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 JUNE 30, 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 .
--- ---
Shares outstanding as of August 5, 1996: 1,051,790 shares of Common
Stock, par value $.01 per share.
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1996
TABLE OF CONTENTS
PAGE
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended
June 30, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the six months ended
June 30, 1996 7
Consolidated Statements of Cash
Flows (unaudited) for the six months
ended June 30, 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 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote
of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
1996 1995
---- ----
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,734,894 $ 3,262,080
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . 6,461,838 7,833,638
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . . . . . 5,044,000 4,913,000
-------------- --------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . 15,240,732 16,008,718
Certificates of deposit in other financial institutions. . . . . . 8,000,000 -
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . 2,540,000 3,602,800
Securities available for sale - cost approximates market . . . . . 2,218,654 1,493,646
Securities held to maturity - market value of
$5,767,000 in 1996 and $7,840,000 in 1995. . . . . . . . . . . . 6,013,020 7,998,631
Mortgage-backed securities available for sale - cost of
$2,906,000 in 1996 and $13,590,000 in 1995 . . . . . . . . . . . 2,919,435 13,744,471
Mortgage-backed securities held to maturity - market
value of $1,842,000 in 1996 and $1,806,000 in 1995 . . . . . . . 1,905,442 1,905,554
Loans, net of allowance for loan losses of $5,533,000
in 1996 and $5,251,000 in 1995 . . . . . . . . . . . . . . . . . 185,410,716 266,631,520
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . 66,891,095 3,263,060
Purchased mortgage servicing rights and excess
servicing fees receivable. . . . . . . . . . . . . . . . . . . . 1,415,286 1,634,307
Foreclosed properties, net . . . . . . . . . . . . . . . . . . . . 2,444,216 4,855,887
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . 1,920,821 2,148,779
Excess of cost over net assets acquired, less
accumulated amortization of $9,014,000 in 1996
and $2,562,000 in 1995 . . . . . . . . . . . . . . . . . . . . . 2,177,995 8,577,073
Advances for taxes, insurance, and other . . . . . . . . . . . . . 717,204 669,557
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . 3,286,316 4,121,922
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,122,452 2,068,489
-------------- --------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . $ 305,223,384 $ 338,724,414
============== ==============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
1996 1995
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . $ 1,555,015 $ 1,495,976
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . 258,268,771 282,001,130
-------------- --------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . 259,823,786 283,497,106
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . 26,261,667 29,833,333
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 120,203 120,203
Capitalized lease obligations. . . . . . . . . . . . . . . . . . . 406,227 424,956
Subordinated capital notes . . . . . . . . . . . . . . . . . . . . 633,429 627,858
Mortgages payable on foreclosed properties . . . . . . . . . . . . - 25,258
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 2,404,985 1,566,048
-------------- --------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . 289,650,297 316,094,762
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 - 1,051,790 in 1996
and 1,049,684 in 1995. . . . . . . . . . . . . . . . . . . . 10,518 10,497
Capital in excess of par . . . . . . . . . . . . . . . . . . . . . 23,656,349 23,652,135
Holding gain on securities available for sale. . . . . . . . . . . 13,748 154,174
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (8,130,028) (1,209,654)
-------------- --------------
Total Shareholders' Equity. . . . . . . . . . . . . . . . 15,573,087 22,629,652
-------------- --------------
Total Liabilities and Shareholders' Equity. . . . . . . . $ 305,223,384 $ 338,724,414
============== ==============
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Six Months
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1995 1996 1995
---- ----
INTEREST INCOME
Loans, including fees. . . . . . . . . . . . . . . . $ 5,133,027 $ 4,672,795 $10,575,305 $ 9,422,401
Federal funds sold and securities purchased
under agreements to resell . . . . . . . . . . . . 78,857 63,072 170,783 119,366
Investment securities, including
dividend income. . . . . . . . . . . . . . . . . . 153,776 206,021 343,198 437,575
Mortgage-backed securities . . . . . . . . . . . . . 110,557 331,804 360,376 670,922
Other. . . . . . . . . . . . . . . . . . . . . . . . 187,248 51,699 324,805 87,480
----------- ----------- ----------- -----------
Total Interest Income . . . . . . . . . . . 5,663,465 5,325,391 11,774,467 10,737,744
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . 3,538,402 3,145,181 7,391,155 5,928,313
Federal Home Loan Bank advances. . . . . . . . . . . 415,011 778,978 856,034 1,644,256
Notes payable. . . . . . . . . . . . . . . . . . . . 2,847 38,898 5,694 94,335
Subordinated capital notes 18,493 18,193 36,877 36,083
Other. . . . . . . . . . . . . . . . . . . . . . . . 37,660 31,028 66,622 60,870
----------- ----------- ----------- -----------
Total Interest Expense. . . . . . . . . . . 4,012,413 4,012,278 8,356,382 7,763,857
----------- ----------- ----------- -----------
Net Interest Income . . . . . . . . . . . . 1,651,052 1,313,113 3,418,085 2,973,887
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . 802,651 597,242 803,052 2,191,938
