-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBKxsGXgyH2CfghMppde3yJuB/CqfLktcYLCtYGFQeIXRrNfXgJvO3zMsYnbENYD Pl+bZPs0/HHjo5HgD+X+zw== 0000914317-00-000240.txt : 20010328 0000914317-00-000240.hdr.sgml : 20010328 ACCESSION NUMBER: 0000914317-00-000240 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEST ESSEX BANCORP INC CENTRAL INDEX KEY: 0001063438 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 223597632 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29770 FILM NUMBER: 584875 BUSINESS ADDRESS: STREET 1: 417 BLOOMFIELD AVE CITY: CALDWELL STATE: NJ ZIP: 07006 BUSINESS PHONE: 9732267911 MAIL ADDRESS: STREET 1: 417 BLOOMFIELD AVE CITY: CALDWELL STATE: NJ ZIP: 07006 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended For the fiscal year ended December 31, 1999 Commission File No.: 0-29770 WEST ESSEX BANCORP, INC. (exact name of registrant as specified in its charter) UNITED STATES 22-3597632 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 417 Bloomfield Avenue, Caldwell, New Jersey 07006 (Address of principal executive offices) Registrant's telephone number, including area code: (973) 226-7911 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. Yes X No The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $12,516,894 based upon the last sales price of $9.00 as listed on The Nasdaq National Market for March 20, 2000. Solely for purposes of this calculation, the shares held by West Essex Bancorp, M.H.C. and the directors and officers of the registrant are deemed to be shares held by affiliates. The number of shares of Common Stock outstanding as of March 20, 2000 is: 4,038,357. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 Annual Report to Shareholders and the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2000 are incorporated herein by reference to Parts II and III, respectively, of this Form 10-K. INDEX PAGE PART I Item 1. Business...................................................... 1 Item 2. Properties.................................................... 36 Item 3. Legal Proceedings............................................. 36 Item 4. Submission of Matters to a Vote of Security Holders........... 37 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 37 Item 6. Selected Financial Data....................................... 37 Item 7. Management's Discussion and Analysis of Financial ............ 37 Condition and Results of Operations........................... 37 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 37 Item 8. Financial Statements and Supplementary Data................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 37 PART III Item 10. Directors and Executive Officers of the Registrant............ 38 Item 11. Executive Compensation........................................ 38 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 38 Item 13. Certain Relationships and Related Transactions................ 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 38 SIGNATURES Item 1. Business. - - ------------------ General West Essex Bancorp, Inc. (the "Company") became the federally chartered stock holding company for West Essex Bank (the "Bank"), a federally chartered stock savings bank on October 2, 1998 in connection with the conversion of the Bank from the mutual to stock form and reorganization of the Bank into a mutual holding company structure ("Reorganization"). In connection with the Reorganization, West Essex Bancorp, M.H.C. (the "MHC") was organized and became a majority holder of the Company's outstanding common stock. The Company, the Bank and the MHC are regulated by the Office of Thrift Supervision (the "OTS"). The Bank is a federally chartered savings bank and is wholly-owned by the Company. The Company is a savings and loan holding company and is subject to regulation by the OTS, the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). Currently, other than investing in various securities, the Company does not directly transact any material business other than through the Bank. Accordingly, the discussion herein addresses the operations of the Company as they are conducted through the Bank. At December 31, 1999, the Company had total assets of $348.3 million, total deposits of $235.0 million and total stockholders' equity of $47.1 million. The Bank was originally organized in 1915 as a New Jersey chartered building and loan association and, in 1995, became a federally chartered savings bank. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers and investing those funds primarily in mortgage-backed securities and mortgage loans secured by one- to four-family residences located in the Bank's primary market area. To a significantly lesser extent, the Bank invests in commercial real estate loans, multi-family loans, construction and land development loans and home equity loans as well as consumer loans and obligations of the federal government and federal agencies as well as states and municipalities. The Bank generally retains for its portfolio all one- to four-family mortgage loans which it originates. The Company's and Bank's executive offices are located at 417 Bloomfield Avenue, Caldwell, New Jersey 07006. The telephone number is (973) 226-7911. Market Area and Competition The Bank conducts its business through its administrative and branch office located in Caldwell, New Jersey, and seven other full service branch offices located in West Orange, Franklin Lakes, River Vale, Pine Brook, Old Tappan and Northvale, all of which are located in the Northern New Jersey counties of Essex, Morris and Bergen. The Bank's deposit gathering base is concentrated in the communities surrounding its offices. While its lending area extends throughout New Jersey, most of the Bank's mortgage loans are secured by properties located in Essex, Morris and Bergen Counties in Northern New Jersey. The economy in the Bank's primary market area is based upon a mixture of service and retail trade. Other employment is provided by a variety of wholesale trade, manufacturing, federal, state and local government, hospitals and utilities. The area is also home to commuters working in the greater New York City metropolitan area. Certain communities in Bergen, Essex and Morris Counties are among the highest per capita income in the country. Essex County contains many older residential commuter towns which function partially as business and service centers. Morris County was once predominantly a rural farming area. It has experienced rapid growth in the residential, commercial and industrial sectors. Bergen County has benefitted from its geographical proximity to New York City. Originally an agricultural region, the county shifted toward manufacturing and service industries and many foreign firms have set up their American headquarters in this County. The Bank faces significant competition both in making loans and in attracting deposits. The State of New Jersey has a high density of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Bank, all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies and insurance companies. These companies compete aggressively through advertising and by cutting interest rates on loans. The Bank has sought to compete for loans by advertising in local papers, developing contacts with local real estate brokers, and providing cash incentives to its retail and mortgage origination staff to attract loans to the Bank. In addition, the Bank is affiliated with several mortgage brokers who, for a fee, provide the Bank with loans. The Bank does not attempt to compete by offering interest rates below those offered by its competitors, but does endeavor to keep its interest rates competitive in that the Bank's rates are neither higher nor lower than rates generally available from the Bank's competitors in its market area. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions. The Bank faces additional competition for deposits from short-term money market funds, common stock, other corporate and government securities funds and from other financial service institutions such as brokerage firms and insurance companies. Lending Activities Loan Portfolio Composition. The Bank's loan portfolio consists primarily of first mortgage loans secured by one- to four-family residences. At December 31, 1999, the Bank had total loans receivable of $156.2 million, of which $122.7 million were one- to four-family, residential mortgage loans, equalling 78.5% of the Bank's total loans receivable. At such date, the remainder of the Bank's loan portfolio consisted primarily of: $13.0 million of commercial real estate loans or 8.3% of total loans receivable; $14.4 million of home equity loans and lines of credit, or 9.2% of total loans receivable; $1.7 million of multi-family residential loans, or 1.1% of total loans receivable; $3.8 million of construction and development loans, or 2.4% of total loans receivable; and $617,000 of consumer loans, or 0.4% of total loans receivable, consisting primarily of loans on passbook deposit accounts and automobile loans. The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. In recent years, the Bank has aggressively sought to increase its originations of mortgage loans and has sought to purchase loans and loan participations. This has resulted in total loans increasing from $116.1 million at December 31, 1997 to $143.0 million at December 31, 1998 and $156.2 million at December 31, 1999. 2 The following table sets forth the composition of the Bank's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
At December 31, ------------------------------------------------------------------------------------- 1999 1998 1997 1996 --------------------- -------------------- -------------------- -------------------- Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- Mortgage Loans: Residential: One- to four-family...................... $122,680 78.54% $114,690 80.20% $87,489 75.34% $60,741 71.88% Multi-family............................. 1,693 1.08 1,943 1.36 2,004 1.73 2,068 2.45 Home equity loans and lines(1)........... 14,382 9.21 9,631 6.73 8,554 7.37 6,653 7.87 Commercial real estate................... 12,965 8.30 11,589 8.11 10,695 9.21 12,275 14.53 Construction and development............. 3,819 2.45 4,394 3.07 6,485 5.58 2,080 2.46 -------- ----- -------- ----- ------- ----- ------- ----- Total mortgage loans.................. 155,539 99.58 142,247 99.47 115,227 99.23 83,817 99.19 -------- ----- -------- ----- ------- ----- ------- ----- Commercial loans............................ 40 0.02 49 0.04 59 0.05 87 0.10 -------- ----- -------- ----- ------- ----- ------- ----- Consumer Loans: Passbook or certificate................. 341 0.22 401 0.28 550 0.47 427 0.51 Other.................................... 276 0.18 305 0.21 291 0.25 168 0.20 -------- ----- -------- ----- ------- ----- ------- ----- Total consumer loans.................. 617 0.40 706 0.49 841 0.72 595 0.71 -------- ----- -------- ----- ------- ----- ------- ----- Total loans receivable.................... 156,196 100.00% 143,002 100.00% 116,127 100.00% 84,499 100.00% ====== ====== ====== ====== Less: Construction loans in process........... (1,886) (1,311) (1,437) (440) Allowance for loan losses............... (1,400) (1,717) (1,885) (1,564) Deferred loan fees, net................. 366 298 (70) (361) -------- --------- ------- ------- Loans receivable, net..................... $153,276 $140,272 $112,735 $82,134 ======== ======== ======== =======
1996 -------------------- Percent Amount of Total ------ -------- Mortgage Loans: Residential: One- to four-family...................... $65,002 74.50% Multi-family............................. 1,115 1.28 Home equity loans and lines(1)........... 4,388 5.03 Commercial real estate................... 12,707 14.56 Construction and development............. 3,032 3.47 ------- ----- Total mortgage loans.................. 86,244 98.84 ------- ----- Commercial loans............................ 234 0.27 ------- ----- Consumer Loans: Passbook or certificate................. 543 0.62 Other.................................... 234 0.27 ------- ----- Total consumer loans.................. 777 0.89 ------- ----- Total loans receivable.................... 87,255 100.00% ====== Less: Construction loans in process........... (592) Allowance for loan losses............... (1,200) Deferred loan fees, net................. (432) ------- Loans receivable, net................... $85,031 =======
(1) Includes second mortgage loans other than home equity loans of $-0-, $-0-, $63,000, $74,000 and $91,000 at December 31, 1999, 1998, 1997, 1996 and 1995. 3 Loan Maturity. The following table shows the remaining contractual maturity of the Bank's loans at December 31, 1999. The table does not include the effect of future principal repayments or prepayments.
At December 31, 1999 ------------------------------------------------------------------------- One- to Equity Construction Four- Multi- Loans and Commercial and Family Family Lines Real Estate Development Commercial ------ ------ ----- ----------- ----------- ---------- (In thousands) Amounts due: One year or less........................... $ 398 $ -- $ 151 $ -- $ 3,259 $- -------- ------ ------- ------- ------- --- After one year: More than one year to three years....... 893 38 163 333 490 -- More than three years to five years..... 1,279 267 1,412 1,084 -- 2 More than five years to ten years....... 8,413 -- 3,537 2,273 30 38 More than 10 years to 20 years.......... 26,550 1,204 8,348 8,307 -- -- More than 20 years..................... 85,147 184 771 968 40 -- -------- ------ ------- ------- ------- --- Total due after one year................... 122,282 1,693 14,231 12,965 560 40 -------- ------ ------- ------- ------- --- Total due.................................. 122,680 1,693 14,382 12,965 3,819 40 Less: Loans in process................. -- -- -- -- (1,886) -- Deferred loan (fees) costs....... 340 5 -- 36 (15) -- Allowance for loan losses........ (927) (29) (198) (180) (58) -- -------- ------ ------- ------- ------- --- Loans receivable, net................... $122,093 $1,669 $14,184 $12,821 $ 1,860 $40 ======== ====== ======= ======= ======= === ----------------- Total Consumer Loans -------- ----- Amounts due: One year or less........................... $356 $ 4,164 ---- ------- After one year: More than one year to three years....... 123 2,040 More than three years to five years..... 138 4,182 More than five years to ten years....... -- 14,291 More than 10 years to 20 years.......... -- 44,409 More than 20 years...................... -- 87,110 --- ------- Total due after one year................... 261 152,032 --- ------- Total due.................................. 617 156,196 Less: Loans in process................. -- (1,886) Deferred loan (fees) costs....... -- 366 Allowance for loan losses........ (8) (1,400) --- ------ Loans receivable, net................... $609 $153,276 ==== ========
4 The following table sets forth, at December 31, 1999, the dollar amount of loans contractually due after December 31, 2000, and whether such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 2000 ------------------------------------------------------- Fixed Adjustable Total -------- ------- -------- (In thousands) Mortgage loans: One- to four-family...................... $85,773 $36,509 $122,282 Multi-family............................. 1,693 -- 1,693 Equity loans and lines................... 10,077 4,154 14,231 Commercial real estate................... 11,467 1,498 12,965 Construction and development............. 290 270 560 -------- ------- -------- Total mortgage loans................... 109,300 42,431 151,731 Commercial loans............................ 40 -- 40 Consumer loans.............................. 227 34 261 -------- ------- -------- Total loans ......................... $109,567 $42,465 $152,032 ======== ======= ========
Origination, Purchase and Servicing of Loans. The Bank's mortgage lending activities are conducted primarily by its loan personnel operating in all of the Bank's branch offices. All loans originated by the Bank, either through internal sources or through loan brokers, are underwritten by the Bank pursuant to the Bank's policies and procedures. The Bank's underwriting policies, guidelines and procedures are modeled after those of FNMA and FHLMC. The Bank originates both adjustable-rate and fixed-rate loans. The Bank's ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates. It is the general policy of the Bank to retain all loans originated in its portfolio. The Bank currently retains the servicing for all loans originated in its portfolio. The Bank has faced significant competition for loans in its market area. Until 1996, the Bank had relied solely upon its own mortgage staff to originate loans and depended primarily upon getting loans from the Bank's customer base. The Bank did not aggressively advertise, nor did it pay brokers to introduce loans to the Bank. Since 1996, the Bank has sought to compete more aggressively for loans. To that end, the Bank began paying its retail and mortgage loan origination staff cash incentives based upon loan originations and has significantly increased its advertising in its local market area. The Bank has also begun working with mortgage brokers and paying them fees in return for referring loan applicants to the Bank. The Bank's efforts have enabled it to substantially increase loan originations since 1996. Specifically, the Bank originated $42.2 million in mortgage loans in 1999, $50.5 million in 1998 and $46.4 million in 1997. During the years ended December 31, 1999 and December 31, 1998, the Bank originated $34.5 million and $45.8 million of one- to four-family loans, respectively, including home equity loans and lines of credit. Based upon the Bank's investment needs and market opportunities, the Bank has, on occasion, purchased loans, primarily one- to four-family loans, or participated in loans, primarily multi-family loans through the Thrift Institutions Community Investment Corporation of New Jersey ("TICIC"). At December 31, 1999, the Bank had nine loan participations through TICIC totalling $2.0 million. The Bank has in its loan portfolio loans generated by third-party mortgage companies which were underwritten pursuant to the Bank's policies, and closed in the name of the Bank. 5 The following table sets forth the Bank's loan originations, purchases, and principal repayments for the periods indicated. The Bank sold no loans during the periods indicated.
For the Years Ended December 31, --------------------------------- 1999 1998 1997 -------- -------- -------- Beginning balance............................................................. $143,002 $116,127 $ 84,499 -------- -------- -------- Purchases--Multi-family mortgage loans....................................... 970 281 -- -------- -------- -------- Loans originated: Mortgage loans: One- to four-family.................................................... 25,440 41,194 35,017 Multi-family........................................................... 455 -- -- Home equity lines...................................................... 9,022 4,644 4,330 Commercial real estate................................................. 2,485 2,310 1,436 Construction and land development...................................... 4,803 2,317 5,610 -------- -------- -------- Total mortgage loans............................................... 42,205 50,465 46,393 -------- -------- -------- Consumer loans: Passbook loans......................................................... 725 371 477 Automobile............................................................. 116 167 222 Credit lines(1)........................................................ 141 3 28 ------- -------- -------- Total consumer loans............................................... 982 541 727 -------- -------- -------- Loans made to facilitate the sale of real estate owned....................................................... -- -- -- -------- -------- -------- Total originations................................................. 43,187 51,006 47,120 -------- -------- -------- Loans transferred to real estate owned...................................... (309) -- (680) -------- -------- -------- Principal repayments and other, net....................................... (30,654) (24,412) (14,812) -------- -------- -------- Ending balance................................................................ $156,196 $143,002 $116,127 ======== ======== ========
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and adjustable-rate mortgage loans ("ARM") secured by one- to four-family residences with maturities of up to 30 years. Loan originations are generally obtained from the Bank's retail and loan origination staff, from local real estate agents, from wholesale brokers and their contacts in the Bank's local real estate industry, from existing or past customers and through referrals from members of the local communities and advertising. One- to four-family mortgage loans are generally underwritten in accordance with FHLMC/FNMA standards. At December 31, 1999, one- to four-family mortgage loans totalled $122.7 million, or 78.5% of the Bank's total loans receivable. Of the Bank's mortgage loans secured by one- to four-family residences, $86.2 million, or 70.2%, were fixed-rate loans and $36.5 million or 29.8% were ARM loans. 6 The Bank currently offers fixed-rate mortgage loans with terms from 10 to 30 years. The Bank generally retains for its portfolio all loans it originates. The Bank also offers ARM loan programs made for terms of 30 years with interest rates which adjust periodically. The Bank's ARM loans generally provide for periodic (not more than 2.0% over the existing interest rate) and overall (not more than 6.0%) caps on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate adjustment on these loans is indexed to the one-year U.S. Treasury CMT Index with a repricing margin of 2.75% above the index. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps reduce the Bank's interest rate exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the credit risk associated with the Bank's adjustable-rate loans but also limit the interest rate sensitivity of its adjustable-rate mortgage loans. The Bank's policy generally is to originate one- to four-family residential mortgage loans in amounts up to 90% of the lower of the appraised value or the selling price of the property securing the loan, but generally requires private mortgage insurance if the loan is in an amount in excess of 80% of the lower of the appraised value or selling price. Mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses. The Bank requires fire, casualty, title and, in certain cases, flood insurance on all properties securing real estate loans made by the Bank. In an effort to provide financing for first-time home buyers, the Bank offers a first-time home buyers program. This program offers one- to four-family residential mortgage loans to qualified individuals. These loans are originated using the Bank's standard underwriting guidelines. With respect to loans granted under this program, the Bank originates these loans in amounts up to 95% of the lower of the appraised value or selling price of the property securing the loan. In addition, the Bank also participates in the First Home Club Program through the FHLB-NY, which benefits low income first time homebuyers. Home Equity Loans. The Bank offers fixed-rate home equity loans and floating rate home equity lines of credit in amounts of up to $150,000. Loans in excess of $150,000 may be made with Board approval. Home equity loans have fixed rates of interest with terms of up to 20 years. Interest rates on such loans will vary depending on the amortization period chosen by the borrowers. Home equity lines of credit have adjustable-rates of interest, which may adjust on a monthly basis. The adjustable-rate of interest charged on such loans is indexed to the prime rate as published in The Wall Street Journal. Currently, home equity lines of credit originated at this time bear a maximum lifetime interest rate cap of 14.0%. The maximum combined loan-to-value ("LTV") ratio on home equity loans and equity lines of credit is 70%; however, this policy provides that management has the discretion to make such real estate loans in excess of 70%. At December 31, 1999, the Bank had in its loan portfolio an aggregate of $19.4 million of home equity loans and equity lines of credit, of which $10.3 million were fixed-rate home equity loans and $9.1 million were equity lines of credit. Of the $9.1 million equity lines of credit, $5.0 million was drawn upon such loans at December 31, 1999. The underwriting standards employed by the Bank for home equity loans and lines of credit include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment and, additionally, from any verifiable secondary income. Creditworthiness of the applicant is of 7 primary consideration. The Bank's home equity loans and lines of credit are secured by first or second liens on one- to four-family residences and condominiums located in the Bank's primary market area. Commercial Real Estate and Multi-Family Lending. The Bank also originates multi-family and commercial real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes such as small shopping centers located in northern New Jersey. The Bank's multi-family and commercial real estate underwriting policy provides that such real estate loans may be made in amounts up to 65% of the appraised value of the property; however, this policy provides that management has the discretion to make such real estate loans in excess of 65% of the appraised value of the property. The Bank's multi-family and commercial real estate lending is limited by the regulatory loans-to-one borrower limit which at December 31, 1999 was $5.7 million. The Bank currently originates multi-family and commercial real estate loans, generally with terms of up to 20 years and has developed a variety of programs, including balloon-type and adjustable mortgages, indexed to the FHLB advance rate, the Prime Rate and the U.S. Treasury Bill rate. The Bank's multi-family and commercial real estate loans have fixed or adjustable rates of interest that adjust periodically and are indexed to either the prime rate as published in The Wall Street Journal or the U.S. Treasury Bill. In reaching its decision on whether to make a multi-family or commercial real estate loan, the Bank considers the net operating income of the property, the borrower's expertise, credit history and profitability and the value of the underlying property. The Bank has generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.15. In addition, environmental impact surveys may be required for multi-family and commercial real estate loans. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. The Bank may not require a personal guarantee on such loans depending on the creditworthiness of the borrower and the amount of the downpayment and other mitigating circumstances. The Bank's multi-family real estate loan portfolio at December 31, 1999 was $1.7 million, or 1.1%, of total loans receivable and the Bank's commercial real estate loan portfolio at such date was $13.0 million, or 8.3%, of total loans receivable. Loans secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards. Construction and Development Lending. The Bank originates construction and development loans for the development of one- to four-family residences. Such loans are made principally to licensed and experienced developers known to the Bank in its primary market area for the construction of single-family developments. The Bank also originates construction and development loans for the development of commercial properties. The Bank generally does not originate loans secured by unimproved land. Construction loans are originated in amounts up to 70% of the lesser of the appraised value of the property, as improved, or the sales price. Such loans are offered for up to two year terms and adjustable interest rates which may adjust monthly and float at margins which are generally indexed to the Prime Rate of interest as reported in The Wall Street Journal. Proceeds of construction loans are disbursed as phases of the construction are completed. Generally, if the borrower is a corporation, partnership or other business entity, personal guarantees by the principals are required. At December 31, 1999, the Bank had $3.8 million of construction loans which amounted to 2.4% of the Bank's total loans receivable. Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan 8 is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction and other assumptions, including the estimated time to sell residential properties. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. Consumer Lending. Consumer loans at December 31, 1999 amounted to $617,000, or 0.4% of the Bank's total loans receivable, and consisted primarily of $341,000 in loans secured by deposit accounts and $243,000 in automobile loans. Such loans are generally originated in the Bank's primary market area. These loans are generally shorter term and have higher interest rates than one- to four-family mortgage loans. Loans secured by rapidly depreciable assets such as automobiles or that are unsecured entail greater risks than one- to four-family mortgage loans. In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. Further, consumer loan collections on these loans are dependent on the borrower's continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default. Commercial Lending. At December 31, 1999, the Bank had $40,000 in commercial loans, which the Bank originated through FHLB program over ten years ago. The Bank currently anticipates that commercial lending activity will increase in the immediate future. Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies and loan approval limits of the Bank. All loans originated by the Bank with principal amounts in excess of $1.0 million require the approval of the Board of Directors. All loans originated by the Bank with principal amounts above $350,000, but less than or equal to $1.0 million require the approval of the Lending Committee. All other loans may be approved by the Bank's Chief Lending Officer. Pursuant to OTS regulations, loans to one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. The Bank will not make loans to one borrower that are in excess of the regulatory limits. Underwriting. With respect to all loans originated by the Bank, it is the general policy of the Bank to retain all such loans in its portfolio. The Bank usually underwrites loans in accordance with FNMA or FHLMC guidelines. Upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency. If necessary, additional financial information may be required. An appraisal of real estate intended to secure a proposed loan generally is required to be performed by outside appraisers approved by the Bank. The Board annually approves independent appraisers used by the Bank and approves the Bank's appraisal policy. The Bank's policy is to obtain title and hazard insurance on all mortgage loans and flood insurance when necessary and the Bank generally requires borrowers to make payments to a mortgage escrow account for the payment of property taxes. No title or flood insurance is required, however, for home equity loans. Delinquent Loans, Classified Assets and Real Estate Owned Delinquencies and Classified Assets. Reports listing all delinquent accounts are generated and reviewed by management at least once a month and the Board of Directors performs a monthly review of all loans or lending relationships delinquent 60 days or more and all real estate owned ("REO"). The procedures taken by the Bank with respect to delinquencies vary depending on the nature of the loan, period and cause 9 of delinquency and whether the borrower is habitually delinquent. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank generally sends the borrower a written notice of non-payment after the loan is first past due. The Bank's guidelines provide that telephone, written correspondence and/or face-to-face contact will be attempted to ascertain the reasons for delinquency and the prospects of repayment. When contact is made with the borrower at any time prior to foreclosure, the Bank will attempt to obtain full payment, offer to work out a repayment schedule with the borrower to avoid foreclosure or, in some instances, accept a deed in lieu of foreclosure. In the event payment is not then received or the loan not otherwise satisfied, additional letters and telephone calls generally are made. If the loan is still not brought current or satisfied and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is 90 days or more delinquent, the Bank will commence foreclosure proceedings against any real property that secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure and, if purchased by the Bank, becomes real estate owned. Federal regulations and the Bank's Asset Classification Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Management of the Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Bank utilizes a two tier approach: (i) identification of impaired loans and the establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and estimated fair value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the level of the allowance for loan losses may be necessary. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and 10 controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that, based on information currently available to it at this time, its allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. The Board reviews classified assets reports prepared by management and classifies its assets on a quarterly basis. The Bank classifies assets in accordance with the management guidelines described above. At December 31, 1999, the Bank had $1.2 million, or 0.36% of total assets, of assets designated as "Substandard," consisting of five one- to four-family mortgage loans, totalling $553,000, and real estate owned totalling $691,000. At December 31, 1999, the largest loan designated as "Substandard" had a carrying balance of $189,000, and was a single-family mortgage loan. At December 31, 1999, no assets were designated as "Doubtful" or "Loss." 11 The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated.
