FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10506
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Essex Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1721085
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(State of organization) (I.R.S. Employer
Identification No.)
Reflections II, Suite 200
200 Golden Oak Court
Virginia Beach, Virginia 23452
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (804) 486-8700
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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 .
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Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1996
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the three months ended March 31, 1996 7
Consolidated Statements of Cash
Flows (unaudited) for the three months
ended March 31, 1996 and 1995 8
Notes to Consolidated Financial
Statements (unaudited) 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
1996 1995
---- ----
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,901,960 $ 3,262,080
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . 2,973,050 7,833,638
Federal funds sold and securities purchased under
agreements to resell. . . . . . . . . . . . . . . . . . . . . 10,092,000 4,913,000
-------------- --------------
Cash and cash equivalents . . . . . . . . . . . . . . . . 15,967,010 16,008,718
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . 2,540,000 3,602,800
Securities available for sale - cost approximates market . . . 2,115,180 1,493,646
Securities held to maturity - market value of
$7,934,000 in 1996 and $7,840,000 in 1995 . . . . . . . . . . 8,017,677 7,998,631
Mortgage-backed securities available for sale - cost of
$3,076,000 in 1996 and $13,590,000 in 1995. . . . . . . . . . 3,115,913 13,744,471
Mortgage-backed securities held to maturity - market
value of $1,854,000 in 1996 and $1,806,000 in 1995. . . . . . 1,905,499 1,905,554
Loans, net of allowance for loan losses of $4,955,000
in 1996 and $5,251,000 in 1995. . . . . . . . . . . . . . . . 252,907,586 266,631,520
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . 6,357,802 3,263,060
Purchased mortgage servicing rights and excess
servicing fees receivable . . . . . . . . . . . . . . . . . . 1,552,669 1,634,307
Foreclosed properties, net . . . . . . . . . . . . . . . . . . 4,953,376 4,855,887
Accrued interest receivable. . . . . . . . . . . . . . . . . . 2,021,320 2,148,779
Excess of cost over net assets acquired, less
accumulated amortization of $2,846,573 in 1996
and $2,562,000 in 1995. . . . . . . . . . . . . . . . . . . . 8,375,258 8,577,073
Advances for taxes, insurance, and other . . . . . . . . . . . 359,900 669,557
Premises and equipment . . . . . . . . . . . . . . . . . . . . 3,383,457 4,121,922
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,994,858 2,068,489
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Total Assets. . . . . . . . . . . . . . . . . . . . . . $315,567,505 $338,724,414
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See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
1996 1995
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . $ 1,559,795 $ 1,495,976
Interest-bearing. . . . . . . . . . . . . . . . . . . . . . 254,355,711 282,001,130
-------------- --------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . 255,915,506 283,497,106
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . 28,047,500 29,833,333
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 120,203 120,203
Capitalized lease obligations. . . . . . . . . . . . . . . . . 415,803 424,956
Subordinated capital notes . . . . . . . . . . . . . . . . . . 629,458 627,858
Mortgages payable on foreclosed properties . . . . . . . . . . - 25,258
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 7,325,109 1,566,048
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Total Liabilities . . . . . . . . . . . . . . . . . . . . 292,453,579 316,094,762
SHAREHOLDERS' EQUITY
Series B preferred stock, $.01 par value:
Authorized shares - 2,250,000
Issued and outstanding shares - 2,125,000 . . . . . . . . . . 21,250 21,250
Series C preferred stock, $.01 par value:
Authorized shares - 125,000
Issued and outstanding shares - 125,000 . . . . . . . . . . . 1,250 1,250
Common stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 1,050,547 in 1996
and 1,049,684 in 1995 . . . . . . . . . . . . . . . . . . . 10,505 10,497
Capital in excess of par . . . . . . . . . . . . . . . . . . . 23,654,052 23,652,135
Holding gain on securities available for sale. . . . . . . . . 40,217 154,174
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (613,348) (1,209,654)
-------------- --------------
Total Shareholders' Equity. . . . . . . . . . . . . . . . 23,113,926 22,629,652
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Total Liabilities and Shareholders' Equity. . . . . . . . $315,567,505 $338,724,414
-------------- --------------
-------------- --------------
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
INTEREST INCOME
Loans, including fees. . . . . . . . . . . . . . . . . . . . . $5,442,278 $ 4,749,606
Federal funds sold and securities purchased
under agreements to resell. . . . . . . . . . . . . . . . . . 91,926 56,294
Investment securities, including dividend income . . . . . . . 189,422 231,554
Mortgage-backed securities . . . . . . . . . . . . . . . . . . 249,819 339,118
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,557 35,781
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Total Interest Income . . . . . . . . . . . . . . . . . . 6,111,002 5,412,353
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,852,753 2,783,132
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . 441,023 865,278
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 2,847 55,437
Subordinated capital notes . . . . . . . . . . . . . . . . . . 18,384 17,890
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,962 29,842
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Total Interest Expense. . . . . . . . . . . . . . . . . . 4,343,969 3,751,579
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Net Interest Income . . . . . . . . . . . . . . . . . . . 1,767,033 1,660,774
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . . 401 1,594,696
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Net Interest Income After
Provision for Loan Losses . . . . . . . . . . . . . . . . 1,766,632 66,078
NONINTEREST INCOME
Loan servicing fees. . . . . . . . . . . . . . . . . . . . . . 412,740 481,409
Mortgage banking income, including
gain on sale of loans . . . . . . . . . . . . . . . . . . . . 120,110 57,669
Other service charges and fees . . . . . . . . . . . . . . . . 144,478 104,119
Net gain (loss) on sale of:
Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 153,188 -
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588 116,462
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064,655 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,823 33,042
---------- ----------
Total Noninterest Income. . . . . . . . . . . . . . . . . 2,007,582 792,701
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
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NONINTEREST EXPENSE
Salaries and employee benefits . . . . . . . . . . . . . . . . 1,387,654 1,107,414
Net occupancy and equipment. . . . . . . . . . . . . . . . . . 386,360 424,668
Deposit insurance premiums . . . . . . . . . . . . . . . . . . 219,503 166,922
Amortization of intangible assets. . . . . . . . . . . . . . . 428,619 199,247
