UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-29770
WEST ESSEX BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
UNITED STATES 22-3597632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
417 Bloomfield Avenue, Caldwell, New Jersey 07006
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 973-226-7911
------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
4,845,393 shares of common stock, par value $0.01 par share, were outstanding as
of July 31, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
WEST ESSEX BANCORP, INC.
FORM 10-QSB
For the Quarter Ended June 30, 2002
INDEX
Page
Number
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Statements of Financial Condition at
June 30, 2002 and December 31, 2001 (Unaudited) 2
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2002 and 2001 (Unaudited) 3
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (Unaudited) 5 - 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 8 - 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15 - 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
WEST ESSEX BANCORP, INC.
PART I. FINANCIAL INFORMATION
June 30, 2002
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ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under accounting
principles generally accepted in the United States have been condensed or
omitted from the following consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. West Essex
Bancorp, Inc. (the "Registrant" or the "Company") believes that the disclosures
presented are adequate to assure that the information presented is not
misleading in any material respect. It is suggested that the following
consolidated financial statements be read in conjunction with the year-end
consolidated financial statements and notes thereto included in the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 2001.
The results of operations for the three and six month periods ended June 30,
2002, are not necessarily indicative of the results to be expected for the
entire fiscal year.
1
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(Unaudited)
June 30, December 31,
2002 2001
-------------------- --------------------
Assets
------
Cash and amounts due from depository institutions $ 2,189,788 $ 2,008,885
Federal funds sold 9,500,000 10,500,000
Interest-bearing deposits in other banks 3,463,529 4,781,061
------------- -------------
Total cash and cash equivalents 15,153,317 17,289,946
Term deposits -- 200,000
Investment securities held to maturity 33,312,716 33,169,187
Mortgage-backed securities held to maturity 162,247,373 137,327,932
Loans receivable 161,343,612 165,935,968
Real estate owned 209,000 209,000
Premises and equipment 2,420,400 2,502,584
Federal Home Loan Bank of New York stock 4,567,100 3,842,800
Accrued interest receivable 1,892,135 1,879,537
Excess of cost over assets acquired 3,161,429 3,457,813
Other assets 6,025,856 4,949,385
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Total assets $ 390,332,938 $ 370,764,152
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits $ 246,364,039 $ 240,864,308
Borrowed money 91,080,300 76,855,928
Advance payments by borrowers for taxes and insurance 973,438 927,375
Other liabilities 1,076,500 1,201,590
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Total liabilities 339,494,277 319,849,201
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Stockholders' Equity
--------------------
Preferred stock (par value $.01), 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock (par value $.01), 9,000,000 shares authorized;
shares issued 5,246,461; shares outstanding 4,845,393 (2002)
and 4,921,615 (2001) 52,465 52,465
Additional paid-in capital 17,503,240 17,379,880
Retained earnings - substantially restricted 39,084,029 37,914,015
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (810,465) (884,158)
Unearned Incentive Plan stock (342,389) (405,730)
Treasury stock, at cost; 401,068 shares (2002) and
324,846 shares (2001) (4,648,219) (3,141,521)
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Total stockholders' equity 50,838,661 50,914,951
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Total liabilities and stockholders' equity $ 390,332,938 $ 370,764,152
============= =============
See notes to consolidated financial statements.