At December 31, 1999 At December 31, 1998 ------------------------------------------------- ---------------------------------------------- 60-89 Days 90 Days or More 60-89 Days 90 Days or More --------------------- ----------------------- --------------------- ----------------------- Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans -------- -------- -------- -------- -------- -------- -------- -------- Loans: .................. (Dollars in thousands) Residential Mortgage . 7 $ 369 11 $ 792 1 $ 15 14 $1,201 Commercial Mortgage .. -- -- -- -- -- -- 1 158 Construction and land -- -- -- -- -- -- 2 725 development ---- ---- ---- ---- ---- ---- ---- ---- Total loans ........ 7 $ 369 11 $ 792 1 $ 15 17 $2,084 ==== ==== ==== ==== ==== ==== ==== ==== Delinquent loans to total loans ............... 0.51% 0.24% 0.79% 0.51% 0.01% 0.01% 1.25% 1.46% ==== ==== ==== ==== ==== ==== ==== ==== At December 31, 1997 ----------------------------------------------------- 60-89 Days 90 Days or More Principal Principal Number Balance Number Balance of Loans of Loans of Loans of Loans -------- -------- -------- -------- Loans: (Dollars in thousands) Residential Mortgage......... 10 $528 19 $1,652 Commercial Mortgage.......... -- -- 1 119 Construction and land -- -- 2 718 development............... ---- ---- ---- ------ Total loans................ 10 $528 22 $2,489 ==== ==== ==== ====== Delinquent loans to total loans......................... 0.72% 0.45% 1.59% 2.14% ==== ==== ==== ======
12 Non-Performing Assets and Impaired Loans. The following table sets forth information regarding nonaccrual loans and REO. At December 31, 1999, REO totalled $900,000 and consisted of nine properties. It is the policy of the Bank to cease accruing interest on loans 90 days or more past due and to fully reserve for all previously accrued interest. For the years ended December 31, 1999 and 1998, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $23,000 and $162,000, respectively. On January 1, 1995, the Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. At December 31, 1999 and 1998, total impaired loans were $189,000 and $1.46 million, respectively. All impaired loans are residential real estate mortgage loans which have been measured for impairment using the fair value of the collateral method. During the year ended December 31, 1999, the average recorded value of impaired loans was $647,000. For these loans, interest income of $147,000 was recognized during 1999.
At December 31, -------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Nonaccrual loans: Residential Mortgages.................................. $ 792 $1,201 $1,576 $1,733 $931 Commercial Mortgages................................... -- 158 119 431 380 Construction and land development...................... -- 725 718 705 734 ------ ------ ------ ------ ------ Total nonaccrual loans............................... 792 2,084 2,413 2,869 2,045 Restructured loans: Residential Mortgages.................................. 92 94 94 99 104 ------ ------ ------ ------ ------ Total non-performing loans........................... 884 2,188 2,507 2,968 2,149 Real estate owned, net(1)................................. 900 582 1,215 1,394 1,352 ------ ------ ------ ------ ------ Total non-performing assets.......................... $1,784 $2,770 $3,722 $4,362 $3,501 ====== ====== ====== ====== ====== Non-performing loans as a percent of total loans(2).............................. 0.57% 1.46% 2.16% 3.51% 2.46% ====== ====== ====== ====== ====== Non-performing assets as a percent of total assets(3)........................... 0.51% 0.84% 1.24% 1.85% 1.57% ====== ====== ====== ====== ======
(1) REO balances are shown net of related valuation allowances. REO includes $209,000 of property that is not considered substandard. (2) Non-performing loans consist of all loans 90 days or more past due and other loans which have been identified by the Bank as presenting uncertainty with respect to the collectibility of interest or principal. (3) Non-performing assets consist of non-performing loans and REO. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 1999 and 1998, the Bank's allowance for loan losses was 0.90% and 1.20%, respectively, of total loans receivable and 176.8% and 82.4%, respectively, of nonaccrual loans. The Bank had non-accrual loans of $792,000 and $2.1 million at December 31, 1999 and 1998, respectively. The Bank will continue to monitor and modify its allowances for loan losses as conditions dictate. While management believes the Bank's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this 13 time, no assurances can be given that the Bank's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. The Bank has established a standardized process to assess the adequacy of the allowance for loan losses and to identify the risks inherent in the loan portfolio. The process incorporates credit reviews and gives consideration to areas of exposure such as concentrations of credit, local economic conditions, trends in delinquencies, collateral coverage, the composition of the performing and non-performing loan portfolios, and other risks inherent in the loan portfolio. Specific allocations of the allowance for loan losses are identified by individual loan based upon a detailed credit review of each such loan. General loan loss allowances are allocated to pools of loans categorized by type and assigned allowance percentages which take into effect past charge-off history, industry averages and current trends and risks. Finally, an unallocated portion of the allowance is maintained to account for the general inherent risk in the loan portfolio, known circumstances which are not addressed in the allocated portion of the allowance (such as the increased dependence on outside mortgage brokers for originations), and the necessary imprecision in the determination of the allocation portion of the allowance. Among the more significant situations and circumstances which are considered within the unallocated portion of the allowance is that the Bank began aggressively competing in the market for loan originations in early 1997 via various means not previously utilized, such as the use of outside mortgage brokers and paying bonuses to inside loan origination personnel. In addition, the Bank increased its advertising efforts and expanded its product line to include product types with more risk, such as a first-time homeowner loan which allows for higher than normal loan to collateral ratios. The loan portfolio grew by $13.2 million or 9.2% in 1999, by $26.9 million or 23.1% in 1998 and by $31.6 million, or 37.4%, in 1997, due to these factors after declining in 1996 and 1995. The increased inherent risk associated with the aforementioned circumstances are elements within the unallocated allowance. Finally, the determination of the allocated portion of the allowance is highly subjective and requires significant reliance on estimates, assumptions and judgments. Specific allowances are typically based upon the appraised value of the underlying collateral, which can vary based upon the particular appraiser involved, and management's estimates of property disposal costs. General allowances are based upon loss percentages applied to delineated loan categories. The loss percentages are a particularly inexact science. As such, management has deemed it prudent to recognize the inherent imprecision of the process by maintaining what it believes to be a conservative, but appropriate level of unallocated reserves. The following table sets forth activity in the Bank's allowance for loan losses for the periods set forth in the following table.
At or For the Years Ended December 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of period ......... $ 1,717 $ 1,885 $ 1,564 $ 1,200 $ 1,236 ------- ------- ------- ------- ------- Provision for (recapture of) loan losses -- (131) 487 232 510 ------- ------- ------- ------- ------- Charge-offs: Mortgage loans: One- to four-family .............. -- 37 60 -- -- Multi-family ..................... -- -- -- -- 56 Commercial real estate .............. -- -- 106 -- -- Construction and land development ... 317 -- -- -- 490 ------- ------- ------- ------- ------- Total mortgage loans ............. 317 37 166 -- 546 ------- ------- ------- ------- ------- Recoveries: Construction and land development ... -- -- -- 132 -- ------- ------- ------- ------- ------- Balance at end of period ............... $ 1,400 $ 1,717 $ 1,885 $ 1,564 $ 1,200 ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average gross loans during the period ................... 0.21% 0.03% 0.17% (0.15)% 0.63% ======= ======= ======= ======= ======= Allowance for loan losses as a percent of total loans .............. 0.90% 1.20% 1.62% 1.85% 1.38% ======= ======= ======= ======= ======= Allowance for loan losses as a percent of non-performing loans ..... 158.37% 78.47% 75.19% 52.70% 55.84% ======= ======= ======= ======= =======
15 The following tables set forth the Bank's percent of allowance for loan losses to total allowance for loan losses and the percent of loans to total loans in each of the categories listed at the dates indicated.
At December 31, 1999 ------------------------------------- Percent of Loans in Percent of Each Allowance Category to Total to Total Amount Allowance Loans ------ --------- ----- (Dollars in thousands) Mortgage loans: Residential .................................... $ 735 52.50% 88.83% Commercial real estate ......................... 141 10.07 8.30 Construction and land development .............. 46 3.29 2.45 ------ ------ ------ Total mortgage loans ......................... 922 65.86 99.58 Commercial loans ................................. -- -- 0.02 Consumer loans ................................... 6 0.43 0.40 ------ ------ ------ 928 66.29 100.00% Unallocated ...................................... 472 33.71 ====== ------ ------ Total allowance for loan losses .............. $1,400 100.00% ====== ====== At December 31, ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 -------------------------- -------------------------- ------------------------- -------------------------- (Dollars in thousands) Percent Percent Percent Percent of Loans of Loans of Loans of Loans Percent of in Each Percent of in Each Percent of in Each Percent of in Each Allowance Category Allowance Category Allowance Category Allowance Category to Total to Total to Total to Total to Total to Total to Total to Total Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ------ --------- ----- ------ --------- ----- ------ --------- ----- ------ --------- ----- Mortgage loans: Residential....... $ 763 44.44% 88.29% $621 32.94% 84.44% $511 32.67% 82.20% $413 34.42% 80.81% Commercial real estate.......... 122 7.11 8.11 112 5.94 9.21 184 11.77 14.53 190 15.83 14.56 Construction and land development..... 418 24.34 3.07 628 33.32 5.58 349 22.31 2.46 141 11.75 3.47 ----- ----- ------ ---- ----- ---- --- ----- ---- --- ----- ---- Total mortgage 1,303 75.89 99.47 1,361 72.20 99.23 1,044 66.75 99.19 744 62.00 98.84 loans........ Commercial loans..... -- -- 0.04 -- -- 0.05 -- -- 0.10 1 0.08 0.27 Consumer loans....... 6 0.35 0.49 6 0.32 0.72 4 0.26 0.71 6 0.50 0.89 ----- ----- ------ ---- ----- ---- ----- ----- ---- --- ----- ---- 1,309 76.24 100.00% 1,367 72.52 100.00% 1,048 67.01 100.00% 751 62.58 100.00% ====== ====== ====== ====== Unallocated.......... 408 23.76 518 27.48 516 32.99 449 37.42 ------ ----- --- ----- --- ----- --- ----- Total............. $1,717 100.00% $1,885 100.00% $1,564 100.00% $1,200 100.00% ====== ====== ====== ====== ====== ====== ====== ======
16 Real Estate Owned. At December 31, 1999, the Company and the Bank had $900,000 of real estate owned consisting of nine properties, of which seven were acquired through foreclosure. When a property is acquired through foreclosure or deed in lieu of foreclosure, it is initially recorded at the lower of the recorded investment in the corresponding loan or the fair value of the related assets at the date of foreclosure, less costs to sell. Thereafter, if there is a further deterioration in value, a specific valuation allowance is provided via a charge to operations for the diminution in value. It is the policy of the Company and the Bank to have obtained an appraisal on all real estate subject to foreclosure proceedings prior to the time of foreclosure, to require appraisals on a periodic basis on foreclosed properties and to conduct inspections on foreclosed properties. Investment Activities The Company can invest in common and preferred stocks, limited partnerships and all investments in which the Bank is permitted to invest. Anything else requires the Board of Director's approval. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily activities. The Bank's current policies generally limit securities investments to U.S. Government and agency securities, municipal bonds and corporate debt obligations and corporate equities. In addition, the Bank's policies permit investments in mortgage-backed securities, including securities issued and guaranteed by FNMA, FHLMC and GNMA. The Bank's current securities investment strategy is to continue to emphasize the purchase of mortgage-backed securities and U.S. Government and agency obligations as well as state and municipal obligations for purposes of interest rate risk management. At December 31, 1999, the Company had $165.7 million in securities, consisting primarily of mortgage-backed securities, U.S. Government and agency obligations, trust preferred securities and municipal obligations. SFAS No. 115 requires the Company to designate its securities as held-to-maturity, available-for-sale or trading depending on the Company's intent regarding its investments. The Company does not currently maintain a trading portfolio of securities. At December 31, 1999, all of the Company's mortgage-backed securities were classified as held-to-maturity. Also at that date, 6.6% of the Company's investment securities were classified as available-for-sale and 93.4% were classified as held-to-maturity. Of the Company's total investment securities and mortgage-backed securities portfolio, the Company's securities classified as held-to-maturity had an aggregate market value of $157.7 million and an amortized cost of $162.8 million. The Company's securities classified as available-for-sale had an aggregate market value of $2.9 million and an amortized cost of $3.0 million at December 31, 1999. Mortgage-Backed Securities. The Bank purchases mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) reduce its credit risk as a result of the guarantee provided by FHLMC, FNMA and GNMA; (iii) utilize these securities as collateral for borrowings; and (iv) increase the liquidity of the Bank. The Bank has primarily invested in mortgage-backed securities issued or sponsored by FNMA, FHLMC and GNMA and private issuers. At December 31, 1999, mortgage-backed securities totalled $121.2 million, or 34.8% of total assets and 36.8% of total interest-earning 17 assets, and all were classified as held-to-maturity. At December 31, 1999, 49.2% of the mortgage-backed securities were adjustable-rate and 50.8% were fixed-rate. The mortgage-backed securities portfolio had coupon rates ranging from 4.97% to 15.00% and had a weighted average yield of 6.55% at December 31, 1999. The estimated fair value of the Bank's mortgage-backed securities held to maturity at December 31, 1999, was $118.8 million, which is $2.4 million less than the amortized cost of $121.2 million. Mortgage-backed securities are created by the pooling of mortgages and issuance of a security with an interest rate which is less than the interest rate on the underlying mortgage. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although the Bank focuses its investments on mortgage-backed securities backed by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including FNMA, FHLMC and GNMA) pool and resell the participation interests in the form of securities to investors such as the Bank and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of loan servicing and payment guarantees. In addition, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of the Bank. Investments in mortgage-backed securities involve a risk that actual prepayments will differ from estimated prepayments used in pricing the security at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities on in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. The Bank estimates prepayments for its mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the mortgage-backed securities at issue and current mortgage interest rates and to determine the yield and estimated maturity of its mortgage-backed security portfolio. Of the Bank's $121.2 million mortgage-backed securities portfolio at December 31, 1999, $2.5 million with a weighted average yield of 6.64% had contractual maturities within five years and $118.7 million with a weighted average yield of 6.55% had contractual maturities over five years. However, the actual maturity of a mortgage-backed security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Bank may be subject to reinvestment risk because, to the extent that the Bank's mortgage-backed securities prepay faster than anticipated, the Bank may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. U.S. Government and Agency Obligations and Obligations of States and Municipalities. At December 31, 1999, the U.S. Government and Agency securities portfolio totalled $33.8 million, or 9.7% of total assets, $30.9 million of which were classified as held-to-maturity. In addition, the Bank held $733,000 in obligations of a New Jersey municipal subdivision. Trust Preferred Securities. At December 31, 1999, the investment portfolio included $10.0 million, or 2.9% of total assets, in trust preferred securities, all of which were purchased in 1998. Trust preferred securities are non-perpetual cumulative preferred stock issued by a wholly owned subsidiary of a bank and are classified as debt securities under generally accepted accounting principles. Securities of this nature are permissible investments for banks and thrifts provided they are of investment grade quality and are rated as such by any of the top rating services. Before purchasing these investments, the Bank researched extensively 18 the permissibility and suitability of these investments and whether they had a place on the balance sheet of the Bank. The Bank's policy as approved by the Board of Directors allows for the purchase of investments which are considered investment grade and are permissible investments under OTS regulations. Securities considered investment grade must be rated in one of the four highest categories by a nationally recognized statistical rating agency. Additionally, the Board's policy limits these type of investments to a maximum aggregate dollar amount of $10,000,000. The Bank's conclusion was that these investments had a place on the balance sheet and, during 1998, $10.0 million of trust preferred security investments in five of the most well known large commercial banks in the eastern United States was made. In addition to $8.9 million of such securities owned by the Bank, the Company owns one trust preferred security which is carried at $1.1 million. During 1999, the OTS reviewed these securities and concluded that, in its opinion, three of the five investments were not of a type suitable for the Bank. Accordingly, the OTS mandated that the Bank liquidate these issues as soon as possible without incurring a loss. The Company determined that these three securities should be retained and thus the Bank may transfer them to the Company over a period of time. One of the three issues was transferred during the fourth quarter of 1999. The $10.0 million in trust preferred securities is a combination of $6.8 million in floating rate (spread to Libor) investments and $3.2 million in fixed rate investments. The adjustable investments offer quarterly interest adjustments, uncapped coupons and call protection unavailable in most other types of adjustable investments. The fixed rate investments offer yield for the balance sheet and presented a cost of funds spread which was unavailable in other types of alternative investments. These investments present the normal type of risk to the Company and the Bank that is associated with other forms of marketable debt securities. These include credit risk, which is associated with the underlying creditworthiness of the issuer, liquidity risk, which is associated with the ability to dispose of a security in a reasonable time period at a reasonable price, and call risk, which is associated with these securities having call provisions after 10 years. 19 The following table sets forth certain information regarding the amortized cost and fair value of securities at the dates indicated.
At December 31, ------------------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ---------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Investment securities available-for-sale(1): U.S. Government and Agency obligations ....................... $ 2,998 $ 2,924 $ 7,983 $ 8,282 $ 6,980 $ 7,081 Investment securities held-to-maturity (1): U.S. Government and Agency obligations ................... 30,856 28,904 25,582 25,884 22,929 23,339 Trust preferred securities ............. 9,993 9,286 10,903 10,619 -- -- Obligations of states and municipal subdivisions ............... 733 679 388 388 -- -- ------- ------- ------- ------- ------- ------- 41,582 38,869 36,873 36,891 22,929 23,339 ------- ------- ------- ------- ------- ------- Federal Home Loan Bank of New York stock (2) ..................... 3,273 3,273 2,607 2,607 2,184 2,184 ------- ------- ------- ------- ------- ------- Total ................................ $47,853 $45,066 $47,463 $47,780 $32,093 $32,604 ======= ======= ======= ======= ======= =======
(1) Available-for-sale securities are carried at fair value while held-to-maturity securities are carried at amortized cost. (2) Investment is required by regulation. As the security is not readily marketable, its cost approximates fair value. The following table sets forth investment securities activities for the periods indicated.
At December 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Investment securities: Investment securities, beginning of period(1) $ 45,156 $ 30,009 $ 24,124 -------- -------- -------- Purchases: Investment securities--held-to-maturity .. 21,045 23,640 10,400 Investment securities--available-for-sale -- 1,000 7,034 Calls: Investment securities--held-to-maturity .. (14,550) (7,740) (10,000) Investment securities--available-for-sale -- -- -- Maturities: Investment securities--held-to-maturity .. (1,150) (2,150) -- Investment securities--available-for-sale -- -- (115) Sales: Investment securities--held-to-maturity .. (908) -- -- Investment securities--available-for-sale (4,987) -- (1,608) Amortization of premiums and discounts ...... 274 199 52 Unrealized gain (loss) ...................... (374) 198 122 -------- -------- -------- Net increase in investment securities ... (650) 15,147 5,885 -------- -------- -------- Investment securities, end of period ........ $ 44,506 $ 45,156 $ 30,009 ======== ======== ========
(1) Includes investment securities available-for-sale. 20 The following table sets forth certain information regarding the amortized cost and fair values of the Bank's mortgage-backed securities, all of which are held-to-maturity, at the dates indicated.
At December 31, ---------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- --------------------------- ---------------------------- Percent Percent Percent Amortized of Fair Amortized of Fair Amortized of Fair Cost Total(1) Value Cost Total(1) Value Cost Total(1) Value ---- -------- ----- ---- -------- ----- ---- -------- ----- (Dollars in thousands) By Issuer: GNMA...................... $51,616 42.58% $51,762 $58,816 53.29% $59,500 $ 78,657 60.42% $ 79,775 FHLMC..................... 18,781 15.49 18,576 26,699 24.19 27,019 26,551 20.40 26,749 FNMA...................... 16,894 13.94 16,787 20,101 18.21 20,267 24,959 19.17 25,150 Other..................... 33,932 27.99 31,682 4,760 4.31 4,727 7 0.01 7 -------- ------ -------- -------- ------ -------- -------- ------ -------- Total mortgage-backed securities (1)(2)... $121,223 100.00% $118,807 $110,376 100.00% $111,513 $130,174 100.00% $131,681 ======== ====== ======== ======== ====== ======== ======== ====== ======== By Coupon Type: Adjustable-rate........... $59,667 49.22% $59,764 $70,919 64.25% $71,390 $ 82,938 63.71% $ 83,740 Fixed-rate................ 61,556 50.78 59,043 39,457 35.75 40,123 47,236 36.29 47,941 -------- ------ -------- -------- ------ -------- -------- ------ -------- Total mortgage-backed securities (1)(2)... $121,223 100.00% $118,807 $110,376 100.00% $111,513 $130,174 100.00% $131,681 ======== ====== ======== ======== ====== ======== ======== ====== ========
(1) Based on amortized cost. (2) Includes net unamortized (discount) premiums of $(37), $206 and $243 at December 31, 1999, 1998 and 1997, respectively. The following table sets forth the Bank's mortgage-backed securities activities for the periods indicated.
For the Years Ended December 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Beginning balance ............................. $110,376 $130,174 $113,254 Purchases................................... 46,531 21,892 37,026 Principal repayments........................ (35,580) (41,587) (20,084) Net amortization and accretion of discounts and premiums................... (104) (103) (22) -------- -------- -------- Ending balance................................. $121,223 $110,376 $130,174 ======== ======== ========
21 The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of investment securities available-for-sale and held-to-maturity and mortgage-backed securities held-to-maturity as of December 31, 1999.