Service bureau . . . . . . . . . . . . . . . . . . . . . . . . 159,398 109,146
Professional fees. . . . . . . . . . . . . . . . . . . . . . . 147,213 161,342
Foreclosed properties, net . . . . . . . . . . . . . . . . . . 5,017 156,342
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,144 429,670
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Total Noninterest Expense . . . . . . . . . . . . . . . . 3,177,908 2,754,751
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Income (Loss) Before Income Taxes and
Extraordinary Item . . . . . . . . . . . . . . . . . . . 596,306 (1,895,972)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . - -
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Income (Loss) Before Extraordinary Item . . . . . . . . . 596,306 (1,895,972)
EXTRAORDINARY ITEM - FORGIVENESS OF
DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 261,683
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Net Income (Loss) . . . . . . . . . . . . . . . . . . . . $ 596,306 $(1,634,289)
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Earnings (loss) per common share:
Income (loss) before extraordinary item . . . . . . . . . . . $ .04 $ (1.81)
Extraordinary item. . . . . . . . . . . . . . . . . . . . . . - 0.25
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Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ .04 $ (1.56)
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See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the three months ended March 31, 1996
Series B Series C Holding Gain
Common Preferred Preferred Capital in on Securities
Stock, $.01 Stock, $.01 Stock, $.01 Excess Accumulated Available
Par Value Par Value Par Value of Par Deficit for Sale Total
--------- --------- --------- ------ ------- -------- -----
Balance at January 1, 1996.. . $10,497 $21,250 $1,250 $23,652,135 $(1,209,654) $ 154,174 $22,629,652
Common stock issued under
employee stock purchase
plan. . . . . . . . . . . . . 8 - - 1,917 - - 1,925
Net decrease in holding gain on
securities available for sale - - - - - (113,957) (113,957)
Net income . . . . . . . . . . - - - - 596,306 - 596,306
------- ------- ------ ----------- ----------- --------- -----------
Balance, March 31, 1996. . . . $10,505 $21,250 $1,250 $23,654,052 $ (613,348) $ 40,217 $23,113,926
------- ------- ------ ----------- ----------- --------- -----------
------- ------- ------ ----------- ----------- --------- -----------
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ 596,306 $(1,634,289)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Extraordinary item - forgiveness of debt . . . . . . . . . . - (261,683)
Provisions for:
Losses on loans, foreclosed properties and other. . . . . (33,546) 1,634,445
Depreciation and amortization of premises
and equipment . . . . . . . . . . . . . . . . . . . . . 135,798 128,040
Amortization (accretion) of:
Premiums and discounts on:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . 47,931 10,119
Mortgage-backed securities held to maturity. . . . . . 55 2,295
Mortgage-backed securities available for sale. . . . . 2,348 -
Securities held to maturity. . . . . . . . . . . . . . 1,579 (4,675)
Purchased mortgage servicing rights and . . . . . . . .
excess servicing fees receivable . . . . . . . . . . . 144,046 183,732
Excess of costs over equity in net assets
acquired . . . . . . . . . . . . . . . . . . . . . . . 284,573 15,515
Other . . . . . . . . . . . . . . . . . . . . . . . . . 494 -
Premium on deposits . . . . . . . . . . . . . . . . . . (34,412) -
Mortgage banking activities:
Net increase in loans originated for resale . . . . . . . (2,986,660) (1,779,980)
Realized gains from sale of loans . . . . . . . . . . . . (108,082) (57,669)
Realized (gains) and losses from sales of:
Securities available for sale . . . . . . . . . . . . . . (153,188) -
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . (588) (116,462)
Premises and equipment. . . . . . . . . . . . . . . . . . (63,789) 17,087
Foreclosed properties . . . . . . . . . . . . . . . . . . 269 (679)
Deposits (Note 3) . . . . . . . . . . . . . . . . . . . . (1,064,655) -
Mutual fund dividends. . . . . . . . . . . . . . . . . . . . (21,534) (9,699)
Changes in operating assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . 232,911 (89,130)
Other assets. . . . . . . . . . . . . . . . . . . . . . . 309,568 527,074
Other liabilities . . . . . . . . . . . . . . . . . . . . 5,760,661 (158,295)
---------- ----------
Net cash provided by (used in) operating activities. . . . . . . $3,050,085 $(1,594,254)
See notes to consolidated financial statements.
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
INVESTING ACTIVITIES
Proceeds from sales of Federal Home Loan Bank stock. . . . . . 1,062,800 1,823,100
Purchase of securities held to maturity. . . . . . . . . . . . (1,020,625) -
Proceeds from maturities of securities held to maturity. . . . 1,000,000 -
Purchase of securities available for sale. . . . . . . . . . . (1,800,000) (2,350,000)
Proceeds from sales of securities available for sale . . . . . 1,200,000 2,550,000
Principal remittances on mortgage-backed securities
held to maturity . . . . . . . . . . . . . . . . . . . . . . - 502,941
Principal remittances on mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . . . . . 491,800 -
Proceeds from sales of mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . . . . . 10,068,189 -
Proceeds from sales of loans . . . . . . . . . . . . . . . . . 7,290,962 8,152,226
Net (increase) decrease in net loans . . . . . . . . . . . . . 6,231,163 (7,712,501)
Proceeds from sales of foreclosed properties . . . . . . . . . 204,410 1,090,344
Increase in foreclosed properties. . . . . . . . . . . . . . . (40,930) (167,719)
Increase in excess servicing fees receivable . . . . . . . . . (62,408) -
Purchase of premises and equipment . . . . . . . . . . . . . . (71,282) (737,461)
Proceeds from sales of premises and equipment. . . . . . . . . 654,980 -
----------- ----------
Net cash provided by investing activities. . . . . . . . . . . 25,209,059 3,150,930
FINANCING ACTIVITIES
Deposits sold in connection with branch sale (Note 3):
NOW and savings deposits . . . . . . . . . . . . . . . . . . (2,326,445) -
Certificates of deposit. . . . . . . . . . . . . . . . . . . (24,510,192) -
Net decrease in NOW and savings deposits . . . . . . . . . . . (603,650) (7,250,043)
Net increase (decrease) in certificates of deposit . . . . . . 957,754 12,346,889
Proceeds from Federal Home Loan Bank advances. . . . . . . . . - 12,500,000
Repayment of Federal Home Loan Bank advances . . . . . . . . . (1,785,833) (17,260,834)
Proceeds from issuance of notes payable. . . . . . . . . . . . - 3,269
Payments on credit facility. . . . . . . . . . . . . . . . . . - (894,377)
Payments on capital lease obligations. . . . . . . . . . . . . (9,153) (30,929)
Payments on mortgages payable on foreclosed
properties . . . . . . . . . . . . . . . . . . . . . . . . . (25,258) (164,742)
Common stock issued under Employee Stock
Purchase Plan. . . . . . . . . . . . . . . . . . . . . . . . 1,925 -
----------- ----------
Net cash used in financing activities. . . . . . . . . . . . . (28,300,852) (750,767)
----------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . (41,708) 805,909
Cash and cash equivalents at beginning of period . . . . . . . 16,008,718 6,906,159
----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . $ 15,967,010 $ 7,712,068
----------- ----------
----------- ----------
See notes to consolidated financial statements.