2
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Loans $ 2,874,425 $ 3,053,035 $ 5,762,093 $ 6,196,372
Mortgage-backed securities 2,270,938 2,052,663 4,444,836 4,227,767
Investment securities 484,919 572,208 950,884 1,241,227
Other interest-earning assets 78,927 205,553 159,859 346,827
------------ ------------ ------------ ------------
Total interest income 5,709,209 5,883,459 11,317,672 12,012,193
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,651,424 2,348,360 3,445,362 4,774,466
Borrowed money 1,050,779 923,797 2,018,620 1,850,200
------------ ------------ ------------ ------------
Total interest expense 2,702,203 3,272,157 5,463,982 6,624,666
------------ ------------ ------------ ------------
Net interest income 3,007,006 2,611,302 5,853,690 5,387,527
Provision for loan losses -- 3,506 -- --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,007,006 2,607,796 5,853,690 5,387,527
------------ ------------ ------------ ------------
Non-interest income:
Fees and service charges 104,309 80,660 186,556 162,048
Gain on sale of securities available for sale -- -- -- 45,000
Other 106,179 70,314 188,437 120,457
------------ ------------ ------------ ------------
Total non-interest income 210,488 150,974 374,993 327,505
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits 1,037,874 939,340 2,042,647 1,798,736
Net occupancy expense of premises 90,597 82,455 184,430 204,700
Equipment 171,939 184,872 342,109 377,249
Loss (gain) on real estate owned 1,287 (16,790) 2,574 (2,382)
Amortization of intangibles 148,192 148,192 296,384 296,384
Miscellaneous 438,046 333,360 798,308 714,255
------------ ------------ ------------ ------------
Total non-interest expenses 1,887,935 1,671,429 3,666,452 3,388,942
------------ ------------ ------------ ------------
Income before income taxes 1,329,559 1,087,341 2,562,231 2,326,090
Income taxes 473,803 375,175 902,032 815,764
------------ ------------ ------------ ------------
Net income $ 855,756 $ 712,166 $ 1,660,199 $ 1,510,326
============ ============ ============ ============
Net income per common share:
Basic $ 0.18 $ 0.15 $ 0.35 $ 0.32
Diluted 0.18 0.15 0.34 0.31
============ ============ ============ ============
Dividends declared per common share: $ 0.14 $ 0.12 $ 0.28 $ 0.24
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 4,708,626 4,779,825 4,729,225 4,780,196
Diluted 4,839,841 4,862,803 4,857,032 4,856,329
============ ============ ============ ============
See notes to consolidated financial statements.
3
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 855,756 $ 712,166 $ 1,660,199 $ 1,510,326
------------ ------------ ------------ ------------
Other comprehensive income -
Unrealized holding (losses) gains on securities available for sale,
net of income taxes of $ -0-, $2,474, $ -0- and $(10,844), -- (4,401) -- 19,295
respectively
Reclassification adjustment for realized gains on securities
available for sale, net of income taxes of $16,191 in 2001 -- -- -- (28,809)
------------ ------------ ------------ ------------
Total other comprehensive income -- (4,401) -- (9,514)
------------ ------------ ------------ ------------
Comprehensive income $ 855,756 $ 707,765 $ 1,660,199 $ 1,500,812
============ ============ ============ ============
See notes to consolidated financial statements.
4
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
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Cash flows from operating activities:
Net income $ 1,660,199 $ 1,510,326
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 125,922 130,228
Net accretion of premiums, discounts and deferred loan fees (88,147) (105,297)
Amortization of intangibles 296,384 296,383
(Gain) on sale of securities available for sale -- (45,000)
(Gain) on sale of real estate owned -- (23,913)
(Increase) decrease in accrued interest receivable (12,598) 118,736
(Increase) in other assets (1,033,112) (651,810)
(Decrease) increase in interest payable (58,864) 249,345
(Decrease) increase in other liabilities (191,354) 458,474
Amortization of Incentive Plan cost 63,341 62,467
ESOP shares committed to be released 182,271 98,895
------------ ------------
Net cash provided by operating activities 944,042 2,098,834
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of term deposits 200,000 --
Purchases of term deposits -- (300,000)
Proceeds from sales of securities available for sale -- 2,045,000
Proceeds from maturities and calls of investment securities held to maturity 5,000,000 9,548,188
Purchases of investment securities held to maturity (5,000,000) (2,000,000)
Principal repayments on mortgage-backed securities held to maturity 27,076,687 20,707,101
Purchases of mortgage-backed securities held to maturity (51,992,648) (26,663,695)
Purchase of loans receivable (4,541) (2,453,011)
Net decrease in loans receivable 4,538,035 1,640,583
Proceeds from sales of real estate owned -- 264,718
Additions to premises and equipment (43,738) (105,037)
Purchase of Federal Home Loan Bank of New York stock (724,300) --
Purchase of life insurance -- (1,700,000)
------------ ------------
Net cash (used in) provided by investing activities (20,950,505) 983,847
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 5,624,859 (1,559,779)
Net increase (decrease) in short-term borrowed money 15,000,000 (450,000)
Proceeds of long-term borrowed money -- 10,000,000
Repayment of long-term borrowed money (775,628) (731,330)
Net increase (decrease) in advance payments by borrowers for taxes
and insurance 46,063 (14,806)
Purchases of treasury stock (1,535,275) (384,625)
Proceeds from sales of treasury stock -- 17,813
Cash dividends paid (490,185) (442,469)
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Net cash provided by financing activities 17,869,834 6,434,804
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Net (decrease) increase in cash and cash equivalents (2,136,629) 9,517,485
Cash and cash equivalents - beginning 17,289,946 8,877,917
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Cash and cash equivalents - ending $ 15,153,317 $ 18,395,402
============ ============
See notes to consolidated financial statements.