At December 31, 1999 -------------------------------------------------------------------------------------- More than One More than Five One Year or Less Year to Five Years Years to Ten Years More than Ten Years -------------------- ------------------- ------------------- ------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Investment securities available-for-sale: U.S. Treasury and Government agency obligations.................. $ -- --% $2,015 6.67% $ -- --% $ 909 7.00% ===== ====== ====== ======= Investment securities held-to-maturity: U.S. Treasury and Government agency obligations.................. $ -- -- $-- -- $8,000 6.83 $22,856 6.84 Municipal obligations.................. 150 3.65 -- -- -- -- 583 4.47 Trust preferred securities............. -- -- -- -- -- -- 9,993 7.02 ----- ------ ------ ------- Total investment securities held to maturity....................... $150 3.65 $-- -- $8,000 6.83 $33,432 6.85 ===== ====== ====== ======= Mortgage-backed securities held-to-maturity: Adjustable-rate: GNMA................................ $ -- -- $-- -- $ -- -- $44,060 6.21 FHLMC............................... -- -- -- -- 547 6.63 3,684 6.82 FNMA................................ -- -- -- -- -- -- 11,376 6.24 ----- ------ ------ ------- Total........................ -- -- -- -- 547 6.63 59,120 6.25 ----- ------ ------ ------- Fixed-rate: GNMA................................ -- -- 2 8.00 6,073 7.38 1,481 8.43 FHLMC............................... -- -- 2,528 6.64 6,145 6.72 5,877 7.17 FNMA................................ -- -- -- -- 511 7.00 5,007 7.05 Other............................... -- -- -- -- -- -- 33,932 6.61 ----- ------ ------ ------- Total........................ -- -- 2,530 6.64 12,729 7.05 46,297 6.79 ----- ------ ------ ------- Total mortgage-backed securities held-to-maturity....................... $ -- -- $2,530 6.64 $13,276 7.03 $105,417 6.49 ===== ====== ====== =======
------------------- Total ------------------ Weighted Carrying Average Value Yield ----- ----- Investment securities available-for-sale: U.S. Treasury and Government agency obligations.................. $ 2,924 6.78% ======= Investment securities held-to-maturity: U.S. Treasury and Government agency obligations.................. $30,856 6.83 Municipal obligations.................. 733 4.30 Trust preferred securities............. 9,993 7.02 ------- Total investment securities held to maturity....................... $41,582 6.83 ======= Mortgage-backed securities held-to-maturity: Adjustable-rate: GNMA................................ $44,060 6.21 FHLMC............................... 4,231 6.80 FNMA................................ 11,376 6.24 ------- Total........................ 59,667 6.26 ------- Fixed-rate: GNMA................................ 7,556 7.59 FHLMC............................... 14,550 6.89 FNMA................................ 5,518 7.04 Other............................... 33,932 6.61 ------- Total........................ 61,556 6.84 ------- Total mortgage-backed securities held-to-maturity....................... $121,223 6.55 ========
22 Sources of Funds General. Deposits, loan repayments and prepayments, security maturities, cash flows generated from operations and FHLB borrowings are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposits consist of savings, checking accounts, NOW accounts, money market and club accounts, certificate of deposit accounts and Individual Retirement Accounts. For the year ended December 31, 1999, average core deposits, which include all non-certificate deposits, represented 40.2% of total average deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank's deposits are obtained predominantly from the areas in which its branch offices are located. The Bank has historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits. The Bank uses traditional means of advertising its deposit products through print media and generally does not solicit deposits from outside its market area. The Bank does not actively solicit certificate accounts in excess of $100,000 or use brokers to obtain deposits. At December 31, 1999, 79.8% of the Bank's certificate of deposit accounts had terms of less than twelve months. The following table presents the deposit activity of the Bank for the periods indicated.
For the Years Ended December 31, ----------------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Beginning balance .................................. $ 238,313 $ 238,192 $ 179,946 --------- --------- --------- Purchase of deposits from another ............... -- -- 51,007 institution Net deposits (withdrawals) ...................... (11,919) (9,626) (850) Interest credited ............................... 8,584 9,747 8,089 --------- --------- --------- Increase in deposit accounts ....................... (3,335) 121 58,246 --------- --------- --------- Ending balance ..................................... $ 234,978 $ 238,313 $ 238,192 ========= ========= =========
At December 31, 1999, the Bank had $18.2 million in certificate accounts in amounts of $100,000 or more maturing as follows.
Weighted Maturity Period Amount Average Rate - - --------------- -------- ------------ (Dollars in thousands) Three months or less $6,330 5.11% Over 3 through 6 months 3,344 5.19 Over 6 through 12 months 5,849 5.21 Over 12 months. 2,633 5.60 ------- Total.......... $18,156 5.23% =======
23 The following table sets forth the distribution of the Bank's average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented. Averages for the periods presented utilize month-end balances.
For the Years Ended December 31, ------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------- ----------------------------- ----------------------------- Percent Percent Percent of Total Weighted of Total Weighted of Total Weighted Average Average Average Average Average Average Average Average Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Demand accounts..................... $36,308 15.35% 0.78% $33,631 14.10% 1.01% $ 24,863 12.60% 1.18% Savings and Club accounts........... 58,727 24.84 2.06 62,120 26.05 2.69 53,221 26.97 2.55 Certificates of deposit............. 141,432 59.81 5.01 142,714 59,85 5.42 119,272 60.43 5.40 -------- ------ -------- ------ -------- ------ Total...................... $236,467 100.00% 3.98 $238,465 100.00% 4.09% $197,356 100.00% 4.10% ======== ====== ======== ====== ======== ====== Certificate accounts(1): Less than six months............. $71,619 51.11% 4.84% $70,208 49.74% 5.15% $ 70,186 49.32% 5.24% Over six through 12 months....... 40,181 28.67 5.11 48,109 34.08 5.32 44,047 30.95 5.59 Over 12 months through 36 months. 24,400 17.41 5.49 19,572 13.86 5.46 25,309 17.78 5.96 Over 36 months................... 3,940 2.81 5.81 3,280 2.32 5.75 2,782 1.95 6.96 -------- ------ -------- ------ -------- ------ Total certificate accounts. $140,140 100.00% 5.05 $141,169 100.00% 5.26 $142,324 100.00% 5.51% ======== ====== ======== ====== ======== ======
(1) Based on remaining maturity of certificates calculated as of the end of the period. 24 The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at December 31, 1999.
Period to Maturity from December 31, 1999 ----------------------------------------------------------------------- Less than One to Two to Three to Four to After One Year Two years Three years Four years Five years Five Years -------- --------- ----------- ---------- ---------- ---------- (In thousands) Certificate accounts: 4.00% and below............. $ 2,808 $ -- $ -- $ -- $ -- $ -- 4.01 to 5.00%............... 59,560 5,153 851 143 177 165 5.01 to 6.00%............... 42,420 13,756 1,967 1,108 981 50 6.01 to 7.00%............... 6,314 1,942 731 276 890 150 7.01 to 8.00%............... 424 -- -- -- -- -- Over 9.00%.................. 21 -- -- -- -- -- -------- ------- ------- ------- ------- ------- $111,547 $20,851 $3,549 $1,527 $2,048 $ 365 ======== ======= ====== ====== ====== ===== Accrued interest payable....... Total.......................
December 31, ---------------------------------- 1999 1998 1997 -------- -------- ------- Certificate accounts: 4.00% and below............. $ 2,808 $ 4,851 $ 2,538 4.01 to 5.00%............... 66,049 45,485 33,593 5.01 to 6.00%............... 60,282 77,729 88,877 6.01 to 7.00%............... 10,303 10,741 14,451 7.01 to 8.00%............... 424 2,129 2,069 Over 9.00%.................. 21 -- 536 ------- -------- ------- 139,887 140,935 142,064 Accrued interest payable....... 253 234 260 ------- -------- ------- Total....................... $140,140 $141,169 $142,324 ======== ======== ========
25 Borrowings. The Bank utilizes borrowings from the FHLB as an alternative to retail deposits to fund its operations as part of its operating strategy. These FHLB borrowings are collateralized primarily by certain of the Bank's mortgage-related securities and secondarily by the Bank's investment in capital stock of the FHLB. FHLB borrowings are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the FHLB. See "Regulation and Supervision--Federal Home Loan Bank System." At December 31, 1999, the Bank had $64.3 million in outstanding FHLB borrowings, compared to $42.0 million at December 31, 1998. The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated.
At or For the Years Ended December 31, --------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in thousands) Average balance outstanding.................... $57,756 $42,364 $26,223 Maximum amount outstanding at any month-end during the period................ 65,453 52,145 43,675 Balance outstanding at end of period........... 64,340 42,010 30,300 Weighted average interest rate during the period........................... 5.67% 5.83% 5.97% Weighted average interest rate at end of period............................... 5.66% 5.69% 6.08%
Subsidiary Activities The Company is the parent corporation of two wholly owned subsidiaries, the Bank and West Essex Property Company ("West Essex Property"). West Essex Property was formed in April 1999 to purchase a parcel of land located in Sussex County, New Jersey from the Company. Upon the purchase of this parcel of land, West Essex Property was to have entered into an arrangement to lease the property to a restaurant chain. As of December 31, 1999, West Essex Property has neither purchased the parcel of land nor entered into a lease arrangement. As of December 31, 1999 and for the year then ended, West Essex Property had no operations, assets, liabilities or equity. In addition, the Bank is the parent corporation of one wholly owned subsidiary corporation, West Essex Insurance Agency ("WEIA"). WEIA was formed in December 1982 to offer insurance products and tax-deferred annuities through an agent. Originally, these products were sold at one of the Bank's branches. Commencing in 1993, customers have been referred to Anthony R. Davis Agency at an off-site location. WEIA receives a fee for each customer referral resulting in the purchase of an insurance and/or annuity product. Sales of annuity products totalled $612,894 for the year ended December 31, 1999. WEIA's earnings are at a nominal level since management decided in early 1994 to de-emphasize this activity due to the lack of demand and controversial publicity associated with uninsured annuity products. Personnel As of December 31, 1999, the Company had 49 authorized full-time employee positions and three authorized part-time employee positions. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. 26 REGULATION AND SUPERVISION General The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The Bank is a member of the FHLB System. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the MHC and the Bank and their operations. The MHC, as a federal mutual holding company and the Company, as a federal corporation, will also be required to file certain reports with, and otherwise comply with the rules and regulations of the OTS. The following summary of the regulation and supervision of savings associations and their holding companies does not purport to be a complete description of the applicable statutes and regulations and is qualified in its entirety by reference to such statutes and regulations. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by the Home Owners Loan Act (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution's capital or assets. Loans-to-One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans-to-one borrower. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1999, the Bank's regulatory limit on loans-to-one borrower was $5.7 million. At December 31, 1999, the Bank's largest aggregate amount of loans-to-one borrower was $1.6 million, consisting of two commercial real estate loans. QTL Test. The HOLA requires savings institutions to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to qualify as a "domestic building and loan association" as that term is defined in the Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of December 31, 1999, the Bank maintained 81.5% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. The rule effective through the first quarter of 1999 established three tiers of 27 institutions based primarily on an institution's capital level. An institution that exceeded all capital requirements before and after a proposed capital distribution ("Tier 1 Association") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during the calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half the excess capital over its capital requirements at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions required prior regulatory approval. At December 31, 1999, the Bank was a Tier 1 Association. Effective April 1, 1999, the OTS's capital distribution regulation changed. Under the new regulation, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. If an application is not required, the institution must still provide prior notice to OTS of the capital distribution. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 4%) of its net withdrawable deposit accounts plus short-term borrowings. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for December 31, 1999 was 25.4%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required by regulation to pay assessments to the OTS to fund the agency's operations. The general assessment, paid on a semi-annual basis, is based upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the year ended December 31, 1999 totaled $74,000. Branching. OTS regulations permit federally chartered savings associations to branch nationwide under certain conditions. Generally, federal savings associations may establish interstate networks and geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings associations. Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and any non-savings institution subsidiaries that the Company may establish) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. A savings association also is prohibited from extending credit to any affiliate engaged in activities not permitted for a bank holding company and may not purchase the securities of an affiliate (other than a subsidiary). 28 The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain board approval procedures to be followed. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.0 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal and state law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to implement these safety and soundness standards. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for all institutions except those with the highest rating on the CAMELS financial institution rating system. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term 29 perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1999, the Bank met each of its capital requirements. The following table presents the Bank's capital position at December 31, 1999.
Capital ------------------------- Actual Required Excess Actual Required Capital Capital Amount Percent Percent ------- ------- ------ ------- ------- (Dollars in thousands) Tangible............ $36,592 $5,135 $31,457 10.69% 1.5% Core (Leverage)..... 36,592 13,693 22,899 10.69% 4.0% Risk-based.......... 37,992 10,645 27,347 28.55% 8.0%
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has a total risk-based capital of less than 8% or a leverage ratio or a Tier 1 capital ratio that is less than 4% is considered to be undercapitalized. A savings institution that has a total risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions may become immediately applicable to the institution depending upon its category, including, but not limited to, increased monitoring by regulators, restrictions on growth, and capital distributions and limitations on expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments for SAIF members approximated six basis points, while Bank Insurance Fund ("BIF") members paid 30 approximately one basis point. By law, there was equal sharing of FICO payments between SAIF and BIF members on January 1, 2000. The Bank's assessment rate for fiscal 1999 was zero basis points and no premium was paid for this period. Payments toward the FICO bonds amounted to $142,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Association. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Community Reinvestment Act. Under the Community Reinvestment Act, as amended ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The FIRREA amended the CRA to require the OTS to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system, which replaced the five-tiered numerical rating system. The Bank's latest CRA rating received from the OTS was "Satisfactory." Federal Home Loan Bank System The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 1999 of $3.3 million. FHLB borrowings must be secured by specified types of collateral and all long-term borrowings may only be obtained for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1999, 1998 and 1997, dividends from the FHLB to the Bank amounted to approximately $207,000, $180,000 and $126,000, respectively. If dividends were reduced, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of recent or future legislation on the FHLBs will not also cause a decrease in the value of FHLB stock held by the Bank, if any. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts. The Federal Reserve Board regulations generally require that reserves be maintained 31 against aggregate transaction accounts as follows: for accounts aggregating $44.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $44.3 million, the reserve requirement is $1.329 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. Holding Company Regulation General. The Company is a federal savings and loan holding company within the meaning of the HOLA. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company. Restrictions Applicable to Mutual Holding Companies. Pursuant to Section 10(o) of the HOLA and the Regulations, a mutual holding company, such as the MHC, may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act (the "BHC Act"), unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. Financial Institution Modernization Legislation. Recently enacted federal legislation designed to modernize the regulation of the financial services industry expands the ability of bank holding companies to affiliate with other types of financial services companies such as insurance companies and investment banking companies. The legislation also expanded the activities permitted for mutual savings and loan holding companies to also include any activity permitted a "financial holding company" under the legislation, including a broad array of insurance and securities activities. The HOLA prohibits a savings and loan holding company, including a federal mutual holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution, or holding company thereof, without prior written approval of the OTS; from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. The HOLA also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other 32 than those authorized for savings and loan holding companies by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. If the savings institution subsidiary of a savings and loan holding company fails to meet the QTL test set forth in Section 10(m) of the HOLA and the regulations of the OTS, the holding company must register with the Federal Reserve Board as a Bank Holding Company within one year of the savings institution's failure to so qualify. Stock Holding Company Subsidiary Regulation. The OTS has adopted regulations governing the two-tier mutual holding company form of organization and mid-tier stock holding companies that are controlled by mutual holding companies. Under these rules, the stock holding company subsidiary holds all the shares of the mutual holding company's savings association subsidiary and issues the majority of its own shares to the mutual holding company parent. In addition, the stock holding company subsidiary is permitted to engage in activities that are permitted for its mutual holding company parent and to have the same indemnification and employment contract restrictions imposed that are on the mutual holding company parent. Finally, OTS regulations maintain that the stock holding company subsidiary must be federally chartered for supervisory controls. 33 FEDERAL AND STATE TAXATION Federal Taxation General. The Bank, the Company and the MHC will report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank, the Company and the MHC. Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income. In August 1996, the provisions repealing the above thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all thrift institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules will have no effect on net income or federal income tax expense. For taxable years beginning after December 31, 1995, the Bank's bad debt deduction will be equal to net charge-offs. The new rules allow an institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending activity for those years is equal to or greater than the institution's average mortgage lending activity for the six taxable years preceding 1996. For this purpose, only home purchase and home improvement loans are included and the institution can elect to have the tax years with the highest and lowest lending activity removed from the average calculation. If an institution is permitted to postpone the reserve recapture, it must begin its six year recapture no later than the 1998 tax year. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to a provision of present law referred to below that require recapture in the case of certain excess distributions to shareholders. Distributions. To the extent that the Bank makes "non-dividend distributions" to the Company that are considered as made (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method, or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. 34 Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). Dividends Received Deduction and Other Matters. The Company may exclude from its income 80% of dividends received from the Bank as long as it maintains ownership in the Bank of at least 20%. Audits. The Bank was last audited by the IRS in 1995 and has not been audited by the New Jersey Department of Revenue ("DOR") in the past five years. State and Local Taxation State of New Jersey. The Bank, the Company and the MHC file New Jersey income tax returns. For New Jersey income tax purposes, savings institutions are presently taxed at a rate equal to 3% of taxable income. For this purpose, "taxable income" generally means federal taxable income, subject to certain adjustments (including addition of interest income on state and municipal obligations). For New Jersey tax purposes, regular corporations are presently taxed at a rate equal to 9% of taxable income. 35 Item 2. Properties. - - -------------------- The Bank currently conducts its business through an administrative and full service branch office located in Caldwell, New Jersey and seven other full service branch offices located in West Orange, Franklin Lakes, River Vale, Pine Brook, Old Tappan and Northvale, New Jersey. Management believes that the Bank's facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Original Net Book Value Year of Property or Leased Leased Leasehold or or Improvements at Location Owned Acquired December 31, 1999 - - -------- ------ -------- ----------------- (In thousands) Administrative/Corporate/ Branch Office: 417 Bloomfield Avenue Owned 1962 $370 Caldwell, NJ 07006 Branch Offices: 216 Main Street Owned 1987 142 West Orange, NJ 07052 487 Pleasant Valley Way Owned 1987 206 West Orange, NJ 07052 574 Franklin Avenue Leased 1978 1 Franklin Lakes, NJ 07417 653 Westwood Avenue Owned 1997 469 River Vale, NJ 07675 267 Changebridge Road Owned 1974 236 Pine Brook, NJ 07058 207 Old Tappan Road Owned 1997 480 Old Tappan, NJ 07675 119 Paris Avenue Owned 1997 314 Northvale, NJ 07647
Item 3. Legal Proceedings. - - ---------------------------- The Company is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Bank. 36 Item 4. Submission of Matters to a Vote of Security Holders. - - ------------------------------------------------------------- None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - - ------------------------------------------------------------------------------- Information regarding the market for the Company's common equity and related stockholder matters appears on the inside back cover of the 1999 Annual Report under the caption "Investor and Corporate Information" and is incorporated herein by reference. Item 6. Selected Financial Data. - - ---------------------------------- Information regarding selected financial data appears on pages 4 and 5 of the 1999 Annual Report under the caption "Selected Consolidated Financial and Other Data" and is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - - ------------------------------------------------------------------------ Information regarding management's discussion and analysis of financial condition and results of operations appears on pages 6 through 19 of the 1999 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by this reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - - -------------------------------------------------------------------- Information regarding qualitative and quantitative disclosures about market risk are contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations-Management of Interest Rate Risk and Market Risk Analysis" in the 1999 Annual Report and is incorporated herein by this reference. Item 8. Financial Statements and Supplementary Data - - ---------------------------------------------------- Information regarding the financial statements and the Independent Auditors' Report appears on pages 20 through 59 of the 1999 Annual Report and is incorporated herein by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - - ------------------------------------------------------------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant. - - ------------------------------------------------------------ The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on April 27, 2000, at pages 4 through 7. 37 Item 11. Executive Compensation. - - -------------------------------- The information relating to directors' compensation and executives' compensation is incorporated herein by reference to the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on April 27, 2000, at pages 7 through 16 and 18 (excluding the Executive Compensation Committee Report and Stock Performance Graph). Item 12. Security Ownership of Certain Beneficial Owners and Management. - - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on April 27, 2000, at pages 3 and 4. Item 13. Certain Relationships and Related Transactions. - - --------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on April 27, 2000, at pages 17 through 18. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - - -------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1999 Annual Report to Stockholders. Page Report of Independent Auditors.......................................21 Consolidated Statements of Financial Condition as of December 31, 1999 and 1998........................................22 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997......................23 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997..................................24 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997..............25 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997......................26 Notes to Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997......................28 38 The remaining information appearing in the 1999 Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report.