9
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31,
1996 1995
---- ----
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties . . . . . . . . . $ 221,291 $ 1,185,906
Transfer of servicing allowance. . . . . . . . . . . . . . . . 67,226 93,631
Transfer of remittances receivable on sold
mortgage-backed securities available for sale. . . . . . . . 105,452 -
Write-off of fixed assets in connection with
termination of capital lease . . . . . . . . . . . . . . . . - 50,393
Increase in mortgages payable on foreclosed properties . . . . - 39,332
Termination of capital lease obligation for fixed assets . . . - 61,469
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,737,444 $ 3,766,300
Net income taxes paid (received) . . . . . . . . . . . . . . - (6,252)
See notes to consolidated financial statements.
10
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MARCH 31, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Essex Bancorp,
Inc. and subsidiaries ("EBI") have been prepared in accordance with generally
accepted accounting principles for condensed interim financial statements and,
therefore, do not include all information required by generally accepted
accounting principles for complete financial statements. The notes included
herein should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in this
report, and the notes to EBI's financial statements for the year ended December
31, 1995 included in the EBI 1995 Annual Report.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments (including normal recurring entries) necessary for a
fair presentation of EBI's financial condition and interim results of
operations. Certain 1995 amounts have been reclassified to conform to 1996
presentation.
NOTE 2 - EARNINGS PER SHARE
Earnings per share for the three months ended March 31, 1996 was computed based
upon income adjusted for preferred stock dividends, divided by 9,210,132, the
weighted average number of common and common equivalent shares outstanding.
Warrants and options issued are considered common stock equivalents using the
modified treasury stock method. Loss per share for the three months ended March
31, 1995 was computed by dividing the loss by 1,049,684, the weighted average
number of common shares outstanding.
NOTE 3 - SALE OF BANK BRANCH
Effective March 15, 1996, Essex Savings Bank, F.S.B. (the "Bank") sold the
deposits and related accrued interest of its Charlotte, North Carolina retail
bank branch, which totaled $28.1 million, along with loans and related accrued
interest totaling $64,000, premises and equipment totaling $586,000, and other
assets totaling $69,000. In connection with the sale of the Charlotte branch,
the Bank recognized a $1.1 million net gain on the sale of deposits and a
$64,000 gain on the sale of premises and equipment. The sale of the Charlotte
branch was undertaken to position the Bank's operations in the more
geographically concentrated and defined market areas of northeastern North
Carolina and eastern Virginia.
The sale of the Charlotte branch required cash of $26.3 million, which was
funded by the sale of fixed-rate first mortgage loans totaling $7.3 million and
mortgage-backed securities available for sale totaling $9.9 million, as well as
the utilization of a portion of the Bank's excess liquidity. The Bank
recognized a gain of $558 and $153,000 from the sale of loans and mortgage-
backed securities, respectively.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets of EBI at March 31, 1996 were $315.6 million as compared to
$338.7 million at December 31, 1995, a decrease of approximately $23.1 million
or 6.8%. The decrease in assets was primarily attributable to the sale of $7.3
million in loans, $9.9 million in mortgage-backed securities, and $586,000 in
premises and equipment in connection with the sale of the Bank's Charlotte,
North Carolina retail bank branch, which is described in Note 3 of the Notes to
Consolidated Financial Statements included in this report. Cash and cash
equivalents also decreased as a result of the sale; however, the impact of this
decrease was offset by the receipt on March 29, 1996 of $5.2 million in pay-offs
on a mortgage loan portfolio subserviced by Essex Home Mortgage Servicing
Corporation ("Essex Home").
In addition to the decline in loans attributable to the Charlotte branch
sale, loans held for investment declined an additional $6.4 million primarily as
a result of prepayment activity prompted by the decline in interest rates.
However, the lower interest rates favorably impacted the amount of loan
originations during the first quarter of 1996. Loans held for sale totaled $6.4
million at March 31, 1996 as compared to $3.3 million at December 31, 1995, an
increase of approximately $3.1 million or 94.8%.
Federal Home Loan Bank ("FHLB") stock decreased $1.1 million as redemption
proceeds were used to repay FHLB advances that matured during the first quarter
of 1996.
