of business, commitments for services
and supplies. Management does not anticipate losses on any of these
transactions.
During the year ended December 31, 1997, the Bank became a defendant in a
litigation matter under which it is accused of breach of contract, fraud and
violation of the New Jersey Consumer Fraud Act. The lawsuit is related to a
condominium construction project which the Bank halted financing on due to
borrower default. The Bank denies the material allegations set forth in the
Complaint. The Bank filed a motion to dismiss the contract claims and to re-
plead the fraud claims. On February 20, 1998, the Superior Court of New Jersey
denied the Bank's motion to dismiss the contract claims, but granted the Bank's
motion required plaintiffs to re-plead the fraud counts with particularity. On
March 13, 1998, the plaintiffs filed an amended complaint and, on April 8, 1998,
the Bank filed its answer to the amended complaint. The plaintiffs are seeking
amoung other things, compensatory damages, punitive damages in the amount of
$5,000,000 and reimbursement of costs and legal fees associated with this
matter. The Bank's ultimate liability, if any, which might arise from the
disposition of these claims cannot presently be determined. Accordingly, no
provision for any liablility that may result upon adjudication has been
recognized in the consolidated financial statements.
The Bank is also a party to various litigation which arises primarily in the
ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on the
consolidated financial position or operations of the Bancorp.
17. LEGISLATIVE MATTERS
- - ------------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The special assessment was recognized in the third quarter of 1996 and was
tax deductible. The Bank took a charge of $1,098,000 as a result of the special
assessment. This legislation eliminated the substantial disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
Currently, the FDIC has estimated that, in addition to normal deposit insurance
premiums, BIF members will pay a portion of the FICO payment equal to 1.3 basis
points on BIF-insured deposits compared to 6.4 basis points by SAIF members on
SAIF-insured deposits.
50
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. LEGISLATIVE MATTERS (Cont'd.)
- - ---------------------------------
The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance assessments on an
ongoing basis.
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- - ---------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used by
the Bank for the purposes of this disclosure. Estimated fair values have been
determined by the Bank using the best available data and estimation methodology
suitable for each category of financial instruments. For those loans and
deposits with floating interest rates, it is presumed that estimated fair values
generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:
Cash and cash equivalents and accrued interest receivable
---------------------------------------------------------
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
Securities
----------
The fair values for securities available for sale, investment securities
held to maturity and mortgage-backed securities held to maturity are based
on quoted market prices or dealer prices, if available. If quoted market
prices or dealer prices are not available, fair value is estimated using
quoted market prices or dealer prices for similar securities.
Loans
-----
The fair value of loans is estimated by discounting future cash flows,
using the current rates at which similar loans with similar remaining
maturities would be made to borrowers with similar credit ratings.
Deposits
--------
For demand, savings and club accounts, fair value is the carrying amount
reported in the consolidated financial statements. For certificates of
deposit, fair value is estimated by discounting future cash flows, using
rates currently offered for deposits of similar remaining maturities.
Borrowed money
--------------
Fair value is estimated using rates currently offered for liabilities of
similar remaining maturities, or when available, quoted market prices.
51
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- - -----------------------------------------------------------
Commitments to extend credit
----------------------------
The fair value of credit commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
The carrying values and estimated fair values of the Bank's financial
instruments are as follows (in thousands):
December 31,
----------------------------------------------------
1998 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ----------- ----------- ------------
Financial assets
----------------
Cash and cash equivalents $ 16,371 $ 16,371 $ 8,696 $ 8,696
Securities available for sale 8,282 8,282 7,081 7,081
Investment securities held to maturity 36,873 36,891 22,929 23,339
Mortgage-baked securities held to maturity 110,376 111,513 130,174 131,681
Loans receivable 140,272 145,855 112,735 114,021
Accrued interest receivable 2,005 2,005 2,012 2,012
Financial liabilities
---------------------
Deposits 238,313 239,702 238,192 239,241
Borrowed money 42,010 41,843 30,300 30,337
Commitments
-----------
Loan origination and purchase 7,209 7,209 1,324 1,324
Unused lines of credit 5,045 5,045 4,236 4,236
Security purchase 2,500 2,500 - -
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
52
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- - -----------------------------------------------------------
In addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, and exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment, real estate owned and advance payments by borrowers for taxes and
insurance. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
19. PARENT ONLY FINANCIAL INFORMATION
- - -------------------------------------
West Essex Bancorp, Inc. operates its wholly owned subsidiary, West Essex Bank.
The earnings of the subsidiary are recognized by the holding company using the
equity method of accounting. Accordingly, earnings of the subsidiary are
recorded as increases in the investment in the subsidiary. The following are
the condensed financial statements for West Essex Bancorp, Inc. (Parent company
only) as of December 31, 1998 and for the period from October 2, 1998
(inception) to December 31, 1998.