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Loan Losses . . . . . . . . . 848,401 715,871 2,615,033 781,949
NONINTEREST INCOME
Loan servicing fees. . . . . . . . . . . . . . . . . 422,375 428,872 835,115 910,281
Mortgage banking income, including
gain on sale of loans. . . . . . . . . . . . . . . 151,011 126,593 271,121 184,262
Other service charges and fees . . . . . . . . . . . 133,047 97,995 277,525 202,114
Net gain (loss) on sale of:
Securities . . . . . . . . . . . . . . . . . . . . - - 153,188 -
Loans. . . . . . . . . . . . . . . . . . . . . . . - - 588 116,462
Deposits . . . . . . . . . . . . . . . . . . . . . - - 1,064,655 -
Other. . . . . . . . . . . . . . . . . . . . . . . . (24,607) 57,943 87,216 90,985
----------- ----------- ----------- -----------
Total Noninterest Income. . . . . . . . . . 681,826 711,403 2,689,408 1,504,104
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Six Months
ENDED JUNE 30, ENDED JUNE 30,
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1996 1995 1996 1995
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NONINTEREST EXPENSE
Salaries and employee benefits . . . . . . . . . . . 1,288,215 1,064,277 2,675,869 2,171,691
Net occupancy and equipment 394,967 404,520 781,327 829,188
Deposit insurance premiums . . . . . . . . . . . . . 218,423 166,922 437,926 333,844
Amortization of intangible assets. . . . . . . . . . 6,304,624 186,490 6,733,243 385,737
Service bureau . . . . . . . . . . . . . . . . . . . 162,170 123,397 321,568 232,543
Professional fees. . . . . . . . . . . . . . . . . . 136,667 115,339 283,880 276,681
Foreclosed properties, net . . . . . . . . . . . . . 81,090 48,315 86,107 204,657
Other. . . . . . . . . . . . . . . . . . . . . . . . 460,751 510,622 904,895 940,292
------------ ----------- ----------- -----------
Total Noninterest Expense . . . . . . . . . 9,046,907 2,619,882 12,224,815 5,374,633
------------ ----------- ----------- -----------
Loss Before Income Taxes and
Extraordinary Item . . . . . . . . . . . (7,516,680) (1,192,608) (6,920,374) (3,088,580)
PROVISION FOR INCOME TAXES. . . . . . . . . . . . . . . - - - -
------------ ----------- ----------- -----------
Loss Before Extraordinary Item . . . . . . . . (7,516,680) (1,192,608) (6,920,374) (3,088,580)
EXTRAORDINARY ITEM - FORGIVENESS OF
DEBT . . . . . . . . . . . . . . . . . . . . . . . . - - - 261,683
------------ ----------- ----------- -----------
Net Loss. . . . . . . . . . . . . . . . . . . . $ (7,516,680) $(1,192,608) $(6,920,374) $(2,826,897)
============ =========== =========== ===========
Loss per common share:
Loss before extraordinary item . . . . . . . . . . $ (7.15) $ (1.14) $ (6.59) $ (2.94)
Extraordinary item . . . . . . . . . . . . . . . . - - - .25
------------ ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (7.15) $ (1.14) $ (6.59) (2.69)
============ =========== =========== ===========
Weighted average common shares outstanding . . . . . 1,050,588 1,049,684 1,050,150 1,049,684
============ =========== =========== ===========
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 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. . . . . . . . . . . . . . . 21 - - 4,214 - - 4,235
Net decrease in holding gain on
securities available for sale . . - - - - - (140,426) (140,426)
Net loss. . . . . . . . . . . . . . - - - - (6,920,374) - (6,920,374)
--------- --------- --------- ----------- ----------- --------- -----------
Balance, June 30, 1996. . . . . . . $10,518 $21,250 $1,250 $23,656,349 $(8,130,028) $ 13,748 $15,573,087
========= ========= ========= =========== =========== ========= ===========
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------
1996 1995
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OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,920,374) $ (2,826,897)
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. . . . . . . 811,981 2,303,608
Depreciation and amortization of premises
and equipment . . . . . . . . . . . . . . . . . . . . . . 267,284 235,408
Amortization (accretion) of:
Premiums and discounts on:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 119,338 132,512
Mortgage-backed securities held to maturity . . . . . . 112 2,721
Mortgage-backed securities available for sale . . . . . 4,778 -
Securities held to maturity . . . . . . . . . . . . . . 6,236 (8,690)
Purchased mortgage servicing rights and
excess servicing fees receivable. . . . . . . . . . . . 281,429 354,706
Excess of costs over equity in net assets
acquired. . . . . . . . . . . . . . . . . . . . . . . . 6,451,813 31,031
Premium on deposits . . . . . . . . . . . . . . . . . . . (67,908) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 988 -
Mortgage banking activities:
Net increase in loans originated for resale . . . . . . . . . (58,268) (3,861,452)
Realized gains from sale of loans . . . . . . . . . . . . . . (252,548) (181,507)
Realized (gains) and losses from sales of:
Securities available for sale . . . . . . . . . . . . . . . . (153,188) -
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (588) (116,462)
Premises and equipment. . . . . . . . . . . . . . . . . . . . (63,789) (12,088)
Foreclosed properties . . . . . . . . . . . . . . . . . . . . (16,704) (48,460)
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,064,655) -
Unrealized loss on loans held for sale . . . . . . . . . . . . . 313,765 -
Changes in operating assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . 227,958 (32,893)
Other assets. . . . . . . . . . . . . . . . . . . . . . . (151,801) 707,341
Other liabilities . . . . . . . . . . . . . . . . . . . . 844,508 (206,180)
------------ ------------
Net cash provided by (used in) operating activities. . . . . . . . . 580,367 (3,788,985)
See notes to consolidated financial statements.