EBI's nonperforming assets, net of specific reserves for
collateral-dependent real estate loans ("CDRELs") and foreclosed properties,
decreased from $11.3 million at December 31, 1995 to $10.5 million at March
31, 1996, and are summarized as follows (in thousands):
March 31, December 31,
1996 1995
---- ----
Nonaccrual loans:
CDRELs, net $ 2,712 $ 2,737
Other 2,522 3,344
Accruing loans 90 days or more past due 94 177
Troubled debt restructured loans 184 143
------ ------
Total nonperforming loans, net 5,512 6,401
Foreclosed properties, net 4,953 4,856
------ ------
Total nonperforming assets,
net of specific reserves $10,465 $11,257
------ ------
------ ------
Accruing loans in the 30-59 day and 60-89 day delinquency categories also
decreased, as shown below (in thousands):
Delinquency March 31, December 31,
Category 1996 1995
-------- ---- ----
30-59 days past due $ 935 $2,222
60-89 days past due 1,069 942
----- -----
$2,004 $3,164
----- -----
----- -----
The decrease in nonperforming assets was primarily attributable to the
decline in other nonaccrual loans. During the first quarter of 1996, the Bank
collected $435,000 on its nonaccruing commercial real estate loans to a single
borrower that were secured by nursing home facilities. An additional payment of
$125,000 was received on these loans during April 1996 as well. The remaining
decline in other nonaccrual loans, as well as the decrease in delinquent loans,
12
was attributable to the continuing improvement in the first mortgage loan
portfolio acquired from Home Savings Bank, F.S.B. on September 15, 1995. At
December 31, 1995, nonaccruing loans in this acquired portfolio, excluding
CDRELs, totaled $1.2 million as compared to $950,000 at March 31, 1996.
Likewise in this same acquired portfolio, loans 30-59 days past due totaled
$977,000 and loans 60-89 days past due totaled $381,000 at December 31, 1995 as
compared to $143,000 and $173,000, respectively, at March 31, 1996.
While foreclosed properties increased slightly during the first quarter of
1996, a significant portion of a foreclosed property secured by farmland in
North Carolina was sold during April 1996, which will result in a $2.0 million
reduction in this property's carrying value during the second quarter of 1996.
The remainder of this property is under contract.
Deposits, the primary source of EBI's funds, totaled $255.9 million at
March 31, 1996 as compared to $283.5 million at December 31, 1995, a decrease of
$27.6 million or 9.7%. The decrease in deposits was attributable to the Bank's
sale of its Charlotte, North Carolina retail bank branch with deposits totaling
$27.9 million, which is described in Note 3 of the Notes to Consolidated
Financial Statements included in this report. FHLB advances decreased from
$29.8 million at December 31, 1995 to $28.0 million at March 31, 1996 as
proceeds from the sale of FHLB stock were used to repay FHLB advances that
matured during the first quarter of 1996. The $5.8 million increase in other
liabilities since December 31, 1995 was primarily attributable to $5.2 million
in loan pay-offs on a servicing portfolio.
Results of Operations
First Quarter of 1996 Compared to First Quarter of 1995
EBI's net income for the three months ended March 31, 1996 totaled
$596,000, compared to a net loss of $1.6 million for the three months ended
March 31, 1995. The annualized return on average assets was .71% for the first
quarter of 1996, compared to (2.19)% for the first quarter of 1995.
On September 15, 1995, EBI and the Bank merged with Home Bancorp, Inc.
("Home Bancorp") and its wholly-owned subsidiary Home Savings Bank, F.S.B.
("Home Savings"), a Norfolk, Virginia-based savings institution (the "Home
Acquisition"). The transaction was accounted for using the purchase method of
accounting. Therefore, results of operations for the three months ended March
31, 1995 have not been restated to reflect the Home Acquisition. However, EBI's
net income for the three months ended March 31, 1996 includes the impact of the
Home Acquisition.
During the first quarter of 1996, EBI's operating results benefited from
the $1.1 million gain on sale of deposits and $64,000 gain on sale of premises
and equipment recognized in connection with the Bank's sale of its Charlotte,
North Carolina retail bank branch. In addition, operating results were
favorably impacted by a $153,000 gain on sale of mortgage-backed securities
available for sale, which was undertaken to provide funds for the Charlotte
branch sale. Excluding the impact of this nonrecurring transaction, EBI
incurred a net loss of $686,000 during the first quarter of 1996, which was a
$1.2 million improvement over the loss from continuing operations during the
first quarter of 1995. The improvement in 1996 was the result of a $1.6 million
reduction in loan loss provisions, which was partially offset by a $423,000
increase in noninterest expense, primarily resulting from an increase in
operating expenses and the amortization of the excess of cost over net assets
acquired associated with the Home Acquisition.
13
During the first quarter of 1995, EBI's operating results benefited from
the recognition of a $262,000 extraordinary gain from the forgiveness of debt.
Excluding this extraordinary item, EBI incurred a loss from continuing
operations of $1.9 million during the quarter ended March 31, 1995. EBI's
operating results were adversely impacted by loan loss provisions of $1.6
million and lower levels of mortgage banking income. In addition, EBI continued
to recognize operating losses because of, among other reasons, the Bank's
inability to increase assets due to regulatory growth restrictions in effect
prior to the Home Acquisition. However, EBI benefited during the first quarter
of 1995 from the recognition of a net gain totaling $116,000 related to the
disposition of loans.
Net Interest Income. The table below presents average balances, computed
on month-end balances, for interest-earning assets and interest-bearing
liabilities, as well as related weighted average yields earned and rates paid
for the three months ended March 31:
1996 1995
--------------------------------- ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1). . . . . . . . . . . . $271,715 $5,442 8.01% $244,496 $4,750 7.77%
Investment securities. . . . . . 13,171 189 5.75 16,129 232 5.74
Mortgage-backed
securities . . . . . . . . . 13,726 250 (2) 7.38 17,963 339 7.55
Federal funds sold and . . . . .
securities purchased under
agreements to resell . . . . 6,986 92 5.26 3,928 56 5.73
Other. . . . . . . . . . . . . . 9,305 138 (3) 5.54 2,051 36 (3) 6.14
------- ------ ------- -----
Total interest-earning
assets. . . . . . . . . . . $314,903 6,111 (2)(3) 7.76 $284,567 5,413 (3) 7.60
------- -------
------- -------
Interest-bearing liabilities:
Deposits . . . . . . . . . . . . $276,046 3,853 5.58 $224,348 2,783 4.96
FHLB advances. . . . . . . . . . 29,473 441 5.99 58,121 865 5.96
Notes payable. . . . . . . . . . 120 3 9.47 2,376 56 9.33
Subordinated capital notes . . . 628 18 11.71 616 18 11.62
Other. . . . . . . . . . . . . . 421 29 (4) 18.29 509 30 (4) 17.49
------- ----- ------- -----
Total interest-bearing
liabilities . . . . . . . . $306,688 4,344 (4) 5.65 $285,970 3,752 (4) 5.24
------- ----- ------- -----
------- ----- ------- -----
Net interest earnings. . . . . . . $1,767 $1,661
----- -----
----- -----
Net interest spread (2),(3),(4). . 2.11% 2.36%
---- ----
---- ----
Net yield on interest-earning
assets (2),(3),(4) . . . . . . . 2.25% 2.34%
---- ----
---- ----
(1) Nonaccrual loans are included in the average balance of loans.