5
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
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Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,005,480 $ 1,038,020
============ ===========
Interest $ 5,522,846 $ 6,375,321
============ ===========
Supplemental schedule of noncash investing activities:
Security purchased in 2000, settled in 2001:
Mortgage-backed security held to maturity $ -- $12,702,308
Accrued interest receivable -- 66,111
============ ===========
Due to broker -- $12,768,419
============ ===========
Issuance of treasury stock to fund Supplemental Employee
Retirement Plan $ 43,359 $ 14,262
============ ===========
See notes to consolidated financial statements.
6
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
---------------------------------
The consolidated financial statements include the accounts of West Essex
Bancorp, Inc. (the "Company"), the Company's wholly owned subsidiary, West Essex
Bank (the "Bank") and the Bank's wholly owned subsidiary, West Essex Insurance
Agency, Inc. The Company's business is conducted principally through the Bank.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
2. BASIS OF PRESENTATION
---------------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and regulations S-X and do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations for the three and six
months ended June 30, 2002, are not necessarily indicative of the results which
may be expected for the entire fiscal year.
3. NET INCOME PER COMMON SHARE
-------------------------------
Basic net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding, adjusted for the
unallocated portion of shares held by the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-6. Diluted
net income per share is calculated by adjusting the weighted average number of
shares of common stock outstanding to include the effect of unallocated ESOP
shares, unearned Incentive Plan shares and stock options, if dilutive, using the
treasury stock method.
On September 28, 2001, the Company's Board of Directors announced a
five-for-four stock split, which was distributed on October 22, 2001, to
stockholders of record on October 8, 2001. Net income per common share for the
three and six months ended June 30, 2001, has been restated to give retroactive
effect to the stock split.
4. SUBSEQUENT EVENT
----------------------
On July 2, 2002, the State of New Jersey enacted changes in its corporate
business tax law. Among these changes are two which significantly impact the
Bank: (a) an increase in the tax rate, from 3% to 9%, applicable to the Bank's
pre-tax income and (b) the elimination of the previously permitted exclusion
from pre-tax income of certain dividends received. These changes are retroactive
to January 1, 2002. The Company has determined that the cumulative effect of the
tax law change, through July 2, 2002, was an increase to net income of
approximately $22,000, which includes, net of the effect of federal income
taxes, the recording of additional current state tax for the six months ended
June 30, 2002, and the adjustment of state deferred tax assets. This adjustment
will be recorded in July 2002.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21F of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Reform Act of 1995, and is including this statement
for purposes of these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal polices of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission (the "SEC").
The Company does not undertake - and specifically disclaims any obligation
- to release publicly the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Management's Discussion and Analysis or Plan of Operation
General
The Company is the federally chartered stock holding company for the Bank,
a federally chartered stock savings bank. The Company, the Bank and West Essex
Bancorp, M.H.C., a mutual holding company and majority owner of the Company, are
regulated by the Office of Thrift Supervision (the "OTS"). The Company's and the
Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on interest-earning assets,
primarily the loan and investment portfolios, and the cost of funds, consisting
of interest paid on deposits and borrowings. Results of operations are also
affected by the provision for loan losses and non-interest expense. Non-interest
expense principally consists of salaries and employee benefits, office occupancy
and equipment expense, amortization of intangibles, advertising, federal deposit
insurance premiums, expenses of real estate owned and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
8
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Total assets were $390.3 million at June 30, 2002, compared to $370.8
million at December 31, 2001, an increase of 19.5 million, or 5.3%. The increase
in total assets was primarily due to an increase of $24.9 million in
mortgage-backed securities funded by decreases of $2.1 million and $4.6 million
in cash and equivalents and loans receivable, respectively, increases of $5.5
million and $14.2 million in deposits and borrowed money, respectively, and net
income of $1.7 million.