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------
1996 1995
---- ----
INVESTING ACTIVITIES
Purchase of certificates of deposit in other
financial institutions . . . . . . . . . . . . . . . . . . . . . (8,000,000) -
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. . . . . . . 3,000,000 1,000,000
Purchase of securities available for sale. . . . . . . . . . . . . . (2,725,008) (5,374,488)
Proceeds from sales of securities available for sale . . . . . . . . 2,000,000 4,700,000
Principal remittances on mortgage-backed securities
held to maturity . . . . . . . . . . . . . . . . . . . . . . . . - 1,069,135
Principal remittances on mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . . . . . . . 764,831 -
Proceeds from sales of mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . . . . . . . 10,068,189 -
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . 7,290,962 8,179,770
Net (increase) decrease in net loans . . . . . . . . . . . . . . . . 8,561,611 (7,385,755)
Proceeds from sales of foreclosed properties . . . . . . . . . . . . 3,442,320 2,198,992
Increase in foreclosed properties. . . . . . . . . . . . . . . . . . (128,203) (229,798)
Increase in excess servicing fees receivable . . . . . . . . . . . . (62,408) -
Purchase of premises and equipment . . . . . . . . . . . . . . . . . (105,627) (914,349)
Proceeds from sales of premises and equipment. . . . . . . . . . . . 654,980 1,984
------------ ------------
Net cash provided by investing activities. . . . . . . . . . . . . . 24,803,822 5,068,591
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 increase (decrease) in NOW and savings deposits. . . . . . . . . 1,045,108 (9,353,713)
Net increase (decrease) in certificates of deposit . . . . . . . . . 3,250,772 19,737,578
Proceeds from Federal Home Loan Bank advances. . . . . . . . . . . . - 14,500,000
Repayment of Federal Home Loan Bank advances . . . . . . . . . . . . (3,571,666) (22,984,167)
Proceeds from issuance of notes payable. . . . . . . . . . . . . . . - 3,893
Payments on credit facility. . . . . . . . . . . . . . . . . . . . . - (894,377)
Payments on capital lease obligations. . . . . . . . . . . . . . . . (18,729) (38,921)
Payments on mortgages payable on foreclosed
properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,258) (164,743)
Common stock issued under Employee Stock
Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 4,235 -
------------ ------------
Net cash used in financing activities. . . . . . . . . . . . . . . . (26,152,175) 805,550
------------ ------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . (767,986) 2,085,156
Cash and cash equivalents at beginning of period . . . . . . . . . . 16,008,718 6,906,159
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 15,240,732 $ 8,991,315
============ ============
See notes to consolidated financial statements.
9
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------
1996 1995
---- ----
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties . . . . . . . . . . . . $ 882,671 $ 1,473,822
Write-off of fixed assets in connection with
termination of capital lease . . . . . . . . . . . . . . . . . . - 50,520
Increase (decrease) in mortgages payable on
foreclosed properties. . . . . . . . . . . . . . . . . . . . . . - (16,482)
Termination of capital lease obligation for fixed assets . . . . . . - 61,469
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,314,228 $ 7,740,864
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)
JUNE 30, 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
Loss per share is based on the loss divided by the weighted average number of
common shares outstanding for each period presented because any assumption of
conversion of warrants and options outstanding would be antidilutive.
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 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.
NOTE 4 - SUBSEQUENT EVENT
Effective July 25, 1996, Essex Savings Bank, F.S.B. (the "Bank") sold the
deposits and related accrued interest of its Raleigh, Wilmington and
Greensboro, North Carolina retail bank branches (the "Branches"), which
approximated $71.3 million, along with deposit loans and related accrued
interest totaling $72,000. In connection with the sale of the Branches, the
Bank recognized a $700,000 gain on the sale of deposits, net of transaction
costs.
The sale of the Branches required cash of $70.5 million, which was funded by
the sale of fixed-rate and adjustable-rate first mortgage loans and related
accrued interest with a carrying value approximating $62.2 million, as well
as the utilization of a portion of the Bank's excess liquidity.
11
NOTE 5 - PROPOSED BRANCH SALE
On July 3, 1996, EBI announced that the Bank had signed an agreement to sell
its Norfolk, Portsmouth, Hampton, Newport News and Grafton, Virginia retail
bank branches to a federal savings bank headquartered in Norfolk, Virginia.
The sale of these branches, which aggregated approximately $69.9 million in
deposits as of June 30, 1996, is anticipated to close during 1996 and is
dependent upon regulatory approval. As a result of the decision to sell
these branches, EBI wrote down the net asset value of the branches, primarily
the excess of cost over net assets acquired ("goodwill"), to their net
realizable value through a $5.9 million charge to earnings during the second
quarter of 1996.