(2) Calculation is based on historical cost balances of mortgage-backed
securities available for sale and does not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
(3) Calculation in 1996 and 1995 includes the accretion of net deferred loan
fees and excludes $8,750 and $4,325, respectively, which consists primarily
of interest earned on custodial accounts maintained for servicing
investors.
(4) Calculation in 1996 and 1995 excludes $9,734 and $7,596, respectively,
which consists primarily of interest paid on escrow accounts.
14
The table below sets forth certain information regarding changes in EBI's
interest income and interest expense between the periods indicated.
Increase (Decrease) From First Quarter of 1995
to First Quarter of 1996 Due to
----------------------------------------------
Volume (1) Rate (1) Net
------ ---- ---
(in thousands)
Interest income on:
Loans (2). . . . . . . . . . . . . . . $541 $ 151 $ 692
Investment securities. . . . . . . . . (43) - (43)
Mortgage-backed securities . . . . . . (82) (7) (89)
Federal funds sold and
securities purchased under
agreements to resell . . . . . . . . 41 (5) 36
Other interest-earning assets. . . . . 105 (3) 102
---- ----- -----
Total interest income (2). . . . . . 562 136 698
Interest expense on:
Deposits . . . . . . . . . . . . . . . 694 376 1,070
FHLB advances. . . . . . . . . . . . . (428) 4 (424)
Notes payable. . . . . . . . . . . . . (54) 1 (53)
Other interest-bearing liabilities . . (2) 1 (1)
---- ----- -----
Total interest expense . . . . . . . 210 382 592
---- ----- -----
Net interest income. . . . . . . . . $352 $(246) $ 106
---- ----- -----
---- ----- -----
(1) Changes attributable to the combined impact of volume and rate have
been allocated proportionately to changes due to volume and changes
due to rate.
(2) Interest income includes the amortization of premiums and the
accretion of net deferred loan fees.
Net interest income increased slightly from $1.7 million for the first
quarter of 1995 to $1.8 million for the first quarter of 1996. However, the
annualized net yield on interest-earning assets decreased from 2.34% for the
first quarter of 1995 to 2.25% for the first quarter of 1996 despite an increase
in the ratio of interest-earning assets to interest-bearing liabilities. The
improvement in this ratio is primarily attributable to the Home Acquisition.
However, even though the loan yield during the first quarter of 1996 was
higher than the yield during the first quarter of 1995, EBI's net yield on
interest-earning assets was more adversely impacted by significant balances
of deposits that had matured and repriced at higher market rates prior to the
decline in interest rates. However, the trend of declining interest rates
may favorably impact EBI's earnings due to the repricing of significant
deposits with shorter maturities as compared to the large amount of
interest-earning assets, predominantly loans, which have fixed interest rates
maturing over longer terms.
Provision for Loan Losses. Changes in the allowance for loan losses for
the three months ended March 31 are as follows (in thousands):
1996 1995
---- ----
Balance at beginning of period $5,251 $3,429
Provision for loan losses. . . 1 1,595
----- -----
5,252 5,024
Loans charged-off, net of recoveries (297) (322)
----- -----
Balance at end of period . . . $4,955 $4,702
----- -----
----- -----
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At December 31,
1995, the unallocated portion of the general loan loss allowance totaled
$791,000. As a result of loan sales and prepayment activity during the first
quarter of 1996, as well as the decline in nonperforming loans, the unallocated
portion of the general loan loss allowance approximated $875,000 at March 31,
1996.
15
Therefore, management considered the loan loss allowance sufficiently adequate
to absorb losses and did not provide for additional losses during the first
quarter of 1996.
The provision for loan losses for the first quarter of 1995 was $1.6
million. Two of the significant CDRELs that contributed to the necessity for
the provision were (i) a commercial loan collateralized by a low-income
apartment complex located in Richmond, Virginia and (ii) a loan secured by a
real estate development located in the Outer Banks of North Carolina. The
additional specific provisions provided for these two CDRELs totaled
approximately $550,000 and $200,000, respectively. In addition, general and
specific provisions of $200,000 and $125,000, respectively, were provided for
certain balloon second mortgage loans subject to recourse against the Resolution
Trust Company ("RTC"). Moreover, the provision for loan losses for the first
quarter of 1995 included adjustments resulting from the Office of Thrift
Supervision's ("OTS") asset quality examination.
Noninterest Income. The significant components of noninterest income for
the three months ended March 31 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan servicing fees. . . . . . . $ 412,740 $481,409 $ (68,669)
Mortgage banking income. . . . . 120,110 57,669 62,441
Other service charges and fees . 144,478 104,119 40,359
Net gain (loss) on sales of:
Securities. . . . . . . . . . . 153,188 - 153,188
Loans . . . . . . . . . . . . . 588 116,462 (115,874)
Deposits. . . . . . . . . . . . 1,064,655 - 1,064,655
Other. . . . . . . . . . . . . . 111,823 33,042 78,781
--------- ------- ---------
$2,007,582 $792,701 $1,214,881
--------- ------- ---------
--------- ------- ---------
Noninterest income for the first quarter of 1996 totaled $2.0 million, an
increase of 153.3% compared to $793,000 for the first quarter of 1995. The
increase resulted from the gains on sales of securities, loans, deposits, and
premises and equipment, which totaled $1.3 million, associated with the Bank's
sale of its Charlotte, North Carolina retail bank branch. Exclusive of these
gains, noninterest income declined $68,000 during the first quarter of 1996,
which resulted primarily from the $116,000 gain on sale of loans recognized
during the first quarter of 1995 required to ensure compliance with regulatory
growth restrictions in effect prior to the Home Acquisition, which was partially
offset by a $62,000 increase in mortgage banking income during the first quarter
of 1996. The level of mortgage banking activity at Essex First Mortgage
Corporation ("Essex First") increased during the first quarter of 1996 as a
result of the lower interest rate environment. By comparison, during the first
quarter of 1995 Essex First was adversely impacted by a lower volume of loan
refinancings, which was attributable to higher mortgage rates and a general
slowdown in refinancings.