Cash and cash equivalents, primarily federal funds sold and
interest-bearing deposits with the Federal Home Loan Bank of New York ("FHLB"),
decreased $2.1 million to $15.2 million at June 30, 2002 from $17.3 million at
December 31, 2001. The decrease in cash and cash equivalents funded purchases of
mortgage-backed securities.
In the aggregate, mortgage-backed securities and investment securities, all
of which were held to maturity issues, totalled $195.6 million at June 30, 2002,
an increase of $25.1 million, or 14.7%, from $170.5 million at December 31,
2001. Mortgage-backed securities increased $24.9 million to $162.2 million due
to purchases exceeding repayments. The increase was funded primarily by borrowed
money. Investment securities increased $144,000 to $33.3 million.
Loans receivable decreased by $4.6 million, or 2.8%, to $161.3 million at
June 30, 2002 from $165.9 million at December 31, 2001.
Deposits totalled $246.4 million at June 30, 2002, an increase of $5.5
million, or 2.3%, from the $240.9 million balance at December 31, 2001.
Borrowed money increased $14.2 million, or 18.5%, to $91.1 million at June
30, 2002, as compared to $76.9 million at December 31, 2001. During the six
months ended June 30, 2002, short-term borrowings increased by $15.0 million and
long-term debt of $776,000 was repaid.
Stockholders' equity decreased $76,000, or 0.1%, to $50.8 million. During
the six months ended June 30, 2002, net income of $1.7 million was offset by
treasury stock purchases of $1.5 million, representing the repurchase of 79,750
shares of Company common stock at an average price of $19.25, and the payment of
cash dividends of $490,000.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Net Income. Net income increased $144,000, or 20.2%, to $856,000 for the
three months ended June 30, 2002 compared with $712,000 for the same 2001
period. The increase in net income during the 2002 period resulted primarily
from increases of $396,000 in net interest income and $59,000 in non-interest
income, which were partially offset by increases of $217,000 in non-interest
expense and $99,000 in income taxes.
Interest Income. Total interest income decreased $174,000, or 3.0%, to $5.7
million for the three months ended June 30, 2002 from $5.9 million for the same
2001 period. The decrease was the result of a 72 basis point decline to 6.16% in
yield, which was partially offset by a $29.1 million, or 8.5%, increase in
average interest-earning assets between the periods. The decrease in yield was
the result of lower market interest rates.
9
Interest income on loans decreased by $179,000 or 5.9% to $2.9 million
during the three months ended June 30, 2002 when compared with $3.1 million for
the same 2001 period. The decrease during the 2002 period resulted from a 26
basis point decline to 7.11% in the yield earned on the loan portfolio, as well
as a $4.1 million, or 2.5%, decrease in average loans outstanding. The decreased
yield is the result of lower rates on originations as well as downward interest
rate adjustments on the Bank's adjustable-rate loan portfolio.
Interest on mortgage-backed securities, all of which are held-to-maturity,
increased $218,000, or 10.6%, to $2.3 million during the three months ended June
30, 2002 when compared with $2.1 million for the same 2001 period. The increase
during the 2002 period resulted from an increase of $38.1 million, or 31.1%, in
the average balance of mortgage-backed securities, partially offset by a 105
basis point decline to 5.65% the in yield thereon. The decreased yield is the
result of lower yields obtained on securities purchased and downward interest
rate adjustments on adjustable rate issues.
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, decreased by $87,000, or 15.2%, to $485,000 during
the three months ended June 30, 2002, when compared to $572,000 during the same
2001 period, primarily due to a decrease of 103 basis points to 5.55% in the
yield earned thereon. The average balance of investment securities increased
slightly to $34.9 million during the quarter ended June 30, 2002, from $34.8
million in the same prior year quarter. The decrease in yield was the result of
calls of several higher yielding securities and lower rates obtained on
securities purchased.
Interest on other interest-earning assets decreased $126,000, or 61.5%, to
$79,000 during the three months ended June 30, 2002 as compared to $205,000 for
the same 2001 period. The decrease was due to decreases of $5.0 million, or
26.6%, in the average balances of such assets and 206 basis points, to 2.30%, in
the yield thereon. The reduced yield is reflective of the decline in short-term
market interest rates.