[intentionally blank]
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Total assets of EBI at June 30, 1996 were $305.2 million as compared
to $338.7 million at December 31, 1995, a decrease of approximately $33.5
million or 9.9%. 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. In addition, Federal Home Loan Bank ("FHLB") stock decreased $1.1
million as redemption proceeds were used to partially fund the scheduled
maturities of FHLB advances during the first half of 1996, and securities
held to maturity decreased $2.0 million. Goodwill decreased $6.4 million
primarily as a result of a $5.9 write down in connection with the proposed
branch sale described in Note 5 of the Notes to Consolidated Financial
Statements included in this report.
Included in loans held for sale at June 30, 1996 were fixed-rate and
adjustable-rate first mortgage loans with a carrying value of $63.3 million,
which were sold during July 1996 to partially fund the sale of the Branches,
as described in Note 4 of the Notes to Consolidated Financial Statements
included in this report. Excluding the impact of the reclassification of
these loans to loans held for sale and the previously-described sale of $7.3
million of loans in connection with the sale of the Bank's Charlotte, North
Carolina retail bank branch, loans held for investment declined $10.3 million
during the first half of 1996 primarily as a result of prepayment activity.
Funds provided from this activity were invested in lower-yielding liquid
investments in order to partially fund the sale of the Branches in July 1996.
Loans held for investment also declined as a result of a $282,000 increase
in the allowance for loan losses.
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 $7.1 million at June 30,
1996, and are summarized as follows (in thousands):
June 30, December 31,
1996 1995
---- ----
Nonaccrual loans:
CDRELs, net $ 1,463 $ 2,737
Other 2,907 3,344
Accruing loans 90 days or more past due 132 177
Troubled debt restructured loans 182 143
------- -------
Total nonperforming loans, net 4,684 6,401
Foreclosed properties, net 2,444 4,856
------- -------
Total nonperforming assets,
net of specific reserves $ 7,128 $11,257
======= =======
Accruing loans in the 30-59 day and 60-89 day delinquency categories
also decreased, as shown below (in thousands):
Delinquency June 30, December 31,
Category 1996 1995
-------- ---- ----
30-59 days past due $ 721 $ 2,222
60-89 days past due 336 942
------- -------
$ 1,057 $ 3,164
======= =======
13
The decrease in nonperforming assets consisted of a $1.7 million
decline in nonperforming loans and a $2.4 million decline in foreclosed
properties. During the second quarter of 1996, the Bank increased the
specific loss allowance on its CDREL secured by a low-income apartment
complex in Richmond, Virginia. This credit originated in February 1990 and
has been modified several times since then in efforts to facilitate a
renovation and sale of the apartment complex. Management has concluded that
the sale of the apartment complex will not occur in the foreseeable future.
The reassessment of this credit coincided with the completion of an
examination of EBI and the Bank by the Office of Thrift Supervision ("OTS").
Other nonaccrual loans decreased during the first half of 1996 as a result of
collections totaling $560,000 on the Bank's nonaccruing commercial real
estate loans to a single borrower that were secured by nursing home
facilities.
The decline in delinquent loans was attributable to the continuing
improvement in the mortgage loan portfolio acquired from Home Savings Bank,
F.S.B. on September 15, 1995. At December 31, 1995, loans 30-59 days past
due in this portfolio totaled $977,000 and loans 60-89 days past due totaled
$381,000 as compared to $78,000 and $22,000, respectively, at June 30, 1996.
The decrease in foreclosed properties resulted primarily from the
sale of a significant portion of a foreclosed property secured by farmland in
North Carolina during April 1996, which resulted in a $2.0 million reduction
in this property's carrying value. The remainder of this property is under
contract.
Deposits, the primary source of EBI's funds, totaled $259.8 million
at June 30, 1996 as compared to $283.5 million at December 31, 1995, a
decrease of $23.7 million or 8.4%. 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 $26.3 million at June
30, 1996 as a result of scheduled maturities.
RESULTS OF OPERATIONS
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
and six months ended June 30, 1995 have not been restated to reflect the Home
Acquisition. However, EBI's net loss for the three months and six months
ended June 30, 1996 include the impact of the Home Acquisition.
FIRST SIX MONTHS OF 1996 COMPARED TO FIRST SIX MONTHS OF 1995
EBI's net loss for the six months ended June 30, 1996 totaled $6.9
million, compared to a net loss of $2.8 million for the six months ended June
30, 1995. During the first six months of 1996, EBI's operating results were
adversely impacted by a $5.9 million write down in the net asset value of
certain of the Bank's Virginia retail bank branches anticipated to be sold
during 1996 and a $314,000 unrealized loss on loans held for sale in
connection with the July 1996 sale of the Branches, which was partially
offset by a $249,000 gain on futures contracts executed to hedge the interest
rate risk of these loans. However, EBI's operating results for the first
half of 1996 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
14
the Charlotte branch sale. Excluding the impact of these nonrecurring
transactions, EBI incurred a net loss of $2.2 million during the first six
months of 1996, which was a $932,000 improvement over the $3.1 million loss
from continuing operations during the first six months of 1995. The
improvement in 1996 was the result of a $1.4 million reduction in loan loss
provisions and a $444,000 increase in net interest income, which were
partially offset by a $969,000 increase in noninterest expense, primarily
resulting from an increase in operating expenses and the amortization of
goodwill associated with the Home Acquisition.