16
Noninterest Expense. The significant components of noninterest expense for
the three months ended March 31 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Salaries and employee benefits . $1,387,654 $1,107,414 $280,240
Net occupancy and equipment. . . 386,360 424,668 (38,308)
Deposit insurance premiums . . . 219,503 166,922 52,581
Amortization of intangible assets 428,619 199,247 229,372
Service bureau . . . . . . . . . 159,398 109,146 50,252
Professional fees. . . . . . . . 147,213 161,342 (14,129)
Foreclosed properties, net . . . 5,017 156,342 (151,325)
Other. . . . . . . . . . . . . . 444,144 429,670 14,474
--------- --------- -------
$3,177,908 $2,754,751 $423,157
--------- --------- -------
--------- --------- -------
Noninterest expense as a percent of average assets was 3.8% in the first
quarter of 1996 compared to 3.7% in the first quarter of 1995. Noninterest
expense increased from $2.8 million in the first quarter of 1995 to $3.2 million
in the first quarter of 1996.
The largest portion of the increase in noninterest expense is accounted for
by a $280,000 increase in salaries and employee benefits. This increase
resulted primarily from the recognition of $234,000 in compensation expense
associated with certain of EBI's stock options. An additional $79,000 increase
was attributable to personnel costs associated with the five branches acquired
in connection with the Home Acquisition.
Another significant component of the increase in noninterest expense is
accounted for by a $229,000 increase in amortization of intangible assets. EBI
recognized goodwill of approximately $8.6 million in connection with the Home
Acquisition, which is being amortized on an accelerated basis over 15 years.
Amortization of this goodwill totaled $269,000 during the first quarter of 1996.
This increase was partially offset by a $40,000 decrease in the amortization of
servicing-related assets.
Net occupancy and equipment expense was $38,000 lower during the first
quarter of 1996 than the first quarter of 1995. While the Bank incurred $62,000
of additional occupancy expense during the first quarter of 1996 attributable to
the branches acquired in connection with the Home Acquisition, it was more than
offset by reductions resulting from the downsizing of EBI's leased corporate
facilities and the closure of Essex First's loan production offices in
Chesapeake and Manassas, Virginia.
The $53,000 increase in deposit insurance premiums in the first quarter of
1996 when compared to the first quarter of 1995 was attributable to higher
assessed deposit levels resulting from the Home Acquisition.
The $50,000 increase in service bureau expense in the first quarter of 1996
when compared to the first quarter of 1995 was primarily attributable to a
higher number of deposit accounts resulting from the Home Acquisition. Also,
higher service bureau charges were incurred as a result of an increase in the
number of mortgage loans serviced by Essex Home, which increased from
approximately 10,000 loans with an aggregate principal balance of $825.8 million
at December 31, 1994 to approximately 12,600 loans with an aggregate principal
balance of $1.1 billion at March 31, 1996.
17
The $14,000 decrease in professional fees in the first quarter of 1996 when
compared to the first quarter of 1995 was primarily attributable to lower legal
and accounting fees, which were sufficient to offset the impact of $60,000 in
consulting fees during the first quarter of 1996 resulting from the Home
Acquisition.
Expenses associated with foreclosed properties for the first quarter of
1996 decreased $151,000 when compared to the first quarter of 1995, resulting
from a decrease of $80,000 in expenses associated with holding foreclosed
properties and a $71,000 reduction in the provision for losses on foreclosed
properties.
The significant components of other noninterest expense for the three
months ended March 31 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan expense . . . . . . . . . . $ 60,265 $ 38,752 21,513
Telephone. . . . . . . . . . . . 59,455 62,732 (3,277)
Postage and courier. . . . . . . 55,072 48,901 6,171
Stationery and supplies. . . . . 33,624 44,854 (11,230)
Advertising and marketing. . . . 37,400 59,575 (22,175)
Corporate insurance. . . . . . . 48,177 39,884 8,293
Travel . . . . . . . . . . . . . 23,613 13,282 10,331
Provision for servicing losses . 6,000 9,000 (3,000)
Other. . . . . . . . . . . . . . 120,538 112,690 7,848
------- ------- -------
$444,144 $429,670 $ 14,474
------- ------- -------
------- ------- -------
Income Taxes. There was no income tax provision recognized for financial
reporting purposes during the quarters ended March 31, 1996 or 1995, because EBI
had significant net operating loss carryforwards, which approximated $19.9
million at December 31, 1995. Also, until consistent profitability is
demonstrated, deferred income tax assets related to EBI's net operating loss
carryforwards and temporary differences will not be recognized.
Liquidity
Liquidity refers to EBI's ability to generate sufficient cash to meet the
funding needs of current loan demand, savings deposit withdrawals, and to pay
operating expenses. EBI generally has no significant source of income other than
dividends from its subsidiaries. As a result of prior regulatory examinations,
EBI and the Bank had entered into Supervisory Agreements with the OTS which
precluded the Bank from making dividend payments to EBI. While these
Supervisory Agreements are no longer in effect as a result of the Home
Acquisition, EBI is still obligated to comply with the spirit of the Agreements.
Consequently, EBI's source of funds is currently limited to assessments to its
subsidiaries for certain operating expenses and tax payments, if any, by such
subsidiaries to EBI, and asset sales.
The Bank's liquidity management is both a daily and long-term function of
funds management. Liquidity is generally invested in short-term investments
such as federal funds sold, certificates of deposit, and in U.S. Treasury and
U.S. Government agency securities of maturities of five years or less. If the
Bank requires funds that cannot be generated internally (i.e., funds generated
through contractual maturities of loans), borrowings from the FHLB may provide
an additional source of funds. At March 31, 1996, the Bank had $28.0 million in
outstanding borrowings from the FHLB. The Bank has not relied upon brokered
deposits as a source of new liquidity, and does not anticipate a change in this
practice in the foreseeable future.
