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 September 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
---------------------- -------------------
(State of organization) (I.R.S. Employer
Identification No.)
9 The Koger Center, Suite 200
Norfolk, Virginia 23502
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (757) 893-1300
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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 November 8, 1996: 1,052,637 shares of Common
Stock, par value $.01 per share.
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1996
Table of Contents
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended
September 30, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the nine months ended
September 30, 1996 7
Consolidated Statements of Cash
Flows (unaudited) for the nine months
ended September 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 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote
of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash.......................................... $ 2,216,313 $ 3,262,080
Interest-bearing deposits..................... 2,094,898 7,833,638
Federal funds sold and securities
purchased under agreements to resell....... 4,254,000 4,913,000
------------ ------------
Cash and cash equivalents.............. 8,565,211 16,008,718
Federal Home Loan Bank stock.................. 2,540,000 3,602,800
Securities available for sale - cost
approximates market......................... 503,966 1,493,646
Securities held to maturity - market value of
$5,831,000 in 1996 and $7,840,000 in 1995... 6,008,150 7,998,631
Mortgage-backed securities available for sale
- cost of $2,678,000 in 1996 and $13,590,000
in 1995..................................... 2,705,413 13,744,471
Mortgage-backed securities held to maturity
- market value of $1,872,000 in 1996 and
$1,806,000 in 1995.......................... 1,905,384 1,905,554
Loans, net of allowance for loan losses
of $3,061,000 in 1996 and $5,251,000
in 1995..................................... 136,431,630 266,631,520
Loans held for sale........................... 2,540,168 3,263,060
Mortgage servicing rights..................... 1,297,825 1,634,307
Foreclosed properties, net.................... 2,158,349 4,855,887
Accrued interest receivable................... 1,228,592 2,148,779
Excess of cost over net assets acquired,
less accumulated amortization of
$2,295,000 in 1996 and $2,562,000 in 1995... 237,330 8,577,073
Advances for taxes, insurance, and other...... 499,057 669,557
Premises and equipment........................ 2,548,012 4,121,922
Other assets.................................. 2,328,706 2,068,489
------------ ------------
Total Assets......................... $171,497,793 $338,724,414
============ ============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
1996 1995
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................ $ 1,571,016 $ 1,495,976
Interest-bearing........................... 127,743,786 282,001,130
------------ ------------
Total deposits........................ 129,314,802 283,497,106
Federal Home Loan Bank advances............... 24,475,833 29,833,333
Notes payable................................. 96,142 120,203
Capitalized lease obligations................. 396,207 424,956
Subordinated capital notes.................... --- 627,858
Mortgages payable on foreclosed properties.... --- 25,258
Other liabilities............................. 2,380,448 1,566,048
------------ ------------
Total Liabilities..................... 156,663,432 316,094,762
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 - 1,052,637
in 1996 and 1,049,684 in 1995............ 10,526 10,497
Capital in excess of par...................... 23,657,961 23,652,135
Holding gain on securities available
for sale................................... 27,191 154,174
Accumulated deficit........................... (8,883,817) (1,209,654)
------------ ------------
Total Shareholders' Equity............ 14,834,361 22,629,652
------------ ------------
Total Liabilities and
Shareholders' Equity................ $171,497,793 $338,724,414
------------ ------------
------------ ------------
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
INTEREST INCOME
Loans, including fees........................ $ 4,148,568 $4,802,437 $14,723,873 $14,224,838
Federal funds sold and securities purchased
under agreements to resell................. 108,070 82,303 278,853 201,669
Investment securities, including
dividend income............................ 151,449 201,368 494,647 638,943
Mortgage-backed securities................... 105,734 317,946 466,110 988,868
Other........................................ 186,051 126,176 510,856 213,656
----------- ---------- ----------- -----------
Total Interest Income................ 4,699,872 5,530,230 16,474,339 16,267,974
INTEREST EXPENSE
Deposits..................................... 2,782,114 3,512,534 10,173,269 9,440,847
Federal Home Loan Bank advances.............. 393,062 678,615 1,249,096 2,322,871
Notes payable................................ 2,728 33,492 8,422 127,827
Subordinated capital notes................... 15,567 18,504 52,444 54,587
Other........................................ 30,031 28,306 96,653 89,176
----------- ---------- ----------- -----------
Total Interest Expense............... 3,223,502 4,271,451 11,579,884 12,035,308
----------- ---------- ----------- -----------
Net Interest Income.................. 1,476,370 1,258,779 4,894,455 4,232,666
PROVISION FOR LOAN LOSSES..................... 575,064 153,724 1,378,116 2,345,662
----------- ---------- ----------- -----------
Net Interest Income After
Provision for Loan Losses............ 901,306 1,105,055 3,516,339 1,887,004
NONINTEREST INCOME
Loan servicing fees.......................... 417,726 435,973 1,252,841 1,346,254
Mortgage banking income, including
gain on sale of loans...................... 185,640 147,204 456,761 331,466
Other service charges and fees............... 111,957 103,184 389,482 305,298
Net gain (loss) on sale of:
Securities................................. --- --- 153,188 ---
Loans...................................... (1,027,070) (924) (1,026,482) 115,538
Deposits................................... 833,376 --- 1,898,031 ---
Other........................................ 311,088 22,672 398,304 113,657
----------- ---------- ----------- -----------
Total Noninterest Income............. 832,717 708,109 3,522,125 2,212,213
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits.............. 1,120,978 1,078,963 3,796,847 3,250,654
Net occupancy and equipment................. 364,553 392,507 1,145,880 1,221,695
Deposit insurance premiums.................. 146,980 179,340 584,906 513,184
Amortization of intangible assets........... 143,798 219,526 6,877,041 605,263
Service bureau.............................. 148,818 132,600 470,386 365,143
Professional fees........................... 118,836 67,408 402,716 344,089
Foreclosed properties, net.................. 14,124 36,339 100,231 240,996
Other....................................... 429,725 431,414 1,334,620 1,371,706