During the first half of 1995, EBI's operating results benefited
from the recognition of income from extraordinary items attributable to
$262,000 of extraordinary gain from the forgiveness of debt. However,
despite the income from extraordinary items, EBI incurred a loss from
continuing operations of $3.1 million during the first half of 1995. EBI's
operating results were adversely impacted by loan loss provisions of $2.2
million and lower levels of net interest income and mortgage banking income.
However, EBI benefited during the first half 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 six months ended June 30:
1996 1995
--------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1). . . . . . . . . . . $265,458 $10,575 7.97% $244,353 $ 9,422 7.71%
Investment securities. . . . . 12,100 343 5.67 15,548 438 5.63
Mortgage-backed
securities . . . . . . . . 9,333 360(2) 7.82 17,705 671 7.58
Federal funds sold and
securities purchased under
agreements to resell . . . 6,533 171 5.23 3,500 119 6.82
Other. . . . . . . . . . . . . 11,501 325(3) 5.37 2,612 88(3) 6.43
-------- ------- -------- -------
Total interest-earning
assets . . . . . . . . $304,925 11,774(2)(3) 7.71 $283,718 10,738(3) 7.57
======== ======= ======== =======
Interest-bearing liabilities:
Deposits . . . . . . . . . . . $265,847 7,391 5.56 $226,651 5,928 5.23
FHLB advances. . . . . . . . . 28,580 856 5.99 55,387 1,644 5.94
Notes payable. . . . . . . . . 120 6 9.47 2,017 95 9.35
Subordinated capital notes . . 630 37 11.71 618 36 11.69
Other. . . . . . . . . . . . . 416 66(4) 18.30 481 61(4) 17.72
-------- ------- -------- -------
Total interest-bearing
liabilities. . . . . . $295,593 8,356(4) 5.63 $285,154 7,764(4) 5.43
======== ======= ======== =======
Net interest earnings. . . . . . $ 3,418 $ 2,974
======= =======
Net interest spread (2),(3),(4). 2.08% 2.14%
===== =====
Net yield on interest-earning
assets (2),(3),(4) . . . . . . 2.25% 2.11%
===== =====
(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 $16,288 and $3,468, respectively, which consists
primarily of interest earned on custodial accounts maintained for
servicing investors.
(4) Calculation in 1996 and 1995 excludes $28,589 and $18,234, respectively,
which consists primarily of interest paid on escrow accounts.
15
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From the First Six Months
of 1995 to the First Six Months of 1996 Due to
----------------------------------------------
Volume (1) Rate (1) Net
---------- -------- -----
(in thousands)
Interest income on:
Loans (2). . . . . . . . . . . . . . . $ 833 $ 320 $1,153
Investment securities. . . . . . . . . (104) 9 (95)
Mortgage-backed securities . . . . . . (370) 59 (311)
Federal funds sold and
securities purchased under
agreements to resell. . . . . . . . 128 (76) 52
Other interest-earning assets. . . . . 267 (30) 237
------ ----- ------
Total interest income (2) . . . . . 754 282 1,036
Interest expense on:
Deposits . . . . . . . . . . . . . . . 1,073 390 1,463
FHLB advances. . . . . . . . . . . . . (832) 44 (788)
Notes payable. . . . . . . . . . . . . (92) 3 (89)
Subordinated capital notes . . . . . . 1 - 1
Other interest-bearing liabilities . . (8) 13 5
------ ----- ------
Total interest expense. . . . . . . 142 450 592
------ ----- ------
Net interest income . . . . . . . . $ 612 $(168) $ 444
====== ===== ======
(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 $3.0 million for the
first half of 1995 to $3.4 million for the first half of 1996. In addition,
the annualized net yield on interest-earning assets increased from 2.11% for
the first half of 1995 to 2.25% for the first half of 1996, reflecting the
impact of 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 whereby excess liquidity maintained in
lower-yielding interest-earning assets was utilized to reduce higher-costing
FHLB advances. In addition, EBI's net yield on interest-earning assets
benefited during the first half of 1996 by the renewal of deposits at lower
market rates. A 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 six months ended June 30 are as follows (in thousands):
1996 1995
---- ----
Balance at beginning of period . . . . . . $5,251 $3,429
Provision for loan losses. . . . . . . . . 803 2,192
------ ------
6,054 5,621
Loans charged-off, net of recoveries . . . (521) (917)
------ ------
Balance at end of period . . . . . . . . . $5,533 $4,704
====== ======
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. However, based on management's assessment of the
uncertainty regarding the successful rehabilitation and ultimate sale of a
low-income apartment complex securing the Bank's most significant problem
credit, additional loss reserves
16
were allocated to this CDREL, which resulted in an $800,000 provision for
loan losses in order to replenish the general loan loss allowance to a level
sufficiently adequate to absorb losses.
The provision for loan losses for the first half of 1995 was $2.2
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, a provision
of $675,000 was 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 half of 1995 included adjustments
resulting from the OTS asset quality examination.