Interest Expense. Interest expense on deposits decreased $697,000, or
29.7%, to $1.65 million during the three months ended June 30, 2002 when
compared to $2.35 million during the same 2001 period. Such decrease was
primarily attributable to a decrease of 133 basis points, to 2.93%, in the cost
of interest-bearing deposits, partially offset by a $5.1 million, or 2.3%,
increase in the average balance thereof. The decrease in cost was largely due to
lower interest rates paid on certificates of deposits, which averaged 3.64% for
the three months ended June 30, 2002 as compared to 5.47% for the same 2001
period. The average cost of non-certificate deposits was 1.71% for the three
months ended June 30, 2002 as compared to 1.82% for the same prior year period.
Interest expense on borrowed money increased by $128,000, or 13.9%, to
$1.05 million during the three months ended June 30, 2002 when compared with
$923,000 during the same 2001 period, due to a $20.6 million, or 30.7%, increase
in average borrowings partially offset by a 72 basis point decline to 4.79% in
average cost. During the three months ended June 30, 2002, the Bank repaid
$391,000 in long-term borrowings having an average interest rate of 5.99%.
Short-term borrowings totalled $30.0 million at June 30, 2002, and had an
average interest rate of 2.78% as compared to $15.0 million at March 31, 2002,
having an average rate of 2.86% and $7.5 million at June 30, 2001, having an
average rate of 4.40%.
Net Interest Income. Net interest income increased $396,000, or 15.2%, to
$3.0 million during the three months ended June 30, 2002, when compared with
$2.6 million for the same 2001 period. Such increase was due to a decrease in
total interest expense of $570,000, partially offset by a decrease in total
interest income of $174,000. The net interest rate spread increased to 2.71% in
2002 from 2.33% in 2001. The increase in the interest rate spread resulted from
a decrease of 110 basis points in the cost of interest-bearing liabilities,
partially offset by a 72 basis point decrease in the yield on interest-earning
assets.
10
Provision for Loan Losses. During the three months ended June 30, 2002, the
Bank did not record a provision for loan losses, as compared to $4,000 during
the same prior year period. At both period ends, the existing balance of the
allowance for loan losses was considered adequate. There were no loan
charge-offs or recoveries during the three months ended June 30, 2002 and 2001.
The allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio and gives due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. At June 30, 2002 and 2001, loans delinquent ninety days or more
totalled $745,000 and $138,000, respectively, representing 0.46% and 0.08%,
respectively, of total loans. At June 30, 2002, the allowance for loan losses
totalled $1.36 million, representing 0.84% of total loans and 182.9% of loans
delinquent ninety days or more. At March 31, 2002, the allowance for loan losses
totalled $1.36 million, representing 0.83% of total loans and 88.3% of loans
delinquent ninety days or more. At June 30, 2001, the allowance for loan losses
totalled $1.36 million, representing 0.81% of total loans and 985.0% of loans
delinquent ninety days or more. The Bank monitors its loan portfolio on a
continuing basis and intends to continue to provide for loan losses based on its
ongoing review of the loan portfolio and general market conditions.
Non-Interest Income. Non-interest income increased $59,000, or 39.1%, to
$210,000 during the three months ended June 30, 2002 from $151,000 during the
same 2001 period.
Non-Interest Expenses. Non-interest expenses increased by $217,000, or
13.0%, to $1.9 million during the three months ended June 30, 2002 when compared
with $1.7 million during the same 2001 period. The primary components of the
2002 period increase were a $99,000 increase in salaries and employee benefits
and a $105,000 increase in miscellaneous non-interest expenses. Salaries and
employee benefits, the largest component of non-interest expenses, increased
$99,000, or 10.5%, to $1.04 million during the three months ended June 30, 2002
from $939,000 during the prior year quarter. This increase was the result of
normal salary increases as well as the increased cost of stock-based
compensation plans, such as the ESOP, which are based on the average price of
the Company's common stock ($19.97 during the quarter ended June 30, 2002, and
$11.39 during the comparable prior year quarter). Miscellaneous non-interest
expenses increased $105,000, or 31.5%, to $438,000 during the three months ended
June 30, 2002 from $333,000 during the prior year quarter. All other elements of
non-interest expense remained little changed at $412,000 and $399,000 during the
three months ended June 30, 2002 and 2001, respectively.