---------- ---------- ----------- ----------
Total Noninterest Expense........... 2,487,812 2,538,097 14,712,627 7,912,730
---------- ---------- ----------- ----------
Loss Before Income Taxes and
Extraordinary Item................ (753,789) (724,933) (7,674,163) (3,813,513)
PROVISION FOR INCOME TAXES................... --- --- --- ---
---------- ---------- ----------- ----------
Loss Before Extraordinary Item........... (753,189) (724,933) (7,674,163) (3,813,513)
EXTRAORDINARY ITEM - FORGIVENESS OF
DEBT........................................ --- 2,683,381 --- 2,945,064
---------- ---------- ----------- ----------
Net Income (Loss)........................ $ (753,789) $1,958,448 $(7,674,163) $ (868,449)
---------- ---------- ----------- ----------
Income (loss) per common share:
Loss before extraordinary item........... $(.72) $ (.31) $(7.30) $(2.58)
Extraordinary item....................... --- 1.16 --- 2.00
---------- ---------- ----------- ----------
Net income (loss)........................ $(.72) $ .85 $(7.30) $ (.58)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average common shares outstanding.. 1,051,799 2,311,488 1,050,704 1,470,285
---------- ---------- ----------- ----------
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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........................ 29 --- --- 5,826 --- --- 5,855
Net decrease in holding
gain on securities
available for sale.......... --- --- --- --- --- (126,983) (126,983)
Net loss..................... --- --- --- --- (7,674,163) --- (7,674,163)
------- ------- ------ ---------- ----------- --------- -----------
Balance, September 30, 1996.. $10,526 $21,250 $1,250 $23,657,961 $(8,883,817) $ 27,191 $14,834,361
------- ------- ------ ---------- ----------- --------- -----------
------- ------- ------ ---------- ----------- --------- -----------
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
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OPERATING ACTIVITIES
Net loss................................... $(7,674,163) $ (868,449)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Extraordinary item - forgiveness
of debt................................. --- (2,945,064)
Provisions for:
Losses on loans, foreclosed properties
and other............................. 1,375,596 2,445,577
Depreciation and amortization of
premises and equipment................ 405,207 353,651
Amortization (accretion) of:
Premiums and discounts on:
Loans.............................. 163,639 244,706
Mortgage-backed securities
held to maturity................. 170 2,567
Mortgage-backed securities
available for sale............... 7,009 ---
Securities held to maturity........ 11,106 (10,668)
Mortgage servicing rights............ 409,712 515,633
Excess of costs over equity in
net assets acquired................ 6,467,328 89,630
Premium on deposits.................. (101,810) ---
Other................................ 7,411 ---
Mortgage banking activities:
Net increase in loans
originated for resale................. 1,155,510 (2,353,057)
Realized gains from sale of loans...... (432,618) (321,910)
Realized (gains) and losses from sales of:
Securities available for sale.......... (153,188) ---
Loans.................................. 1,026,482 (115,538)
Premises and equipment................. (203,429) 12,661
Foreclosed properties.................. (46,337) (66,896)
Deposits............................... (1,898,031) ---
Changes in operating assets and
liabilities:
Accrued interest receivable............ 920,187 56,943
Other assets........................... (153,331) (449,932)
Other liabilities...................... 186,542 (500,346)
---------- -----------
Net cash provided by (used in)
operating activities.................... 1,472,992 (3,910,492)
See notes to consolidated financial statements.
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
---------------------------------
1996 1995
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INVESTING ACTIVITIES
Purchase of certificates of deposit in other
financial institutions................................. (17,000,000) ---
Proceeds from maturities of certificates of deposit in
other financial institutions........................... 17,000,000 ---
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 2,000,000
Purchase of securities available for sale................. (4,460,320) (7,594,033)
Proceeds from sales of securities available for sale...... 5,450,000 6,800,000
Principal remittances on mortgage-backed securities
held to maturity....................................... --- 2,017,939
Principal remittances on mortgage-backed securities
available for sale..................................... 990,065 ---
Proceeds from sales of mortgage-backed securities
available for sale..................................... 10,068,189 ---
Proceeds from sales of loans.............................. 118,090,724 8,215,597
Net (increase) decrease in net loans...................... 8,342,656 1,013,544
Proceeds from sales of foreclosed properties.............. 4,243,968 2,978,201
Increase in foreclosed properties......................... (213,074) (251,461)
Increase in mortgage servicing rights..................... (73,230) ---
Purchase of premises and equipment........................ (122,902) (1,008,976)
Proceeds from sales of premises and equipment............. 1,412,276 1,984
------------ -----------
Net cash provided by investing activities 146,770,527 15,995,895
FINANCING ACTIVITIES
Deposits sold in connection with branch sales (Note 3):
NOW and savings deposits............................... (18,017,885) ---
Certificates of deposit................................ (140,351,280) ---
Net increase (decrease) in NOW and savings deposits...... 4,918,011 (9,351,698)
Net increase in certificates of deposit.................. 3,193,841 25,457,147
Proceeds from Federal Home Loan Bank advances............ --- 14,500,000
Repayment of Federal Home Loan Bank advances............. (5,357,500) (41,332,500)
Proceeds from issuance of notes payable.................. --- 1,003,893
Payments on notes payable................................ (24,061) ---
Payments on credit facility.............................. --- (894,377)
Payments on capital lease obligations.................... (28,749) (47,282)
Payments on mortgages payable on foreclosed properties... (25,258) (164,743)
Common stock issued under Employee Stock
Purchase Plan......................................... 5,855 ---
Redemption of redeemable preferred stock................. --- (473,839)
Capital contributed in connection with acquisition....... --- 7,459,288
------------ -----------
Net cash used in financing activities.................... (155,687,026) (3,844,111)
------------ -----------
Increase (decrease) in cash and cash equivalents......... (7,443,507) 8,241,292
Cash and cash equivalents at beginning of period......... 16,008,718 6,906,159
------------ -----------
Cash and cash equivalents at end of period............... $ 8,565,211 $15,147,451
------------ -----------
------------ -----------
See notes to consolidated financial statements.