NONINTEREST INCOME. The significant components of noninterest
income for the six months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan servicing fees. . . . . . . . $ 835,115 $ 910,281 $ (75,166)
Mortgage banking income. . . . . . 271,121 184,262 86,859
Other service charges and fees . . 277,525 202,114 75,411
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. . . . . . . . . . . . . . . 87,216 90,985 (3,769)
---------- ---------- ----------
$2,689,408 $1,504,104 $1,185,304
========== ========== ==========
Noninterest income for the first half of 1996 totaled $2.7 million,
an increase of 78.8% compared to $1.5 million for the first half 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 and a
$249,000 gain on futures contracts executed to hedge the interest rate risk
of loans to be sold in connection with the July 1996 sale of the Branches,
which were partially offset by a $314,000 unrealized loss on loans held for
sale at June 30, 1996. Exclusive of these transactions related to branch
sales, noninterest income declined $32,000 during the first half of 1996,
which resulted primarily from the $116,000 gain on sale of loans recognized
during the first half of 1995 required to ensure compliance with regulatory
growth restrictions in effect prior to the Home Acquisition, which was
partially offset by an $87,000 increase in mortgage banking income during the
first half of 1996. The level of mortgage banking activity at Essex First
Mortgage Corporation ("Essex First") increased during the first half of 1996
as a result of the lower interest rate environment. By comparison, during
the first half 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.
17
NONINTEREST EXPENSE. The significant components of noninterest
expense for the six months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Salaries and employee benefits. . . . . $ 2,675,869 $2,171,691 $ 504,178
Net occupancy and equipment . . . . . . 781,327 829,188 (47,861)
Deposit insurance premiums. . . . . . . 437,926 333,844 104,082
Amortization of intangible assets . . . 6,733,243 385,737 6,347,506
Service bureau. . . . . . . . . . . . . 321,568 232,543 89,025
Professional fees . . . . . . . . . . . 283,880 276,681 7,199
Foreclosed properties, net. . . . . . . 86,107 204,657 (118,550)
Other . . . . . . . . . . . . . . . . . 904,895 940,292 (35,397)
----------- ---------- ----------
$12,224,815 $5,374,633 $6,850,182
=========== ========== ==========
Noninterest expense increased from $5.4 million in the first half of
1995 to $12.2 million in the first half of 1996. The largest portion of the
increase in noninterest expense is accounted for by the $6.3 million increase
in amortization of intangible assets. EBI recognized goodwill of
approximately $8.6 million in connection with the Home Acquisition, which was
being amortized on an accelerated basis over 15 years. For the six months
ended June 30, 1996, normal amortization of this goodwill totaled $541,000.
As a result of the Bank's decision to sell certain of the branches acquired
in the Home Acquisition, the Bank recognized a $5.9 million write down of
goodwill during the second quarter of 1996. Exclusive of this write down,
noninterest expense as a percent of average assets was 3.9% in the first half
of 1996 compared to 3.6% in the first half of 1995.
The other significant component of the increase in noninterest
expense was a $504,000 increase in salaries and employee benefits resulting
primarily from $418,000 in compensation expense associated with certain of
EBI's stock options and personnel costs associated with the five branches
acquired in connection with the Home Acquisition.
Net occupancy and equipment expense was $48,000 lower during the
first half of 1996 than the first half of 1995. While the Bank incurred
additional occupancy expense during the first half 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 $104,000 increase in deposit insurance premiums and the $89,000
increase in service bureau expense in the first half of 1996 when compared to
the first half of 1995 were attributable to higher deposit levels resulting
from the Home Acquisition.
The $7,000 decrease in professional fees in the first half of 1996
when compared to the first half of 1995 was primarily attributable to
declines in legal and accounting fees, which were sufficient to offset the
impact of $120,000 in consulting fees during the first half of 1996 resulting
from the Home Acquisition. The contract for these consulting fees was
rescinded effective July 31 1996.
Expenses associated with foreclosed properties for the first half of
1996 decreased $119,000 when compared to the first half of 1995, resulting
from a $106,000 reduction in the provision for losses on foreclosed
properties.
18
The significant components of other noninterest expense for the six
months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan expense. . . . . . . . . . . . $ 133,377 $ 88,525 $ 44,852
Telephone . . . . . . . . . . . . . 122,257 129,846 (7,589)
Postage and courier . . . . . . . . 114,845 109,830 5,015
Stationery and supplies . . . . . . 71,234 106,578 (35,344)
Advertising and marketing . . . . . 105,895 136,341 (30,446)
Corporate insurance . . . . . . . . 97,303 77,419 19,884
Travel. . . . . . . . . . . . . . . 40,745 43,504 (2,759)
Provision for servicing losses. . . 12,000 9,000 3,000
Other . . . . . . . . . . . . . . . 207,239 239,249 (32,010)
---------- ---------- ----------
$ 904,895 $ 940,292 $ (35,397)
========== ========== ==========
INCOME TAXES. There was no income tax provision recognized for
financial reporting purposes during the first six months of 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.
SECOND QUARTER OF 1996 COMPARED TO SECOND QUARTER OF 1995
EBI's net loss for the three months ended June 30, 1996 totaled $7.5
million, compared to a net loss of $1.2 million for the three months ended
June 30, 1995. During the second quarter of 1996, EBI's operating results
were adversely affected by a $5.9 million write down in the net asset value
of certain of the Bank's Virginia retail bank branches anticipated to be sold
during 1996 and an $803,000 loan loss provision. EBI's net loss in the
second quarter of 1995 was adversely impacted by loan loss provisions of
$597,000 and lower levels of net interest income and mortgage banking income.