Income Taxes. Income tax expense totalled $474,000, or 35.6% of income
before income taxes, during the three months ended June 30, 2002 as compared to
$375,000, or 34.5% of income before income taxes, during the comparable 2001
period.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
Net Income. Net income increased $150,000, or 9.9%, to $1.7 million for the
six months ended June 30, 2002 compared with $1.5 million for the same 2001
period. The increase in net income during the 2002 period resulted primarily
from increases of $466,000 in net interest income and $47,000 in non-interest
income, which were partially offset by increases of $277,000 in non-interest
expense and $86,000 in income taxes.
Interest Income. Total interest income decreased $694,000, or 5.8%, to
$11.3 million for the six months ended June 30, 2002 from $12.0 million for the
same 2001 period. The decrease was the result of a 79 basis point decrease to
6.22% in yield, partially offset by a $21.7 million, or 6.3%, increase in
average interest-earning assets.
11
Interest income on loans decreased by $434,000, or 7.0%, to $5.8 million
during the six months ended June 30, 2002 when compared with $6.2 million for
the same 2001 period. The decrease during the 2002 period resulted from a 41
basis point decrease to 7.06% in the yield earned on the loan portfolio and a
decrease of $2.5 million, or 1.5%, in the average balance of loans outstanding.
The decreased yield is the result of lower rates on originations and downward
interest rate adjustments on the Bank's adjustable-rate mortgage loans.
Interest on mortgage-backed securities, all of which are held-to-maturity,
increased $217,000, or 5.1%, to $4.4 million during the six months ended June
30, 2002 when compared with $4.2 million for the same 2001 period. The increase
during the 2002 period resulted from an increase of $28.0 million, or 22.4%, in
the average balance of mortgage-backed securities, partially offset by a 96
basis point decline to 5.81% in yield thereon. The decreased yield is the result
of lower yields obtained on securities purchased and downward interest rate
adjustments on adjustable rate issues.
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, decreased by $290,000, or 23.4%, to $951,000 during
the six months ended June 30, 2002, when compared to $1.2 million during the
same 2001 period, primarily due to decreases of $3.3 million, or 8.9%, in the
average balance of such assets, and 107 basis points to 5.62% in the yield
earned thereon. The decrease in average balance was the result of calls, sales
and maturities exceeding purchases of such securities. The decrease in yield was
the result of the calls of several higher yielding securities and the lower
yields available on purchased securities.
Interest on other interest-earning assets decreased $187,000, or 53.9%, to
$160,000 during the six months ended June 30, 2002 as compared to $347,000 for
the same 2001 period. The decrease was due to a decrease of $570,000, or 3.9%,
in the average balance of such assets, along with a 247 basis point decrease to
2.27% in the yield thereon. The reduced yield is reflective of the decline in
short-term market interest rates.
Interest Expense. Interest expense on deposits decreased $1.3 million, or
27.8%, to $3.45 million during the six months ended June 30, 2002 when compared
to $4.77 million during the same 2001 period. Such decrease was primarily
attributable to a decrease of 126 basis points, to 3.07%, in the cost of
interest-bearing deposits, partially offset by a $3.9 million, or 1.8%, increase
in the average balance thereof. The decrease in cost is largely due to lower
interest rates paid on certificates of deposit, which averaged 3.85% for the six
months ended June 30, 2002 as compared to 5.56% for the same 2001 period. The
average cost of non-certificate deposits was 1.71% for the six months ended June
30, 2002 as compared to 1.82% for the same prior year period.
Interest expense on borrowed money increased by $169,000, or 9.1%, to $2.02
million during the six months ended June 30, 2002 when compared with $1.85
million during the same 2001 period, primarily due to an increase of $15.9
million, or 24.0%, in average borrowings, partially offset by a decrease of 67
basis points to 4.91% in the cost thereof. During the six months ended June 30,
2002, the Bank repaid $776,000 in long-term borrowings having an average
interest rate of 5.99%. At June 30, 2002 and December 31, 2001, short-term
borrowings totalled $30.0 million and $15.0 million, respectively, and carried
an average rate of 2.78% and 2.86%, respectively.