9
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
--------------------------------
1996 1995
----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans................. $ 1,265,499 $ 2,308,232
Write-off of fixed assets in connection with
termination of capital lease............................. --- 50,520
Transfer of servicing allowance to loan loss allowance...... --- 93,631
Increase (decrease) in mortgages payable on
foreclosed properties.................................... --- (7,630)
Termination of capital lease obligation for fixed assets.... --- 61,469
Increase in assets attributable to acquisition:
Net loans................................................ --- 50,498,727
Excess of cost over net assets acquired.................. --- 8,127,942
Premises and equipment................................... --- 756,823
Federal Home Loan Bank stock............................. --- 538,700
Accrued interest receivable.............................. --- 518,655
Other assets............................................. --- 161,276
Foreclosed properties.................................... --- 125,329
Increase in liabilities attributable to acquisition:
Deposits................................................. --- 51,826,331
Accrued interest payable................................. --- 446,376
Notes payable............................................ --- 120,203
Other liabilities........................................ --- 248,330
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest................................................. $11,606,849 $11,962,287
Net income taxes received................................ (109,244) (6,252)
See notes to consolidated financial statements.
10
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 for the three and nine months ended September 30, 1996 were
based on the loss divided by the weighted average number of common shares
outstanding for the respective periods because any assumption of conversion
of warrants and options outstanding would be antidilutive. Earnings per
share for the three and nine months ended September 30, 1995 were based on
income adjusted for preferred stock dividends divided by the weighted average
number of common stock and common stock equivalents outstanding for the
respective periods using the modified treasury stock method.
NOTE 3 - SALES OF BANK BRANCHES
Since December 31, 1995, Essex Savings Bank, F.S.B. (the "Bank") has sold
eight of its 13 retail bank branches (collectively, the "Branches") with
deposits and related accrued interest totaling $162.2 million, which are
detailed below. Further, the Bank's sale of its Grafton, Virginia retail
bank branch with deposits totaling $5.4 million at September 30, 1996 was
completed on November 7, 1996.
Effective March 15, 1996, 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. In the aggregate, the Bank
recognized a net gain of $1.3 million, or $1.22 per share, on the sale of the
Charlotte branch.
11
Effective July 25, 1996, the Bank sold the deposits and related accrued
interest of its Raleigh, Wilmington and Greensboro, North Carolina retail
bank branches, which totaled $71.2 million, along with deposit loans and
related accrued interest totaling $72,000. In connection with the sale of the
Branches, the Bank recognized a $701,000 net gain on the sale of deposits.
The sale of these branches required cash of $70.3 million, which was funded
by the sale of fixed-rate and adjustable-rate first mortgage loans and
related accrued interest totaling $62.6 million, as well as the utilization
of a portion of the Bank's excess liquidity. The Bank recognized a loss of
$188,000 on the sale of loans. In the aggregate, the Bank recognized a net
gain of $513,000, or $.49 per share, on the sale of the Raleigh, Wilmington
and Greensboro branches.
Effective September 26, 1996, the Bank sold the deposits and related accrued
interest of its Norfolk, Portsmouth, Hampton and Newport News, Virginia
retail bank branches, which totaled $62.9 million, along with deposit loans
and related accrued interest totaling $68,000 and premises and equipment
totaling $600,000. In connection with the sale, the Bank recognized a
$132,000 net gain on the sale of deposits and a $152,000 gain on the sale of
premises and equipment. In addition to transaction costs, the gain on the
sale of deposits was reduced by a $1.9 million write-off of the remaining
excess of cost over net assets acquired ("goodwill") associated with the
branches. As a result of its decision to sell these branches, the Bank wrote
down the net asset value of the branches, primarily goodwill, to their net
realizable value through a $5.9 million charge to earnings during the second
quarter of 1996.
The sale of these branches required cash of $60.2 million, which was funded
by the sale of fixed-rate and adjustable-rate first mortgage loans and
related accrued interest totaling $49.9 million, as well as the utilization
of a portion of the Bank's excess liquidity. The Bank recognized a loss of
$839,000 on the sale of loans. In the aggregate, the Bank recognized a net
loss of $555,000, or $.53 per share, on the sale of the Norfolk, Portsmouth,
Hampton and Newport News branches.