[intentionally blank]
19
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 June 30:
1996 1995
--------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1). . . . . . . . . . . $259,200 $5,133 7.92% $243,689 $4,673 7.67%
Investment securities. . . . . 11,030 154 5.58 14,753 206 5.69
Mortgage-backed
securities . . . . . . . . 4,939 110(2) 9.02 17,450 332 7.61
Federal funds sold and . . . .
securities purchased under
agreements to resell . . . 6,080 79 5.19 3,316 63 7.61
Other. . . . . . . . . . . . . 13,697 187(3) 5.25 3,000 51(3) 6.75
-------- ------ -------- ------
Total interest-earning
assets . . . . . . . . . $294,946 5,663(2)(3) 7.67 $282,208 5,325(3) 7.55
======== ========
Interest-bearing liabilities:
Deposits . . . . . . . . . . . $255,647 3,538 5.54 $228,893 3,145 5.50
FHLB advances. . . . . . . . . 27,687 415 6.00 52,354 779 5.95
Notes payable. . . . . . . . . 120 3 9.47 1,538 39 10.11
Subordinated capital notes . . 632 18 11.71 619 18 11.75
Other. . . . . . . . . . . . . 411 38(4) 18.30 446 31(4) 18.28
-------- ------ -------- ------
Total interest-bearing
liabilities. . . . . . . $284,497 4,012(4) 5.61 $283,850 4,012(4) 5.64
======== ------ ======== ------
Net interest earnings. . . . . . $1,651 $1,313
====== ======
Net interest spread (2),(3),(4). 2.06% 1.91%
===== =====
Net yield on interest-earning
assets (2),(3),(4) . . . . . . 2.25% 1.87%
===== =====
(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 $7,538 and $1,044, respectively, which consists
primarily of interest earned on custodial accounts maintained for
servicing investors.
(4) Calculation in 1996 and 1995 excludes $18,855 and $10,638, respectively,
which consists primarily of interest paid on escrow accounts.
[intentionally blank]
20
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From the First Six Months
of 1995 to the First Six Months of 1996 Due to
----------------------------------------------
Volume (1) Rate (1) Net
---------- -------- -----
(in thousands)
Interest income on:
Loans (2). . . . . . . . . . . . . . . $ 304 $ 156 $ 460
Investment securities. . . . . . . . . (52) - (52)
Mortgage-backed securities . . . . . . (568) 346 (222)
Federal funds sold and
securities purchased under
agreements to resell. . . . . . . . 128 (112) 16
Other interest-earning assets. . . . . 206 (70) 136
------ ------ ------
Total interest income (2) 18 320 338
Interest expense on:
Deposits . . . . . . . . . . . . . . . 370 23 393
FHLB advances. . . . . . . . . . . . . (404) 40 (364)
Notes payable. . . . . . . . . . . . . (34) (2) (36)
Other interest-bearing liabilities . . (2) 9 7
------ ------ ------
Total interest expense. . . . . . . (70) 70 -
------ ------ ------
Net interest income . . . . . . . . $ 88 $ 250 $ 338
====== ====== ======
(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 $1.3 million for the
second quarter of 1995 to $1.7 million for the second quarter of 1996. In
addition, the annualized net yield on interest-earning assets increased from
1.87% for the second quarter of 1995 to 2.25% for the second quarter of 1996,
reflecting the impact of an increase in the ratio of interest-earning assets
to interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. Changes in the allowance for loan losses
for the three months ended June 30 are as follows (in thousands):
1996 1995
---- ----
Balance at beginning of period . . . . . . $4,955 $4,702
Provision for loan losses. . . . . . . . . 802 597
------ ------
5,757 5,299
Loans charged-off, net of recoveries . . . (224) (595)
------ ------
Balance at end of period . . . . . . . . . $5,533 $4,704
====== ======
During the second quarter of 1996 an $800,000 provision was deemed
necessary by management to ensure the adequacy of the general loan loss
allowance after allocating additional loss reserves to the Bank's problem
credit secured by a low-income apartment complex in Richmond, Virginia.
During the second quarter of 1995, general provisions of $350,000 were
provided for certain balloon second mortgage loans subject to recourse
against the RTC.
21
NONINTEREST INCOME. The significant components of noninterest
income for the three months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan servicing fees. . . . . . . . . $ 422,375 $ 428,872 $ (6,497)
Mortgage banking income. . . . . . . 151,011 126,593 24,418
Other service charges and fees . . . 133,047 97,995 35,052
Other. . . . . . . . . . . . . . . . (24,607) 57,943 (82,550)
---------- ---------- ----------
$ 681,826 $ 711,403 $ (29,577)
========== ========== ==========
Noninterest income for the second quarter of 1996 totaled $682,000,
a decrease of 4.2% compared to $711,000 for the second quarter of 1995. The
decrease resulted primarily from a $314,000 unrealized loss on loans held for
sale recognized during the second quarter of 1996 in connection with the July
1996 sale of the Branches, which was partially offset by a $249,000 gain on
futures contracts executed to hedge the interest rate risk of these loans and
an increase in mortgage banking income during the second quarter of 1996
because of an increase in mortgage banking activity.