18
The Bank anticipates that it will have sufficient funds available to meet
its current loan commitments. At March 31, 1996, the Bank had outstanding
commitments (including unused lines of credit) to originate and/or purchase
mortgage and non-mortgage loans of $6.1 million. Certificates of deposit which
are scheduled to mature within one year totaled $156.0 million at March 31,
1996, and borrowings from the FHLB that are scheduled to mature within the same
period amounted to $7.6 million. Essex First's commitments to originate
residential construction builder loans and construction/permanent loans totaled
$30.2 million and $3.9 million, respectively, as of March 31, 1996.
Asset and Liability Management
The primary objective of asset and liability management is to assure
adequate liquidity and maintenance of appropriate balances between
interest-sensitive earning assets and interest-bearing liabilities at the
Bank. Effective management of sources and uses of funds is recognized by the
Bank as a necessity in order to maximize profits while incurring a minimum
amount of risk.
The Bank utilizes interest rate sensitivity analyses, as developed by the
OTS, to measure the loss in net portfolio value ("NPV"), expressed as a
percentage of the Bank's market value of assets, assuming certain percentage
changes in interest rates. NPV is the market value of assets, less the market
value of liabilities, plus the net market value of off-balance sheet items.
Also, the Bank monitors its cumulative one-year interest rate sensitivity gap,
which is the measure by which the Bank's assets and liabilities are subject to
repricing in future time periods. Effective asset and liability management
seeks to ensure that net interest income is maximized while the impact of
changes in the level of market interest rates is minimized. An objective of the
Bank will continue to be the reduction of the sensitivity of its earnings to
interest rate fluctuations by diversifying the sources of funds, improving its
interest rate spread, improving the ratio of interest-earning assets to
interest-bearing liabilities, and achieving a better matching of the maturities
of interest rate sensitive assets and liabilities.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of NPV exceeding 2.0% of the estimated discounted cash flow value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule provides that the OTS will calculate the interest
rate risk component quarterly for each institution. The rule also authorizes
the Director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. The final rule was
effective January 1, 1994. However, the date that institutions are first
required to deduct the interest rate risk component has been postponed several
times and is currently delayed indefinitely until a final rule is published by
the OTS. The OTS calculated that there was not an interest rate risk component
for the Bank as of December 31, 1995. Moreover, the final regulations allow for
a nine-month lag in determining the amount of capital required to be deducted
from risk-based capital. Therefore, based on the nine-month lag provision, the
Bank may use the lowest interest rate risk component for any of the preceding
three quarters in determining the deduction, if any, from risk-based capital.
Because the Bank did not have an interest rate risk component at any quarter end
during 1995, there would not have been a deduction from the Bank's risk-based
capital at March 31, 1996, if such regulation had been effective as of such
date.
19
Regulatory Matters
Federal Regulatory Capital Requirements. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires that savings
institutions satisfy three separate requirements of specified capital as a
percent of the appropriate asset base: a tangible capital requirement equal to
1.5% of adjusted total assets, a core capital requirement equal to 3.0% of
adjusted total assets, and a risk-based capital requirement equal to 8% of
risk-weighted assets. At March 31, 1996, the Bank was in compliance with the
capital requirements established by FIRREA.
Section 38 of the Federal Deposit Insurance Act, as added by the FDIC
Improvement Act ("FDICIA"), requires each appropriate agency and the Federal
Deposit Insurance Corporation ("FDIC") to, among other things, take prompt
corrective action ("PCA") to resolve the problems of insured depository
institutions that fall below certain capital ratios. Federal regulations under
FDICIA classify savings institutions as "adequately capitalized" based on four
separate requirements of specified capital as a percent of the appropriate asset
base: tangible equity of 2.00%, Tier 1 core capital of 4.00%, Tier 1 risk-based
capital of 4.00%, and total risk-based capital of 8.00%. As of March 31, 1996,
the Bank was "adequately capitalized" for PCA purposes.
The OTS has proposed to modify the core capital requirement. Under the OTS
proposal, only savings institutions rated a composite 1 under the OTS CAMEL
rating system will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. For all other savings institutions, the minimum core
capital leverage ratio will be 3% plus at least an additional 100 to 200 basis
points. Furthermore, the OTS has issued a rule adding an interest rate risk
component to its risk-based capital requirement. See "Asset and Liability
Management" for a description of this rule.
Recent Regulatory Developments. Deposits of the Bank are currently insured
by the Savings Association Insurance Fund ("SAIF"). Both the SAIF and the Bank
Insurance Fund ("BIF"), the deposit insurance fund that covers most commercial
bank deposits, are statutorily required to be recapitalized to a ratio of 1.25%
of insured reserve deposits. While the BIF has reached the required reserve
ratio, the SAIF is not expected to be recapitalized until 2002 at the earliest.
The RTC Completion Act authorized $8 billion in funding for the SAIF. However,
such funds only become available to the SAIF if the FDIC determines that the
funds are needed to cover losses of the SAIF and several other stringent
criteria are met.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as the Bank will be competitively
disadvantaged as compared to commercial banks by the resulting premium
differential. It is anticipated that, under present conditions, it will be at
least several years before the SAIF reaches a reserve ratio of 1.25% of insured
deposits.
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The proposed legislation would have
provided that all SAIF member institutions pay a special one-time assessment
to recapitalize the SAIF, which in the aggregate would have been sufficient
to bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based
on the current level of reserves
20
maintained by the SAIF, it was anticipated that the amount of the special
assessment required to recapitalize the SAIF would have been approximately 80 to
85 basis points of the SAIF-assessable deposits. It was anticipated that after
the recapitalization of the SAIF, premiums paid by SAIF-insured institutions
would be reduced to match those currently being assessed BIF-insured commercial
banks. The legislation also provided for the merger of the BIF and the SAIF,
with such merger being conditioned upon the prior elimination of the thrift
charter.