3.1 Federal MHC Subsidiary Holding Company Charter of West Essex Bancorp, Inc.* 3.2 Bylaws of West Essex Bancorp, Inc.* 4.0 Draft Stock Certificate of West Essex Bancorp, Inc.* 10.1 West Essex Bank Employee Stock Ownership Plan** 10.2 West Essex Bank Employee Stock Ownership Plan Trust** 10.3 ESOP Loan Commitment Letter** 10.4 West Essex Bank Employee Stock Ownership Trust Loan and Security Agreement** 10.5 Employment Agreement between West Essex Bank and Leopold W. Montanaro** 10.6 Employment Agreement between West Essex Bancorp, Inc. and Leopold W. Montanaro** 10.7 Three Year Change in Control Agreement between West Essex Bank and Dennis A. Petrello** 10.8 Three Year Change in Control Agreement between West Essex Bank and Charles E. Filippo** 10.9 Three Year Change in Control Agreement between West Essex Bank and Craig L. Montanaro** 10.10 Three Year Change in Control Agreement between West Essex Bancorp, Inc. and Dennis A. Petrello** 10.11 Three Year Change in Control Agreement between West Essex Bancorp, Inc. and Charles E. Filippo** 10.12 Three Year Change in Control Agreement between West Essex Bancorp, Inc. and Craig L. Montanaro** 10.13 West Essex Bank Employee Severance Compensation Plan** 10.14 West Essex Bank Supplemental Executive Retirement Plan** 10.15 West Essex Bank Management Supplemental Executive Retirement Plan** 10.16 Restated Executive Supplemental Retirement Income Agreement for Leopold W. Montanaro* 10.17 Restated Executive Supplemental Retirement Income Agreement for Charles E. Filippo* 10.18 West Essex Bancorp, Inc. 1999 Stock-Based Incentive Plan 11.0 Computation of Earnings Per Share 13.0 Portions of the 1999 Annual Report to Shareholders 21.0 Subsidiary information is incorporated herein by reference to "Part I-Business-Subsidiary Activities" 23.0 Consent of Radics & Co., LLC 27.0 Financial Data Schedule
(b) Reports on Form 8-K None. ---------------------------------- * Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, filed on June 12, 1998, as amended, Registration No. 333-56729. ** Incorporated herein by reference into this document from the Exhibits to the Form 10-K, filed on March 31, 1999. *** Incorporated herein by reference into this document from the Proxy Statement dated March 17, 2000 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WEST ESSEX BANCORP, INC. By: /s/ Leopold W. Montanaro ------------------------ Leopold W. Montanaro President, Chief Executive Officer and Director Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Name Title Date - - ---- ----- ---- /s/ Leopold W. Montanaro President, Chief Executive March 29, 2000 - - ------------------------ Officer and Director Leopold W. Montanaro (principal executive officer) /s/ Dennis A. Petrello Executive Vice President March 29, 2000 - - ---------------------- and Chief Financial Officer Dennis A. Petrello (principal accounting and financial officer) /s/ William J. Foody Chairman of the Board March 29, 2000 - - --------------------- William J. Foody /s/ David F. Brandley Director March 29, 2000 - - ---------------------- David F. Brandley /s/ Everett N. Leonard Director March 29, 2000 - - ---------------------- Everett N. Leonard /s/ James P. Vreeland Director March 29, 2000 - - --------------------- James P. Vreeland /s/ John J. Burke Director March 29, 2000 - - ----------------- John J. Burke EX-11 2 EXHIBIT 11.0 Computation of Earnings Per Share WEST ESSEX BANCORP, INC. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED December 31, 1999 and December 31, 1998 (Dollars in Thousands, Except Per Share Amounts) For the Calendar Year -------------------------- 1999 1998 (1) ---------- ---------- Basic: Net income ................................ $3,043,349 $1,397,300 Net income applicable to common stock ..... $3,043,349 $1,397,300 Average common shares outstanding - basic .................. 4,004,069 4,062,395 Basic earnings per share .................. $ 0.76 $ 0.34 Diluted: Net income ................................ $3,043,349 $1,397,300 ---------- ---------- Average common shares outstanding - basic . 4,004,069 4,062,395 Effect of dilutive securities ............. 3,682 -- ---------- ---------- Average common shares outstanding - diluted 4,007,731 4,062,395 ========== ========== Diluted earnings per share ..................... $ 0.76 $ 0.34 ========== ========== - - --------------------- (1) The registrant's initial public stock offering took place on October 2, 1998. Earnings per share is calculated based on net income for 1998 and the weighted average shares outstanding since October 2, 1998 as if such shares had been outstanding the entire fiscal year. EX-13 3 EXHIBIT 13.0 Portions of the 1999 Annual Report to Stockholders TABLE OF CONTENTS West Essex Bancorp, Inc. is a $348.3 million savings and loan holding company headquartered in Caldwell, New Jersey. Through its subsidiary, West Essex Bank, the Company operates 8 banking offices in Essex, Morris and Bergen County. Founded in 1915, West Essex Bank is a federally-chartered FDIC-insured stock savings bank. Financial Highlights ....................................................... 1 President's Message ........................................................ 2 Selected Consolidated Financial and Other Data ............................. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................. 6 Management Responsibility Statement ........................................ 20 Independent Auditor's Report ............................................... 21 Consolidated Statements of Financial Condition ............................. 22 Consolidated Statements of Income .......................................... 23 Consolidated Statements of Comprehensive Income ............................ 24 Consolidated Statements of Changes in Stockholders' Equity ................. 25 Consolidated Statements of Cash Flows ...................................... 26 Notes to Consolidated Financial Statements ................................. 28 Directors and Officers ..................................................... 60 Investor and Corporate Information ........................ Inside Back Cover
WEST ESSEX BANCORP, INC. FINANCIAL HIGHLIGHTS (Dollar amounts in thousands, except per share date) At or for the Year Ended December 31, ------------------------------------------ 1999 1998 1997 ----------- ----------- ----------- Total assets .................................. $ 348,307 $ 328,609 $ 299,025 Total investment and mortgage-backed securities 165,729 155,532 160,184 Total loans receivable ........................ 156,196 143,002 116,127 Allowance for loan losses ..................... 1,400 1,717 1,885 Total deposits ................................ 234,978 238,313 238,192 Borrowed money ................................ 64,340 42,101 30,300 Total stockholders' equity .................... 47,110 46,754 29,275 Net interest income ........................... 10,891 9,096 8,460 Provision for (recapture of) loan losses ...... -- (131) 487 Net income (1)(2) ............................. 3,043 1,397 737 Basic and diluted earnings per share (1)(3) ... 0.76 0.34 N/A Book value per share .......................... 11.62 11.14 N/A Average interest rate spread .................. 2.66% 2.48% 2.87% Return on average assets (1)(2) ............... 0.89% 0.44% 0.29% Return on average stockholders' equity (1)(2) . 6.46% 4.10% 2.51% Common shares outstanding at year end ......... 4,054,357 4,197,233 N/A
(1) Results for 1998 include $842,000 of charitable contributions representing the initial funding by the Company of the West Essex Bancorp Charitable Foundation. Exclusive of this contribution, net income would have been $1,936,000, or $0.48 per share, which reflects a return on average assets of 0.61% and a return on average stockholders' equity of 5.68%. (2) Results for 1997 include a $1.6 million loss recorded on the excess of cost over assets acquired in conjunction with deposits purchased from another institution. Exclusive of this loss, net income would have been $1,752,000, which reflects a return on average assets of 0.69% and a return on average stockholders' equity of 5.96%. (3) Assumes the stock conversion was completed on January 1, 1998. - 1 - WEST ESSEX BANCORP, INC. ANNUAL REPORT PRESIDENT'S MESSAGE In reviewing 1999, our first full year as a publicly traded company, we recorded excellent growth in earnings per share and return on equity. I am also pleased to report a substantial increase in cash earnings, net interest income and total assets. Also, a smooth transition into the year 2000 occurred despite speculation by many of a Y2K meltdown. While we are excited about our long-term growth opportunities for West Essex Bank, our enthusiasm is quieted by the reaction of the marketplace to the equities of financial companies. With the equity market seemingly focused on the Internet community, it appears large and small cap banks and financial companies have been relegated to the rear of the marketplace for the time being. Having said this, we believe West Essex Bancorp is well positioned to continuously seek out opportunities that enhance shareholder value. With a solid financial base and prudent management we will strive to grow the earnings and assets of the Company in a qualitative manner thereby enhancing the Company's franchise value. Management's vision is to make West Essex Bank the community bank of choice in each location where we are established. Our mission is to demonstrate through product delivery and excellent service, how we can strengthen the economic and social fabric of our community. While mergers and acquisitions continue to reduce the number of banks in the country, we continue to see the demand for community-oriented institutions such as ours. We are excited about the opportunities of the new millennium and the rapid changes that technology is providing and look forward to capitalizing on these factors. Significant highlights for the Company in 1999 include the initiation of a $.30 per share annual dividend on our common stock, asset growth of $19.7 million to $348.3 million and loan and investment growth of $23.2 million to $319.1 million. Net income rose from $1.4 million in 1998 to $3.0 million in 1999, an increase of 118%. Cash earnings increased significantly from $1.8 million in 1998 to $3.4 million in 1999, an increase of 93%. Loan originations for 1999 totaled $43.2 million, and our loan to deposit ratio increased to 66% from 60% in the prior period. Finally, as of December 31, 1999, core deposits represented 40.4% of deposit account balances. Other measures of performance include improvements in the return on average assets to .89% from 0.44% in the prior period and an increase in the return an average equity to 6.46% from 4.10%. Also very important was the significant improvement in the Company's efficiency ratio from 71.41% for 1998 to 54.45% for 1999. Earnings per share (diluted), also increased to $0.76 in 1999 from $0.34 for 1998. Net interest margin increased to 3.31% from 3.01% at the same time that operating expenses to average assets decreased to 2.00% for 1999 from 2.40% for 1998. -2- In August of 1999, the Company received regulatory approval to repurchase up to 15% of it's publicly traded common shares. Through the end of 1999, the Company was successful in repurchasing approximately 79% of those shares. While limited liquidity in the Company's stock has impeded the Company's efforts to repurchase its shares, the Company is committed to aggressively managing its excess capital through stock repurchases. In the year ahead, the Company will continue to seek means to enhance stockholder value through continued stock repurchases, balance sheet growth, a possible increase in our cash dividends, possible branch expansion, and other reasonable opportunities that may become available to the Company. The Bank's web site, which initially will only provide information to customers, will ultimately allow transactions. Through our service provider, our web site will give us the ability to deliver not only our current products and services to our customer base, but new products and services as well, including on-line banking and the ability to pay bills over the Internet. We remain optimistic about our long-term outlook, especially with the recent passage of financial modernization legislation permitting banking institutions to engage in any financial activities complementing the financial service industry. We will continue to focus on those opportunities and markets that are in alignment with the strategic position and objectives of West Essex Bancorp. I would be remiss if I did not recognize the efforts and contributions of our very dedicated directors, officers and staff who continue to work to achieve the goals and aspirations of the Company, its shareholders and customers and we will continue as always to remain grateful for the confidence and loyalty you have placed in us. Sincerely, /s/Leopold W. Montanaro ----------------------- Leopold W. Montanaro President & CEO -3- WEST ESSEX BANCORP, INC. Selected Consolidated Financial and Other Data - - ---------------------------------------------- The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.
At December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Thousands) Selected Consolidated Financial Data: Total assets (1) .................... $348,307 $328,609 $299,025 $235,969 $223,165 Loans receivable, net (2) ........... 153,276 140,272 112,735 82,134 85,031 Securities available-for-sale: Investment securities, net ..... 2,924 8,282 7,081 1,647 1,932 Securities held-to-maturity: Investment securities, net ..... 41,582 36,873 22,929 22,476 18,482 Mortgage-backed securities, net 121,223 110,376 130,174 113,254 100,032 Deposits (1) ........................ 234,978 238,313 238,192 179,946 178,392 Borrowed money ...................... 64,340 42,101 30,300 23,650 17,000 Total stockholders' equity .......... 47,110 46,754 29,275 28,452 26,856 For the Years Ended December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Thousands) Selected Operating Data: Interest income ............................... $ 22,751 $ 21,315 $ 18,116 $ 16,467 $ 15,735 Interest expense .............................. 11,860 12,219 9,656 8,300 7,618 -------- -------- -------- -------- -------- Net interest income ...................... 10,891 9,096 8,460 8,167 8,117 Provision for (recapture of) loan losses ...................................... -- (131) 487 232 510 -------- -------- -------- -------- -------- Net interest income after ................ provision for (recapture of) loan losses 10,891 9,227 7,973 7,935 7,607 Noninterest income ............................ 685 529 373 476 332 Noninterest expense (3) ....................... 6,869 7,607 7,173 5,919 4,446 -------- -------- -------- -------- -------- Income before income taxes (3) ................ 4,707 2,149 1,173 2,492 3,493 Income taxes (3) .............................. 1,664 752 436 836 1,221 -------- -------- -------- -------- -------- Net income .................................... $ 3,043 $ 1,397 $ 737 $ 1,656 $ 2,272 ======== ======== ======== ======== ========
(continued on next page) -4-
At or For the Years Ended December 31, ---------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Selected Financial Ratios and Other Data: Performance Ratios (4): Return on average assets (3) .............. 0.89 % 0.44 % 0.29 % 0.74 % 1.07 % Return on average stockholders' equity (3) 6.46 4.10 2.51 5.95 8.84 Average stockholders' equity /average assets ......................... 13.73 10.75 11.55 12.37 12.09 Interest rate spread (5) .................. 2.66 2.48 2.87 3.15 3.34 Net interest margin (6) ................... 3.31 3.01 3.44 3.74 3.93 Non-interest expenses to average assets (3) 2.00 2.40 2.82 2.63 2.09 Stockholders' equity to total assets ...... 13.53 14.23 9.79 12.06 12.03 Efficiency ratio (7) ...................... 54.45 71.41 57.04 56.58 52.86 Regulatory Capital Ratios (4): Tangible capital .......................... 10.69 10.44 7.98 12.06 12.02 Core capital .............................. 10.69 10.44 7.98 12.06 12.02 Risk-based capital ........................ 28.55 28.81 26.10 39.15 37.50 Asset Quality Ratios (4): Non-performing loans to total assets ...... 0.25 0.67 0.84 1.26 0.96 Non-performing loans to total loans receivable .............................. 0.57 1.46 2.16 3.51 2.46 Non-performing assets to total assets ..... 0.51 0.84 1.24 1.85 1.57 Allowance for loan losses to non-performing loans .................... 158.37 78.47 75.19 52.70 55.84 Average interest-earning assets to average interest-bearing liabilities ............ 117.99 112.99 114.39 115.46 115.94 Net interest income after provision for loan losses to non-interest expenses (3) 158.55 121.30 111.15 134.06 171.10 Number of full-service customer facilities ........ 8 8 8 5 5
(1) The increase in assets in fiscal 1997 was due primarily to the purchase of three branch offices from Summit Bank. (2) The allowance for loan losses at December 31, 1999, 1998, 1997, 1996, and 1995 was $1.4 million, $1.7 million, $1.9 million, $1.6 million, and $1.2 million, respectively. (3) Includes, for the year ended December 31, 1996, the SAIF Special Assessment of $1.1 million and the related income tax benefit of $395,000. If excluded, return on average assets, return on average stockholders' equity, non-interest expenses to average assets and net interest income after provision for loan losses to non-interest expenses would be 1.05%, 8.47% 2.14% and 164.59%, respectively, for the year ended December 31, 1996. Includes, for the years ended December 31, 1999, 1998 and 1997, amortization expense related to the excess of cost over assets acquired from Summit Bank of $593,000, $593,000, and $1.7 million, respectively, and the related income tax benefit of $213,000, $213,000 and $627,000, respectively. If excluded, return on average assets, return on average stockholders' equity, non-interest expenses to average assets and net interest income after provision for loan losses to non-interest expense would be 1.00%, 7.26%, 1.83% and 173.53%, respectively, for the year ended December 31, 1999, 0.56%, 5.21%, 2.21% and 131.55%, respectively, for the year ended December 31, 1998 and 0.73%, 6.30%, 2.13% and 146.83%, respectively, for the year ended December 31, 1997. (4) With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (5) The interest rate spread represents the difference between the weighted average yield on average interest- earning assets and the weighted average cost of average interest-bearing liabilities. (6) The net interest margin represents net interest income as a percent of average interest-earning assets. (7) The efficiency ratio represents non-interest expenses, excluding the SAIF special Assessment, impairment loss and amortization relating to intangible assets and loss on REO, divided by the sum of net interest and non-interest income excluding income on REO and security gain/loss. -5- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS West Essex Bancorp, Inc. ("the Company"), is the stock holding company for West Essex Bank ("the Bank"). The Company is headquartered in Caldwell, New Jersey and its principal business currently consists of the operations of the Bank. West Essex Bancorp, M.H.C., a mutual holding company formed in connection with the Bank's conversion to stock form and reorganization into the holding company form of organization, which was consummated October 2, 1998, owns 58.0% of the Company's outstanding common stock. The Bank's results of operations are dependent primarily on net interest income, which is the difference between the income earned on its loan and investment portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Bank's provision for loan losses and fees and other service charges. The Bank's noninterest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, federal deposit insurance premiums, the cost of foreclosed real estate operations, data processing, advertising and business promotion and other expenses. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Bank. Forward-Looking Statements This Annual Report on Form 10-K contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake - and specifically disclaims any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Management of Interest Rate Risk and Market Risk Analysis The principal objectives of the Company's interest rate risk management is to evaluate the interest rate risk included in certain balance sheet accounts; determine the level of risk appropriate given the Company's business strategy, operating environment, capital and liquidity requirements and performance objectives; and manage the risk consistent with the Board of Directors' approved guidelines. Through such management, the Company seeks to reduce the vulnerability of its operations to changes in interest rates. The Board of Directors of the Bank has established an Asset/Liability Committee, which is responsible for reviewing asset/liability policies and interest rate risk position. The Asset/Liability Committee meets at least on a quarterly basis, reports trends and interest rate risk position to the Board of Directors and reviews with the Board its activities and strategies, the effect of those strategies on the Bank's net interest margin, the market value of the portfolio, and the effect the changes in interest rates will have on the Bank's portfolio and exposure limits. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Company. - 6 - WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS To manage its interest rate risk and help offset the originations of long-term fixed rate mortgage loans, the Company has employed the following strategies: (i) utilizing adjustable-rate mortgage-backed securities to offset the effect of holding long-term fixed rate mortgage loans and (ii) lengthening the maturities of both borrowed money and deposits. The Bank continues to seek opportunities to originate for its portfolio one-to four-family residential mortgage loans, as well as other loans, in its primary market area of Essex, Morris and Bergen Counties, New Jersey. The Bank's total loan portfolio had decreased as a percent of the Bank's total assets from 1993 through 1996 when loan originations, primarily due to intense competition in the Bank's market area for loan originations, began to decrease. To address this situation, the Bank began to pursue loan originations more aggressively and began, in 1997, to use outside mortgage brokers to generate increased volume. During 1999, the Bank, as part of its efforts to generate new loans, moved to aggressively promote its loan products by using newspaper advertisements and by instituting an incentive program with its employees. The latter program proved highly successful and will be continued in 2000. Further, due to the relatively low interest rate environment that has existed in recent years, the Bank has originated primarily fixed-rate one-to four-family mortgage loans. The Bank's purchase of adjustable-rate mortgage-backed securities, as well as various shorter term debt obligations of federal, state and local governments, has enabled the Company to effectively manage its interest rate risk. At December 31, 1999, the Company had $121.2 million or 34.8% of total assets in mortgage-backed securities classified as held-to-maturity, and $44.5 million or 12.8% of total assets in investment securities, of which $2.9 million or 0.8% of total assets were classified as available-for-sale. At the same date, loans receivable, net, totalled $153.3 million or 44.0% of total assets. Net Portfolio Value. The Bank's interest rate sensitivity is monitored by management through the use of the OTS model which estimates the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expect cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OTS produced its analysis based upon data submitted on the Bank's quarterly Thrift Financial Reports. The following table sets forth the Bank's NPV as of December 31, 1999, as calculated by the OTS.
NPV as % of Portfolio Change in Net Portfolio Value Value of Assets Interest Rates ------------------------------------------ --------------------------- In Basis Points $ % NPV (Rate Shock) Amount Change Change Ratio Change (1) ------------ ------ ------ ------ ----- ---------- 300 $ 10,792 $ (21,276) (66)% 3.53 % (605) 200 18,266 (13,802) (43) 5.79 (379) 100 25,444 (6,624) (21) 7.82 (176) Static 32,068 - - 9.58 - (100) 37,248 5,180 16 10.87 129 (200) 40,539 8,470 26 11.61 203 (300) 41,334 9,265 29 11.71 213
(1) Expressed in basis points. -7- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet. The following table sets forth certain information relating to the Company at December 31, 1999, and for the years ended December 31, 1999, 1998 and 1997. The average yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the period shown except where noted otherwise and reflect annualized yields and costs. Average balances are derived from average month-end balances except for the average balances of other interest-earning assets and borrowed money, which are derived from average daily balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The yields and costs include fees which are considered adjustments to yields.
At December 31, 1999 --------------------- Yield/ Balance Cost ------- ---- Assets: (Dollars in Thousands) Interest-earning assets: Loans receivable ....................................... $ 154,677 7.44 % Mortgage-backed securities ............................. 121,223 6.55 Investment securities(1) ............................... 44,506 6.84 Other interest-earning assets .......................... 10,290 4.58 --------- Total interest-earning assets ......... 330,696 6.94 Allowance for loan losses .............................. (1,400) Non-interest-earning assets ............................ 19,011 --------- Total assets .......................... $ 348,307 ========= Liabilities and Retained Earnings: Interest-bearing liabilities: Interest-bearing deposits: Demand deposits ................................. $ 21,092 1.39 Savings and club accounts ....................... 57,735 2.04 Certificates of deposit ......................... 140,140 5.05 --------- Total interest-bearing deposits ....... 218,967 3.90 Borrowed money ......................................... 64,340 5.66 --------- Total interest-bearing liabilities .... 283,307 4.30 Non-interest bearing deposits ................................ 16,011 Other non-interest-bearing liabilities ....................... 1,879 --------- Total liabilities ..................... 301,197 Retained earnings ............................................ 47,110 --------- Total liabilities and retained earnings $ 348,307 ========= Interest rate spread ......................................... 2.64 % ==== Net interest-earning assets .................................. $ 47,389 ========= Ratio of average interest-earning assets to average interest-bearing liabilities ........................... 1.17x ====
(1) Included securities available for sale. -8-
WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Years Ended December 31, ---------------------------------------------------------------- 1999 1998 ------------------------------ ------------------------------ Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- Assets: (Dollars in Thousands) Interest-earning assets: Loans receivable $ 149,356 $ 11,240 7.53 % $ 129,416 $ 10,083 7.79 % Mortgage-backed securities 119,953 7,722 6.44 121,346 7,853 6.47 Investment securities (1) 47,227 3,177 6.73 39,195 2,695 6.88 Other interest-earning assets 12,241 611 4.99 12,419 684 5.51 --------- -------- --------- -------- Total interest-earning assets 328,777 22,750 6.92 302,376 21,315 7.05 ------- ------- Allowance for loan losses (1,546) (1,832) Other non-interest-earning assets 15,912 16,503 --------- --------- Total assets $ 343,143 $ 317,047 ========= ========= Liabilities and Retained Earnings: Interest-bearing liabilities: Interest-bearing deposits: Demand $ 20,732 284 1.37 $ 20,412 339 1.66 Savings and club 58,727 1,210 2.06 62,120 1,672 2.69 Certificates of deposit 141,432 7,090 5.01 142,714 7,736 5.42 --------- -------- --------- -------- Total interest-bearing deposits 220,891 8,584 3.89 225,246 9,747 4.33 Borrowed money 57,756 3,275 5.67 42,364 2,472 5.84 --------- -------- --------- -------- Total interest-bearing liabilities 278,647 11,859 4.26 267,610 12,219 4.57 -------- -------- Non-interest-bearing deposits 15,576 13,219 Other non-interest-bearing liabilities 1,796 2,121 --------- --------- Total liabilities 296,019 282,950 Stockholders' equity 47,124 34,097 --------- --------- Total liabilities and stockholders' equity $ 343,143 $ 317,047 ========= ========= Net interest income/interest rate spread $ 10,891 2.66 % $ 9,096 2.48 % ======== ==== ======= ==== Net interest-earning assets/net yield on interest-earning assets $ 50,130 3.31 % $ 34,766 3.01 % ========= ==== ======== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.18x 1.13x ===== =====
------------------------------------ 1997 ------------------------------------ Average Average Yield/ Balance Interest Cost ------- -------- ---- Assets: Interest-earning assets: Loans receivable $ 97,277 $ 7,908 8.13 % Mortgage-backed securities 114,996 7,909 6.88 Investment securities (1) 26,774 1,897 7.09 Other interest-earning assets 7,019 401 5.71 -------- ------- Total interest-earning assets 246,016 18,115 7.36 -------- Allowance for loan losses (1,739) Other non-interest-earning assets 10,422 --------- Total assets $ 254,699 ========= Liabilities and Retained Earnings: Interest-bearing liabilities: Interest-bearing deposits: Demand $ 16,360 293 1.79 Savings and club 53,221 1,357 2.55 Certificates of deposit 119,272 6,439 5.40 -------- ------- Total interest-bearing deposits 188,853 8,089 4.28 Borrowed money 26,223 1,566 5.97 --------- ------ Total interest-bearing liabilities 215,076 9,655 4.49 -------- Non-interest-bearing deposits 8,503 Other non-interest-bearing liabilities 1,711 --------- Total liabilities 225,290 29,409 Stockholders' equity --------- Total liabilities and stockholders' equity $ 254,699 ========= Net interest income/interest rate spread $ 8,460 2.87 % ======== ==== Net interest-earning assets/net yield on interest-earning assets $ 30,940 3.44 % ======== ==== Ratio of interest-earning assets to interest-bearing 1.14x liabilities =====
(1) Includes securities available for sale. -9- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated on a proportional basis between changes in rate and volume.