NOTE 4 - SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") ASSESSMENT
The deposits of the Bank are currently insured by the 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 has not. On September 30, 1996, the
Deposit Insurance Fund Act was enacted (the "Act"). The Act requires that
each SAIF-insured institution pay a special assessment of 65.7 basis points
on SAIF-assessable deposits as of March 31, 1995 to the Federal Deposit
Insurance Corporation ("FDIC") no later than November 27, 1996. However, the
Bank applied with the FDIC to be deemed a "weak institution" as defined in
the Act. On November 8, 1996, the Bank was notified by the FDIC that its
application had been approved. Therefore, the Bank is exempt from paying a
$1.8 million special SAIF assessment. Instead, it will pay deposit insurance
premiums based on SAIF-assessable deposits held in periods after the date of
enactment using a defined rate schedule. These premiums will be reported as
a charge to earnings as incurred.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Total assets of EBI at September 30, 1996 were $171.5 million as compared to
$338.7 million at December 31, 1995, a decrease of approximately $167.2
million or 49.4%. The decrease in assets was primarily attributable to the
sale of the Branches described in Note 3 of the Notes to Consolidated
Financial Statements, which resulted in (i) the sale of first mortgage loans
and related accrued interest totaling $119.8 million, mortgage-backed
securities available for sale totaling $9.9 million and premises and
equipment totaling $1.2 million, (ii) the utilization of a portion of the
Bank's excess liquidity, and (iii) a $7.8 million write down of goodwill
associated with the Branches. Unrelated to the sale of the Branches, 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 early months of 1996, and securities held to maturity decreased $2.0
million.
Included in the decrease in loans held for investment is the impact of
loans sales undertaken to partially fund the sale of the Branches. Excluding
the impact of these sales, loans held for investment declined $11.1 million
during the first nine months 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.
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 $5.9 million at
September 30, 1996, and are summarized as follows (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Nonaccrual loans:
CDRELs, net.............................. $ 895 $ 2,737
Other.................................... 2,573 3,344
Accruing loans 90 days or more past due..... 46 177
Troubled debt restructured loans............ 229 143
------ -------
Total nonperforming loans, net......... 3,743 6,401
Foreclosed properties, net.................. 2,158 4,856
------ -------
Total nonperforming assets,
net of specific reserves............... $5,901 $11,257
------ -------
------ -------
Accruing loans in the 30-59 day and 60-89 day delinquency categories also
decreased, as shown below (in thousands):
Delinquency September 30, December 31,
Category 1996 1995
----------- ------------- ------------
30-59 days past due........................ $1,356 $2,222
60-89 days past due........................ 463 942
------ ------
$1,819 $3,164
------ ------
------ ------
The decrease in nonperforming assets consisted of a $2.7 million decline in
nonperforming loans and a $2.7 million decline in foreclosed properties.
During 1996, the Bank increased the specific loss allowance on its CDREL
secured by a low-income apartment complex in Richmond, Virginia. This credit
(the "Richmond Apartments loan") originated in February 1990 and has been
modified several times since then in efforts to facilitate a renovation and
sale of the apartment complex. Because management concluded that the sale of
the apartment complex will not occur in the foreseeable future, this credit
was charged off in its entirety in the third quarter of
13
1996. Other nonaccrual loans decreased primarily 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 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 $294,000 and $125,000, respectively, at September 30, 1996.
The decrease in foreclosed properties resulted primarily from the sale of a
significant portion of a foreclosed property consisting of 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 with a
carrying value of $196,000 is under contract.
Deposits, the primary source of EBI's funds, totaled $129.3 million at
September 30, 1996 as compared to $283.5 million at December 31, 1995, a
decrease of $154.2 million or 54.4%. The decrease in deposits was
attributable to the sale of the Branches, which is described in Note 3 of the
Notes to Consolidated Financial Statements. However, at the Bank's branches,
other than the Branches, deposits increased approximately $14.9 million since
December 31, 1995. FHLB advances decreased from $29.8 million at December
31, 1995 to $24.5 million at September 30, 1996 as a result of scheduled
maturities. The Bank's subordinated capital notes issued in 1988 and 1989 at
interest rates of 11.5% to 12% were redeemed at par in their entirety in
August 1996.
Total shareholders' equity at September 30, 1996 was $14.8 million, a
decrease of $7.8 million from shareholders' equity of $22.6 million at
December 31, 1995. This change reflects EBI's net loss of $7.7 million for
the nine months ended September 30, 1996, which is further described below.
The Series B and Series C preferred stock issued by EBI in connection with
the Home Acquisition (as defined below) has a stated value and liquidation
preference of $15.0 million, exclusive of cumulative but undeclared dividends
of $1.4 million at September 30, 1996. In January 1996, the board of
directors of EBI appointed a Strategic Evaluation Committee to evaluate
strategic alternatives to enhance shareholder value. See "Regulatory
Matters" below.
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
nine months ended September 30, 1995 have not been restated to reflect the
Home Acquisition. However, EBI's net loss for the three months and nine
months ended September 30, 1996 include the impact of the Home Acquisition.
FIRST NINE MONTHS OF 1996 COMPARED TO FIRST NINE MONTHS OF 1995
EBI's net loss for the nine months ended September 30, 1996 totaled $7.7
million, compared to a net loss of $868,000 for the nine months ended
September 30, 1995. During the first nine months of 1996, EBI's operating
results were adversely impacted by a $1.0 million loss on the sale of loans
in connection with funding the sale of the Branches described in Note 3 of
the Notes to Consolidated Financial Statements and a $7.8 million write down
in goodwill associated with the sale of the Branches. However, EBI's
operating results for the first nine months of 1996 benefited from a $3.8
million total premium on deposits sold and $216,000 gain on sale of premises
and equipment in connection with the sale of the Branches. In addition,
operating results were favorably impacted by a $153,000 gain on sale of
mortgage-backed securities available for sale related to the sale of the
Branches. Excluding the impact of these nonrecurring
14
transactions, EBI incurred a net loss of $3.0 million during the first nine
months of 1996, which was an $800,000 improvement over the $3.8 million loss
from continuing operations during the first nine months of 1995. The
improvement in 1996 was the result of a $968,000 reduction in loan loss
provisions and a $662,000 increase in net interest income, which were
partially offset by a $920,000 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 nine months of 1995, EBI's operating results benefited from
the recognition of income from extraordinary items attributable to $2.9
million of debt forgiveness. However, despite the nonrecurring income from
extraordinary items, EBI incurred a loss from continuing operations of $3.8
million during the first nine months of 1995. EBI's operating results were
adversely impacted by loan loss provisions of $2.3 million and lower levels
of net interest income and 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.