NONINTEREST EXPENSE. The significant components of noninterest
expense for the three months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Salaries and employee benefits. . . . . $1,288,215 $1,064,277 $ 223,938
Net occupancy and equipment . . . . . . 394,967 404,520 (9,553)
Deposit insurance premiums. . . . . . . 218,423 166,922 51,501
Amortization of intangible assets . . . 6,304,624 186,490 6,118,134
Service bureau. . . . . . . . . . . . . 162,170 123,397 38,773
Professional fees . . . . . . . . . . . 136,667 115,339 21,328
Foreclosed properties, net. . . . . . . 81,090 48,315 32,775
Other . . . . . . . . . . . . . . . . . 460,751 510,622 (49,871)
---------- ---------- ----------
$9,046,907 $2,619,882 $6,427,025
========== ========== ==========
Noninterest expense increased from $2.6 million in the second
quarter of 1995 to $9.0 million in the second quarter of 1996. The largest
portion of the increase in noninterest expense is accounted for by the $6.1
million increase in amortization of intangible assets, which consisted of
$272,000 of normal amortization of goodwill recognized in connection with the
Home Acquisition and a $5.9 million write down of goodwill resulting from the
Bank's decision to sell certain of the branches acquired in the Home
Acquisition. Exclusive of this write down, noninterest expense as a percent
of average assets was 4.0% in the second quarter of 1996 compared to 3.6% in
the second quarter of 1995.
The other significant component of the increase in noninterest
expense was a $224,000 increase in salaries and employee benefits resulting
primarily from $228,000 in compensation expense associated with certain of
EBI's stock options.
22
The significant components of other noninterest expense for the
three months ended June 30 are presented below:
Increase
1996 1995 (Decrease)
---- ---- ----------
Loan expense. . . . . . . . . . . . $ 73,112 $ 49,773 $ 23,339
Telephone . . . . . . . . . . . . . 62,802 67,114 (4,312)
Postage and courier . . . . . . . . 59,773 60,929 (1,156)
Stationery and supplies . . . . . . 37,610 61,724 (24,114)
Advertising and marketing . . . . . 68,495 76,766 (8,271)
Corporate insurance . . . . . . . . 49,126 37,535 11,591
Travel. . . . . . . . . . . . . . . 17,132 30,222 (13,090)
Provision for servicing losses. . . 6,000 - 6,000
Other . . . . . . . . . . . . . . . 86,701 126,559 (39,858)
---------- ---------- ----------
$ 460,751 $ 510,622 $ (49,871)
========== ========== ==========
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 June 30, 1996, the Bank
had $26.3 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.
The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. At June 30, 1996, the Bank had
outstanding commitments (including unused lines of credit) to originate
and/or purchase mortgage and non-mortgage loans of $6.9 million.
Certificates of deposit which are scheduled to mature within one year totaled
$156.0 million at June 30, 1996, and borrowings from the FHLB that are
scheduled to mature within the same period amounted to $9.6 million. Essex
First's commitments to originate residential construction builder loans and
construction/permanent loans totaled $30.9 million and $6.0 million,
respectively, as of June 30, 1996.
REGULATORY MATTERS
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
23
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. Further, in
connection with the completion of the OTS examination on June 20, 1996,
management will submit an updated business plan to the OTS by September 30,
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 June 30, 1996, the operations of EBI after
the Home Acquisition are not profitable and the retail banking branches
acquired from Home Savings require additional capital in order to be
successful full-service facilities. Because the Bank's capital is not
sufficient to allow for a major expansion plan or retrofitting strategy for
underperforming branches, in early 1996, the Committee began assessing the
viability of branch sales, as well as a concurrent comprehensive plan for
general and administrative expense reductions, as a means to increase
regulatory capital ratios and ultimately achieve improved profitability and
franchise value. The Committee retained an independent consultant to
critically review EBI's business plan, which incorporated branch sales
assumptions, and to suggest viable strategic options that may lead to
enhanced shareholder value. The consultant's report, received in May 1996,
validated the Committee's conclusions regarding the need for immediate branch
sales in addition to those already negotiated for the Branches, as described
in Note 4 of the Notes to Consolidated Financial Statements included in this
report. EBI then proceeded to contact and negotiate with prospective
acquirors, resulting in the proposed branch sale described in Note 5 of the
Notes to Consolidated Financial Statements included in this report.
Prospectively, the operations of EBI are expected to improve significantly
through the write off of goodwill, the sale of unprofitable branches, and the
reduction in operating expenses. However, while management is of the opinion
that capital compliance will be maintained throughout 1996, until EBI's
recurring profitability is restored, management can not provide assurances
that compliance with all regulatory capital requirements can be sustained
beyond that horizon.
[intentionally blank]
24
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
All of the information called for by Item 4. is incorporated herein
by reference to Part II. Item 4. of the Registrant's Form 10-Q for
the quarterly period ended March 31, 1996.
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
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
[intentionally blank]
25
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.
August 6, 1996 By: /s/ Gene D. Ross
-------------- ----------------------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
August 6, 1996 By: /s/ Mary-Jo Rawson
-------------- ----------------------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
26