Year Ended Year Ended December 31, 1999 December 31, 1998 Compared to Compared to Year Ended Year Ended December 31, 1998 December 31, 1997 ------------------------------- ------------------------------ Increase (Decrease) Increase (Decrease) Due to Due to ------------------- ----------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (In Thousands) Interest income: Loans receivable ............ $ 1,504 $ (347) $ 1,157 $ 2,517 $ (342) $ 2,175 Mortgage-backed securities .. (93) (38) (131) 427 (483) (56) Investment securities ....... 542 (60) 482 856 (58) 798 Other interest-earning assets (10) (63) (73) 298 (15) 283 ------- ------- ------- ------- ------- ------- Total ............................ 1,943 (508) 1,435 4,098 (898) 3,200 ------- ------- ------- ------- ------- ------- Interest expense: Demand deposits (1) ......... 5 (60) (55) 69 (23) 46 Savings and club accounts ... (87) (375) (462) 237 78 315 Certificates of deposit ..... (69) (577) (646) 1,273 24 1,297 Borrowed money .............. 877 (74) 803 941 (35) 906 ------- ------- ------- ------- ------- ------- Total ............................ 726 (1,086) (360) 2,520 44 2,564 ------- ------- ------- ------- ------- ------- Net change in net interest income $ 1,217 $ 578 $ 1,795 $ 1,578 $ (942) $ 636 ======= ======= ======= ======= ======= =======
(1) Includes NOW and Money Market accounts. Comparison of Financial Condition at December 31, 1999 and December 31, 1998 Total assets were $348.3 million at December 31, 1998, compared to $328.6 million at December 31, 1998, an increase of $19.7 million, or 6.0%. The increase in assets was funded primarily by an increase in FHLB borrowings of $22.3 million. Cash and cash equivalents, primarily interest-bearing deposits with the FHLB, decreased $3.7 million to $12.7 million at December 31, 1999 from $16.4 million at December 31, 1998. The decrease in cash and cash equivalents was used to fund securities purchases. -10- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In the aggregate, mortgage-backed securities and investment securities, including available-for- sale and held-to-maturity issues, totalled $165.7 million at December 31, 1999, an increase of $10.2 million from $155.5 million at December 31, 1998. Such increase was funded by the aforementioned decrease in cash and cash equivalents and by increased borrowings. Mortgage-backed securities, all of which are held-to-maturity, increased $10.8 million due to purchases exceeding repayments. Investment securities held-to-maturity increased $4.7 million, due to security purchases exceeding maturities, while investment securities available-for-sale decreased $5.4 million, primarily due to $5.0 million in securities sold. At December 31, 1999, 75.9% of the investment securities, including available-for-sale and held-to-maturity issues, consisted of U.S. Government and Agency obligations, while 72.0% of the mortgage-backed securities portfolio consisted of Fannie Mae ("FNMA"), Freddie Mac ("FHLMC") and Ginnie Mae ("GNMA") issues. Investment securities available for sale included $2.0 million of U.S. Treasury notes and $909,000 of U.S. Government Agency notes while investment securities held-to-maturity consisted of $500,000 of U.S. Treasury notes, $30.4 million of U.S. Government Agency notes, $10.0 million in trust preferred securities and $733,000 in municipal bonds and notes. Loans receivable increased $13.0 million to $153.3 million at December 31, 1999 from $140.3 million at December 31, 1998. The increase was primarily in the one- to four-family mortgage and home equity loan categories, which increased $7.6 million and $4.8 million, respectively. At December 31, 1999, 87.5% of the outstanding balance of loans in the portfolio consisted of one-to four-family related loans, compared to 86.9% at December 31, 1998. Deposits totalled $235.0 million at December 31, 1999, a decrease of $3.3 million or 1.4% from the $238.3 million balance at December 31, 1998. Borrowed money increased $22.3 million to $64.3 million at December 31, 1999, as compared to $42.0 million at December 31, 1998. Based on the lower cost of wholesale funds as compared to comparable maturity retail deposits, management chose to fund the asset growth discussed above with additional FHLB borrowings. During the year ended December 31, 1999, short-term borrowings increased $6.0 million to $6.0 million, with an average cost of 5.80% at year end, while long-term debt increased $16.3 million to $58.3 million, the result of $24.0 million in new borrowings with 1 to 10 year maturities and an average cost of 5.75% and the repayment of current maturities of long-term debt of $7.7 million. The increased borrowed money was used to fund increased lending. Stockholders' equity increased $356,000 or 0.8%, to $47.1 million at December 31, 1999 from $46.8 million at the prior year end. During 1999, net income of $3.0 million was largely offset by $1.5 million in treasury stock acquisitions, $739,000 used to fund the Company's newly implemented Stock-Based Incentive Plan, and $496,000 in dividends declared to stockholders. Comparison of Operating Results for the Years Ended December 31, 1999 and 1998 Net Income. Net income for 1999 was $3.04 million, an increase of $1.64 million from $1.40 million in 1998. The increase was primarily the result of two factors. The primary factor was the $1.79 million increase in net interest income to $10.89 million in 1999 compared to $9.10 million in 1998, which was the result of an increase in total interest income and a decrease in total interest expense. Additionally, charitable contribution expenses totalled $17,000 in 1999, a decrease of $846,000 from the 1998 total of $863,000. $842,000 of the 1998 charitable contribution expense related to the initial funding of the West Essex Bancorp Charitable Foundation, a charitable foundation established in -11- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS connection with the Company's initial public stock offering, with a $100,000 cash contribution and a contribution by the Company of 74,214 shares of Company common stock. The aforementioned two factors combined to increase income before income taxes and net income by $2.64 million and $1.69 million, respectively. Interest Income. Total interest income increased 6.7% to $22.75 million for 1999 as compared to $21.31 million for 1998. The increase was due to a $26.4 million or 8.7% increase in average interest-earning assets during 1999, which more than offset a drop of 13 basis points in the yield earned thereon to 6.92% in 1999 from 7.05% in 1998. The increased average balances of earning assets were funded by increased FHLB borrowings. Interest income on loans during 1999 increased by $1.16 million, or 11.5%, to $11.24 million when compared to $10.08 million during 1998. During the years ended December 31, 1999 and 1998, the yield earned on the loan portfolio was 7.53% and 7.79%, respectively. The average balance of loans outstanding during the years ended December 31, 1999 and 1998 totalled $149.4 million and $129.4 million, respectively. The decreased yield is the result of the lower market interest rates prevailing during much of 1999. The increased average balance during 1999 is the result of the continued increase in loan origination efforts, including the use of outside mortgage brokers, which began in 1997. Loan originations were $42.2 million in 1999 and $50.5 million in 1998. Interest on mortgage-backed securities, all of which are held-to-maturity, decreased $131,000, or 1.7%, during 1998 to $7.72 million compared to $7.85 million for 1998. During the year ended December 31, 1999, the average balance of mortgage-backed securities outstanding decreased $1.3 million, or 1.1%, to $120.0 million when compared to $121.3 million for 1998. The yield earned on the mortgage-backed securities portfolio decreased marginally to 6.44% in 1999 from 6.47% in 1998. Interest earned on investment securities, including both available-for-sale and held-to-maturity issues, increased by $482,000, or 17.9%, to $3.2 million for 1999, when compared to $2.7 million for 1998. The increase resulted from an increase of $8.0 million, or 20.5%, in the average balance of the investment securities portfolio, which more than offset a decrease of 15 basis points in the yield earned on the investment securities portfolio to 6.73% in 1999 from 6.88% in 1998. The increased average balance is the result of purchases during 1999 while the decreased yield is due to the lower market rates available thereon. Interest on other interest-earning assets totalled $611,000 and $684,000 during 1999 and 1998, respectively. The yield earned on other interest-earning assets decreased to 4.99% in 1999 from 5.51% in 1998, while the average balance of other interest-earning assets outstanding decreased $178,000 or 1.4%. Interest Expense. Interest expense on deposits decreased $1.17 million, or 11.9%, to $8.58 million during 1999 compared to $9.75 million for 1998. The decrease during 1999 was attributable to a decrease of 44 basis points in the average cost of interest-bearing deposits to 3.89% for 1999 from 4.33% or 1998, along with a decrease of $4.4 million, or 1.9%, in the average balance of interest-bearing deposits outstanding. The decreased cost of deposits was due to the lower market rates prevailing for much of 1999 and was seen in all deposit categories. -12- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense on borrowed money increased $803,000, or 32.5%, to $3.3 million during 1999 compared to $2.5 million for 1998. The increase during 1999 was attributable to an increase of $15.4 million in the average balance of borrowings outstanding, partially offset by a decrease of 17 basis points in the cost of borrowings to 5.67% for 1999 from 5.84% for 1998. The increased average balance reflects management's increased use of borrowed funds to compensate for deposit loss, leverage the balance sheet and to manage interest rate risk. The decreased interest rate on borrowings resulted from the paydown of older debt having higher interest rates. Net Interest Income. Net interest income for 1999 increased $1.8 million, or 19.7%, to $10.9 million in 1999 from $9.1 million in 1998. The net interest rate spread increased to 2.66% in 1999 from 2.48% in 1998 and the interest rate margin increased to 3.31% in 1999 from 3.01% in 1998. These increases primarily resulted from a 31 basis point decrease in the cost of interest-bearing liabilities to 4.26% in 1999 from 4.57% in 1998, which more than offset a 13 basis point decrease in the yield earned on average interest-earning assets to 6.92% in 1999 from 7.05% in 1998. In addition to the increases in interest rate spread and margin, the Company was able to improve net interest income by increasing net interest-earning assets by $15.4 million and by leveraging the balance sheet through increased borrowings. Provision for Loan Losses. During 1999, the Company did not record a provision for loan losses as management determined that the existing allowance for loan losses was adequate. During 1998, the Bank recorded a recapture of $131,000 from the allowance for loan losses as a credit to provision for loan losses. The recaptured allowance of $131,000 in 1998 represented 6.9% of the allowance for loan losses at the end of 1997 and reflected a $405,000 or 16.3% decrease in loans delinquent ninety days or more. At December 31, 1999 and 1998, the Bank's loan portfolio included loans totalling $792,000 and $2.1 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on management's evaluation of the risks inherent in its loan portfolio which gives due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $1.40 million at December 31, 1999, representing 0.90% of total loans and 176.8% of loans delinquent ninety days or more, compared to an allowance of $1.72 million at December 31, 1998, representing 1.20% of total loans and 82.4% of loans delinquent ninety days or more. During 1999 and 1998, the Bank charged off loans aggregating $317,000 and $37,000, respectively. The $317,000 charge-off in 1999 represented the final resolution of the Bank's largest nonperforming loan, a construction loan that had been in default for over six years. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. The Bank has established a standardized process to assess the adequacy of the allowance for loan losses and to identify the risks inherent in the loan portfolio. The process incorporates credit reviews and gives consideration to areas of exposure such as concentrations of credit, local economic conditions, trends in delinquencies, collateral coverage, the composition of the performing and non-performing loan portfolios, and other risks inherent in the loan portfolio. -13- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Specific allocations of the allowance for loan losses are identified by individual loan based upon a detailed credit review of each such loan. General loan loss allowances are allocated to pools of loans categorized by type and assigned allowance percentages which take into effect past charge off history, industry averages and current trends and risks. Finally, an unallocated portion of the allowance is maintained to account for the general inherent risk in the loan portfolio, known circumstances which are not addressed in the allocated portion of the allowance (such as the increased dependence on outside mortgage brokers for originations), and the necessary imprecision in the determination of the allocated portion of the allowance. The allowance for loan losses includes specific, general and unallocated allowances of $50,000, $878,000 and $472,000, respectively, at December 31, 1999, as compared to $492,000, $817,000 and $408,000, respectively, at December 31, 1998. The decrease in the specific allowance primarily reflects the final resolution of several loans related to a large condominium project which had been in default since 1993. The general allowance at December 31, 1999 represents 0.56% of total loans, a slight decrease from 0.57% at the prior year end. The unallocated allowance at December 31, 1999 represents 0.30% of total loans, a slight increase from 0.29% at the prior year end. A factor included in the unallocated allowance at both December 31, 1999 and 1998 is the large volume of loan originations generated by the Bank via the use of outside mortgage brokers since 1997 as compared to no such loans in prior years. The Company believes the use of outside brokers somewhat increases the inherent risks in the loan portfolio. The general and unallocated allowances increased primarily due to the $13.2 million increase in the loan portfolio. Non-Interest Income. Non-interest income increased by $156,000, or 29.5% to $685,000 during 1999 as compared to $529,000 for 1998. The increase in non-interest income during 1999 resulted primarily from $127,000 in gains on sales of securities during 1999 compared to none in 1998, and increases in fees and service charges of $21,000, or 5.7%, and miscellaneous income of $8,000, or 4.9%. Non-Interest Expenses. Non-interest expenses decreased $738,000, or 9.7%, to $6.9 million during 1999 compared to $7.6 million for 1998. Charitable contribution expense totalled $17,000 in 1999, a decrease of $846,000 over the 1998 amount of $863,000. $842,000 of the 1998 charitable contribution expense related to the initial funding of the West Essex Bancorp Charitable Foundation with a $100,000 cash contribution and a contribution by the Company of 74,214 shares of Company common stock. Loss on real estate owned decreased by $98,000 to $42,000 in 1999 as compared to $140,000 in 1998, due to a reduction in loss provisions recorded to $ - 0 - in 1999 from $131,000 in 1998. Excluding the aforementioned factors, non-interest expenses were $6.81 million in 1999, or $207,000 higher than the $6.60 million comparable amount in 1998. This increase of 3.1% is attributable to the growth of the Company, which is reflected by a 8.2% increase in average total assets. In accordance with the foregoing, salaries and employee benefits increased $179,000 or 5.8%, occupancy and equipment expenses increased $25,000, or 2.5%, and miscellaneous expenses increased $3,000 or 0.2%. Included in miscellaneous expenses, among other things, are legal fees, accounting and auditing fees, director fees, FHLB demand deposit charges, insurance costs, telephone expenses and stationery and supplies expenses and the nonrecurring expenses associated with Year 2000 compliance issues. Income Taxes. Income tax expense totalled $1.66 million and $752,000 during 1999 and 1998, respectively. The increase in 1999 resulted primarily from an increase in pre-tax income of $2.56 million. The Company's effective income tax rate was 35.3% in 1999 and 35.0% in 1998. -14- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Operating Results for the Years Ended December 31, 1998 and 1997 Net Income. Net income for 1998 was $1.40 million, an increase of $660,000 from $737,000 in 1997. The increase was primarily the result of four factors. The amortization of the excess of cost over assets acquired in connection with the October 1997 purchase of deposits from Summit Bank totalled $593,000 in 1998, or $1.15 million less than the comparable 1997 figure of $1.74 million, which included a $1.59 million loss upon the reassessment of the carrying value of this asset at the end of 1997. Charitable contribution expense totalled $863,000 in 1998, an increase of $849,000 over the 1997 amount of $14,000. $842,000 of the 1998 charitable contribution expense related to the initial funding of the West Essex Bancorp Charitable Foundation, a charitable foundation established in connection with the Company's initial public stock offering, with a $100,000 cash contribution and a contribution by the Company of 74,214 shares of Company common stock. In 1998, a $131,000 recapture of provision for loan losses represented an improvement of $618,000 over the provision of $487,000 recorded in 1997. Finally, loss on real estate owned decreased by $240,000 to $140,000 in 1998 as compared to $380,000 in 1997. The aforementioned four factors combined to increase income before income taxes and net income by $1.16 million and $742,000, respectively. The remaining decrease of $82,000 in net income was the result of increased non-interest expenses, exclusive of those discussed above, partially offset by increased non-interest income, and the income tax effect thereon. Interest Income. Total interest income increased 17.7% to $21.3 million for 1998 as compared to $18.1 million or 1997. The increase was due to a $56.4 million or 22.9% increase in average interest-earning assets during 1998, which more than offset a drop of 31 basis points in the yield earned thereon to 7.05% in 1998 from 7.36% in 1997. Increased average balances and decreased yield were experienced in all categories of interest-earning assets. The increased average balances of earning assets were the result of increased loan originations and securities purchases funded by the $16.6 million net proceeds of the Company's 1998 initial public stock offering, the Summit deposit purchase of late 1997 and increased FHLB borrowings. Interest income on loans during 1998 increased by $2.2 million, or 27.5%, to $10.1 million when compared to $7.9 million during 1997. During the years ended December 31, 1998 and 1997, the yield earned on the loan portfolio was 7.79% and 8.13%, respectively. The average balance of loans outstanding during the years ended December 31, 1998 and 1997 totalled $129.4 million and $97.3 million, respectively. The decreased yield is the result of the lower market interest rates prevailing during 1998. The increased average balance during 1998 is the result of the continued increase in loan origination efforts, including the use of outside mortgage brokers, which began in 1997. Originations were $50.5 million in 1998, up from $47.1 million in 1997. Interest on mortgage-backed securities, all of which are held-to-maturity, decreased $56,000 or 0.7%, during 1998 to $7.85 million compared to $7.91 million for 1997. During the year ended December 31, 1998, the average balance of mortgage-backed securities outstanding increased $6.3 million, or 5.5%, to $121.3 million when compared to $115.0 million for 1997. The yield earned on the mortgage-backed securities portfolio decreased to 6.47% in 1998 from 6.88% in 1997. The decrease in the average yield on mortgage-backed securities during 1998 resulted primarily from lower market interest rates. -15- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest earned on investment securities, including both available-for-sale and held-to-maturity issues, increased by $798,000, or 42.1%, to $2.7 million for 1998, when compared to $1.9 million for 1997. The increase resulted from an increase of $12.4 million, or 46.4%, in the average balance of the investment securities portfolio, which more than offset a decrease of 21 basis points in the yield earned on the investment securities portfolio to 6.88% in 1998 from 7.09% in 1997. The increased average balance is the result of purchases during 1998 while the decreased yield is due to the lower market rates available thereon. Interest on other interest-earning assets totalled $684,000 and $401,000 during 1998 and 1997, respectively. The yield earned on other interest-earning assets decreased to 5.51% in 1998 from 5.71% in 1997, which partially offset an increase of $5.4 million, or 76.9%, in the average balance of other interest-earning assets outstanding. The increased average balance in 1998 is due to the temporary investment of net proceeds of the initial public stock offering in overnight deposits. Interest Expense. Interest expense on deposits increased $1.7 million, or 13.1%, to $9.74 million during 1998 compared to $8.09 million for 1997. The increase during 1998 was attributable to an increase of five basis points in the average cost of interest-bearing deposits to 4.33% for 1998 from 4.28% or 1997, along with an increase of $36.4 million, or 19.3%, in the average balance of interest-bearing deposits outstanding. The increased average balance of interest-bearing deposits primarily reflects the purchase of deposits from Summit Bank during October 1997. Interest expense on borrowed money increased $906,000, or 57.9%, to $2.5 million during 1998 compared to $1.6 million for 1997. The increase during 1998 was attributable to an increase of $16.1 million in the average balance of borrowings outstanding, partially offset by a decrease of 13 basis points in the cost of borrowings to 5.84% for 1998 from 5.97% for 1997. The increased average balance reflects management's increased use of borrowed funds to leverage the balance sheet. The decreased interest rate on borrowings resulted from the paydown of older debt having higher interest rates as well as the lower interest rates available on new borrowings obtained in 1998. Net Interest Income. Net interest income for 1998 increased $636,000, or 7.5%, to $9.1 million in 1998 from $8.5 million in 1997. The net interest rate spread decreased to 2.48% in 1998 from 2.87% in 1997 and the interest rate margin decreased to 3.01% in 1998 from 3.44% in 1997. These decreases primarily resulted from a 31 basis point decrease in the yield earned on interest-earning assets to 7.05% in 1998 from 7.36% in 1997 coupled with an 8 basis point increase in the cost of average interest-bearing liabilities to 4.57% in 1998 from 4.49% in 1997. Despite the decreases in interest rate spread and margin, the Company was able to improve net interest income by increasing net interest-earning assets by $3.8 million and by leveraging the balance sheet through increased borrowings. Provision for Loan Losses. During 1998, the Bank recorded a recapture of $131,000 from the allowance for loan losses as a credit to provision for loan losses. During 1997, the Bank provided $487,000 for loan losses. The recaptured allowance of $131,000 in 1998 represented 6.9% of the allowance for loan losses at the end of 1997 and reflected the $405,000 or 16.3% decrease in loans delinquent ninety days or more and the reduced uncertainty involving circumstances discussed in the third succeeding paragraph. At December 31, 1998 and 1997, the Bank's loan portfolio included loans totalling $2.1 million and $2.5 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on management's evaluation of the risks inherent in -16- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS its loan portfolio which give due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $1.72 million at December 31, 1998, representing 1.20% of total loans and 82.4% of loans delinquent ninety days or more compared to an allowance of $1.89 million at December 31, 1997, representing 1.62% of total loans and 75.7% of loans delinquent ninety days or more. During 1998 and 1997, the Bank charged off loans aggregating $37,000 and $166,000, respectively. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. The Bank has established a standardized process to assess the adequacy of the allowance for loan losses and to identify the risks inherent in the loan portfolio. The process incorporates credit reviews and gives consideration to areas of exposure such as concentrations of credit, local economic conditions, trends in delinquencies, collateral coverage, the composition of the performing and non-performing loan portfolios, and other risks inherent in the loan portfolio. Specific allocations of the allowance for loan losses are identified by individual loan based upon a detailed credit review of each such loan. General loan loss allowances are allocated to pools of loans categorized by type and assigned allowance percentages which take into effect past charge off history, industry averages and current trends and risks. Finally, an unallocated portion of the allowance is maintained to account for the general inherent risk in the loan portfolio, known circumstances which are not addressed in the allocated portion of the allowance (such as the increased dependence on outside mortgage brokers for originations), and the necessary imprecision in the determination of the allocated portion of the allowance. The allowance for loan losses includes specific, general and unallocated allowances of $492,000, $817,000 and $408,000, respectively, at December 31, 1998, as compared to $605,000, $761,000 and $518,000, respectively, at December 31, 1997. The decrease in the specific allowance primarily reflects the continued resolution of loans related to a large condominium project which had been in default since 1993 and was subject to bankruptcy proceedings and a lawsuit. The uncertainty in regard to these credits is also accounted for in the unallocated allowance in amounts which decrease as the ability to clearly quantify the specific losses increases. Another factor included in the unallocated allowance at December 31, 1998 and 1997 is the large volume of loan originations generated by the bank by outside mortgage brokers during 1998 and 1997 as compared to no such loans in prior years. The Company believes the use of outside brokers increases the inherent risks in the loan portfolio. The general allowance increased primarily due to the $26.9 million increase in the loan portfolio. Non-Interest Income. Non-interest income increased by $156,000, or 41.8%, to $529,000 during 1998 as compared to $373,000 for 1997. The increase in non-interest income during 1998 resulted primarily from a $20,000 loss on sale of securities available for sale during 1997 compared to none in 1998, and increases in fees and service charges of $93,000 and miscellaneous income of $43,000. The increase during the 1998 period in fees and service charges resulted primarily from the increased number of deposit accounts serviced since the October 1997 Summit Bank deposit purchase. Non-Interest Expenses. Non-interest expense increased $434,000, or 6.1% to $7.6 million during 1998 compared to $7.2 million for 1997. During 1997, in conjunction with the purchase of three branches and related deposit liabilities from Summit Bank, the Bank recorded $7.6 million in excess of cost over assets acquired. The amortization of the excess of cost over assets acquired in connection with the October 1997 purchase of deposits from Summit Bank totalled $593,000 in 1998, or $1.15 million -17- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS less than the comparable 1997 figure of $1.74 million, which included a $1.59 million loss upon the reassessment of the carrying value of this asset at the end of 1997. Charitable contribution expense totalled $863,000 in 1998, an increase of $849,000 over the 1997 amount of $14,000. $842,000 of the 1998 charitable contribution expense related to the initial funding of the West Essex Bancorp Charitable foundation, a charitable foundation established in connection with the Company's initial public stock offering, with a $100,000 cash contribution and a contribution by the Company of 74,214 shares of Company common stock. Loss on real estate owned decreased by $240,000 to $140,000 in 1998 as compared to $380,000 in 1997, due to a reduction in loss provisions recorded to $131,000 in 1998 from $373,000 in 1997. Excluding the aforementioned factors, non-interest expenses were $6.0 million in 1998, or $974,000 higher than the $5.0 million comparable amount in 1997. This increase of 19.3% is attributable to the growth of the Company, which is reflected by a 24.5% growth in average total assets and an increase in business locations from five to eight effective October 1997. In accordance with the foregoing, salaries and employee benefits increased $255,000 or 9.0%, occupancy and equipment expenses increased $253,000 or 34.1% and miscellaneous expense increased $445,000 or 33.4%. Included in miscellaneous expenses, among other things, are legal fees, accounting and auditing fees, director fees, FHLB demand deposit charges, insurance costs, telephone expense and stationery and supplies expenses and expenses associated with Year 2000 compliance issues. Income Taxes. Income tax expense totalled $752,000 and $436,000 during 1998 and 1997, respectively. The increase in 1998 resulted primarily from an increase in pre-tax income of $976,000 and from the purchase, in 1998, of trust preferred securities which are afforded favorable income tax treatment under the internal revenue code. The Company's effective income tax rate was 35.0% in 1998 and 37.2% in 1997. Liquidity and Capital Resources The Bank's primary sources of funds on a long-term and short-term basis are deposits, principal and interest payments on loans, mortgage-backed and investment securities and FHLB borrowings. The Bank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows, mortgage prepayments and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition. The Bank has continued to maintain the required levels of liquid assets as defined by OTS regulations. This requirement of the OTS, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Bank's currently required liquidity ratio is 4.0%. At December 31, 1999, the Bank's regulatory liquidity ratio was 25.40%. At December 31, 1999, the Bank exceeded all of its regulatory capital requirements with a tangible capital level of $36.6 million, or 10.7%, of total adjusted assets, which is above the required level of $5.1 million, or 1.5%; core capital of $36.6 million, or 10.7%, of total adjusted assets, which is above the required level of $13.7 million, or 4%; and risk-based capital of $38.0 million, or 28.6%, of risk-weighted assets, which is above the required level of $10.6 million, or 8%. The most liquid assets are cash and cash equivalents and investment securities available for sale. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At December 31, 1999, cash and cash equivalents and investment securities available for sale totalled $15.7 million, or 4.5% of total assets. -18- WEST ESSEX BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company and the Bank have other sources of liquidity if a need for additional funds arises, including FHLB borrowings. At December 31, 1999, the Bank had $64.3 million in borrowings outstanding from the FHLB. Depending on market conditions and the pricing of deposit products and FHLB borrowings, the Bank may continue to rely on FHLB borrowing to fund asset growth. At December 31, 1999, the Bank had commitments to originate and purchase loans and fund unused outstanding lines of credit and undisbursed proceeds of construction mortgages totaling $12.1 million. The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificate accounts, including Individual Retirement Account ("IRA") accounts, which are scheduled to mature in less than one year from December 31, 1999, totalled $111.8 million. The Bank expects that substantially all of the maturing certificate accounts will be retained by the Bank at maturity. Impact of Inflation and Changing Prices The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results generally in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Accounting for Derivative Instruments and Hedging Activities. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In addition, certain provisions of this statement will permit, at the date of initial adoption of SFAS No. 133, the transfer of any held-to-maturity security into either the available-for-sale or trading category and the transfer of any available-for-sale security into the trading category. Transfers from the held-to-maturity portfolio at the date of initial adoption will not call into question the entity's intent to hold other debt securities to maturity in the future. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 and is not expected to have a material impact on the Company and the Bank, which do not intend to adopt SFAS No. 133 earlier than required. -19- January 27, 2000 MANAGEMENT RESPONSIBILITY STATEMENT Management of West Essex Bancorp, Inc. and Subsidiaries is responsible for the preparation of the consolidated financial statements and all other consolidated financial information included in this report. The consolidated financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis. All consolidated financial information included in this report agrees with the consolidated financial statements. In preparing the consolidated financial statements, management makes informed estimates and judgments, with consideration given to materiality, about the expected results of various events and transactions. Management maintains a system of internal accounting control that includes personnel selection, appropriate division of responsibilities and formal procedures and policies consistent with high standards of accounting and administrative practice. Consideration has been given to the necessary balance between costs of systems of internal control and the benefits derived. Management reviews and modifies its systems of accounting and internal control in light of changes in conditions and operations as well as in response to recommendations from the independent certified public accountants. Management believes the accounting and internal control systems provide reasonable assurance that assets are safeguarded and financial information is reliable. The Board of Directors (the "Board") is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and in the control of operations. The Board appoints the independent certified public accountants. The Board meets with management, the independent certified public accountants and the internal auditor, approved the overall scope of audit work and related fee arrangements and reviews audit reports and findings. /s/ Dennis A. Petrello /s/ Leopold W. Montanaro - - -------------------------- ------------------------- Dennis A. Petrello Leopold W. Montanaro Executive Vice President President & CEO /s/ Charles E. Filippo ------------------------- Charles E. Filippo Executive Vice President -20- INDEPENDENT AUDITORS' REPORT ---------------------------- To The Board of Directors and Stockholders West Essex Bancorp, Inc. We have audited the accompanying consolidated statements of financial condition of West Essex Bancorp, Inc. (the "Bancorp") and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to in the second preceding paragraph present fairly, in all material respects, the consolidated financial position of West Essex Bancorp, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/Radics & Co., LLC -------------------- Radics & Co., LLC Pine Brook, New Jersey January 27, 2000 -21-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, ----------------------------------- Assets Note(s) 1999 1998 - - ------ ------- -------------- -------------- Cash and amounts due from depository institutions $ 5,728,992 $ 1,547,464 Interest-bearing deposits in other banks 7,016,853 14,823,967 ------------- ------------- Total cash and cash equivalents 1 and 18 12,745,845 16,371,431 Securities available for sale 1, 3, 12 and 18 2,923,750 8,282,450 Investment securities held to maturity 1, 4, 12 and 18 41,582,003 36,873,165 Mortgage-backed securities held to maturity 1, 5, 12 and 18 121,223,315 110,376,072 Loans receivable 1, 6 and 18 153,276,187 140,272,203 Real estate owned 1 and 7 899,738 582,138 Premises and equipment 1 and 8 2,737,456 2,947,374 Federal Home Loan Bank of New York stock 12 3,272,700 2,607,300 Accrued interest receivable 1, 9 and 18 2,005,563 2,004,809 Excess of cost over assets acquired 1 and 10 4,643,348 5,236,116 Other assets 15 2,996,932 3,055,825 -------------- -------------- Total assets $ 348,306,837 $ 328,608,883 ============== ============== Liabilities and Stockholders' Equity - - ------------------------------------ Liabilities - - ----------- Deposits 11 and 18 $ 234,977,812 $ 238,312,941 Borrowed money 12 and 18 64,340,115 42,009,880 Advance payments by borrowers for taxes and insurance 1,044,140 921,958 Other liabilities 14 and 15 834,824 610,050 ------------- ------------- Total liabilities 301,196,891 281,854,829 ------------- ------------- Commitments and contingencies 17 and 18 - -
Stockholders' Equity 1, 2, 13, 14 and 15 - - -------------------- Preferred stock (par value $.01), 1,000,000 shares authorized; no shares issued or outstanding - - Common stock (par value $.01), 9,000,000 shares authorized; shares issued 4,197,233; shares outstanding 4,054,357 (1999) and 4,197,233 (1998) 41,972 41,972 Additional paid-in capital 17,332,133 17,339,291 Retained earnings - substantially restricted 33,054,528 30,507,475 Common stock acquired by Employee Stock Ownership Plan ("ESOP") (1,178,874) (1,326,233) Unearned Incentive Plan stock (655,549) - Treasury stock, at cost; 142,876 shares (1999) (1,436,550) - Accumulated other comprehensive (loss) income - Unrealized (loss) gain on securities available for sale, net of income taxes (47,714) 191,549 ------------- ------------- Total stockholders' equity 47,109,946 46,754,054 ------------- ------------- Total liabilities and stockholders' equity $ 348,306,837 $ 328,608,883 ============= =============
See notes to consolidated financial statements. -22-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ---------------------------------------------- Note(s) 1999 1998 1997 ------ ------------ ------------ ----------- Interest income: Loans 1 and 6 $ 11,240,049 $ 10,082,633 $ 7,908,541 Mortgage-backed securities 1 7,722,483 7,852,565 7,908,940 Investment securities 1 2,834,753 2,216,231 1,661,624 Securities available for sale 1 341,975 478,981 235,529 Other interest-earning assets 611,308 684,273 400,842 ------------ ------------ ----------- Total interest income 22,750,568 21,314,683 18,115,476 ------------ ------------ ----------- Interest expense: Deposits 11 8,583,870 9,747,271 8,089,473 Borrowed money 3,275,525 2,471,538 1,566,165 ------------ ------------ ----------- Total interest expense 11,859,395 12,218,809 9,655,638 ------------ ------------ ----------- Net interest income 10,891,173 9,095,874 8,459,838 Provision for (recapture of) loan losses 6 - (130,630) 487,015 ------------ ------------ ----------- Net interest income after provision for (recapture of) loan losses 10,891,173 9,226,504 7,972,823 ------------ ------------ ----------- Non-interest income: Fees and service charges 387,300 366,319 273,443 Gain (loss) on dispositions of securities 1, 3 and 4 126,597 - (20,245) Other 170,957 163,331 120,039 ------------ ------------ ----------- Total non-interest income 684,854 529,650 373,237 ------------ ------------ -----------
Non-interest expenses: Salaries and employee benefits 1 and 14 3,282,547 3,103,230 2,847,886 Net occupancy expense of premises 1 and 17 354,017 334,699 245,879 Equipment 1 665,517 659,998 495,742 Loss on real estate owned 1 and 7 41,891 140,277 379,870 Charitable contributions 2 17,178 863,434 14,401 Amortization of intangibles 10 592,768 592,768 1,743,062 Other 1,915,377 1,912,411 1,446,101 ------------ ------------ ----------- Total non-interest expenses 6,869,295 7,606,817 7,172,941 ------------ ------------ ----------- Income before income taxes 4,706,732 2,149,337 1,173,119 Income taxes 1 and 15 1,663,383 752,037 436,279 ------------ ------------ ----------- Net income $ 3,043,349 $ 1,397,300 $ 736,840 ============ ============ =========== Net income per common share: 1 and 16 Basic $ 0.76 $ 0.34(1) N/A(1) ============ ============ =========== Diluted $ 0.76 $ 0.34(1) N/A(1) ============ ============ =========== Weighted average number of common shares outstanding: 1 and 16 Basic 4,004,069 4,062,395(1) N/A(1) ============ ============ ========= Diluted 4,007,751 4,062,395(1) N/A(1) ============ ============ =========
(1) West Essex Bank converted to stock form on October 2, 1998. See notes to consolidated financial statements. -23-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, ------------------------------------------ 1999 1998 1997 ----------- ----------- ----------- Net income .................................................. $ 3,043,349 $ 1,397,300 $ 736,840 ----------- ----------- ----------- Other comprehensive (loss) income, net of income taxes: Unrealized holding (losses) gains on securities available for sale, net of income taxes of $122,051, $(71,384) and $(36,269), respectively (217,166) 127,015 65,387 Reclassification adjustment for realized (gains) losses on securities available for sale, net of income taxes of $12,418, $ - 0 - and $ - 0 - , respectively ... (22,097) -- 20,245 ----------- ----------- ----------- Other comprehensive (loss) income ........................... (239,263) 127,015 85,632 ----------- ----------- ----------- Comprehensive income ........................................ $ 2,804,086 $ 1,524,315 $ 822,472 =========== =========== ===========
See notes to consolidated financial statements. -24-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Retained Additional Earnings - Common Stock Common Paid-In Substantially Acquired by Stock Capital Restricted ESOP ----- ------- ---------- ---- Balance - December 31, 1996 ......................... $ -- $ -- $ 28,473,335 $ -- Net income for the year ended December 31, 1997 ..... -- -- 736,840 -- Unrealized gain on securities available for sale, net of income taxes ..................... -- -- -- -- ------------ ------------ ------------ ------------ Balance - December 31, 1997 ......................... -- -- 29,210,175 -- Net income for the year ended December 31, 1998 ..... -- -- 1,397,300 -- Net proceeds from initial public stock offering ..... 41,972 17,340,088 -- -- Common stock acquired by ESOP ....................... -- -- -- (1,473,584) ESOP shares committed to be released ................ -- (797) -- 147,351 Initial capitalization of mutual holding company .... -- -- (100,000) -- Unrealized gain on securities available for sale, net of income taxes ................................... -- -- -- -- ------------ ------------ ------------ ------------ Balance - December 31, 1998 ......................... 41,972 17,339,291 30,507,475 (1,326,233) Net income for the year ended December 31, 1999 ..... -- -- 3,043,349 -- Purchase of 144,500 shares of treasury stock ........ -- -- -- -- Acquisition of 73,884 shares of common stock by Incentive Plan .................................... -- -- -- -- Incentive Plan stock earned ......................... -- -- -- -- ESOP shares committed to be released ................ -- (5,940) -- 147,359 Reissuance of 1,624 shares of treasury stock ........ -- (1,218) -- -- Cash dividends declared on common stock ............. -- -- (496,296) -- Unrealized loss on securities available for sale, net of income taxes ............................... -- -- -- -- ------------ ------------ ------------ ------------ Balance - December 31, 1999 ......................... $ 41,972 $ 17,332,133 $ 33,054,528 $ (1,178,874) ============ ============ ============ ============
Accumulated Other Unearned Comprehensive Total Incentive Treasury (Loss) Stockholders' Plan Stock Stock Income Equity ---------- ----- ------ ------ Balance - December 31, 1996 ......................... $ -- $ -- $ (21,098) $ 28,452,237 Net income for the year ended December 31, 1997 ..... -- -- -- 736,840 Unrealized gain on securities available for sale, net of income taxes ..................... -- -- 85,632 85,632 ------------ ------------ ------------ ------------ Balance - December 31, 1997 ......................... -- -- 64,534 29,274,709 Net income for the year ended December 31, 1998 ..... -- -- -- 1,397,300 Net proceeds from initial public stock offering ..... -- -- -- 17,382,060 Common stock acquired by ESOP ....................... -- -- -- (1,473,584) ESOP shares committed to be released ................ -- -- -- 146,554 Initial capitalization of mutual holding company .... -- -- -- (100,000) Unrealized gain on securities available for sale, net of income taxes ................................... -- -- 127,015 127,015 ------------ ------------ ------------ ------------ Balance - December 31, 1998 ......................... -- -- 191,549 46,754,054 Net income for the year ended December 31, 1999 ..... -- -- -- 3,043,349 Purchase of 144,500 shares of treasury stock ........ -- (1,453,094) -- (1,453,094) Acquisition of 73,884 shares of common stock by Incentive Plan .................................... (738,840) -- -- (738,840) Incentive Plan stock earned ......................... 83,291 -- -- 83,291 ESOP shares committed to be released ................ -- -- -- 141,419 Reissuance of 1,624 shares of treasury stock ........ -- 16,544 -- 15,326 Cash dividends declared on common stock ............. -- -- -- (496,296) Unrealized loss on securities available for sale, net of income taxes ............................... -- -- (239,263) (239,263) ------------ ------------ ------------ ------------ Balance - December 31, 1999 ......................... $ (655,549) $ (1,436,550) $ (47,714) $ 47,109,946 === ==== ============ ============ ============ ============
See notes to consolidated financial statements. -25-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income ................................................................. $ 3,043,349 $ 1,397,300 $ 736,840 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of premises and equipment ............... 235,426 278,355 230,524 Net accretion of premiums, discounts and deferred loan fees ........... (180,677) (245,904) (127,373) Amortization of intangibles ........................................... 592,768 592,768 1,743,062 Provision for (recapture of) loan losses .............................. -- (130,630) 487,015 Provision for losses on real estate owned ............................. -- 130,630 372,985 (Gain) loss on sale of securities available for sale .................. (34,515) -- 20,245 (Gain) on sale of investment security held to maturity ................ (92,082) -- -- (Gain) on sale of real estate owned ................................... -- (5,386) (30,080) (Gain) on trade-in of automobile ...................................... -- (16,401) -- Deferred income tax (benefit) ......................................... 219,825 (11,944) (725,335) (Increase) decrease in accrued interest receivable ................... (754) 7,388 (360,770) (Increase) in other assets ............................................ (26,463) (67,304) (11,726) Increase (decrease) in interest payable .............................. 115,353 (29,160) 90,624 Increase (decrease) in other liabilities .............................. 12,172 124,497 (2,815,465) Amortization of Incentive Plan cost ................................... 83,291 -- -- Contribution of common stock .......................................... -- 742,140 -- ESOP shares committed to be released .................................. 141,419 146,554 -- ------------ ------------ ------------ Net cash provided by (used in) operating activities ............... 4,109,112 2,912,903 (389,454) ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of securities available for sale ....................... 5,021,875 -- 1,588,229 Proceeds from repayments on and calls of securities available for sale ..... -- -- 115,272 Purchases of securities available for sale ................................. -- (1,000,000) (7,033,784) Proceeds from sale of security held to maturity ............................ 1,000,000 -- -- Proceeds from maturities and calls of investment securities held to maturity 15,700,000 9,889,845 10,000,000 Purchases of investment securities held to maturity ........................ (21,044,969) (23,640,389) (10,399,678) Principal repayments on mortgage-backed securities held to maturity ........ 35,580,321 41,586,542 20,084,461 Purchases of mortgage-backed securities held to maturity ................... (46,531,053) (21,891,969) (37,026,167) Purchases of loans receivable .............................................. (970,155) (280,707) -- Net (increase) decrease in loans receivable ................................ (12,333,080) (26,973,831) (31,617,835) Proceeds from sales of real estate owned ................................... -- 503,458 483,300 Proceeds from other payments received on real estate owned ................. -- 4,000 39,602 Capitalized cost of real estate owned ...................................... (8,362) -- (6,665) Additions to premises and equipment ........................................ (25,508) (86,744) (352,753) Purchase of Federal Home Loan Bank of New York stock ....................... (665,400) (423,500) (513,400) ------------ ------------ ------------ Net cash (used in) investing activities ........................... (24,276,331) (22,313,295) (54,639,418) ------------ ------------ ------------
Cash flows from financing activities: Net proceeds from initial public stock offering ............................ -- 16,639,920 -- Initial capitalization of mutual holding company ........................... -- (100,000) -- Common stock acquired by ESOP .............................................. -- (1,473,584) -- Net (decrease) increase in deposits ........................................ (3,344,709) 149,960 7,148,632 Net (decrease) increase in short-term borrowed money ....................... 6,000,000 (18,000,000) 12,000,000 Proceeds of long-term borrowed money ....................................... 24,000,000 38,000,000 3,000,000 Repayment of long-term borrowed money ...................................... (7,669,765) (8,290,120) (8,350,000) Net increase in advance payments by borrowers for taxes and insurance ....................................................... 122,182 149,529 150,239 Purchases of treasury stock ................................................ (1,453,094) -- -- Cost of Incentive Plan stock ............................................... (738,840) -- -- Cash dividends paid on common stock ........................................ (374,141) -- -- Cash received in connection with branch purchases .......................... -- -- 42,021,857 ------------ ------------ ------------ Net cash provided by financing activities ......................... 16,541,633 27,075,705 55,970,728 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ........................... (3,625,586) 7,675,313 941,856 Cash and cash equivalents - beginning ............................................ 16,371,431 8,696,118 7,754,262 ------------ ------------ ------------ Cash and cash equivalents - ending ............................................... $ 12,745,845 $ 16,371,431 $ 8,696,118 ============ ============ ============
See notes to consolidated financial statements. -26-
WEST ESSEX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ------------------------------------------- 1999 1998 1997 ------------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes ............................................ $ 1,358,707 $ 860,000 $ 1,035,078 ============= =========== =========== Interest ................................................ $ 11,744,042 $12,241,337 $ 9,501,814 ============= =========== =========== Supplemental schedule of noncash investing activities: Unrealized (loss) gain on securities available or sale, net of income taxes ............ $ (239,263) $ 127,015 $ 85,632 ============= =========== =========== Loans receivable transferred to real estate owned ....... $ 309,238 $ -- $ 679,914 ============= =========== =========== Assets acquired in connection with branch purchases: Loans receivable ................................... $ -- $ -- $ 54,693 Premises and equipment ............................. -- -- 1,360,000 Excess of cost over assets acquired ................ -- -- 7,571,946 Other assets ....................................... -- -- 457 ------------- ----------- ----------- $ -- $ -- $ 8,987,096 ============= =========== =========== Liabilities acquired in connection with branch purchases: Deposits ........................................... $ -- $ -- $51,007,382 Other liabilities .................................. -- -- 1,571 ------------- ----------- ----------- $ -- $ -- $51,008,953 ============= =========== =========== Issuance of treasury stock to fund Supplemental Employee Retirement Plan ....................................... $ 15,326 $ -- $ -- ============= =========== =========== Cash dividend declared, not paid ........................ $ 122,155 $ -- $ -- ============= =========== ===========
See notes to consolidated financial statements. -27- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - ----------------------------------------------- Basis of consolidated financial statement presentation ------------------------------------------------------ The consolidated financial statements include the accounts of West Essex Bancorp, Inc. ("Bancorp"), the Bancorp's wholly owned subsidiary, West Essex Bank ("Bank") and the Bank's wholly owned subsidiary, West Essex Insurance Agency, Inc. ("Subsidiary"), and have been prepared in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the valuation of real estate owned and the recoverability of excess of cost over assets acquired. Management believes that the allowance for loan losses is adequate and that real estate owned and excess of cost over assets acquired are appropriately valued. While management uses available information to recognize losses on loans and real estate owned and to assess the recoverability of excess of cost over assets acquired, future additions to the allowance for loan losses or further writedowns of real estate owned and excess of cost over assets acquired may be necessary based on changes in economic and market conditions in the Bank's market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and real estate owned valuations. Such agencies may require the Bank to recognize additions to the allowance or additional writedowns based on their judgments about information available to them at the time of their examination. Cash and cash equivalents ------------------------- Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of three months or less. Investments and mortgage-backed securities ------------------------------------------ Debt securities over which there exists positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities nor as held-to-maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in a separate component of stockholders' equity. Premiums and discounts on all securities are amortized/accreted using the interest method. Interest and dividend income on securities, which includes amortization of premiums and accretion of discounts, is recognized in the consolidated financial statements when earned. The adjusted cost basis of an identified security sold or called is used for determining security gains and losses recognized in the consolidated statements of income. -28- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - - ----------------------------------------------- Loans receivable ---------------- Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan (costs) fees. Interest is calculated by the use of the actuarial method. The Bank defers loan origination fees and certain direct loan origination costs and amortizes such amounts, using a method which approximates the level-yield method, as an adjustment of yield over the contractual lives of the related loans. Uncollectible interest on loans that are contractually delinquent ninety days or more is charged off and the related loans placed on nonaccrual status, or, alternatively, an allowance for uncollectible interest is established by a charge to interest income equal to all interest previously accrued. Under either method, income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is probable, in which case the loan is returned to an accrual status. Allowance for loan losses ------------------------- An allowance for loan losses is maintained at a level considered adequate to absorb loan losses. Management of the Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Bank utilizes a two tier approach: (1) identification of impaired loans and the establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and estimated fair value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the level of the allowance for loan losses may be necessary. -29- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) - - ------------------------------------------------ Allowance for loan losses (Cont'd) ------------------------- A loan evaluated for impairment is deemed to be impaired when based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. All loans identified as impaired are evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied first to interest receivable and then to principal. Real estate owned ----------------- Real estate owned consists of real estate acquired by foreclosure or deed in lieu of foreclosure. Real estate owned is recorded at the lower of cost or fair value at date of acquisition and thereafter carried at the lower of such initially recorded amount or fair value less estimated selling costs. Costs incurred in developing or preparing properties for sale are capitalized. Income and expense related to the holding and operating of properties are recorded in operations. Gains and losses from sales of such properties are recognized as incurred. Concentration of risk --------------------- The Bank's real estate and lending activity is concentrated in real estate and loans secured by real estate located in the State of New Jersey Premises and equipment ---------------------- Premises and equipment are comprised of land, at cost, and buildings and improvements, leasehold improvements and furnishings and equipment, at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed on the straight-line method over the following estimated useful lives. Buildings and improvements 10 to 50 years Leasehold improvements Shorter of useful life or term of lease Furnishing and equipment 3 to 10 years Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred. Rental income is netted against occupancy costs in the consolidated statements of income. -30- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) - - ------------------------------------------------ Excess of cost over assets acquired ----------------------------------- The cost in excess of the fair value of net assets acquired was recorded on October 17, 1997 in conjunction with the acquisition of certain assets and assumption of certain liabilities of three branch offices of another financial institution. This asset primarily consists of core deposit intangibles, which represent the intangible value of depositor relationships assumed in the transaction, and is being amortized to expense over a ten-year period by use of the straight-line method. On a periodic basis, management reviews the excess of cost over assets acquired and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such asset. In such instances, impairment, if any, is measured on a discounted estimated cash flow basis. Interest-rate risk ------------------ The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to purchase securities and to make loans secured by real estate. The potential for interest-rate risk exists as a result of the generally shorter duration of the Bank's interest-sensitive liabilities compared to the generally longer duration of its interest-sensitive assets. In a rising interest rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Bank's interest-earning assets and interest-bearing liabilities in order to measure its level of interest-rate risk and to plan for future volatility. Accounting for stock-based compensation --------------------------------------- Statement of Financial Accounting Standards ("Statement") No. 123 "Accounting for Stock-Based Compensation", issued by the Financial Accounting Standards Board ("FASB"), establishes financial accounting and reporting standards for stock-based employee compensation plans. While all entities are encouraged to adopt the "fair value based method" of accounting for employee stock compensation plans, Statement No. 123 also allows an entity to continue to measure compensation cost under such plans using the "intrinsic value based method" specified in Accounting Principles Board Opinion No. 25. The Bancorp has elected to apply the intrinsic value based method. Included in Note 14 to consolidated financial statements are the pro forma disclosures required by Statement No. 123. Income taxes ------------ The Bancorp and Subsidiaries file a consolidated federal income tax return. Income taxes are allocated based on the contribution of income to the consolidated income tax return. Separate state income tax returns are filed. -31- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) - - ------------------------------------------------ Income taxes (Cont'd.) ------------ Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the income tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and tax reporting purposes. The income tax effect of these temporary differences is accounted for as deferred income taxes applicable to future periods. Net income per common share --------------------------- Basic net income per common share is computed by dividing net income for the year by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the ESOP. Diluted net income per common share is computed by adjusting the weighted average number of shares of common stock outstanding to include the effect of outstanding stock options and compensation grants, if dilutive, using the treasury stock method. For 1998, per share amounts were calculated based upon income for the entire year 1998, although the Bank converted to stock form on October 2, 1998, and the weighted average number of shares outstanding since October 2, 1998 as if such shares were outstanding during all of 1998. Reclassification ---------------- Certain amounts as of and for the year ended December 31, 1998 and 1997 have been reclassified to conform with the current year's presentation. 