Such limitations were removed by the Office of Thrift Supervision ("OTS")
subsequent to the Home Acquisition.
[intentionally blank]
15
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 nine months ended September 30:
1996 1995
---------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)....................... $245,474 $14,724 8.00% $247,294 $14,225 7.67%
Investment securities........... 11,743 494 5.62 15,080 639 5.65
Mortgage-backed
securities................... 7,713 466(2) 8.06 17,355 989 7.60
Federal funds sold and
securities purchased under
agreements to resell......... 7,100 279 5.24 3,936 202 6.83
Other........................... 12,193 511(3) 5.42 3,976 213(3) 6.93
-------- ------ ------- --------
Total interest-earning
assets.................. $284,223 16,474(2)(3) 7.72 $287,641 16,268(3) 7.54
-------- --------
-------- --------
Interest-bearing liabilities:
Deposits........................ $245,867 10,173 5.52 $234,418 9,441 5.37
FHLB advances................... 27,687 1,249 6.02 51,214 2,323 6.05
Notes payable................... 119 8 9.45 1,732 128 9.84
Subordinated capital notes...... 532 53 13.15 619 54 11.75
Other........................... 411 97(4) 18.30 468 89(4) 17.86
-------- ------ -------- ------
Total interest-bearing
liabilities............. $274,616 11,580(4) 5.60 $288,451 12,035(4) 5.55
-------- ------ -------- ------
-------- --------
Net interest earnings............ $ 4,894 $ 4,233
------- --------
------- --------
Net interest spread (2),(3),(4).. 2.12% 1.99%
---- ----
Net yield on interest-earning
assets (2),(3),(4)............. 2.31% 1.97%
---- ----
---- ----
(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 $15,140 and $7,116, respectively, which consists
primarily of interest earned on custodial accounts maintained for
servicing investors.
(4) Calculation in 1996 and 1995 excludes $40,258 and $26,520, respectively,
which consists primarily of interest paid on escrow accounts.
16
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 Nine Months
of 1995 to the First Nine Months of 1996 Due to
-----------------------------------------------
Volume (1) Rate (1) Net
------------ --------- ------
(in thousands)
Interest income on:
Loans (2).................... $ (165) $664 $ 499
Investment securities........ (141) (4) (145)
Mortgage-backed securities... (615) 92 (523)
Federal funds sold and
securities purchased under
agreements to resell....... 157 (80) 77
Other interest-earning
assets..................... 370 (72) 298
------ ----- ----
Total interest
income (2)............ (394) 600 206
Interest expense on:
Deposits..................... 469 263 732
FHLB advances................ (1,062) (12) (1,074)
Notes payable................ (115) (5) (120)
Subordinated capital notes... (10) 9 (1)
Other interest-bearing
liabilities................ (9) 17 8
------ ----- ----
Total interest expense... (727) 272 (455)
------ ----- ----
Net interest income...... $ 333 $ 328 $ 661
------ ----- ----
------ ----- ----
(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 from $4.2 million for the first nine months
of 1995 to $4.9 million for the first nine months of 1996. In addition, the
annualized net yield on interest-earning assets increased from 1.97% for the
first nine months of 1995 to 2.31% for the first nine months of 1996,
reflecting the impact of an increase in the ratio of interest-earning assets
to interest-bearing liabilities. The most significant factors impacting the
improvement in net interest income during 1996 were (i) the improved yield on
loans resulting from repricing of adjustable-rate mortgages and (ii) the
reduction in higher-costing FHLB advances and notes payable, which were
partially offset by the impact of selling higher-yielding mortgage-backed
securities and maintaining excess liquidity in lower-yielding interest
earning assets in anticipation of funding the sales of the Branches. The
increase in average deposits and the rate paid on them also negatively
impacted the increase in net interest income. However, deposits are more
responsive to changes in the interest rate environment. Therefore, 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 nine months ended September 30 are as follows (in thousands):
1996 1995
------- -------
Balance at beginning of period...................... $ 5,251 $ 3,429
Provision for loan losses........................... 1,378 2,346
General loan loss allowance of acquired
institution...................................... --- 500
------- -------
6,629 6,275
Loans charged-off, net of recoveries................ (3,568) (1,189)
------- -------
Balance at end of period............................ $ 3,061 $ 5,086
------- -------
------- -------
17
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 rehabilitation and ultimate sale of the property securing the
Richmond Apartments loan, the Bank's most significant problem credit,
additional loss reserves were allocated to this CDREL, which resulted in a
$1.4 million provision for loan losses in order to replenish the general loan
loss allowance to a level sufficiently adequate to absorb losses. Included
in net charge-offs for the first nine months of 1996 is $2.8 million for the
charge-off of this credit in its entirety.