The legislation discussed above had been, for some time, included as part
of a fiscal 1996 federal budget bill, but was eliminated prior to the bill being
enacted on April 26, 1996. In light of the legislation's elimination and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Bank. If the legislation were to be enacted in
the future, which would assess a one-time special assessment of 85 basis points,
the Bank would (based upon the Bank's SAIF deposits as of March 31, 1995) pay
approximately $2.3 million, before related tax benefits, if any. In addition,
the enactment of such legislation may have the effect of immediately reducing
the capital of SAIF-member institutions by the amount of the special assessment.
The proposed legislation also provides that any savings association that would
become undercapitalized under the FDIC's PCA regulations as a result of the
special deposit premium assessment could be exempted from payment of the
assessment, provided that the institution would continue to be subject to the
payment of semiannual assessments under the current rate schedule following the
recapitalization of the SAIF.
Regulatory Compliance. On June 30, 1995, EBI and the Bank entered into a
definitive agreement to acquire Home Bancorp and its wholly-owned subsidiary,
Home Savings. The Home Acquisition was consummated on September 15, 1995, and
as a result of the transaction the OTS terminated supervisory agreements EBI and
the Bank had entered into with the OTS. However, the boards of directors of EBI
and the Bank have undertaken, as required by the OTS, to continue to implement
and adhere to the spirit of the provisions of the agreements. Such provisions
include restrictions on dividend payments and expense reimbursements, and among
other areas of compliance, restrictions on transactions with affiliates,
continued oversight of asset quality, and the submission of an updated business
plan for 1996, which was submitted to the OTS on January 22, 1996 and approved
on March 25, 1996.
In January 1996, the board of directors of EBI formed a special committee
of the board, the Strategic Evaluation Committee (the "Committee"). The purpose
of the Committee, among other objectives, is to review strategic alternatives to
enhance shareholder value. Although the Bank exceeded all regulatory capital
requirements at March 31, 1996, the operations of the Company after the Home
Acquisition are not profitable. Accordingly, the Committee is evaluating
profitability enhancements and possible corporate restructurings. In the first
quarter of 1996, the Bank sold its Charlotte, North Carolina branch including
$28.1 million of deposits and accrued interest payable and $709,000 of assets
(including premises and equipment, loans on deposits and accrued interest
receivable, and cash), which resulted in a pre-tax gain of $1.3 million. In
addition, on April 15, 1996, the Bank's management announced that an agreement
had been signed to sell its Wilmington, Greensboro, and Raleigh, North Carolina
retail bank branches to a state-chartered commercial bank in North Carolina.
These branches aggregate approximately $77 million in deposits. The sale is
anticipated to close in the third quarter of 1996 and is dependent upon
regulatory approval. While management is of the opinion that capital compliance
will be maintained throughout 1996, the OTS is presently conducting an
examination of the Bank. Adjustments, if any, resulting from the examination
could have an adverse impact on the Bank's regulatory capital. Moreover, until
the Company's recurring profitability is restored, management can not provide
assurances that compliance with all regulatory capital requirements can be
sustained beyond that horizon.
21
Standards for Safety and Soundness. Effective August 9, 1995, the federal
banking regulatory agencies jointly implemented Interagency Guidelines
Establishing Standards for Safety and Soundness ("Guidelines") for all insured
depository institutions relating to internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, fees and benefits, and employment
contracts and other compensation arrangements of executive officers, employees,
directors and principal stockholders of insured depository institutions that
would prohibit compensation and benefits and arrangements that are excessive or
that could lead to a material financial loss for the institution. In addition,
the federal banking regulatory agencies are planning to adopt asset quality and
earnings standards. These proposed safety and soundness standards were issued
for public comment until August 24, 1995. After reviewing the comments, the
agencies intend to add the asset quality and earnings standards to the standards
already in the Guidelines. If an insured depository institution fails to meet
any of its prescribed standards as described above, it may be required to submit
to the appropriate federal banking agency a compliance plan specifying the steps
that will be taken to cure the deficiency and the time within which these steps
will be taken. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company to correct the deficiency and until corrected,
may impose restrictions on the institution or holding company, including any of
the restrictions applicable under the prompt corrective action provisions of
FDICIA. The Bank does not currently meet some of the proposed standards for
asset quality and earnings. Accordingly, the Bank may be required to file a
safety and soundness compliance plan.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 1996, an annual meeting of stockholders of EBI was held for the
purpose of considering and voting upon (i) the election of two directors for a
term of three years, (ii) the approval of the First and Second Amendments to the
EBI Stock Option Plan, and (iii) the approval of the First Amendment to the EBI
Non-Employee Directors Stock Option Plan. At the meeting, (i) the election of
Mr. Roscoe D. Lacy, Jr. as a director was approved by a vote of 1,004,560 EBI
common shares voting in favor, 5,579 shares voting against and 16,400 shares
abstaining, (ii) the election of Mr. Robert G. Hecht as a director was approved
by a vote of 1,004,903 shares voting in favor, 5,236 shares voting against and
16,400 shares abstaining, (iii) the First and Second Amendments to the EBI Stock
Option Plan were approved by a vote of 646,122 shares voting in favor, 77,997
shares voting against and 302,420 shares abstaining, and (iv) the First
Amendment to the EBI Non-Employee Directors Stock Option Plan was approved by a
vote of 911,319 shares voting in favor, 83,075 shares voting against and 32,145
shares abstaining. No other business was conducted at the meeting.
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibits are filed as part of this
Part II:
Exhibit No. Description
----------- -----------
10.1 Branch Purchase and Deposit Assumption Agreement
dated April 11, 1996 between Essex Savings Bank,
F.S.B. and Centura Bank
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Essex Bancorp, Inc.
May 10, 1996 By: /s/ Gene D. Ross
------------ -----------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
May 10, 1996 By: /s/ Mary-Jo Rawson
------------ ------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
24
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
10.1 Branch Purchase and Deposit Assumption Agreement dated April
11, 1996 between Essex Savings Bank, F.S.B. and Centura Bank
11 Statement re: computation of earnings per share
27 Financial Data Schedule
E-1