Net Interest Income. Net interest income increased $466,000, or 8.6%, to
$5.9 million during the six months ended June 30, 2002, when compared with $5.4
million the same 2001 period. Such increase was due to a decrease in total
interest expense of $1.2 million, or 18.2%, partially offset by a decrease in
total interest income of $694,000. The net interest rate spread increased to
2.66% in 2002 from 2.39% in 2001. The increase in the interest rate spread
resulted from a decrease of 106 basis points in the cost of interest-bearing
liabilities, partially offset by a 79 basis point decrease in the yield on
interest-earning assets.
12
Provision for Loan Losses. During the six months ended June 30, 2002 and
2001, the Bank did not record a provision for loan losses as the existing
balance of the allowance for loan losses was considered adequate. There were no
charge-offs or recoveries during the six months ended June 30, 2002 and 2001.
The allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio and gives due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. At June 30, 2002, the allowance for loan losses stood at $1.36
million, representing 0.84% of total loans and 182.9 % of loans delinquent
ninety days or more. At December 31, 2001, the allowance for loan losses stood
at $1.36 million, representing 0.80% of total loans and 235.8% of loans
delinquent ninety days or more. At June 30, 2001, the allowance for loan losses
stood at $1.36 million, representing 0.81% of total loans and 985.0% of loans
delinquent ninety days or more. The Bank monitors its loan portfolio on a
continuing basis and intends to continue to provide for loan losses based on its
ongoing review of the loan portfolio and general market conditions.
Non-Interest Income. Non-interest income increased $47,000, or 14.3%, to
$375,000 during the six months ended June 30, 2002 from $328,000 during the same
2001 period. The 2001 amount included a $45,000 gain on the sale of a security
available for sale.
Non-Interest Expenses. Non-interest expenses increased by $277,000, or
8.2%, to $3.7 million during the six months ended June 30, 2002 when compared
with $3.4 million during the same 2001 period. Salaries and employee benefits,
the largest component of non-interest expenses, increased $244,000, or 13.6%, to
$2.0 million during the six months ended June 30, 2002 from $1.8 million during
the prior year period. This increase was the result of normal salary increases
as well as the increased cost of stock-based compensation plans, such as the
ESOP, which are based on the average price of the Company's common stock ($19.13
during the six months ended June 30, 2002, and $10.71 during the comparable
prior year period). All other elements of non-interest expense remained little
changed at $1.6 million during both the six months ended June 30, 2002 and 2001.
Income Taxes. Income tax expense totalled $902,000, or 35.2% of income
before income taxes, during the six months ended June 30, 2002 as compared to
$816,000, or 35.1% of income before income taxes, during the comparable 2001
period.
Liquidity and Capital Resources
The Company's and Bank's primary sources of funds on a long-term and
short-term basis are deposits, principal and interest payments on loans,
mortgage-backed and investment securities and FHLB borrowings. The Bank uses the
funds generated to support its lending and investment activities as well as any
other demands for liquidity such as deposit outflows. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit flows,
mortgage prepayments and the exercise of call features on debt securities are
greatly influenced by general interest rates, economic conditions and
competition.
The Company's most liquid assets are cash and cash equivalents. The levels
of these assets are dependent on operating, financing, lending and investing
activities during any given period. At June 30, 2002, cash and cash equivalents
totalled $15.2 million, or 3.9% of total assets.
The Company, through its Bank subsidiary, has other sources of liquidity if
a need for additional funds arises, including FHLB borrowings. At June 30, 2002,
the Bank had $91.1 million in borrowings outstanding from the FHLB. Depending on
market conditions, the pricing of deposit products and FHLB borrowings, the Bank
may continue to rely on FHLB borrowings to fund asset growth.
13
At June 30, 2002, the Bank had commitments to originate and purchase loans
and fund unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totalling $17.0 million and commitments to purchase
securities totalling $6.0 million. The Bank anticipates that it will have
sufficient funds available to meet its current commitments. Certificate
accounts, including Individual Retirement Account accounts, which are scheduled
to mature in less than one year from June 30, 2002, totalled $120.0 million. The
Bank expects that substantially all of the maturing certificate accounts will be
retained by the Bank.