53
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - -----------------------------------------------
STATEMENT OF CONDITION
----------------------
December 31,
1998
-------------
Assets:
Cash and due from banks $ 95,743
Interest-bearing deposits 5,855,678
Securities held to maturity 907,315
Loan receivable from the Bank 1,294,464
Investment in subsidiaries 38,427,846
Other assets 213,911
-------------
Total assets $ 46,794,957
=============
Liabilities:
Due to subsidiaries $ 39,149
Other liabilities 1,754
-------------
40,903
Stockholders' equity 46,754,054
-------------
Total liabilities and stockholders' equity $ 46,794,957
=============
54
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - -----------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
From Inception
October 2, 1998
to December 31,
1998
---------------
Dividend from the Bank $ 100,000
Interest income 73,912
---------
Total income 173,912
---------
Charitable contributions 842,140
Other expenses 4,259
---------
Total expenses 846,399
---------
Loss before income tax (benefit) and equity in
undistributed earnings of subsidiaries (672,487)
Income tax (benefit) (261,251)
---------
Loss before equity in undistributed
earnings of subsidiaries (411,236)
Equity in undistributed
earnings of subsidiaries 329,268
---------
Net loss $ (81,968)
=========
55
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- - ----------------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
From Inception
October 2, 1998
to December 31,
1998
-------------------
Cash flows from operating activities:
Net loss $ (81,968)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Accretion of discount (525)
Contribution of common stock to foundation 742,140
Other, net (173,008)
Equity in undistributed earnings of subsidiaries (329,268)
------------
Net cash provided by operating activities 157,371
------------
Cash flows from investing activities:
Purchase of securities held to maturity (906,790)
Increase in loan receivable from Bank (1,294,464)
------------
Net cash (used in) investing activities (2,201,254)
------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 7,995,304
------------
Net cash provided by financing activities 7,995,304
------------
Net increase in cash and cash equivalents 5,951,421
Cash and cash equivalents - beginning -
------------
Cash and cash equivalents - ending $ 5,951,421
============
56
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- ------------- ----------------- ----------------
(In thousands, except for per share amounts)
Total interest income $ 5,115 $ 5,342 $ 5,460 $ 5,398
Total interest expense 2,870 3,117 3,216 3,016
-------- --------- --------- ---------
Net interest income 2,245 2,225 2,244 2,382
Provision for (recapture of) loan losses (22) - (19) (90)
Non-interest income 140 121 133 135
Non-interest expenses 1,636 1,607 1,632 2,732
Income taxes 260 257 278 (43)
-------- --------- --------- ---------
Net income (loss) $ 511 $ 482 $ 486 $ (82)
======== ========= ========= =========
Net income (loss) per share - basic
and diluted N/A (1) N/A (1) N/A (1) $ (0.02)
======== ========= ========= =========
Weighted average number of
common shares outstanding -
basic and diluted N/A (1) N/A (1) N/A (1) 4,062 (1)
======== ========= ======== =========
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------------- ------------- ----------------- ----------------
(In thousands)
Total interest income $ 4,252 $ 4,358 $ 4,547 $ 4,958
Total interest expense 2,152 2,259 2,465 2,779
-------- --------- --------- ---------
Net interest income 2,100 2,099 2,082 2,179
Provision for (recapture of) loan losses 55 187 248 (3)
Non-interest income 113 96 59 105
Non-interest expenses 1,351 1,350 1,187 3,285
Income taxes (benefit) 284 235 262 (345)
-------- --------- --------- ---------
Net income (loss) $ 523 $ 423 $ 444 $ (653)
======== ========= ======== =========
Net income (loss) per share N/A (1) N/A (1) N/A (1) N/A (1)
======== ========= ======== =========
Weighted average number of
common shares outstanding N/A (1) N/A (1) N/A (1) N/A (1)
======== ========= ======== =========
(1) Converted to stock form on October 2, 1998.
57
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
21. IMPACT OF NEW ACCOUNTING STANDARDS
- - ----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
At the date of initial application of SFAS No. 133, an entity may transfer any
held-to-maturity security into the available-for-sale category or the trading
category. An entity will then be able in the future to designate a security
transferred into the available-for-sale category as the hedged item, or its
variable interest payments as the cash flow hedged transactions, in a hedge of
the exposure to changes in market interest rates, changes in foreign currency
exchange rates, or changes in the overall fair value. (SFAS No. 133 precludes a
held-to-maturity security from being designated as the hedged item in a fair
value hedge of market interest rate risk or the risk of changes in its overall
fair value and precludes the variable cash flows of a held-to-maturity security
from being designated as the hedged transaction in a cash flow hedge of market
interest rate risk). SFAS No. 133 provides that such transfers from the held-
to-maturity category at the date of initial adoption shall not call into
question an entity's intent to hold other debt securities to maturity in the
future.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999, the quarter ended March 31, 2000 for the Bancorp and
subsidiaries. Initial application shall be as of the beginning of an entity's
fiscal quarter. Earlier application of all of the provisions of SFAS No. 133
is permitted only as of the beginning of a fiscal quarter. Earlier application
of selected provisions or retroactive application of provisions of SFAS No. 133
are not permitted.