The provision for loan losses for the first nine months of 1995 was $2.3
million. Two of the significant CDRELs that contributed to the necessity for
the provision were (i) the Richmond Apartments loan 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 recognized for certain balloon second mortgage loans subject
to recourse against the Resolution Trust Company. 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 nine months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
---------- ---------- -----------
Loan servicing fees............... $1,252,841 $1,346,254 $ (93,413)
Mortgage banking income........... 456,761 331,466 125,295
Other service charges and fees.... 389,482 305,298 84,184
Net gain (loss) on sales of:
Securities...................... 153,188 --- 153,188
Loans........................... (1,026,482) 115,538 (1,142,020)
Deposits........................ 1,898,031 --- 1,898,031
Other............................. 398,304 113,657 284,647
---------- ---------- ----------
$3,522,125 $2,212,213 $1,309,912
---------- ---------- ----------
---------- ---------- ----------
Noninterest income for the first nine months of 1996 totaled $3.5
million, an increase of 59.2% compared to $2.2 million for the first nine
months of 1995. The increase resulted from the gains on sales of securities,
deposits, and premises and equipment, which totaled $2.3 million, associated
with the sales of the Branches described in Note 3 of the Notes to
Consolidated Financial Statements, which were partially offset by a $1.0
million loss on loans sold to partially fund the sales of the Branches.
Exclusive of these transactions related to the sales of the Branches,
noninterest income increased $69,000 during the first nine months of 1996,
which resulted primarily from the $125,000 increase in mortgage banking
income. The level of mortgage banking activity at Essex First Mortgage
Corporation ("Essex First") increased during the first nine months of 1996 as
a result of the lower interest rate environment. By comparison, during the
first nine months 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.
18
NONINTEREST EXPENSE. The significant components of noninterest expense
for the nine months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
----------- ---------- ----------
Salaries and employee benefits.... $ 3,796,847 $3,250,654 $ 546,193
Net occupancy and equipment....... 1,145,880 1,221,695 (75,815)
Deposit insurance premiums........ 584,906 513,184 71,722
Amortization of intangible assets. 6,877,041 605,263 6,271,778
Service bureau.................... 470,386 365,143 105,243
Professional fees................. 402,716 344,089 58,627
Foreclosed properties, net........ 100,231 240,996 (140,765)
Other............................. 1,334,620 1,371,706 (37,086)
----------- ---------- ----------
$14,712,627 $7,912,730 $6,799,897
----------- ---------- ----------
----------- ---------- ----------
Noninterest expense increased from $7.9 million in the first nine months
of 1995 to $14.7 million in the first nine months 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 nine months ended September 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 the write down of goodwill, noninterest expense as a percent of
average assets was 3.6% in the first nine months of 1996 compared to 3.5% in
the first nine months of 1995.
The other significant component of the increase in noninterest expense
was a $546,000 increase in salaries and employee benefits resulting primarily
from a $447,000 increase in compensation expense associated with certain of
EBI's stock options and a $190,000 increase in personnel costs associated
with the five branches acquired in connection with the Home Acquisition.
However, these increases were partially offset by an $87,000 decrease in
personnel costs associated with the Bank's branches in Raleigh, Greensboro,
Wilmington and Charlotte, North Carolina and in Newport News, Virginia, which
were sold in 1996 as described in Note 3 of the Notes to Consolidated
Financial Statements.
Net occupancy and equipment expense was $76,000 lower during the first
nine months of 1996 than the first nine months of 1995. While the Bank
incurred additional occupancy expense during the first nine months 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.
Deposit insurance premiums increased $72,000 during the first nine months
of 1996 compared to the same period in 1995. This increase in deposit
insurance premiums and the $105,000 increase in service bureau expense in the
first nine months of 1996 when compared to the first nine months of 1995 were
attributable to higher deposit levels resulting from the Home Acquisition.
The $59,000 increase in professional fees during the first nine months of
1996 was attributable to $140,000 in consulting fees resulting from the Home
Acquisition, which were partially offset by decreases in legal and accounting
fees.
Expenses associated with foreclosed properties for the first nine months
of 1996 decreased $141,000 when compared to the first nine months of 1995,
resulting from a reduction in operating costs and the provision for losses
associated with foreclosed properties
19
The significant components of other noninterest expense for the nine
months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
---------- ---------- --------
Loan expense.................. $ 205,483 $ 148,054 $ 57,429
Telephone..................... 176,966 200,788 (23,822)
Postage and courier........... 158,391 148,339 10,052
Stationery and supplies....... 100,064 148,740 (48,676)
Advertising and marketing..... 156,781 178,585 (21,804)
Corporate insurance........... 141,112 118,226 22,886
Travel........................ 58,231 64,718 (6,487)
Provision for servicing losses 19,000 9,000 10,000
Other......................... 318,592 355,256 (36,664)
---------- ---------- --------
$1,334,620 $1,371,706 $(37,086)
---------- ---------- --------
---------- ---------- --------
INCOME TAXES. There was no income tax provision recognized for financial
reporting purposes during the first nine 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.
THIRD QUARTER OF 1996 COMPARED TO THIRD QUARTER OF 1995
EBI's net loss for the three months ended September 30, 1996 totaled
$754,000, compared to net income of $2.0 million for the three months ended
September 30, 1995. During the third quarter of 1996, EBI's operating
results were adversely affected by a $962,000 loss on the sale of loans in
connection with funding the sale of the Branches described in Note 3 of the
Notes to Consolidated Financial Statements and a $1.9 million write down of
the remaining goodwill associated with the sale of the Branches. However,
EBI's operating results for the third quarter of 1996 benefited from a $2.8
million premium on deposits sold and a $152,000 gain on sale of premises and
equipment in connection with the sale of the Branches. Excluding the impact
of these nonrecurring transactions, EBI's net operating loss for the third
quarter was $777,000, which was primarily attributable to a $575,000 loan
loss provision.