At June 30 , 2002, the Company had total equity, determined in accordance
with accounting principles generally accepted in the United States of America,
of $50.8 million, or 13.0% of total assets. At June 30, 2002, the Bank exceeded
all of its regulatory capital requirements with a tangible capital level of
$45.4 million, or 11.8% of total adjusted assets, which is above the required
level of $5.8 million, or 1.5%; core capital of $45.4 million, or 11.8% of total
adjusted assets, which is above the required level of $15.4 million, or 4.0%;
and risk-based capital of $46.8 million, or 32.8% of risk-weighted assets, which
is above the required level of $11.4 million, or 8.0%. An institution with a
ratio of tangible capital to adjusted total assets of greater than or equal to
5.0% is considered to be "well-capitalized" pursuant to OTS regulations.
Recent Developments
On July 2, 2002, the State of New Jersey enacted changes in its corporate
business tax law. Among these changes are two which significantly impact the
Bank: (a) an increase in the tax rate, from 3% to 9%, applicable to the Bank's
pre-tax income and (b) the elimination of the previously permitted exclusion
from pre-tax income of certain dividends received. These changes are retroactive
to January 1, 2002. The Company has determined that the cumulative effect of the
tax law change, through July 2, 2002, was an increase to net income of
approximately $22,000, which includes, net of the effect of federal income
taxes, the recording of additional current state taxes for the six months ended
June 30, 2002, and the adjustment of state deferred tax assets. This adjustment
will be recorded in July 2002.
In regard to future periods, the aforementioned State of New Jersey tax law
changes are expected to result in levels of net income approximately 6% lower
than those determined under prior law.
14
WEST ESSEX BANCORP, INC.
PART II . OTHER INFORMATION
June 30, 2002
ITEM 1. Legal Proceedings
------------------
Neither the Company nor the Bank is involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, including a recent lawsuit filed by a former employee
related to a claim filed by that employee under the Workers' Compensation
Law of the State of New Jersey. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the financial
condition and results of operations of the Company.
ITEM 2. Changes in Securities
----------------------
None.
ITEM 3. Defaults Upon Senior Securities
--------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
The 2002 Annual Meeting of Stockholders was held on May 21, 2002. The
following matters were submitted to the stockholders:
1. Election of three directors:
A. Directors elected at the meeting:
Term to Number of Shares
Expire in For Withheld
--------- --- --------
Mr. David F. Brandley 2005 4,748,195 4,103
Mr. S.M. Terry LaCorte 2004 4,729,009 23,289
Mr. Everett N. Leonard 2005 4,747,048 5,250
B. The following directors' terms of office as a director continued
after the meeting:
(i) Mr. John J. Burke
(ii) Mr. William J. Foody
(iii) Mr. Leopold W. Montanaro
15
WEST ESSEX BANCORP, INC.
PART II . OTHER INFORMATION
June 30, 2002
ITEM 4. Submission of Matters to a Vote of Security Holders (Cont'd.)
---------------------------------------------------------------
2. The ratification of Radics & Co., LLC as independent auditors of
the Company for the fiscal year ending December 31, 2002.
Number of Shares
-----------------------------------------------------------------
For Against Abstained
--------- --------- ----------
4,750,285 1,721 293
ITEM 5. Other Information
-------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits:
3.1 Charter of West Essex Bancorp, Inc. *
3.2 Bylaws of West Essex Bancorp, Inc. *
4.0 Form of Common Stock Certificate *
10.5 West Essex Bancorp, Inc. Amended and Restated Employment Agreement with
Leopold W. Montanaro
10.6 West Essex Bank Amended and Restated Employment Agreement with
Leopold W. Montanaro
11.0 Statement regarding computation of per share earnings
99.0 Certifications of Chief Executive Officer and Chief Financial
Officer
* Incorporated herein by reference into this document from the
Exhibits to Form S-1. Registration Statement and any amendments
thereto, Registration No. 333-56729.
(b) Reports on Form 8-K:
None
16
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WEST ESSEX BANCORP, INC.
Date: August 12, 2002 By: /s/ Leopold W. Montanaro
------------------ -----------------------------------------
Leopold W. Montanaro
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2002 By: /s/ Dennis A. Petrello
------------------ -----------------------------------------
Dennis A. Petrello
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
17