Management of the Bancorp and subsidiaries has not yet determined when SFAS No.
133 will be implemented, but does not believe the ultimate implementation of
SFAS No. 133 will have a material impact on their consolidated financial
position or results of operations.
58
DIRECTORS AND OFFICERS
----------------------
Directors of
West Essex Bancorp, Inc. Principal Officers of Principal Officers of
and West Essex Bank West Essex Bancorp, Inc. West Essex Bank
- - ------------------------ ------------------------ ---------------------
William J. Foody Leopold W. Montanaro Leopold W. Montanaro
Chairman of Board President and Chief President & Chief
Managing Partner, Executive Officer Executive Officer
Trammell Crow Dennis A. Petrello Dennis A. Petrello
Leopold W. Montanaro Executive Vice President Executive Vice President
President & CEO and Chief Financial Officer and Chief Financial Officer
West Essex Bank Charles E. Filippo Charles E. Filippo
Everett N. Leonard Executive Vice President Executive Vice President
Retired, Craig L. Montanaro and Chief Lending Officer
Verona Boro Administrator Senior Vice President Craig L. Montanaro
John J. Burke and Secretary and Treasurer Senior Vice President
President and Secretary and Treasurer
JJ Burke & Associates Michael T. Sterrazza
David F. Brandley, Esq. Vice President and Controller
Partner in the law Firm of Lisa A. Mulligan
Brandley & Kleppe Vice President & Personnel Officer
James P. Vreeland Donna Duess
Retired New Jersey Vice President
State Senator John E. Gerasimow
Vice President
INVESTOR AND CORPORATE INFORMATION
- - ----------------------------------
CORPORATE HEADQUARTERS
West Essex Bancorp, Inc.
417 Bloomfield Avenue, Caldwell, New Jersey 07006
(973) 226-7911
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m. on Wednesday,
April 21, 1999 at the Radisson Hotel, Route 46 East, Fairfield, New Jersey
07006. Shareholders are encouraged to attend.
ANNUAL REPORT ON FORM 10-K
A copy of West Essex Bancorp, Inc's annual report on Form 10-K without exhibits
is available without charge to shareholders upon written request. Requests
should be sent to Mr. Dominic Tangredi, Compliance Officer.
STOCK TRANSFER/REGISTER
Questions regarding the transfer of stock, lost certificates, address changes,
account consolidation and cash dividends should be addressed to Registrar and
Transfer Company, 10 Commerce, Cranford, New Jersey 07203 (908) 241-9880. Allow
three weeks for a reply.
SPECIAL COUNSEL
Muldoon, Murphy and Faueette LLP, 5101 Wisconsin Avenue, NW, Washington, DC
20016.
INDEPENDENT ACCOUNTANTS
Radics & Co., L.L.C. Route 46 East, Pine Brook, New Jersey, 07058.
INQUIRIES
Security analysts, retail brokers and shareholders seeking financial information
should contact Dennis A. Petrello, Executive Vice President and Chief Financial
Officer, Requests for written materials can be forwarded to the attention of Mr.
Dominic Tangredi, Investor Relations Department.
STOCK INFORMATION
West Essex Bancorp, Inc., is traded on the NASDAQ National Market under the
ticker symbol "WEBK." As of December 31, 1998, West Essex Bancorp, Inc. had
4,197,233 shares of common stock outstanding and approximately 614 shareholders
of record.
STOCK PRICE
1998
QUARTER HIGH LOW
------- ---- ---
4/th/ Quarter $10,125 $9.25
The following table illustrates West
Essex Bancorp, Inc.'s high and low
closing stock prices on the NASDAQ
National Market during 1998.
WEST ESSEX BANCORP, INC.
CORPORATE HEADQUARTERS
417 Bloomfield Avenue
Caldwell, New Jersey 07006
(973) 226-7911
BANK OFFICES
MONTVILLE
267 Changebridge Road
Pine Brook, NJ 07058
(973) 575-7080
FRANKLIN LAKES
574 Franklin Avenue
Franklin Lakes, NJ 07417
(201) 891-5500
PLEASANT VALLEY WAY
487 Pleasant Valley Way
West Orange, NJ 07052
(973) 731-4630
TORY CORNER
216 Main Street
West Orange, NJ 07052
(973) 325-1230
OLD TAPPAN
207 Old Tappan Road
Old Tappan, NJ 07675
(201) 767-0007
NORTHVALE
119 Paris Avenue
Northvale, NJ 07647
(201) 768-7800
RIVER VALE
653 Westwood Avenue
River Vale, NJ 07675
(201) 664-3700