EBI's net income in the third quarter of 1995 was the result of the
recognition of a $2.7 million extraordinary gain associated with the
forgiveness of debt. Exclusive of this item, EBI's net loss in the third
quarter of 1995 was $725,000, which was primarily attributable to lower net
interest income.
20
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 September 30:
1996 1995
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- --------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)......................... $207,054 $4,149 8.01% $251,393 $4,802 7.64%
Investment securities............. 11,029 151 5.49 14,133 201 5.70
Mortgage-backed
securities..................... 4,697 106(2) 9.00 16,692 318 7.62
Federal funds sold and
securities purchased under
agreements to resell........... 8,232 108 5.25 4,615 82 7.13
Other............................. 13,577 186(3) 5.48 6,288 127(3) 7.79
-------- ----- ------- ------
Total interest-earning
assets..................... $244,589 4,700(2)(3) 7.68 $293,121 5,530(3) 7.54
-------- --------
-------- --------
Interest-bearing liabilities:
Deposits......................... $205,907 2,782 5.40 $247,307 3,513 5.68
FHLB advances.................... 25,902 393 6.07 43,724 679 6.21
Notes payable.................... 116 3 9.39 1,184 33 11.31
Subordinated capital notes....... 336 16 18.55 623 18 11.87
Other............................ 401 30(4) 18.30 438 28(4) 18.29
-------- ----- -------- ------
Total interest-bearing
liabilities............... $232,662 3,224(4) 5.52 $293,276 4,271(4) 5.81
-------- ----- -------- ------
-------- --------
Net interest earnings.............. $1,476 $1,259
------ ------
------ ------
Net interest spread (2),(3),(4).... 2.16% 1.73%
---- ----
Net yield on interest-earning
assets (2),(3),(4)............ 2.43% 1.72%
---- ----
---- ----
(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 $3,647 in 1995, which consists primarily of interest
earned on custodial accounts maintained for servicing investors.
(4) Calculation in 1996 and 1995 excludes $11,669 and $8,286, respectively,
which consists primarily of interest paid on escrow accounts.
21
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
Third Quarter of 1995 to the
Third Quarter of 1996 Due to
-------------------------------
Volume (1) Rate (1) Net
---------- -------- ---
(in thousands)
Interest income on:
Loans (2) ............................. $(1,981) $1,328 $(653)
Investment securities.................. (43) (7) (50)
Mortgage-backed securities............. (538) 326 (212)
Federal funds sold and
securities purchased under
agreements to resell............... 149 (123) 26
Other interest-earning assets.......... 282 (223) 59
------- ------ -----
Total interest income (2).......... (2,131) 1,301 (830)
Interest expense on:
Deposits............................... (566) (165) (731)
FHLB advances.......................... (271) (15) (286)
Notes payable.......................... (26) (4) (30)
Subordinated capital notes............. (38) 36 (2)
Other interest-bearing liabilities..... (2) 4 2
------- ------ ------
Total interest expense.............. (903) (144) (1,047)
------- ------ ------
Net interest income................. $(1,228) $1,445 $ 217
------- ------ ------
------- ------ ------
(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 third
quarter of 1995 to $1.5 million for the third quarter of 1996. In addition,
the annualized net yield on interest-earning assets increased from 1.72% for
the third quarter of 1995 to 2.43% for the third 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 September 30 are as follows (in thousands):
1996 1995
------ ------
Balance at beginning of period........... $5,533 $4,704
Provision for loan losses................ 575 154
General loan loss allowance of
acquired institution................... --- 500
------ ------
6,108 5,358
Loans charged-off, net of recoveries..... (3,047) (272)
------ ------
Balance at end of period................. $3,061 $5,086
------ ------
------ ------
During the third quarter of 1996 a $575,000 provision was deemed
necessary by management to ensure the adequacy of the general loan loss
allowance after allocating additional loss reserves to the Richmond
Apartments loan. This credit totaling $2.8 million was charged off in its
entirety during the third quarter of 1996.
22
NONINTEREST INCOME. The significant components of noninterest income for
the three months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
----------- -------- -----------
Loan servicing fees.............. $ 417,726 $435,973 $ (18,247)
Mortgage banking income.......... 185,640 147,204 38,436
Other service charges and fees... 111,957 103,184 8,773
Net gain (loss) on sale of:
Loans......................... (1,027,070) (924) (1,026,146)
Deposits...................... 833,376 --- 833,376
Other............................ 311,088 22,672 288,416
----------- -------- ----------
$ 832,717 $708,109 $ 124,608
----------- -------- ----------
----------- -------- ----------
Noninterest income for the third quarter of 1996 totaled $833,000, an
increase of 17.6% compared to $708,000 for the third quarter of 1995.
However, noninterest income for the third quarter of 1996 included the net
impact of branch sales totaling $23,000. Excluding the branch sales
transactions, noninterest income for the third quarter of 1996 increased
$101,000, which was primarily attributable to a $38,000 increase in mortgage
banking income and a $71,000 increase in other noninterest income.
NONINTEREST EXPENSE. The significant components of noninterest expense
for the three months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
---------- ---------- ----------
Salaries and employee benefits.... $1,120,978 $1,078,963 $ 42,015
Net occupancy and equipment....... 364,553 392,507 (27,954)
Deposit insurance premiums........ 146,980 179,340 (32,360)
Amortization of intangible assets. 143,798 219,526 (75,728)
Service bureau.................... 148,818 132,600 16,218
Professional fees................. 118,836 67,408 51,428
Foreclosed properties, net........ 14,124 36,339 (22,215)
Other............................. 429,725 431,414 (1,689)
---------- ---------- ---------
$2,487,812 $2,538,097 $(50,285)
---------- ---------- ---------
---------- ---------- ---------
Noninterest expense decreased $50,000 or 1.98% from the third quarter of
1995 to the third quarter of 1996. Noninterest expense as a percent of
average assets was 4.2% in the third quarter of 1996 compared to 3.3% in the
third quarter of 1995.