2. REORGANIZATION AND STOCKHOLDERS' EQUITY - - -------------------------------------------- The Bancorp is a business corporation formed at the direction of the Bank under the laws of the United States on October 2, 1998. On October 2, 1998: (i) the Bank reorganized from a federally chartered mutual savings bank to a federally chartered stock savings bank in the mutual holding company form of organization; (ii) the Bank issued all of its outstanding capital stock to the Bancorp; and (iii) the Bancorp consummated its initial public offering of common stock, par value $.01 per share (the "Common Stock"), by selling at a price of $10.00 per share, 1,772,898 of common stock to certain eligible account holders of the Bank who had subscribed for such shares, by issuing 2,350,121 shares of Common Stock to West Essex Bancorp, M.H.C. ("MHC"), a mutual holding company formed at the direction of the Bank (collectively, the "Reorganization and Offering") and by contributing 74,214 shares of Common Stock to West Essex Bancorp Charitable Foundation (the "Foundation"). The MHC was initially funded with $100,000 received from the Bank. The Reorganization and Offering resulted in net proceeds of $16.6 million, after expenses of $1.1 million. The Bancorp also established the Foundation, which is dedicated to the communities served by the Bank. In connection with the Reorganization and Offering, the Common Stock contributed by the Bancorp to the Foundation at a value of $742,140, along with $100,000 in cash, was charged to charitable contribution expense. During the year ended December 31, 1999, the MHC waived its right to receive cash dividends on the shares of Company common stock it owns. If MHC had not waived its rights to receive dividends, the amount of such dividends would have been $705,000. -32- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. REORGANIZATION AND STOCKHOLDERS' EQUITY (Cont'd.) - - ------------------------------------------------------- In addition to the 9,000,000 authorized shares of Common Stock, the Bancorp authorized 1,000,000 shares of preferred stock with a par value of $0.01 per share (the "Preferred Stock"). The Board of Directors is authorized, subject to any limitations by law, to provide for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restriction thereof. As of December 31, 1999 and 1998, there were no shares of Preferred Stock issued. 3. SECURITIES AVAILABLE FOR SALE - - ----------------------------------
December 31, 1999 ----------------------------------------------------- Gross Unrealized Amortized ------------------------ Carrying Cost Gains Losses Value ---------- ---------- ---------- ---------- U.S. Government (including agencies) obligations: Due after one year through five years ...... $1,998,280 $ 16,720 $ -- $2,015,000 Due after ten years ........................ 1,000,000 -- 91,250 908,750 ---------- ---------- ---------- ---------- $2,998,280 $ 16,720 $ 91,250 $2,923,750 ========== ========== ========== ========== December 31, 1998 ----------------------------------------------------- Gross Unrealized Amortized ------------------------ Carrying Cost Gains Losses Value ---------- ---------- ---------- ---------- U.S. Government (including agencies) obligations: Due after one year through five years ...... $6,983,248 $ 300,452 $ -- $7,283,700 Due after ten years ........................ 1,000,000 -- 1,250 998,750 ---------- ---------- ---------- ---------- $7,983,248 $ 300,452 $ 1,250 $8,282,450 ========== ========== ========== ==========
The following table presents details of sales of securities available for sale:
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ---------- --------- ---------- Sales proceeds ........... $5,021,875 $ -- $1,588,229 Gross gains .............. 34,515 -- -- Gross losses ............. -- -- 20,245
-33- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENT SECURITIES HELD TO MATURITY - - -------------------------------------------
December 31, 1999 -------------------------------------------------------- Gross Unrealized Carrying -------------------------- Estimated Value Gains Losses Fair Value ----------- ----------- ----------- ----------- U.S. Government (including agencies): Due after five years through ten years . $ 8,000,000 $ -- $ 229,690 $ 7,770,310 After ten years ........................ 22,856,030 106,438 1,829,053 21,133,415 ----------- ----------- ----------- ----------- 30,856,030 106,438 2,058,743 28,903,725 ----------- ----------- ----------- ----------- Obligations of states and municipalities: Due in one year or less ................ 150,000 -- -- 150,000 After ten years ........................ 583,074 -- 53,665 529,409 ----------- ----------- ----------- ----------- 733,074 -- 53,665 679,409 ----------- ----------- ----------- ----------- Trust preferred securities due after ten years 9,992,899 -- 707,296 9,285,603 ----------- ----------- ----------- ----------- $41,582,003 $ 106,438 $ 2,819,704 $38,868,737 =========== =========== =========== ===========
December 31, 1998 -------------------------------------------------------- Gross Unrealized Carrying -------------------------- Estimated Value Gains Losses Fair Value ----------- ----------- ----------- ----------- U.S. Government (including agencies): Due in one year or less ................ $ 999,854 $ 8,896 $ -- $ 1,008,750 After one year through five years ...... 2,000,000 1,250 -- 2,001,250 After five years through ten years ..... 14,000,000 67,341 -- 14,067,341 After ten years ........................ 8,582,551 287,313 63,067 8,806,797 ----------- ----------- ----------- ----------- 25,582,405 364,800 63,067 25,884,138 ----------- ----------- ----------- ----------- Obligations of states and municipalities: Due in one year or less ................ 150,000 -- -- 150,000 After ten years ........................ 237,859 -- 11 237,848 ----------- ----------- ----------- ----------- 387,859 -- 11 387,848 ----------- ----------- ----------- ----------- Trust preferred securities due after ten years 10,902,901 -- 284,151 10,618,750 ----------- ----------- ----------- ----------- $ 36,873,165 $ 364,800 $ 347,229 $36,890,736 ============ =========== =========== ===========
During the year ended December 31, 1999, proceeds of $1,000,000 were received and a gain of $92,082 recorded as the result of the sale of one security. The issuer of the security was involved in a merger/acquisition and issued a tender offer to buy back the security at par value. There were no sales of investment securities held to maturity during the years ended December 31, 1998 and 1997. -34- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY - - ------------------------------------------------
December 31, 1999 ------------------------------------------------------------ Gross Unrealized Carrying ---------------------------- Estimated Value Gains Losses Fair Value ------------ ------------ ------------ ------------ Government National Mortgage Association .... $ 51,615,620 $ 358,293 $ 212,091 $ 51,761,822 Federal Home Loan Mortgage Corporation ...... 18,781,288 67,310 272,548 18,576,050 Federal National Mortgage Association ....... 16,894,108 51,290 157,943 16,787,455 Collateralized mortgage obligations ......... 33,927,305 -- 2,250,606 31,676,699 Other ....................................... 4,994 -- -- 4,994 ------------ ------------ ------------ ------------- $121,223,315 $ 476,893 $ 2,893,188 $118,807,020 ============ ============ ============ ============= December 31, 1998 ------------------------------------------------------------ Gross Unrealized Carrying ---------------------------- Estimated Value Gains Losses Fair Value ------------ ------------ ------------ ------------ Government National Mortgage Association .... $ 58,815,923 $ 684,197 $ -- $ 59,500,120 Federal Home Loan Mortgage Corporation ...... 26,698,689 323,089 3,333 27,018,445 Federal National Mortgage Association ....... 20,100,956 167,237 1,375 20,266,818 Collateralized mortgage obligations ......... 4,754,425 4,325 37,500 4,721,250 Other ....................................... 6,079 -- -- 6,079 ------------ ------------ ------------ ------------ $110,376,072 $ 1,178,848 $ 42,208 $111,512,712 ============ ============ ============ =============
There were no sales of mortgage-backed securities held to maturity during the years ended December 31, 1999, 1998 and 1997. -35- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LOANS RECEIVABLE - - ---------------------
December 31, -------------------------------- 1999 1998 ------------- -------------- Real estate mortgage: Conventional .................... $ 136,950,614 $ 127,710,491 FHA insured and VA guaranteed ... 386,890 511,667 ------------- ------------- 137,337,504 128,222,158 ------------- ------------- Agency for International Development .. 40,136 48,510 ------------- ------------- Construction and land development ..... 3,819,271 4,393,956 ------------- ------------- Consumer: Passbook or certificate ......... 340,492 401,484 Equity .......................... 14,381,738 9,631,219 Automobile ...................... 242,641 273,888 Credit reserve .................. 33,732 31,053 ------------- ------------- 14,998,603 10,337,644 ------------- ------------- Total loans .................. 156,195,514 143,002,268 ------------- ------------- Less: Loans in process ............. 1,885,739 1,311,520 Allowance for loan losses .... 1,400,366 1,716,790 Net deferred loan (costs) fees (366,778) (298,245) ------------- ------------- 2,919,327 2,730,065 ------------- ------------- $ 153,276,187 $ 140,272,203 ============= =============
The Bank has granted loans to officers and directors of the Bank and to their associates. Related party loans do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $1,419,000 and $1,550,000 at December 31, 1999 and 1998, respectively. During the year ended December 31, 1999, no new loans were granted and repayments totalled $131,000. -36- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LOANS RECEIVABLE (Cont'd.) - - --------------------- Nonperforming loans consist of nonaccrual and renegotiated loans. Nonaccrual loans are those on which income under the accrual method has been discontinued with subsequent interest payments credited to interest income when received, or if ultimate collectibility of principal is in doubt, applied as principal reductions. Renegotiated loans are loans whose contractual interest rates have been reduced or where other significant concessions have been made due to a borrower's financial difficulties. Interest on renegotiated loans is accrued to interest income. Nonperforming loans were as follows:
December 31, -------------------------------------- 1999 1998 1997 ------ ------ ------ (In Thousands) Nonaccrual ..................... $ 792 $2,084 $2,413 Renegotiated ................... 92 94 94 ------ ------ ------ $ 884 $2,178 $2,507 ====== ====== ======
The impact of nonperforming loans on interest income is as follows:
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (In Thousands) Interest income if performing in accordance with original terms $ 70 $191 $234 Interest income actually recorded ............................. 47 29 57 ---- ---- ---- Interest income lost .......................................... $ 23 $162 $177 ==== ==== ====
The following is an analysis of the allowance for loan losses:
Year Ended December 31, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Balance - beginning ....................... $ 1,716,790 $ 1,885,021 $ 1,563,991 Provision (credited) charged to operations -- (130,630) 487,015 Loans charged off to allowance ............ (316,424) (37,601) (165,985) ----------- ----------- ----------- $ 1,400,366 $ 1,716,790 $ 1,885,021 =========== =========== ===========
-37- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LOANS RECEIVABLE (Cont'd.) - - --------------------- Impaired loans and related amounts recorded in the allowance for loan losses are summarized as follows:
December 31, --------------------- 1999 1998 ------- ------- (In Thousands) Recorded investment in impaired loans: With recorded allowances ....................... $ 189 $1,159 Without recorded allowances .................... -- 303 ------ ------ Total impaired loans ................... 189 1,462 Related allowance for loan losses .............. 35 442 ------ ------ Net impaired loans ..................... $ 154 $1,020 ====== ======
For the years ended December 31, 1999, 1998 and 1997, the average recorded investment in impaired loans totalled $647,000, $1,537,000 and $1,916,000, respectively. During the years ended December 31, 1999, 1998 and 1997, interest income of $147,000, $ - 0 - and $ - 0 - , respectively, was recognized on such loans, all on the cash basis, during the time each loan was impaired. 7. REAL ESTATE OWNED - - ----------------------
December 31, --------------------- 1999 1998 -------- --------- Acquired in settlement of loans .............. $899,738 $582,138 Allowance for losses ......................... -- -- -------- --------- $899,738 $ 582,138 ======== =========
The following is an analysis of the allowance for losses:
Year Ended December 31, ------------------------------------- 1999 1998 1997 ---------- --------- --------- Balance - beginning ............ $ -- $ 174,000 $ 98,000 Provisions charged to operations -- 130,630 372,985 Losses charged to allowance .... -- (304,630) (296,985) ---------- --------- --------- Balance - ending ............... $ -- $ -- $ 174,000 ========== ========= =========
-38- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. REAL ESTATE OWNED (Cont'd.) - - ---------------------- The following is an analysis of the (loss) on real estate owned:
Year Ended December 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- Gain on sale, net .................. $ -- $ 5,386 $ 30,080 Carrying costs, net of rental income (41,891) (15,033) (36,965) Provision for losses ............... -- (130,630) (372,985) --------- --------- --------- $ (41,891) $(140,277) $(379,870) ========= ========= =========
8. PREMISES AND EQUIPMENT - - ---------------------------
December 31, ---------------------------- 1999 1998 ---------- ---------- Land ....................................... $ 979,315 $ 979,315 ---------- ---------- Buildings and improvements ................. 2,171,300 2,171,300 Less accumulated depreciation .............. 933,255 858,469 ---------- ---------- 1,238,045 1,312,831 ---------- ---------- Leasehold improvements ..................... 112,754 112,754 Less accumulated amortization .............. 112,136 111,077 ---------- ---------- 618 1,677 ---------- ---------- Furnishings and equipment .................. 2,678,794 2,654,522 Less accumulated depreciation .............. 2,159,316 2,000,971 ---------- ---------- 519,478 653,551 ---------- ---------- $2,737,456 $2,947,374 ========== ==========
-39- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. ACCRUED INTEREST RECEIVABLE - - --------------------------------
December 31, ------------------------ 1999 1998 ---------- ---------- Loans .......................................... $ 770,427 $ 736,133 Mortgage-backed securities ..................... 697,578 661,895 Investments and other interest-earning assets .. 549,467 620,352 ---------- ---------- 2,017,472 2,018,380 Less allowance for uncollected interest on loans 11,909 13,571 ---------- ---------- $2,005,563 $2,004,809 ========== ==========
10. EXCESS OF COST OVER ASSETS ACQUIRED - - ----------------------------------------- On October 17, 1997, the Bank acquired three branch locations from another financial institution. The amounts related to the transaction are reflected separately in the consolidated statement of cash flows for the year ended December 31, 1997. The $7,571,946 excess of cost over assets acquired initially recorded was based upon the amount of deposits the Bank had acquired. The deposits purchased declined at a rate significantly in excess of that expected before stabilizing by December 31, 1997. Management performed a reassessment of the carrying value of this asset and, as a result, a loss of $1,585,313 was recorded. Such loss is included in "Amortization of intangibles" in the consolidated statement of income for the year ended December 31, 1997. 11. DEPOSITS - - -------------
December 31, ----------------------------------------------------------------------------- 1999 1998 -------------------------------------- ------------------------------------ Weighted Weighted Average Average Rate Amount Percent Rate Amount Percent ---- ------ ------- ---- ------ ------- Demand accounts: Non-interest-bearing ........ 0.00% $ 16,011,384 6.81 0.00% $ 16,142,250 6.77 Interest-bearing ............ 1.39% 21,091,606 8.98 1.30% 20,695,238 8.69 ------------ ----- ------------ ----- 0.79% 37,102,990 15.79 0.73% 36,837,488 15.46 Savings and club accounts .......... 2.04% 57,735,315 24.57 2.52% 60,306,242 25.30 Certificates of deposit ............ 5.05% 140,139,507 59.64 5.26% 141,169,211 59.24 ------------ ----- ------------ ----- 3.64% $234,977,812 100.00 3.87% $238,312,941 100.00 ============ ====== ============ ======
The amount of certificates of deposit with balances of $100,000 or more at December 31, 1999 and 1998 were approximately $18,156,000 and $17,656,000, respectively. -40- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. DEPOSITS (Cont'd.) - - ------------------------- The scheduled maturities of certificates of deposit are as follows (in thousands):
December 31, -------------------------- 1999 1998 -------- --------- One year or less ........................... $111,800 $118,317 After one to three years ................... 24,400 19,572 After three years .......................... 3,940 3,280 -------- -------- $140,140 $141,169 ======== ========
A summary of interest on deposits is as follows (in thousands):
Year Ended December 31, ----------------------------------- 1999 1998 1997 ------ ------ ------ Demand accounts ...................... $ 284 $ 339 $ 293 Savings and club accounts ............ 1,210 1,672 1,357 Certificates of deposit .............. 7,090 7,736 6,439 ------ ------ ------ $8,584 $9,747 $8,089 ====== ====== ======
-41- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BORROWED MONEY - - --------------------
December 31, -------------------------------------------------------------- 1999 1998 ------------------------- -------------------------- Weighted Weighted Average Average Rate Amount Rate Amount ---- ------ ---- ------ Securities sold under agreements to to repurchase maturing within one year ...... 5.80% $ 6,000,000 --% $ -- Convertible advances (a): due May 14, 2001 ........................ --% -- 5.55% 2,000,000 due November 13, 2006 ................... 5.90% 5,000,000 --% -- due March 24, 2008 ...................... 5.33% 10,000,000 5.33% 10,000,000 due March 25, 2008 ...................... 5.59% 10,000,000 5.59% 10,000,000 due May 12, 2008 ........................ 5.23% 3,000,000 5.23% 3,000,000 due March 24, 2009 ...................... 5.42% 5,000,000 -- % -- Monthly amortizing advances: Payable in 37 monthly principal and interest installments of $96,286 and a final payment of $192,818 on February 24, 2003 ...................... 5.84% 3,412,916 5.84% 4,339,572 Payable in 97 monthly principal and interest installments of $55,591 and a final payment of $111,347 on February 25, 2008 ...................... 6.03% 4,327,199 6.03% 4,720,308 Term advances maturing during: 1999 --% -- 6.50% 4,350,000 2000 6.40% 1,600,000 6.99% 600,000 2001 6.27% 1,000,000 -- % -- 2002 6.42% 1,000,000 -- % -- 2003 6.55% 1,000,000 -- % -- 2004 5.60% 10,000,000 -- % -- 2008 5.55% 3,000,000 5.55% 3,000,000 ----------- ----------- 5.66% $64,340,115 5.69% $42,009,880 =========== ===========
(a) Convertible at lender option to replacement funding at then current rates on February 12, 1999, November 12, 2002, March 24, 2001, March 25, 2003, May 12, 1999 and March 24, 2004, respectively, and quarterly thereafter. During 1999, the lender exercised its option on the advance due May 14, 2001 and the Bank chose to repay the advance. Certain information concerning borrowed money is summarized as follows:
Year Ended December 31, ------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Average balance outstanding ................ $57,756 $42,364 $26,223 Maximum month-end balance outstanding ...... 65,453 52,145 43,675 Average interest rate ...................... 5.67% 5.84% 5.97%
-42- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BORROWED MONEY (Cont'd.) - - --------------------- The foregoing borrowings were secured by pledges of the Bank's investment in the following:
December 31, --------------------- 1999 1998 ------- ------- (In Thousands) FHLB capital stock ................................. $ 3,273 $ 2,677 Mortgage-backed securities held to maturity ........ 51,596 53,785 Investment securities held to maturity ............. 19,847 -- Securities available for sale ...................... 2,015 -- ------- ------- $76,731 $56,462 ======= =======
13. REGULATORY CAPITAL - - ------------------------ The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted total assets (as defined). The following tables present a reconciliation of capital per generally accepted accounting principles ("GAAP") and regulatory capital and information as to the Bank's capital levels at the dates presented:
December 31, ----------------------- 1999 1998 -------- -------- (In Thousands) GAAP capital ....................................... $ 41,187 $ 38,428 Less: excess of cost over assets acquired .......... (4,643) (5,236) Less: unrealized loss (gain) on debt securities .... 48 (192) -------- -------- Core and tangible capital .......................... 36,592 33,000 Add: loan valuation allowance, as limited .......... 1,400 1,500 -------- -------- Total regulatory capital .................... $ 37,992 $ 34,500 ======== ========
-43- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. REGULATORY CAPITAL (Cont'd.) - - ------------------------
As of December 31, 1999 ---------------------------------------------------------------------- To Be Well Capitalized Under prompt Minimum Capital Corrective Actual Requirements Actions Provisions ----------------- ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Total Capital (to risk-weighted assets) $37,992 28.55% $10,645 8.00% $13,306 10.00% Tier 1 Capital (to risk-weighted assets) 36,592 27.50% - - 7,983 6.00% Core (Tier 1) Capital (to adjusted total assets) 36,592 10.69% 13,693 4.00% 17,116 5.00% Tangible Capital (to adjusted total assets) 36,592 10.69% 5,135 1.50% - - As of December 31, 1999 ---------------------------------------------------------------------- To Be Well Capitalized Under prompt Minimum Capital Corrective Actual Requirements Actions Provisions ----------------- ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Total Capital (to risk-weighted assets) $34,500 28.81% $ 9,580 8.00% $11,975 10.00% Tier 1 Capital (to risk-weighted assets) 33,000 27.56% - - 7,185 6.00% Core (Tier 1) Capital (to adjusted total assets) 33,000 10.44% 12,649 4.00% 15,811 5.00% Tangible Capital (to adjusted total assets) 33,000 10.44% 4,743 1.50% - -
As of March 31, 1999, the most recent notification from the OTS, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions existing or events which have occurred since notification that management believes have changed the institution's category. -44- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. BENEFIT PLANS - - ----------------- Pension Plan ------------ The Bank has a non-contributory pension plan covering all eligible employee. The plan is a defined benefit plan which provides benefits based on a participant's years of service and compensation. The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The following table sets forth the plan's funded status:
December 31, --------------------------- 1999 1998 ------------ ----------- Actuarial present value of benefit obligation, including vested benefits of $2,668,704 and $2,977,510, respectively $ 2,704,530 $ 3,016,288 =========== =========== Projected benefit obligation - beginning .................... $ 3,622,467 $ 3,257,644 Service cost ................................................ 151,864 116,891 Interest cost ............................................... 233,456 217,015 Actuarial (gain) loss ....................................... (581,255) 132,101 Benefits paid ............................................... (100,372) (97,951) Settlements ................................................. (41,848) (3,233) ----------- ----------- Projected benefit obligation - ending ....................... 3,284,312 3,622,467 ----------- ----------- Plan assets at fair value - beginning ....................... 3,393,200 2,984,086 Actual return on assets ..................................... 474,093 367,471 Employer's contributions .................................... 125,466 142,827 Benefits paid ............................................... (100,372) (97,951) Settlements ................................................. (41,848) (3,233) ----------- ----------- Plan assets at fair value - ending .......................... 3,850,539 3,393,200 ----------- ----------- Funded status ............................................... 566,227 (229,267) Unrecognized net transition obligation ...................... 126,582 158,227 Unrecognized past service cost .............................. 61,386 70,937 Unrecognized net gain ....................................... (973,632) (156,686) ----------- ----------- Accrued pension cost included in other liabilities .......... $ (219,437) $ (156,789) =========== ===========
Included in the $973,632 unrecognized gain at December 31, 1999 is $600,604 related to the change in assumptions used to value the plan. See the second succeeding table for such assumptions. The following table sets forth the components of net periodic pension cost:
Year Ended December 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- Net periodic pension cost included the following components: Service cost ............................ $ 151,864 $ 116,891 $ 109,752 Interest cost ........................... 233,456 217,015 206,416 Expected return on plan assets .......... (238,402) (210,282) (180,400) Amortization of net transition obligation 31,645 31,645 31,645 Amortization of past service cost ....... 9,553 9,553 9,553 --------- --------- --------- Net periodic pension cost included in salaries and employee benefits . $ 188,116 $ 164,822 $ 176,966 ========= ========= =========
-45- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. BENEFIT PLANS - - ----------------- Pension Plan (Cont'd.) ------------ Assumptions used to value the pension plan were as follows:
December 31, -------------------------------------------------- 1999 1998 1997 ---- ---- ---- Discount rate 8.00% 6.50% 6.75% Expected long-term rate of return 8.00% 7.00% 7.00% Rate of increase in compensation levels 5.50% 4.50% 4.50%
ESOP ---- Effective upon the consummation of the Bank's reorganization, an ESOP was established for all eligible employees who had completed a twelve-month period of employment with the Bank and at least 1,000 hours of service and had attained the age of 21. The ESOP used $1,473,854 in proceeds from a term loan obtained from the Bancorp to purchase 147,768 shares of Bancorp common stock in the open market. The term loan principal is payable over ten equal annual installments through December 31, 2007. Interest on the term loan is fixed at a rate of 8.25%. Each year, the Bank intends to make discretionary contributions to the ESOP which will be equal to principal and interest payments required on the term loan. The loan is further paid down by the amount of dividends paid, if any, on the common stock owned by the ESOP. Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the suspense account will be allocated among the participants on the basis of compensation, as described by the Plan, in the year of allocation. The ESOP is accounted for in accordance with Statement of Position 93-6 "Accounting for Employee Stock Ownership Plans", which was issued by the American Institute of Certified Public Accountants in November 1993. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for basic net income per common share computations. ESOP compensation expense was $141,419 and $146,554 for the years ended December 31, 1999 and 1998, respectively. The ESOP shares were as follows:
December 31, ---------------------------- 1999 1998 ---------- ---------- Allocated shares ........................... 29,554 14,777 Shares committed to be released ............ -- -- Unreleased shares .......................... 118,214 132,991 ---------- ---------- Total ESOP shares .......................... 147,768 147,768 ========== ========== Fair value of unreleased shares ............ $1,108,256 $1,255,103 ========== ==========
-46- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. BENEFIT PLANS (Cont'd.) - - ---------------------------- ESOP (Cont'd.) --------------- In addition to the above, the Bancorp has established a supplemental benefit plan to offset the ESOP benefit reduction applicable to certain members of Bancorp management due to limitations imposed by the Internal Revenue Code. The amount expensed related to this plan totalled approximately $15,000 for each of the years ended December 31, 1999 and 1998. The 1998 liability was settled via the issuance of 1,624 shares of Bancorp common stock during the year ended December 31, 1999. The Bancorp plans to settle the 1999 liability in the same manner. 1999 Stock-Based Incentive Plan (the "Incentive Plan") ------------------------------------------------------ In April 1999, the Bancorp's stockholders approved, and the Bancorp implemented the Incentive Plan. Under the Incentive Plan, employees of the Bancorp and it's subsidiaries may be awarded up to 73,884 shares of Bancorp common stock (the "Stock Awards") and issued options to purchase up to 184,711 shares of Bancorp common stock (the "Stock Options"). Additional information on the Stock Awards and Stock Options is contained in the succeeding paragraphs. Stock Awards ------------ Stock Awards under the Incentive Plan are granted in the form of Bancorp common stock, which are held by the Incentive Plan Trust, and vest over a period of five years (20% annually from the date of grant). The Stock Awards become fully vested upon the death or disability of the holder. On April 30, 1999, the Bancorp awarded 65,756 shares of its common stock (47,286 shares to employees and 18,470 shares to outside directors). At December 31, 1999, none of the Stock Awards were vested and up to 8,128 shares are available for future grants. During the year ended December 31, 1999, approximately $83,000 in expense related to the Stock Awards was recorded. The amount of expense recorded for the Stock Awards is based upon the number of shares awarded, the market price of the Bancorp's common stock at the grant date ($9.50 per share) and the period over which the Stock Awards are earned (60 months). Stock Options ------------- Stock Options granted under the Incentive Plan may be either options that qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory options. Options granted will vest and will be exercisable on a cumulative basis in equal installments at the rate of 20% per year commencing one year from the date of grant. All options granted will be exercisable in the event the optionee terminates his employment due to death or disability. The options expire ten years from the date of grant. On April 30, 1999, options to purchase 176,048 shares of Bancorp common stock were granted, which include non-incentive stock options to directors and incentive stock options to officers and employees. The options granted, none of which were exercised during 1999 or exercisable at December 31, 1999, are summarized as follows: -47- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. BENEFIT PLANS (Cont'd.) - - ---------------------------- Stock Options (Cont'd.) ------------------------
Shares Weighted -------------------------------------- Average Non- Exercise Exercise Incentive Incentive Total Price Price --------- --------- ----- ----- ----- 46,855 129,193 176,048 $ 9.50 $ 9.50 ====== ======= ======= ======== ========
At December 31, 1999, stock options for up to 8,663 shares of Bancorp common stock remain available for future grants. The Bancorp, as permitted by Statement No. 123, recognizes compensation cost for stock options granted based on the intrinsic value method instead of the fair value based method. The weighted-average grant-date fair value of the stock options granted during 1999, which have an exercise price equal to the market price of the Bancorp's common stock at the grant date, is estimated using the Black-Scholes option-pricing model. Such fair value and the assumptions used for estimating fair value are as follows: Weighted average grant-date fair value per share $2.54 Expected common stock dividend yield 3.16% Expected volatility 27.66% Expected option life 6.5 years Risk-free interest rate 5.36% Had the Bancorp used the fair value based method, net income for the year ended December 31, 1999 would have been decreased to $3,005,000 and both basic and diluted net income per common share would have been reduced to $0.75 for the year ended December 31, 1999. 15. INCOME TAXES - - ----------------- The Bank qualifies as a Savings Institution under the provisions of the Internal Revenue Code and, therefore, must calculate its bad debt deduction using either the experience method or the specific charge off method. Retained earnings at December 31, 1999, include approximately $6.8 million of such bad debt allowance for which federal income taxes have not been provided. If such amount is used for purposes other then for bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate. -48- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. INCOME TAXES (Cont'd.) - - ---------------------------- The components of income taxes are summarized as follows:
Year Ended December 31, -------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current tax expense: Federal income ............. $ 1,336,166 $ 676,231 $ 1,066,590 State income ............... 107,392 87,750 95,024 ----------- ----------- ----------- 1,443,558 763,981 1,161,614 ----------- ----------- ----------- Deferred tax expense (benefit): Federal income ............. 192,560 (6,746) (664,857) State income ............... 27,265 (5,198) (60,478) ----------- ----------- ----------- 219,825 (11,944) (725,335) ----------- ----------- ----------- $ 1,663,383 $ 752,037 $ 436,279 =========== =========== ===========
The components of the net deferred income tax asset are as follows:
December 31, ------------------------- 1999 1998 ---------- ----------- Deferred tax assets: Allowance for loan losses ......................... $ 501,162 $ 650,010 Benefit plans ..................................... 134,307 49,569 Goodwill .......................................... 645,052 610,762 Charitable contribution carryforward .............. 62,394 209,717 Unrealized loss on securities available for sale .. 26,816 -- Other ............................................. 18,250 19,142 ---------- ---------- Total deferred tax assets ..................... 1,387,981 1,539,200 ---------- ---------- Deferred tax liabilities: Deferred loan origination fees, net ............... 188,407 162,415 Unrealized gain on securities available for sale .. -- 107,653 Other ............................................. 17,196 1,398 ---------- ---------- Total deferred tax liabilities ................ 205,603 271,466 ---------- ---------- Net deferred tax asset included in other assets $1,182,378 $1,267,734 ========== ==========
Refundable income taxes totalling $121,575 and $129,079 are included in other assets at December 31, 1999 and 1998, respectively. Income taxes payable totalling $76,687 and $1,754 are included in other liabilities at December 31, 1999 and 1998, respectively. -49- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. INCOME TAXES (Cont'd.) - - ---------------------------- The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:
Year Ended December 31, -------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Federal income tax ............................ $ 1,600,289 $ 730,775 $ 398,860 Increases (reductions) in taxes resulting from: New Jersey savings institution tax, net of federal income tax effect ......... 88,814 54,484 22,800 Other items, net .......................... (25,720) (33,222) 14,619 ----------- ----------- ----------- Effective income tax .......................... $ 1,663,383 $ 752,037 $ 436,279 =========== =========== ===========
16. NET INCOME PER COMMON SHARE - - ---------------------------------
Year Ended December 31, 1999 ---------------------------------------- Weighted Net Average Per Share Income Shares Amounts ------ ------ ------- Basic net income per share ......... $3,043,349 4,004,069 $ 0.76 ======== Effect of dilutive securities: Stock options ................ -- 2,681 Unearned Incentive Plan shares -- 1,001 ---------- --------- -------- Diluted net income per share ....... $3,043,349 4,007,751 $ 0.76 ========== ========= ========
Year Ended December 31, 1998 ------------------------------------------- Weighted Net Average Per Share Income Shares (1) Amounts (1) ------ ---------- ----------- Basic and diluted net income per share $1,397,300 4,062,395 $ 0.34 ========== ========= ========
(1) West Essex Bank converted to stock form on October 2, 1998. Amounts have been calculated based upon net income for the entire year ended December 31, 1998 and as if the conversion took place on January 1, 1998. -50- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. COMMITMENTS AND CONTINGENCIES - - ---------------------------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments primarily include commitments to extend credit. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of these instruments reflect the extent of involvement the Bank has in those particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At December 31, 1999 and 1998, the Bank had $5,134,000 and $7,209,000, respectively, in outstanding commitments to originate and purchase loans. The outstanding commitments at December 31, 1999 include $530,000 for fixed rate mortgage loans with an interest rate of 7.875%, $2,923,000 for adjustable rate mortgage loans with initial rates ranging from 7.00% to 7.375%, $256,000 for home equity loans at fixed rates ranging from 7.25% to 7.50%, $125,000 for floating rate equity lines of credit with initial rates of 7.75% to 8.00% and $1,300,000 for purchases of loan participations, consisting of a $300,000 adjustable rate loan on which the initial rate will be fixed at funding for five years at 1.60% above the Federal Home Loan Bank CIP advance rate and will adjust every fifth year thereafter and a $1,000,000 construction loan which will carry a floating interest rate of 0.375% above the prime rate. At December 31, 1999 and 1998, undisbursed funds from approved lines of credit under a homeowners' equity lending program amounted to approximately $5,001,000 and $4,970,000, respectively. Unless they are specifically cancelled by notice from the Bank, these funds represent firm commitments available to the respective borrowers on demand. The interest rate charged for any month on funds disbursed under the program ranges from 0.50% below to 1.75% above the prime rate published in The Wall Street Journal on the last day of the preceding month. At December 31, 1999 and 1998, undisbursed funds from approved unsecured lines of credit under the Credit Reserve program totalled $79,000 and $75,000, respectively. Funds drawn on these lines are assessed interest at a rate of 15.00%. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but primarily includes commercial and residential real estate. At December 31, 1999, the Bank was committed to purchase a $246,000 participation in a Federal National Mortgage Association mortgage-backed security, the terms of which have not yet been determined. -51- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. COMMITMENTS AND CONTINGENCIES (Cont'd.) - - --------------------------------------------- Rentals under a long-term operating lease for a branch office amounted to approximately $57,000, $49,000 and $50,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the minimum rental commitment under this noncancellable lease expiring in October, 2003 is $214,000, consisting of $56,000 for each of the years 2000 through 2002 and $46,000 for 2003. The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions. The Bank is a party to various litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material effect on the consolidated financial position or operations of the Bancorp. 18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - - --------------------------------------------------- The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used for the purposes of this disclosure. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below: Cash and cash equivalents and accrued interest receivable --------------------------------------------------------- The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value. Securities ---------- The fair values for securities available for sale, investment securities held to maturity and mortgage-backed securities held to maturity are based on quoted market prices or dealer prices, if available. If quoted market prices or dealer prices are not available, fair value is estimated using quoted market prices or dealer prices for similar securities. Loans ----- The fair value of loans is estimated by discounting future cash flows, using the current rates at which similar loans with similar remaining maturities would be made to borrowers with similar credit ratings. -52- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.) - - -------------------------------------------------------------- Deposits -------- For demand, savings and club accounts, fair value is the carrying amount reported in the consolidated financial statements. For certificates of deposit, fair value is estimated by discounting future cash flows, using rates currently offered for deposits of similar remaining maturities. Borrowed money -------------- Fair value is estimated using rates currently offered for liabilities of similar remaining maturities, or when available, quoted market prices. Commitments to extend credit ---------------------------- The fair value of credit commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The carrying values and estimated fair values of financial instruments are as follows (in thousands):
December 31, --------------------------------------------------- 1999 1998 ------------------------- ------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------ ----------- ----------- ----------- Financial assets ---------------- Cash and cash equivalents $12,746 $12,746 $16,371 $16,371 Securities available for sale 2,924 2,924 8,282 8,282 Investment securities held to maturity 41,582 38,869 36,873 36,891 Mortgage-backed securities held to maturity 121,223 118,807 110,376 111,513 Loans receivable 153,276 153,454 140,272 145,855 Accrued interest receivable 2,006 2,006 2,005 2,005 Financial liabilities --------------------- Deposits 234,978 235,892 238,313 239,702 Borrowed money 64,340 60,032 42,010 41,843 Commitments ----------- Loan origination and purchase 5,134 5,134 7,209 7,209 Unused lines of credit 5,080 5,080 5,045 5,045 Security purchase 246 246 2,500 2,500
-53- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.) - - -------------------------------------------------------------- Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business, and exclude the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment, real estate owned and advance payments by borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. 19. PARENT ONLY FINANCIAL INFORMATION - - --------------------------------------- West Essex Bancorp, Inc. operates its wholly owned subsidiary, West Essex Bank. The earnings of the subsidiary are recognized by the holding company using the equity method of accounting. Accordingly, earnings of the subsidiary are recorded as increases in the investment in the subsidiary. The following are the condensed financial statements for West Essex Bancorp, Inc. (Parent company only). -54- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. PARENT ONLY FINANCIAL INFORMATION (Cont'd.) - - --------------------------------------------------
STATEMENTS OF CONDITION ----------------------- December 31, --------------------------- 1999 1998 ----------- ----------- Assets: Cash and due from banks ................ $ 10,904 $ 95,743 Interest-bearing deposits .............. 1,372,748 5,855,678 Securities held to maturity ............ 1,057,907 907,315 Loan receivable from the Bank .......... 4,391,828 1,294,464 Real estate owned ...................... 135,000 -- Investment in subsidiaries ............. 41,186,716 38,427,846 Other assets ........................... 91,362 213,911 ----------- ----------- Total assets .................... $48,246,465 $46,794,957 =========== =========== Liabilities: Due to subsidiaries .................... $ 1,045,914 $ 39,149 Other liabilities ...................... 173,896 1,754 ----------- ----------- 1,219,810 40,903 Stockholders' equity ........................... 47,026,655 46,754,054 ----------- ----------- Total liabilities and stockholders' equity ..... $48,246,465 $46,794,957 =========== ===========
-55- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. PARENT ONLY FINANCIAL INFORMATION (Cont'd.) - - --------------------------------------------------
STATEMENTS OF OPERATIONS ------------------------ From Inception Year Ended October 2, 1998 December 31, to December 31, 1999 1998 ----------- ---------- Dividend from the Bank ................................ $ -- $ 100,000 Interest income ....................................... 433,046 73,912 Gain on disposition of security ....................... 92,082 -- ---------- ---------- Total income ........................... 525,128 173,912 ---------- ---------- Charitable contributions .............................. -- 842,140 Other expenses ........................................ 179,841 4,259 ---------- ---------- Total expenses ......................... 179,841 846,399 ---------- ---------- Income (loss) before income tax (benefit) and equity in undistributed earnings of subsidiaries ............. 345,287 (672,487) Income tax (benefit) .................................. 125,405 (261,251) ---------- ---------- Income (loss) before equity in undistributed earnings of subsidiaries ............................ 219,882 (411,236) Equity in undistributed earnings of subsidiaries ............................ 2,823,467 329,268 ---------- ---------- Net income (loss) ..................................... $3,043,349 $ (81,968) ========== ==========
-56- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. PARENT ONLY FINANCIAL INFORMATION (Cont'd.) - - --------------------------------------------------
STATEMENT OF CASH FLOWS Year Ended October 2, 1998 December 31, to December 31, 1999 1998 ------------ --------------- Cash flows from operating activities: Net income (loss) ................................................ $ 3,043,349 $ (81,968) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Accretion of discount ..................................... (603) (525) Gain on disposition of security ........................... (92,082) -- Deferred income taxes ..................................... 152,937 (209,717) Contribution of common stock to foundation ................ -- 742,140 Other, net ................................................ (49,464) 36,709 Equity in undistributed earnings of subsidiaries .......... (2,823,467) (329,268) ---------- ---------- Net cash provided by operating activities .......... 230,670 157,371 ---------- ---------- Cash flows from investing activities: Purchase of securities held to maturity .......................... -- (906,790) Proceeds from disposition of security ............................ 1,000,000 -- Increase in loan receivable from Bank ............................ (3,097,364) (1,294,464) Purchase of real estate owned from subsidiary .................... (135,000) -- ---------- ---------- Net cash (used in) investing activities ............ (2,232,364) (2,201,254) ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of common stock ....................... -- 7,995,304 Purchase of treasury stock ....................................... (1,453,094) -- Purchase of incentive plan stock ................................. (738,840) -- Cash dividends paid to stockholders .............................. (374,141) -- ---------- ---------- Net cash (used in ) provided by financing activities (2,566,075) 7,995,304 ---------- ---------- Net (decrease) increase in cash and cash equivalents ..................... (4,567,769) 5,951,421 Cash and cash equivalents - beginning .................................... 5,951,421 -- ---------- ---------- Cash and cash equivalents - ending ....................................... $ 1,383,652 $ 5,951,421 =========== ===========
-57- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. QUARTERLY FINANCIAL DATA (UNAUDITED) - - ------------------------------------------
Quarter Ended --------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ---- ---- ---- ---- (In thousands, except for per share amounts) ........................ Total interest income ...... $5,559 $5,711 $5,746 $5,735 Total interest expense ..... 2,825 3,004 3,013 3,018 ------ ------ ------ ------ Net interest income ........ 2,734 2,707 2,733 2,717 Provision for loan losses .. -- -- -- -- Non-interest income ........ 157 174 128 226 Non-interest expenses ...... 1,716 1,737 1,652 1,765 Income taxes ............... 423 410 426 404 ------ ------ ------ ------ Net income ................. $ 752 $ 734 $ 783 $ 774 ====== ====== ====== ====== Net income per common share: Basic .................. $0.185 $0.180 $0.195 $0.200 Diluted ................ 0.185 0.180 0.195 0.200 Weighted average number of common shares outstanding: Basic .................. 4,066 4,070 4,010 3,871 Diluted ................ 4,066 4,070 4,018 3,877
Quarter Ended --------------------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ---- ---- ---- ---- (In thousands, except for per share amounts) Total interest income .................... $ 5,115 $ 5,342 $ 5,460 $ 5,398 Total interest expense ................... 2,870 3,117 3,216 3,016 ------- ------- ------- ------- Net interest income ...................... 2,245 2,225 2,244 2,382 (Recapture of) loan losses ............... (22) -- (19) (90) Non-interest income ...................... 140 121 133 135 Non-interest expenses .................... 1,636 1,607 1,632 2,732 Income taxes ............................. 260 257 278 (43) ------- ------- ------- ------- Net income (loss) ........................ $ 511 $ 482 $ 486 $ (82) ======= ======= ======= ======= Net income (loss) per common share - basic and diluted ............................ N/A (1) N/A (1) N/A (1) $(0.020) ======= ======= ======= ======= Weighted average number of common shares outstanding - basic and diluted ...................... N/A (1) N/A (1) N/A (1) 4,062 (1) ======= ======= ======= ===========
(1) Converted to stock form on Otober 2, 1998. -58- WEST ESSEX BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. IMPACT OF NEW ACCOUNTING STANDARDS - - ---------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. At the date of initial application of SFAS No. 133, an entity may transfer any held-to-maturity security into the available-for-sale category or the trading category. An entity will then be able in the future to designate a security transferred into the available-for-sale category as the hedged item, or its variable interest payments as the cash flow hedged transactions, in a hedge of the exposure to changes in market interest rates, changes in foreign currency exchange rates, or changes in the overall fair value. (SFAS No. 133 precludes a held-to-maturity security from being designated as the hedged item in a fair value hedge of market interest rate risk or the risk of changes in its overall fair value and precludes the variable cash flows of a held-to-maturity security from being designated as the hedged transaction in a cash flow hedge of market interest rate risk). SFAS No. 133 provides that such transfers from the held-to-maturity category at the date of initial adoption shall not call into question an entity's intent to hold other debt securities to maturity in the future. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, the quarter ended March 31, 2001 for the Bancorp and subsidiaries. Initial application shall be as of the beginning of an entity's fiscal quarter. Earlier application of all of the provisions of SFAS No. 133 is permitted only as of the beginning of a fiscal quarter. Earlier application of selected provisions or retroactive application of provisions of SFAS No. 133 are not permitted. Management of the Bancorp and subsidiaries has not yet determined when SFAS No. 133 will be implemented, but does not believe the ultimate implementation of SFAS No. 133 will have a material impact on their consolidated financial position or results of operations. -59- WEST ESSEX BANCORP, INC. - - ------------------------ Corporate Headquarters 417 Bloomfield Avenue Caldwell, New Jersey 07006 (973) 226-7911 Bank Branch Offices Montville 267 Changebridge Road Pine Brook, NJ 07058 (973) 575-7080 Franklin Lakes 574 Franklin Avenue Franklin Lakes, NJ 07417 (201) 891-5500 Northvale 119 Paris Avenue Northvale, NJ 07647 (201) 768-7800 Old Tappan 207 Old Tappan Road Old Tappan, NJ 07675 (201) 767-0007 Pleasant Valley Way 487 Pleasant Valley Way West Orange, NJ 07052 (973) 731-4630 River Vale 653 Westwood Avenue River Vale, NJ 07675 (201) 664-3700 Tory Corner 216 Main Street West Orange, NJ 07052 (973) 325-1230 DIRECTORS AND OFFICERS - - ---------------------- Directors of West Essex Bancorp, Inc. and West Essex Bank - - ------------------------ Leopold W. Montanaro Chairman of the Board of West Essex Bancorp, Inc. William J. Foody Chairman of the Board of West Essex Bank Managing Partner Trammell Crow Everett N. Leonard Retired, Verona Boro Administrator John J. Burke President JJ Burke & Associates David F. Brandley, Esq. Partner in the Law Firm of Brandley & Kleppe James P. Vreeland Retired New Jersey State Senator Principal Officers of West Essex Bancorp, Inc. - - ------------------------ Leopold W. Montanaro President and Chief Executive Officer Dennis A. Petrello Executive Vice President and Chief Financial Officer Charles E. Filippo Executive Vice President Craig L. Montanaro Senior Vice President and Secretary and Treasurer Principal Officers of West Essex Bank - - ----------------------- Leopold W. Montanaro President and Chief Executive Officer Executive Officer Dennis A. Petrello Executive Vice and Chief Financial Officer Charles E. Filippo Executive Vice President and Chief Lending Officer Craig L. Montanaro Senior Vice President and Secretary and Treasurer Michael T. Sferrazza Vice President and Controller Lisa A. Mulligan Vice President and Personnel Officer Donna Duess Vice President John E. Gerasimow Vice President -60- INVESTOR AND CORPORATE INFORMATION - - ---------------------------------- CORPORATE HEADQUARTERS West Essex Bancorp, Inc. 417 Bloomfield Avenue, Caldwell, New Jersey 07006 (973) 226-7911 Annual Meeting The annual meeting of shareholders will be held at 10:00 a.m. on Thursday, April 27, 2000 at the Radisson Hotel, Route 46 East, Fairfield, New Jersey. Shareholders are encouraged to attend. Annual Report on Form 10-K A copy of West Essex Bancorp, Inc.'s annual report on Form 10-K without exhibits is available without charge to shareholders upon written request. Requests should be sent to Mr. Dominic Tangredi, Compliance Officer. Stock Transfer/Register Questions regarding the transfer of stock, lost certificates, address changes, account consolidation and cash dividends should be addressed to Registrar and Transfer Company, 10 Commerce, Cranford, New Jersey 07203, phone number (908)241-9880. Allow three weeks for a reply. Special Counsel Muldoon, Murphy and Faucette LLP, 5101 Wisconsin Avenue, NW, Washington, DC 20016. Independent Accountants Radics & Co., LLC, Route 46 East, Pine Brook, New Jersey 07058. Inquiries Security analysts, retail brokers and shareholders seeking financial information should contact Dennis A. Petrello, Executive Vice President and Chief Financial Officer. Requests for written materials can be forwarded to the attention of Mr. Dominic Tangredi, Investor Relations Department. Stock Information West Essex Bancorp, Inc., is traded on the Nasdaq National Market under the ticker symbol "WEBK." As of December 31, 1999, West Essex Bancorp, Inc. had 4,054,357 shares of common stock outstanding and approximately 452 shareholders of record. Stock Price and Dividends The following table discloses the dividends declared and the high and low bids for the Company's common stock on the Nasdaq National Market for each quarterly period indicated. The Company did not declare or pay dividends in 1998. Dividends High Low Quarter ended Per Share Price Price - - ------------- --------- ----- ----- December 31, 1999 $ 0.075 $ 10.000 $ 9.375 September 30, 1999 0.075 10.250 9.250 June 30, 1999 0.075 9.625 9.000 March 31, 1999 0.075 10.000 9.000 December 31, 1998 None 10.125 9.250 EX-23.0 4 Exhibit 23.0 Consent of Radics & Co., LLC CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference into the previously filed Registration Statement on Form S-8 (No. 333-84785) of West Essex Bancorp, Inc. (the "Company") of our report dated January 27, 2000, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. /s/ Radics & Co., LLC --------------------- Radics & Co., LLC March 27, 2000 Pine Brook, New Jersey EX-27 5
9 YEAR DEC-31-1999 Jan-01-1999 DEC-31-1999 5,728,992 7,016,853 0 0 2,923,750 162,805,318 157,675,757 154,676,553 1,400,366 348,306,837 234,977,812 6,000,000 1,878,964 58,340,115 0 0 41,972 47,067,974 348,306,837 11,240,049 10,899,211 611,308 22,750,568 8,583,870 11,859,395 10,891,173 0 126,597 6,869,295 4,706,732 3,043,349 0 0 3,043,349 0.76 0.76 3.31 792,000 0 92,000 0 1,716,790 316,424 0 1,400,366 928,366 0 472,000
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