UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30, 2002
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-29770
-------
WEST ESSEX BANCORP, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
UNITED STATES 22-3597632
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
417 Bloomfield Avenue, Caldwell, New Jersey 07006
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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:
4,856,999 shares of common stock, par value $0.01 par share, were outstanding as
of October 25, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
WEST ESSEX BANCORP, INC.
FORM 10-QSB
For the Quarter Ended September 30, 2002
INDEX
Page
Number
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Statements of Financial Condition at
September 30, 2002 and December 31, 2001 (Unaudited) 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2002 and 2001 (Unaudited) 3
Consolidated Statements of Comprehensive Income for the Three
and Nine Months Ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 (Unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis or Plan
of Operation 9 - 16
Item 3. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS 19 - 20
WEST ESSEX BANCORP, INC.
PART I. FINANCIAL INFORMATION
September 30, 2002
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under accounting
principles generally accepted in the United States of America 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 nine month periods ended September
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)
September 30, December 31,
2002 2001
------------- -------------
Assets
------
Cash and amounts due from depository institutions $ 1,945,573 $ 2,008,885
Federal funds sold 5,000,000 10,500,000
Interest-bearing deposits in other banks 4,242,978 4,781,061
------------- -------------
Total cash and cash equivalents 11,188,551 17,289,946
Term deposits -- 200,000
Investment securities held to maturity 36,058,741 33,169,187
Mortgage-backed securities held to maturity 172,932,375 137,327,932
Loans receivable 150,762,037 165,935,968
Real estate owned 209,000 209,000
Premises and equipment 2,439,110 2,502,584
Federal Home Loan Bank of New York stock 4,540,900 3,842,800
Accrued interest receivable 2,062,683 1,879,537
Excess of cost over assets acquired 3,013,237 3,457,813
Other assets 5,906,037 4,949,385
------------- -------------
Total assets $ 389,112,671 $ 370,764,152
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits $ 251,059,598 $ 240,864,308
Borrowed money 84,683,849 76,855,928
Advance payments by borrowers for taxes and insurance 758,652 927,375
Other liabilities 1,404,173 1,201,590
------------- -------------
Total liabilities 337,906,272 319,849,201
------------- -------------
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 4,856,999 (2002)
and 4,921,615 (2001) 52,465 52,465
Additional paid-in capital 17,594,238 17,379,880
Retained earnings - substantially restricted 39,190,073 37,914,015
Common stock acquired by Employee Stock Ownership
Plan ("ESOP") (773,619) (884,158)
Unearned Incentive Plan stock (302,548) (405,730)
Treasury stock, at cost; 389,462 shares (2002) and
324,846 shares (2001) (4,554,210) (3,141,521)
------------- -------------
Total stockholders' equity 51,206,399 50,914,951
------------- -------------
Total liabilities and stockholders' equity $ 389,112,671 $ 370,764,152
============= =============
See notes to consolidated financial statements.
2
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Loans $ 2,702,270 $ 3,141,380 $ 8,464,363 $ 9,337,752
Mortgage-backed securities 2,224,650 1,973,317 6,669,486 6,201,084
Investment securities 480,342 548,490 1,431,226 1,789,717
Other interest-earning assets 93,691 144,966 253,550 491,793
------------ ------------ ------------ ------------
Total interest income 5,500,953 5,808,153 16,818,625 17,820,346
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,644,722 2,237,585 5,090,084 7,012,051
Borrowed money 1,052,418 945,903 3,071,038 2,796,103
------------ ------------ ------------ ------------
Total interest expense 2,697,140 3,183,488 8,161,122 9,808,154
------------ ------------ ------------ ------------
Net interest income 2,803,813 2,624,665 8,657,503 8,012,192
Provision for loan losses -- -- -- --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,803,813 2,624,665 8,657,503 8,012,192
------------ ------------ ------------ ------------
Non-interest income:
Fees and service charges 90,495 95,899 277,051 257,947
Gain on sale of securities available for sale -- -- -- 45,000
Other 65,228 67,479 253,665 187,936
------------ ------------ ------------ ------------
Total non-interest income 155,723 163,378 530,716 490,883
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits 1,069,904 904,960 3,112,551 2,703,696
Net occupancy expense of premises 101,703 83,894 286,133 288,594
Equipment 166,957 120,126 509,066 497,375
Loss (gain) on real estate owned 1,418 (4,724) 3,992 (7,106)
Amortization of intangibles 148,192 148,192 444,576 444,576
Merger related expenses 307,371 -- 322,371 --
Miscellaneous 459,426 332,442 1,242,734 1,046,697
------------ ------------ ------------ ------------
Total non-interest expenses 2,254,971 1,584,890 5,921,423 4,973,832
------------ ------------ ------------ ------------
Income before income taxes 704,565 1,203,153 3,266,796 3,529,243
Income taxes 355,672 391,746 1,257,704 1,207,510
------------ ------------ ------------ ------------
Net income $ 348,893 $ 811,407 $ 2,009,092 $ 2,321,733
============ ============ ============ ============
Net income per common share:
Basic $ 0.07 $ 0.17 $ 0.43 $ 0.49
Diluted 0.07 0.17 0.41 0.48
============ ============ ============ ============
Dividends declared per common share $ 0.14 $ 0.12 $ 0.42 $ 0.36
============ ============ ============ ============
Weighted average number of common shares
outstanding:
Basic 4,705,422 4,753,439 4,721,291 4,771,277
Diluted 4,846,454 4,880,903 4,853,506 4,862,609
============ ============ ============ ============
See notes to consolidated financial statements.
3
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net income $ 348,893 $ 811,407 $ 2,009,092 $ 2,321,733
---------- ---------- ----------- -----------
Other comprehensive income
Unrealized holding gains on securities available for sale,
net of income taxes of $ -0- $7,871, $ -0- and -- 14,004 -- 33,299
$18,715, 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 -- 14,004 -- 4,490
---------- ---------- ----------- -----------
Comprehensive income $ 348,893 $ 825,411 $ 2,009,092 $ 2,326,223
========== ========== =========== ===========
See notes to consolidated financial statements.
4
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 2,009,092 $ 2,321,733
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 184,488 193,096
Net accretion of premiums, discounts and deferred loan fees (74,285) (152,406)
Amortization of intangibles 444,576 444,576
(Gain) on sale of securities available for sale -- (45,000)
(Gain) on sale of real estate owned -- (34,007)
(Gain) on trade-in of automobile -- (2,360)
(Increase) decrease in accrued interest receivable (183,146) 144,839
(Increase) in other assets (889,659) (326,055)
(Decrease) increase in interest payable (133,038) 304,604
Increase in other liabilities 155,658 14,431
Amortization of Incentive Plan cost 103,182 93,702
ESOP shares committed to be released 292,284 161,331
------------ ------------
Net cash provided by operating activities 1,909,152 3,118,484
------------ ------------
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 8,000,000 16,548,188
Purchases of investment securities held to maturity (10,671,716) (4,000,000)
Principal repayments on mortgage-backed securities held to maturity 38,564,081 31,090,524
Purchases of mortgage-backed securities held to maturity (74,173,443) (31,696,442)
Purchase of loans receivable (4,541) (2,765,918)
Net decrease (increase) in loans receivable 15,039,838 (8,286,408)
Proceeds from sales of real estate owned -- 394,712
Additions to premises and equipment (121,014) (130,898)
(Purchase) redemption of Federal Home Loan Bank of New York stock (698,100) 2,900
Purchase of life insurance -- (1,700,000)
------------ ------------
Net cash (used in) provided by investing activities (23,864,895) 1,201,658
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 10,375,253 (467,170)
Net increase (decrease) in short-term borrowed money 10,000,000 (2,950,000)
Proceeds of long-term borrowed money -- 10,000,000
Repayment of long-term borrowed money (2,172,079) (1,105,139)
Net (decrease) in advance payments by borrowers for taxes
and insurance (168,723) (110,440)
Purchase of treasury stock (1,535,275) (907,775)
Proceeds from sales of treasury stock 88,206 17,813
Cash dividends paid (733,034) (657,704)
------------ ------------
Net cash provided by financing activities 15,854,348 3,819,585
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,101,395) 8,139,727
Cash and cash equivalents - beginning 17,289,946 8,877,917
------------ ------------
Cash and cash equivalents - ending $ 11,188,551 $ 17,017,644
============ ============
See notes to consolidated financial statements.
5
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2002 2001
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,405,480 $ 1,238,020
=========== ===========
Interest $ 8,294,160 $ 9,503,550
=========== ===========
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 Management 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 of America.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the three
and nine months ended September 30, 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.
4. MERGER AGREEMENT
-------------------
At September 11, 2002, the Company, the Bank and West Essex Bancorp, M.H.C., the
mutual holding company which owns the majority of the outstanding capital stock
of the Company, entered into a merger agreement with Kearny Financial Corp.
(Kearny Financial), the parent corporation of Kearny Federal Savings Bank, and
Kearny MHC, the parent company of Kearny Financial. At the date of the merger,
the Company's common stock held by public stockholders other than West Essex
Bancorp, M.H.C. will be purchased for $35.10 per share, in cash. The transaction
is subject to several conditions including the receipt of shareholder and
regulatory approvals.
In the event the Company enters into a merger, acquisition, consolidation or
other form of business combination agreement with another entity, the Company
will be required to pay Kearny Financial the amount of $4.0 million in cash upon
written demand by Kearny Financial. Merger related charges, which include but
are not limited to professional fees for investment banking, legal and
accounting, are expected to be $1.3 million.
7
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. MERGER AGREEMENT (Cont'd.)
-----------------------------
Prior to or upon the effective date of the merger, the Company's ESOP, Incentive
Stock Plan, and Stock Option Plan will be terminated on such terms as contained
in the merger agreement. Upon termination, all participant accounts will be
considered fully vested and nonforfeitable and all remaining plan assets will be
allocated to the participants.
Certain executive officers of the Bank have employment agreements or change of
control agreements that will become effective on the date of the merger.
Payments required under these agreements will be liabilities of Kearny Fiancial.
8
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.
9
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Total assets were $389.1 million at September 30, 2002, compared to $370.8
million at December 31, 2001, an increase of $18.3 million, or 4.9%. The
increase in total assets was primarily due to an increase of $35.6 million in
mortgage-backed securities funded by a decrease of $15.1 million in loans
receivable and increases of $10.2 million and $7.8 million in deposits and
borrowed money, respectively, and net income of $2.0 million.
Cash and cash equivalents, primarily federal funds sold and
interest-bearing deposits with the Federal Home Loan Bank of New York ("FHLB"),
decreased $6.1 million to $11.2 million at September 30, 2002, from $17.3
million at December 31, 2001. The decrease in cash and cash equivalents funded
purchases of investment securities, purchases of treasury stock and cash
dividends to stockholders.
In the aggregate, mortgage-backed securities and investment securities, all
of which were held to maturity issues, totalled $209.0 million at September 30,
2002, an increase of $38.5 million, or 22.6%, from $170.5 million at December
31, 2001. Mortgage-backed securities increased $35.6 million to $172.9 million
and investment securities increased $2.9 million to $36.1 million. These
increases were due to purchases exceeding repayments.
Loans receivable decreased by $15.1 million, or 9.1%, to $150.8 million at
September 30, 2002, from $165.9 million at December 31, 2001. The decrease in
loans was the result of increased repayment activity brought about by the lowest
mortgage interest rate market in over thirty years.
Deposits totalled $251.1 million at September 30, 2002, an increase of
$10.2 million, or 4.2%, from the $240.9 million balance at December 31, 2001.
Borrowed money increased $7.8 million, or 10.1%, to $84.7 million at
September 30, 2002, as compared to $76.9 million at December 31, 2001. During
the nine months ended September 30, 2002, short-term borrowings increased by
$10.0 million and long-term debt of $2.2 million was repaid.
Stockholders' equity increased $291,000, or 0.6%, to $51.2 million. During
the nine months ended September 30, 2002, net income of $2.0 million and
$395,000 in amortization of ESOP and Incentive Plan stock compensation 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 $733,000.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and 2001
Net Income. Net income decreased $462,000, or 57.0%, to $349,000 for the
three months ended September 30, 2002, compared with $811,000 for the same 2001
period. The decrease in net income during the 2002 period resulted primarily
from a $670,000 increase in non-interest expenses, partially offset by a
$179,000 increase in net interest income and a $36,000 decrease in income tax
expense.
Interest Income. Total interest income decreased $307,000, or 5.3%, to $5.5
million for the three months ended September 30, 2002, from $5.8 million for the
same 2001 period. The decrease was the result of a 95 basis point decline to
5.82% in yield, which was partially offset by a $34.7 million, or 10.1%,
increase in average interest-earning assets between the periods. The decrease in
yield was the result of lower market interest rates.
10
Interest income on loans decreased by $439,000, or 14.0%, to $2.7 million
during the three months ended September 30, 2002, when compared with $3.1
million for the same 2001 period. The decrease during the 2002 period resulted
from a 48 basis point decline to 6.81% in the yield earned on the loan
portfolio, along with a $13.6 million, or 7.9%, decrease in average loans
outstanding. The decreased yield is the result of lower rates obtained on
originations as well as downward interest rate adjustments on the Bank's
adjustable-rate mortgage loans. The decrease in average balance reflects
increased loan repayment volume brought about by the lowest mortgage interest
rate market in over thirty years.
Interest on mortgage-backed securities, all of which are held-to-maturity,
increased $252,000, or 12.8%, to $2.2 million during the three months ended
September 30, 2002, when compared with $2.0 million for the same 2001 period.
The increase during the 2002 period resulted primarily from an increase of $42.9
million, or 35.3%, in average mortgage-backed securities, partially offset by a
decrease of 108 basis points, to 5.41%, in yield earned thereon. The increased
average balance is due to purchases of mortgage-backed securities exceeding
repayments. The decreased yield is largely the result of lower yields available
on purchased issues 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 $69,000, or 12.6%, to $480,000 during
the three months ended September 30, 2002, when compared to $549,000 during the
same 2001 period, due to a decrease of 121 basis points, to 5.19%, in the yield
earned on investment securities, partially offset by a $2.7 million, or 7.9%,
increase in the average balance of such assets. The decrease in yield was the
result of calls of several higher yielding securities and the lower yields
available on purchased issues.
Interest on other interest-earning assets decreased $51,000, or 35.2%, to
$94,000 during the three months ended September 30, 2002, as compared to
$145,000 for the same 2001 period. The decrease was due to a decrease of 170
basis points, to 2.11%, in yield, partially offset by an increase of $2.6
million, or 17.3%, in the average balance of such assets. The reduced yield is
reflective of the decline in market interest rates.
Interest Expense. Interest expense on deposits decreased $593,000, or
26.5%, to $1.6 million during the three months ended September 30, 2002, when
compared to $2.2 million during the same 2001 period. Such decrease was
attributable to a decrease of 122 basis points, to 2.83%, in the cost of
interest-bearing deposits, partially offset by an $11.5 million, or 5.2%,
increase in the average balance thereof. The decrease in cost is largely due to
lower interest rates paid on certificates of deposits, which averaged 3.43% for
the three months ended September 30, 2002, as compared to 5.15% for the same
2001 period. The average cost of non-certificate deposits was 1.83% for the
three months ended September 30, 2002, as compared to 1.90% for the same prior
year period.
Interest expense on borrowed money increased by $106,000, or 11.2%, to
$1.05 million during the three months ended September 30, 2002, when compared
with $946,000 during the same 2001 period, primarily due to a $20.8 million, or
31.0%, increase in average borrowings, partially offset by an 85 basis point
decrease, to 4.78%, in the average cost of borrowed money. During the three
months ended September 30, 2002, the Bank repaid $1.4 million in long-term
borrowings having an average interest rate of 6.27%. Short-term borrowings
totalled $25.0 million at September 30, 2002, and had an average interest rate
of 2.57%, as compared to $30.0 million at June 30, 2002, having an average rate
of 2.78% and $5.0 million at September 30, 2001, having an average rate of
3.78%.
11
Net Interest Income. Net interest income increased $179,000, or 6.9%, to
$2.8 million during the three months ended September 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 $486,000, partially offset by a decrease in total
interest income of $307,000. The net interest rate spread increased to 2.45% in
2002 from 2.35% in 2001. The increase in the interest rate spread resulted from
a decrease of 105 basis points, to 3.37%, in the cost of interest-bearing
liabilities, partially offset by a 95 basis point decrease, to 5.82%, in the
yield on interest-earning assets.
Provision for Loan Losses. During the three months ended September 30, 2002
and 2001, the Bank did not record a provision for loan losses. 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 September 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. The Bank intends to continue to provide for
loan losses based on its periodic review of the loan portfolio and general
market conditions. At September 30, 2002 and June 30, 2002, loans delinquent
ninety days or more totalled $579,000 and $745,000, respectively, representing
0.38% and 0.46%, respectively, of total loans. At September 30, 2002, the
allowance for loan losses stood at $1.36 million, representing 0.89% of total
loans and 236% of loans delinquent ninety days or more. At June 30, 2002, the
allowance for loan losses stood at $1.36 million, representing 0.84% of total
loans and 183% of loans delinquent ninety days or more. At September 30, 2001,
the allowance for loan losses stood at $1.36 million, representing 0.76% of
total loans and 280% 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 decreased $7,000, or 4.3%, to
$156,000 during the three months ended September 30, 2002, from $163,000 during
the same 2001 period.
Non-Interest Expenses. Non-interest expenses increased by $670,000, or
42.3%, to $2.3 million during the three months ended September 30, 2002, when
compared with $1.6 million during the same 2001 period. The primary components
of the period increase were increases in salaries and employee benefits,
equipment expense, merger related expenses and miscellaneous expenses of
$165,000, $47,000, $307,000 and $127,000, respectively. The $165,000, or 18.2%,
increase in salaries and employee benefits, the largest component of
non-interest expenses, reflects increased pension plan expense and the increased
cost of stock-based compensation plans. The expenses related to the Company's
stock-based compensation plans are based upon the average price of the Company's
common stock, which was approximately $23.53 per share during the three months
ended September 30, 2002, as compared to approximately $13.53 per share during
the three months ended September 30, 2001. Equipment expenses increased $47,000,
or 39.2%, to $167,000 during the quarter ended September 30, 2002, from $120,000
during the same prior year quarter due primarily to increased expenses related
to the Bank's outside data processing center. During the quarter ended September
30, 2001, the Bank negotiated a reduction in fees charged by its outside data
processor retroactive to the beginning of 2001. Accordingly, the full amount of
the fee reduction for nine months was recorded during the quarter ended
September 30, 2001. Merger related expenses of $307,000 associated with the
proposed merger with Kearny, primarily legal and financial advisory costs, were
recorded during the quarter ended September 30, 2002. There were no such
expenses recorded in the comparable prior year period. Miscellaneous
non-interest expenses increased $127,000, or 38.3%, to $459,000 during the three
months ended September 30, 2002, from $332,000 during the prior year quarter.
The increase in miscellaneous non-interest expenses was spread through a number
of categories, the most significant of which were legal fees, advertising,
insurance and audit and accounting fees.
12
Income Taxes. Income tax expense totalled $356,000, or 50.5% of income
before income taxes, during the three months ended September 30, 2002, as
compared to $392,000, or 32.6% of income before income taxes, during the
comparable 2001 period. Income before income taxes during the three months ended
September 30, 2002, includes merger related expenses of $307,000, which are not
deductible for income tax purposes. Income tax expense for the three months
ended September 30, 2002, was 35.1% of income before income taxes and merger
related expenses.
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 effect of the tax law change, which included the
cumulative effect thereof at the enactment date, was an increase in income tax
expense of approximately $20,000 during the three months ended September 30,
2002. Such increase included, net of the effect of federal income taxes, the
recording of additional current state taxes for the six months ended June 30,
2002, recording current state taxes at the new higher tax rate for the three
months ended September 30, 2002, and a cumulative adjustment of state deferred
tax assets.
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.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
2001
Net Income. Net income decreased $313,000, or 13.5%, to $2.0 million for
the nine months ended September 30, 2002, compared with $2.3 million for the
same 2001 period. The decrease in net income during the 2002 period resulted
primarily from increases in non-interest expenses and income taxes of $948,000
and $50,000, respectively, which were partially offset by increases in net
interest income and non-interest income of $646,000 and $40,000, respectively.
Interest Income. Total interest income decreased $1.0 million, or 0.8%, to
$16.8 million for the nine months ended September 30, 2002, from $17.8 million
for the same 2001 period. The decrease was the result of an 85 basis point
decrease, to 6.08%, in yield, partially offset by a $25.4 million, or 7.1%,
increase in average interest-earning assets between the periods. The decrease in
yield was the result of lower market interest rates.
Interest income on loans decreased by $873,000, or 9.3%, to $8.4 million
during the nine months ended September 30, 2002, when compared with $9.3 million
for the same 2001 period. The decrease during the 2002 period resulted from a
decrease of $6.2 million, or 3.7%, in the average balance of loans outstanding,
along with a 43 basis point decrease, to 6.98%, in the yield earned on the loan
portfolio. The decreased yield is the result of lower rates obtained on
originations as well as downward interest rate adjustments on the Bank's
adjustable-rate mortgage loans. The decrease in average balance reflects
increased loan repayment volume brought about by the lowest mortgage interest
rate market in over thirty years.
Interest on mortgage-backed securities, all of which are held-to-maturity,
increased $469,000, or 7.6%, to $6.7 million during the nine months ended
September 30, 2002, when compared with $6.2 million for the same 2001 period.
The increase during the 2002 period resulted from an increase of $33.0 million,
or 26.7%, in the average balance of mortgage-backed securities, partially offset
by a decrease of 101 basis points, to 5.67%, in the yield earned thereon. The
increased average balance is due to purchases of mortgage-backed securities
exceeding repayments. The decreased yield is largely the result of lower yields
available on purchased issues and downward interest rate adjustments on
adjustable rate issues.
13
Interest earned on investment securities, including both available-for-sale
and held-to-maturity issues, decreased by $359,000, or 20.1%, to $1.4 million
during the nine months ended September 30, 2002, when compared to $1.8 million
during the same 2001 period, primarily due to decreases of $1.3 million, or
3.6%, in the average balance of such assets, and 113 basis points, to 5.47%, in
the yield earned thereon. The reduced yield is reflective of the decline in
market interest rates.
Interest on other interest-earning assets decreased $238,000, or 48.4%, to
$254,000 during the nine months ended September 30, 2002, as compared to
$492,000 for the same 2001 period. The decrease was due to a 221 basis point
decrease, to 2.21%, in yield, partially offset by an increase of $496,000, or
3.3%, in the average balance of such assets. The reduced yield is reflective of
the decline in market interest rates.
Interest Expense. Interest expense on deposits decreased $1.9 million, or
27.4%, to $5.1 million during the nine months ended September 30, 2002, when
compared to $7.0 million during the same 2001 period. Such decrease was
primarily attributable to a decrease of 125 basis points, to 2.99%, in the
average cost of interest-bearing deposits, partially offset by a $6.4 million,
or 2.9%, increase in the average balance thereof. The decrease in cost is due to
lower interest rates paid on certificates of deposit, which averaged 3.71% for
the nine months ended September 30, 2002, as compared to 5.42% for the same 2001
period. The average cost of non-certificate deposits was 1.75% for the nine
months ended September 30, 2002, as compared to 1.85% for the same prior year
period.
Interest expense on borrowed money increased by $275,000, or 9.8%, to $3.1
million during the nine months ended September 30, 2002, when compared with $2.8
million during the same 2001 period, primarily due to a $17.5 million, or 26.3%,
increase in average borrowings, which more than offset a 73 basis point
decrease, to 4.87%, in the average cost of borrowed money. During the nine
months ended September 30, 2002, the Bank repaid $2.2 million in long-term
borrowings having an average interest rate of 6.14%. At September 30, 2002, and
December 31, 2001, short-term borrowings totalled $25.0 million and $15.0
million, respectively, and carried an average rate of 2.57% and 2.86%,
respectively.
Net Interest Income. Net interest income increased $646,000, or 8.1%, to
$8.7 million during the nine months ended September 30, 2002, when compared with
$8.0 million for the same 2001 period. Such increase was due to a decrease in
total interest expense of $1.65 million, which more than offset a decrease in
total interest income of $1.00 million. The net interest rate spread increased
to 2.58% in 2002 from 2.38% in 2001. The increase in the interest rate spread
resulted from a decrease of 105 basis points, to 3.50%, in the cost of
interest-bearing liabilities, which more than offset an 85 basis point decrease,
to 6.08%, in the yield earned on interest-earning assets.
Provision for Loan Losses. During the nine months ended September 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. During the
nine months ended September 30, 2002 and 2001, there were no loan charge-offs or
recoveries. The allowance for loan losses is based on management's evaluation of
the risk inherent in its loan portfolio and gives due consideration to the
changes in general market conditions and in the nature and volume of the Bank's
loan activity. The Bank intends to continue to provide for loan losses based on
its periodic review of the loan portfolio and general market conditions. At
September 30, 2002 and 2001, loans delinquent ninety days or more totalled
$579,000 and $487,000, respectively, representing 0.38% and 0.27%, respectively,
of total loans at each date. At September 30, 2002, the allowance for loan
losses stood at $1.36 million, representing 0.89% of total loans and 236% 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 236%
of loans delinquent ninety days or more. At September 30, 2001, the allowance
for loan losses stood at $1.36 million, representing 0.76% of total loans and
280% 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.
14
Non-Interest Income. Non-interest income increased $40,000, or 8.1%, to
$531,000 during the nine months ended September 30, 2002, from $491,000 during
the same 2001 period. The 2001 amount includes a $45,000 gain on the sale of a
security available for sale.
Non-Interest Expenses. Non-interest expenses increased by $948,000, or
19.1%, to $5.9 million during the nine months ended September 30, 2002, when
compared with $5.0 million during the same 2001 period. The primary components
of the period increase were increases in salaries and employee benefits, merger
related expenses and miscellaneous expenses of $409,000, $322,000, and $196,000,
respectively. Salaries and employee benefits, the largest component of
non-interest expenses, increased $409,000, or 15.1%, to $3.1 million during the
nine months ended September 30, 2002, from $2.7 million during the prior year
period, reflecting increased pension plan expense and the increased cost of
stock-based compensation plans. The expenses related to the Company's
stock-based compensation plans are based upon the average price of the Company's
common stock, which was approximately $20.59 per share during the nine months
ended September 30, 2002, as compared to approximately $11.65 per share during
the nine months ended September 30, 2001. Merger related expenses of $322,000
associated with the proposed merger with Kearny, primarily legal and financial
advisory costs, were recorded during the nine months ended September 30, 2002.
There were no such expenses recorded in the comparable prior year period.
Miscellaneous non-interest expenses increased $196,000, or 18.7%, to $1.2
million during the nine months ended September 30, 2002, from $1.0 million
during the comparable prior year period. The increase in miscellaneous
non-interest expenses was spread through a number of categories, the most
significant of which were legal fees, advertising, insurance and audit and
accounting fees.
Income Taxes. Income tax expense totalled $1.26 million, or 38.5% of income
before income taxes, during the nine months ended September 30, 2002, as
compared to $1.21 million, or 34.2% of income before income taxes, during the
comparable 2001 period. Income before income taxes during the nine months ended
September 30, 2002, includes merger related expenses of $322,000, which are not
deductible for income tax purposes. Income tax expense for the nine months ended
September 30, 2002, was 35.0% of income before income taxes and merger related
expenses. In addition, the effect of the State of New Jersey tax law change
enacted in 2002, which included the cumulative effect thereof at the enactment
date, was an increase in income tax expense of approximately $20,000 during the
nine months ended September 30, 2002. Such increase included, net of the effect
of federal income taxes, the recording of current state taxes for the nine
months ended September 30, 2002, at the higher rate of 9% and a cumulative
adjustment of state deferred tax assets.
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.
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 September 30, 2002, cash and cash
equivalents totalled $11.2 million, or 2.9% of total assets.
15
The Company, through its Bank subsidiary, has other sources of liquidity if
a need for additional funds arises, including FHLB borrowings. At September 30,
2002, the Bank had $84.7 million in borrowings outstanding from the FHLB.
Depending on market conditions, the pricing of deposit products and FHLB
borrowings, the Bank may continue to rely on FHLB borrowings to fund asset
growth.
At September 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 $17.4 million and commitments to purchase
securities totalling $21.9 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 September 30, 2002, totalled $118.2
million. The Bank expects that substantially all of the maturing certificate
accounts will be retained by the Bank.
At September 30 , 2002, the Company had total equity, determined in
accordance with accounting principles generally accepted in the United States of
America, of $51.2 million, or 13.2% of total assets. At September 30, 2002, the
Bank exceeded all of its regulatory capital requirements with a tangible capital
level of $46.1 million, or 12.0% of total adjusted assets, which is above the
required level of $5.8 million, or 1.5%; core capital of $46.1 million, or 12.0%
of total adjusted assets, which is above the required level of $15.4 million, or
4.0%; and risk-based capital of $47.4 million, or 34.1% of risk-weighted assets,
which is above the required level of $11.1 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.
ITEM 3: CONTROLS AND PROCEDURES
-----------------------
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed
within 90 days of the filing date of this report, the chief executive
officer and the principal financial officer of the Company concluded
that the Company's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of
those controls by the chief executive officer and principal financial
officer.
16
WEST ESSEX BANCORP, INC.
PART II . OTHER INFORMATION
September 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 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
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
3.1 Charter of West Essex Bancorp, Inc. *
3.2 Bylaws of West Essex Bancorp, Inc. *
4.0 Form of Common Stock Certificate *
11.0 Statement regarding computation of per share earnings
* 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:
On September 12, 2002, the Company filed a current report on Form
8-K to announce its merger agreement with Kearny Financial Corp.
A copy of the press release announcing the merger and a copy of
the merger agreement were included as exhibits to the Form 8-K.
17
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: November 5, 2002 By: /s/ Leopold W. Montanaro
-------------------------------------
Leopold W. Montanaro
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: November 5, 2002 By: /s/ Michael T. Sferrazza
-------------------------------------
Michael T. Sferrazza
Vice President and Controller
(principal financial officer)
18
CERTIFICATIONS
--------------
I, Leopold W. Montanaro, certify, that:
1. I have reviewed this quarterly report on Form 10-QSB of West Essex
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 5, 2002 /s/ Leopold W. Montanaro
-------------------------------------
Leopold W. Montanaro
President and Chief Executive Officer
(principal executive officer)
19
I, Michael T. Sferrazza, certify, that:
1. I have reviewed this quarterly report on Form 10-QSB of West Essex
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 5, 2002 /s/ Michael T. Sferrazza
------------------------------------
Michael T. Sferrazza
Vice President and Controller
(principal financial officer)
20