The significant components of other noninterest expense for the three
months ended September 30 are presented below:
Increase
1996 1995 (Decrease)
--------- -------- ----------
Loan expense.................... $ 72,106 $ 59,529 $ 12,577
Telephone....................... 54,709 70,942 (16,233)
Postage and courier............. 43,546 38,509 5,037
Stationery and supplies......... 28,830 42,162 (13,332)
Advertising and marketing....... 50,886 42,244 8,642
Corporate insurance............. 43,809 40,807 3,002
Travel.......................... 17,486 21,214 (3,728)
Provision for servicing losses.. 7,000 --- 7,000
Other........................... 111,353 116,007 (4,654)
-------- -------- --------
$429,725 $431,414 $ (1,689)
-------- -------- --------
-------- -------- --------
23
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 (the
"Agreements") with the OTS which precluded the Bank from making dividend
payments to EBI. While these 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 with 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 September 30, 1996, the Bank
had $24.5 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 September 30, 1996, the Bank had
outstanding commitments (including unused lines of credit) to originate
and/or purchase mortgage and non-mortgage loans of $6.8 million.
Certificates of deposit which are scheduled to mature within one year totaled
$63.7 million at September 30, 1996, and borrowings from the FHLB that are
scheduled to mature within the same period amounted to $11.1 million. Essex
First's commitments to originate residential construction builder loans and
construction/permanent loans totaled $31.8 million and $8.6 million,
respectively, as of September 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 the 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. Further, in connection with the completion of the OTS
examination on June 20, 1996, management submitted an updated draft business
plan to the OTS on September 27, 1996.
In January 1996, the board of directors of EBI formed a special committee
of the board, the Strategic Evaluation Committee (the "Committee"). Although
the Bank exceeded all regulatory capital requirements after the Home
Acquisition, the operations of EBI since the Home Acquisition have not been
profitable and the retail banking branches acquired from Home Savings
required additional capital in order to be successful full-service
facilities. Because the Bank's capital was 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
24
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 previously negotiated for the Charlotte, Raleigh, Greensboro and
Wilmington, North Carolina branches. EBI proceeded to contact and negotiate
with prospective acquirors, resulting in the sale of the Norfolk, Portsmouth,
Hampton, Newport News and Grafton, Virginia branches. These branch sales are
described in Note 3 of the Notes to Consolidated Financial Statements.
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.
As of September 30, 1996, the Bank's core and risk-based regulatory
capital ratios were 8.58% and 14.52%, respectively, resulting in excess core
capital of $7.9 million and excess risk-based capital of $7.3 million over
the minimum regulatory requirements. While management is of the opinion that
capital compliance will be maintained throughout 1997, 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. Moreover, EBI's losses and continuing inability to generate
income sufficient to cover the cumulative dividends on the Series B and C
preferred stock issued by EBI in connection with the Home Acquisition
continue to affect the equity of the holders of EBI's common and preferred
stock. The Committee will continue to evaluate strategic alternatives to
enhance shareholder value.
25
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 -- Not Applicable
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
On July 3, 1996, EBI issued a press release, and the disclosures
contained therein were deemed significant to stockholders. Therefore, a
Form 8-K was filed on July 16, 1996 and the disclosures in the press
release were attached. In this press release, EBI disclosed that the Bank
had signed an agreement to sell its Norfolk, Portsmouth, Hampton, Newport
News, and Grafton retail bank branches to CENIT Bank, FSB. No pro forma
information or financial statements were filed in connection with this
Form 8-K.
On August 9, 1996, EBI filed a Form 8-K in which it disclosed under
Item 2--Acquisition or Disposition of Assets-the Bank's sale of the deposits
and related assets of its Wilmington, Raleigh and Greensboro, North
Carolina branches to Centura Bank, Inc. pursuant to the Branch Purchase
and Deposit Assumption Agreement dated April 11, 1996. In addition, under
Item 7-Financial Statements and Exhibits, unaudited pro forma financial
information was provided which included the historical financial
statements of EBI, pro forma adjustments directly attributable to the sale
of the branches and pro forma results as of June 30, 1996 with regard to
the pro forma consolidated balance sheet and for the year ended
December 31, 1995 and for the six months ended June 30, 1996 with regard
to the unaudited pro forma consolidated statements of operations.
On October 9, 1996, EBI filed a Form 8-K in which it disclosed under
Item 2--Acquisition or Disposition of Assets-the Bank's sale of the deposits
and related assets of its Norfolk, Portsmouth, Hampton and Newport News,
Virginia branches to CENIT Bank, FSB pursuant to the Branch Purchase and
Deposit Assumption Agreement dated July 2, 1996. In addition, under
Item 7--Financial Statements and Exhibits, unaudited pro forma financial
information was provided which included the historical financial
statements of EBI, pro forma adjustments directly attributable to the
sale of the branches and pro forma results as of June 30, 1996 with regard
to the pro forma consolidated balance sheet and for the year ended
December 31, 1995 and for the six months ended June 30, 1996 with regard
to the unaudited pro forma consolidated statements of operations.
26
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.
November 8, 1996 By: /s/ Gene D. Ross
- ---------------- -----------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
November 8, 1996 By: /s/ Mary-Jo Rawson
- ---------------- -------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer