FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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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.
The Koger Center
Building 9, 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
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 .
--- ---
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1997
TABLE OF CONTENTS
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PAGE
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 3
Consolidated Balance Sheets (unaudited)
as of March 31, 1997 and December 31, 1996........ 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1997
and 1996.......................................... 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the three months ended
March 31, 1997.................................... 7
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 1997 and 1996........................... 8
Notes to Consolidated Financial Statements
(unaudited)....................................... 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................ 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings................................. 19
Item 2. Changes in Securities............................. 19
Item 3. Defaults Upon Senior Securities................... 19
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 19
Item 5. Other Information................................. 19
Item 6. Exhibits and Reports on Form 8-K.................. 19
2
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS
Cash......................................................... $ 2,066,694 $ 1,824,160
Interest-bearing deposits.................................... 2,015,195 1,727,091
Federal funds sold and securities purchased under agreements
to resell................................................... 1,944,000 2,644,000
-------------- --------------
Cash and cash equivalents.................................. 6,025,889 6,195,251
Federal Home Loan Bank stock................................. 1,335,200 2,540,000
Securities available for sale--cost approximates market...... 16,750 9,162
Securities held to maturity--market value of $5,187,000 in
1997 and $5,890,000 in 1996................................. 5,298,551 6,003,219
Mortgage-backed securities held to maturity--market value of
$1,869,000 in 1997 and $1,869,000 in 1996................... 1,905,270 1,905,327
Loans, net of allowance for loan losses of $2,362,000 in 1997
and $2,556,000 in 1996...................................... 152,588,486 145,550,845
Loans held for sale.......................................... 2,362,028 2,462,525
Mortgage servicing rights.................................... 1,475,405 1,349,160
Foreclosed properties, net................................... 2,306,726 2,054,213
Accrued interest receivable.................................. 1,168,368 1,147,933
Excess of cost over net assets acquired, less accumulated
amortization of $2,032,000 in 1997 and $2,016,000 in
1996....................................................... 206,299 221,815
Advances for taxes, insurance, and other..................... 500,779 790,928
Premises and equipment....................................... 2,359,884 2,485,122
Other assets................................................. 2,380,313 1,551,352
-------------- --------------
Total Assets............................................$ 179,929,948 $ 174,266,852
-------------- --------------
-------------- --------------
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing..................................... $ 1,127,081 $ 1,070,037
Interest-bearing........................................ 135,875,484 129,963,341
-------------- --------------
Total deposits........................................ 137,002,565 131,033,378
Federal Home Loan Bank advances........................... 25,404,167 25,690,000
Notes payable............................................. 96,142 96,142
Capitalized lease obligations............................. 372,821 385,251
Mortgages payable on foreclosed properties................ 10,391 10,391
Other liabilities......................................... 1,918,550 1,945,988
-------------- --------------
Total Liabilities..................................... 164,804,636 159,161,150
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--1,054,736 in 1997 and
1,053,379 in 1996..................................... 10,547 10,534
Capital in excess of par.................................. 23,661,195 23,659,333
Accumulated deficit....................................... (8,568,930) (8,586,665)
-------------- --------------
Total Shareholders' Equity............................ 15,125,312 15,105,702
-------------- --------------
Total Liabilities and Shareholders' Equity............ $ 179,929,948 $ 174,266,852
-------------- --------------
-------------- --------------
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
------------ ------------
INTEREST INCOME
Loans, including fees........................................... $ 3,149,138 $ 5,442,278
Federal funds sold and securities purchased under agreements to
resell........................................................ 36,347 91,926
Investment securities, including dividend income................ 118,137 189,422
Mortgage-backed securities...................................... 30,364 249,819
Other........................................................... 37,250 137,557
------------ ------------
Total Interest Income....................................... 3,371,236 6,111,002
------------ ------------
INTEREST EXPENSE
Deposits........................................................ 1,758,250 3,852,753
Federal Home Loan Bank advances................................. 379,417 441,023
Notes payable................................................... 2,277 2,847
Subordinated capital notes...................................... -- 18,384
Other........................................................... 19,472 28,962
------------ ------------
Total Interest Expense...................................... 2,159,416 4,343,969
------------ ------------
Net Interest Income......................................... 1,211,820 1,767,033
PROVISION FOR LOAN LOSSES......................................... (22,453) 401
------------ ------------
Net Interest Income After Provision for Loan Losses......... 1,234,273 1,766,632
NONINTEREST INCOME
Loan servicing fees............................................. 401,898 412,740
Mortgage banking income, including gain on sale of loans........ 88,219 120,110
Other service charges and fees.................................. 110,962 144,478
Net gain (loss) on sale of:
Securities.................................................... -- 153,188
Loans......................................................... -- 588
Deposits...................................................... -- 1,064,655
Other......................................................... 1,549 111,823
------------ ------------
Total Noninterest Income.................................... 602,628 2,007,582
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See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
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NONINTEREST EXPENSE
Salaries and employee benefits.................................. 771,629 1,387,654
Net occupancy and equipment..................................... 292,195 386,360
Deposit insurance premiums...................................... 112,345 219,503
Amortization of intangible assets............................... 125,426 428,619
Service bureau.................................................. 126,751 159,398
Professional fees............................................... 69,661 147,213
Foreclosed properties, net...................................... (4,898) 5,017
Other........................................................... 326,057 444,144
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Total Noninterest Expense................................... 1,819,166 3,177,908
---------- ---------
Income Before Income Taxes.................................. 17,735 596,306
PROVISION FOR INCOME TAXES........................................ -- --
---------- ---------
Net Income.................................................. $ 17,735 $ 596,306
---------- ---------
Earnings (loss) per common share (Note 2):....................... $ (.36) $ .04
---------- ----------
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the three months ended March 31, 1997
SERIES B SERIES C
COMMON PREFERRED PREFERRED CAPITAL IN
STOCK, $.01 STOCK, $.01 STOCK, $.01 EXCESS ACCUMULATED
PAR VALUE PAR VALUE PAR VALUE OF PAR DEFICIT TOTAL
----------------- ----------- ----------- ------------- ------------- -------------
Balance at January 1, 1997 $10,534 $ 21,250 $ 1,250 $ 23,659,333 $(8,586,665) $15,105,702
Common stock issued under
Employee Stock Purchase
Plan..................... 13 -- -- 1,862 -- 1,875
Net income................. -- -- -- -- 17,735 17,735
----------------- ----------- ---------- ------------- ------------- -------------
Balance, March 31, 1997.... $10,547 $ 21,250 $ 1,250 $ 23,661,195 $(8,568,930) $15,125,312
----------------- ----------- ---------- ------------- ------------- -------------
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---------- -----------
OPERATING ACTIVITIES
Net income......................................................... $ 17,735 $ 596,306
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Provisions for:
Losses on loans, foreclosed properties and other............... 14,148 (33,546)
Depreciation and amortization of premises and equipment........ 108,786 135,798
Amortization (accretion) of:
Premiums and discounts on:
Loans...................................................... 43,024 47,931
Mortgage-backed securities held to maturity............... 57 55
Mortgage-backed securities available for sale............. -- 2,348
Securities held to maturity............................... 3,074 1,579
Mortgage servicing rights.................................. 109,910 144,046
Excess of costs over equity in net assets acquired......... 15,516 284,573
Other...................................................... -- 494
Premium on deposits........................................ -- (34,412)
Mortgage banking activities:
Net (increase) decrease in loans originated
for resale................................................... 180,452 (2,986,660)
Realized gains from sale of loans.............................. (79,955) (108,082)
Realized (gains) and losses from sales of:
Securities available for sale.................................. -- (153,188)
Loans.......................................................... -- (588)
Premises and equipment......................................... 33,975 (63,789)
Foreclosed properties.......................................... (57,221) 269
Deposits....................................................... -- (1,064,655)
Mutual fund dividends............................................ -- (21,534)
Changes in operating assets and liabilities:
Accrued interest receivable.................................... (20,435) 232,911
Other assets................................................... (544,812) 309,568
Other liabilities.............................................. (27,438) 5,760,661
---------- ----------
Net cash provided by (used in) operating activities................ (203,184) 3,050,085
See notes to consolidated financial statements
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
----------- -------------
INVESTING ACTIVITIES
Proceeds from redemption of Federal Home Loan Bank stock...... 1,204,800 1,062,800
Purchase of securities held to maturity....................... (298,406) (1,020,625)
Proceeds from maturities of securities held to maturity....... 1,000,000 1,000,000
Purchase of securities available for sale..................... (2,507,588) (1,800,000)
Proceeds from sales of securities available for sale.......... 2,500,000 1,200,000
Principal remittances on mortgage-backed securities available
for sale.................................................... -- 491,800
Proceeds from sales of mortgage-backed securities available
for sale.................................................... -- 10,068,189
Proceeds from sales of loans.................................. -- 7,290,962
Net (increase) decrease in net loans.......................... (7,678,034) 6,231,163
Proceeds from sales of foreclosed properties.................. 451,312 204,410
Increase in foreclosed properties............................. (57,383) (40,930)
Increase in mortgage servicing rights......................... (236,155) (62,408)
Purchase of premises and equipment............................ (21,313) (71,282)
Proceeds from sales of premises and equipment................. 3,790 654,980
----------- -------------
Net cash provided by (used in) investing activities........... (5,638,977) 25,209,059
FINANCING ACTIVITIES
Deposits sold in connection with branch sale:
NOW and savings deposits.................................... -- (2,326,445)
Certificates of deposit..................................... -- (24,510,192)
Net increase (decrease) in NOW and savings deposits........... 3,021,138 (603,650)
Net increase in certificates of deposit....................... 2,948,049 957,754
Proceeds from Federal Home Loan Bank advances................. 7,000,000 --
Repayment of Federal Home Loan Bank advances.................. (7,285,833) (1,785,833)
Payments on capital lease obligations......................... (12,430) (9,153)
Payments on mortgages payable on foreclosed properties........ -- (25,258)
Common stock issued under Employee Stock
Purchase Plan................................................. 1,875 1,925
----------- -------------
Net cash provided by (used in) financing activities........... 5,672,799 (28,300,852)
----------- -------------
Decrease in cash and cash equivalents......................... (169,362) (41,708)
Cash and cash equivalents at beginning of period.............. 6,195,251 16,008,718
----------- -------------
Cash and cash equivalents at end of period.................... $ 6,025,889 $ 15,967,010
----------- -------------
See notes to consolidated financial statements.
9
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties.................... $ 619,823 $ 221,291
Transfer of remittances receivable on sold mortgage-backed
securities available for sale................................. -- 105,452
Increase in mortgages payable on foreclosed properties.......... -- 39,332
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest...................................................... $ 2,148,231 $ 4,737,444
Net income taxes paid (received).............................. -- --
See notes to consolidated financial statements.
10
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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, 1996 included in the EBI 1996 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. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and the disclosures of contingent assets and liabilities at the date of the
financial statements and that affect the reported amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2--EARNINGS PER SHARE
Earnings per share ("EPS") is computed based upon income adjusted for
preferred stock dividends, divided by the average number of common shares
outstanding. If dilutive for any period, warrants and options are treated as
outstanding using the modified treasury stock method. The weighted average
number of common and common equivalent shares outstanding used in the EPS
calculation for 1997 was 1,053,394 and for 1996 was 9,210,132.
In February 1997, the Financial Accounting Standards Board (the "Board")
issued Statement of Financial Accounting Standards No. 128--Earnings Per
Share ("SFAS 128"). SFAS 128 specifies the computation, presentation, and
disclosure requirements for EPS for entities with publicly-held common stock
or potential common stock, such as EBI. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted; however, after the effective
date, all prior-period EPS data presented shall be restated to conform with
the provisions of SFAS 128. Under SFAS 128, basic EPS will replace primary
EPS and will be computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the
period. Therefore, to the extent that EBI's primary EPS calculations for
prior periods considered the dilutive impact of warrants and options for
common stock, EBI's SFAS 128 restatement will result in significantly higher
basic EPS. Accordingly, pro forma basic EPS for the three months ended March
31, 1996 was $.23 using 1,049,712 weighted average common shares outstanding
during the period.
Also in February 1997, the Board issued Statement of Financial Accounting
Standards No. 129-- Disclosure of Information about Capital Structure ("SFAS
129"), which is effective contemporaneously with SFAS 128. However, because EBI
is currently subject to similar disclosure requirements of the Securities and
Exchange Commission, SFAS 129 will have no effect on EBI's disclosures regarding
its capital structure.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets of EBI at March 31, 1997 were $179.9 million as compared to
$174.3 million at December 31, 1996, an increase of approximately $5.7 million
or 3.3%. The increase in assets was primarily attributable to a $7.0 million
increase in loans held for investment and an $829,000 increase in other assets,
which were partially offset by a $1.2 million decrease in Federal Home Loan Bank
("FHLB") stock and a $705,000 decrease in securities held to maturity. The
increase in loans held for investment resulted from (i) the purchase of an
adjustable-rate first mortgage loan portfolio and (ii) mortgage loan
originations by Essex First Mortgage Corporation ("Essex First"). The increase
in other assets resulted from the first quarter pay-off of borrowings against
the cash surrender value of EBI's key-man insurance policies. The decrease in
FHLB stock resulted from the FHLB's new policy regarding stock holdings in
excess of membership requirements, which limits any FHLB member's excess stock
to no more than $500,000. The decrease in securities held to maturity resulted
from the maturity of a U.S. Treausry Note during the first quarter of 1997.
EBI's nonperforming assets, net of specific reserves for
collateral-dependent real estate loans ("CDRELs") and foreclosed properties,
increased from $5.2 million at December 31, 1996 to $5.8 million at March 31,
1997, and are summarized as follows (in thousands):
MARCH 31, DECEMBER 31,
1997 1996
----------- -------------
Nonaccrual loans:
CDRELs, net...................................................... $ 621 $ 609
Other............................................................ 2,558 2,299
Accruing loans 90 days or more past due............................ -- 30
Troubled debt restructured loans................................... 328 223
----------- ---------
Total nonperforming loans, net................................. 3,507 3,161
Foreclosed properties, net......................................... 2,307 2,054
Total nonperforming assets, net of specific reserves........... $ 5,814 $ 5,215
----------- ---------
Accruing loans in the 30-59 day and 60-89 day delinquency categories
decreased, as shown below (in thousands):
DELINQUENCY MARCH 31, DECEMBER 31,
CATEGORY 1997 1996
----------- ----------- -----------
30-59 days past due................................................ $ 815 $ 1,156
60-89 days past due................................................ 464 335
----------- ---------
$ 1,279 $ 1,491
----------- ---------
The increase in nonperforming assets occurred primarily in nonaccrual loans
and foreclosed properties. The increase in nonaccrual loans resulted from the
continued delinquency of a $288,000 loan secured by an apartment complex in
Suffolk, Virginia. This loan had been reported in the 30-59 day delinquency
category at December 31, 1996. The borrower has made payments on the loan since
December 1996 in accordance with a bankruptcy plan and the Bank expects the
borrower to settle this loan in full during the second quarter of 1997. The
increase in foreclosed properties occurred at Essex First and resulted from the
foreclosure on two construction loans totaling $317,000 to one builder. Both
loans are secured by single-family residences.
12
Deposits, the primary source of EBI's funds, totaled $137.0 million at March
31, 1997 as compared to $131.0 million at December 31, 1996, an increase of $6.0
million or 4.6%. The increase in deposits was attributable to increases in Essex
Savings Bank's (the "Bank") money market accounts and certificates of deposit.
While deposits grew at each of the Bank's branches, the most significant growth
occurred at the Richmond, Virginia branch.
Total shareholders' equity at March 31, 1997 was $15.1 million. However, the
Series B and Series C preferred stock has a stated value and liquidation
preference of $15.0 million, exclusive of cumulative but undeclared dividends
and accrued interest thereon of $2.2 million at March 31, 1997. To the extent
that EBI's income is not sufficient to cover the cumulative dividends on the
Series B and C preferred stock, the equity of EBI's common and preferred
shareholders will be affected. Accordingly, EBI's Strategic Evaluation Committee
continues to evaluate profitability enhancements and possibilities for corporate
restructurings.
RESULTS OF OPERATIONS
First Quarter of 1997 Compared to First Quarter of 1996
EBI's net income for the three months ended March 31, 1997 totaled $18,000,
compared to net income of $596,000 for the three months ended March 31, 1996.
However, during the first quarter of 1996, EBI's operating results included $1.3
million of nonrecurring income associated with the Bank's sale of its Charlotte,
North Carolina retail bank branch on March 15, 1997. Excluding the impact of
this nonrecurring income, EBI would have incurred a net loss of $686,000 during
the first quarter of 1996. Accordingly, EBI's net income for the first quarter
of 1997 improved $704,000 over the first quarter of 1996. This improvement
reflected the impact of (i) an increase in the net yield on interest-earning
assets as described below and (ii) a decrease in noninterest expense resulting
from the Bank's sale of nine retail bank branches during 1996 and a decline in
stock option compensation expense. These favorable impacts were partially offset
by the loss of net interest income associated with assets sold in connection
with the branch sales.
[intentionally blank]
13
NET INTEREST INCOME. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the three months ended
March 31:
1997 1996
-------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------ -------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1)..................................... $150,756 $3,149 8.36% $271,715 $5,442 8.01%
Investment securities......................... 8,575 118 5.51 13,171 189 5.75
Mortgage-backed securities.................... 1,905 30 6.37 13,726 250 7.38(2)
Federal funds sold and securities purchased
under agreements to resell.................. 2,789 37 5.21 6,986 92 5.26
Other......................................... 2,861 37 5.21 9,305 138(3) 5.54
-------- ------ -------- ------
Total interest-earning assets............. $166,886 3,371 8.08 $314,903 6,111(2)(3) 7.76
Interest-bearing liabilities:
Deposits...................................... $131,761 1,758 5.41 $276,046 3,853 5.58
FHLB advances................................. 25,653 379 6.00 29,473 441 5.99
Notes payable................................. 96 2 9.61 120 3 9.47
Subordinated capital notes.................... -- -- -- 628 18 11.71
Capitalized lease............................. 380 20(4) 18.52 421 29(4) 18.29
Total interest-bearing liabilities......... $157,890 2,159(4) 5.54 $306,688 4,344(4) 5.65
-------- ------ -------- ------
Net interest earnings........................... $ 1,212 $1,767
------- ------
Net interest spread (2),(3),(4)............... 2.54% 2.11%
---- ----
---- ----
Net yield on interest-earning assets
(2),(3),(4)................................. 2.91% 2.25%
---- ----
---- ----
- ------------------------
(1) Nonaccrual loans are included in the average balance of loans. Yield
calculation includes the accretion of net deferred loan fees.
(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 excludes $8,750, which consists primarily of interest
earned on custodial accounts maintained for servicing investors.
(4) Calculation in 1997 and 1996 excludes $2,102 and $9,734, respectively, which
consists primarily of interest paid on escrow accounts.
14
The table below sets forth certain information regarding changes in EBI's
interest income and interest expense between the periods indicated.
INCREASE (DECREASE) FROM FIRST QUARTER OF 1996
TO FIRST QUARTER OF 1997 DUE TO
---------------------------------------------
VOLUME (1) RATE (1) NET
----------- ----------- ----------
(IN THOUSANDS)
Interest income on:
Loans (2)...................................................................... $ (2,518) $ 225 $ (2,293)
Investment securities.......................................................... (64) (7) (71)
Mortgage-backed securities..................................................... (190) (30) (220)
Federal funds sold and securities purchased under agreements to resell......... (54) (1) (55)
Other interest-earning assets.................................................. (93) (8) (101)
--------- --------- ---------
Total interest income (2)................................................. (2,919) 179 (2,740)
Interest expense on:
Deposits....................................................................... (1,979) (116) (2,095)
FHLB advances.................................................................. (63) 1 (62)
Notes payable.................................................................. (1) -- (1)
Subordinated debt.............................................................. (18) -- (18)
Other interest-bearing liabilities............................................. (9) -- (9)
--------- --------- ---------
Total interest expense.................................................... (2,070) (115) (2,185)
--------- --------- ---------
Net interest income....................................................... $ (849) $ 294 $ (555)
--------- --------- ---------
--------- --------- ---------
- ------------------------
(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 decreased from $1.8 million for the first quarter of
1996 to $1.2 million for the first quarter of 1997, primarily as a result of the
loss of net interest income associated with assets sold in connection with the
Bank's sale of nine branches during 1996. However, the annualized net yield on
interest-earning assets increased 66 basis points from 2.25% for the first
quarter of 1996 to 2.91% for the first quarter of 1997 as a result of an
increase in the ratio of interest-earning assets to interest-bearing liabilities
in conjunction with an increase in the yield on loans, which reflects the Bank's
emphasis on investment in adjustable-rate single-family residential loans.
PROVISION FOR LOAN LOSSES. Changes in the allowance for loan losses for the
three months ended March 31 are as follows (in thousands):
1997 1996
--------- ---------
Balance at beginning of period............................................. $2,556 $5,251
Provision for loan losses.................................................. (22) 1
------ ------
2,534 5,252
Loans charged-off, net of recoveries....................................... (172) (297)
------ ------
Balance at end of period................................................... $2,362 $4,955
------ ------
------ ------
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At March 31,
1997, the unallocated portion of the general loan loss allowance approximated
$266,000. Management considered the loan loss allowance adequate to absorb
losses and did not provide for additional losses during the first quarter of
1997.
15
NONINTEREST INCOME. The significant components of noninterest income for
the three months ended March 31 are presented below:
INCREASE
1997 1996 (DECREASE)
---------- ------------ -------------
Loan servicing fees...................................................... $ 401,898 $ 412,740 $ (10,842)
Mortgage banking income.................................................. 88,219 120,110 (31,891)
Other service charges and fees........................................... 110,962 144,478 (33,516)
Net gain (loss) on sales of:
Securities............................................................. -- 153,188 (153,188)
Loans.................................................................. -- 588 (588)
Deposits............................................................... -- 1,064,655 (1,064,655)
Other.................................................................... 1,549 111,823 (110,274)
---------- ------------ -------------
$ 602,628 $ 2,007,582 $ (1,404,954)
---------- ------------ -------------
Noninterest income for the first quarter of 1997 totaled $603,000 as
compared to $2.0 million for the first quarter of 1996. However, noninterest
income in 1996 included the gains on sales of securities, loans, deposits, and
premises and equipment, which totaled $1.3 million, associated with the Bank's
sale of its Charlotte, North Carolina retail bank branch. Exclusive of these
gains, noninterest income was $725,000 during the first quarter of 1996;
accordingly, the effective decline in noninterest income for the first quarter
of 1997 was $122,000. This decline was primarily attributable to (i) lower
service charges and fees resulting primarily from the Bank's sale of nine
branches during 1996 and (ii) lower mortgage banking income resulting from fewer
loans originated for sale in the secondary market as Essex First focused on
expanding its construction lending programs.
Effective May 31, 1997, Essex Home Mortgage Servicing Corporation's ("Essex
Home") largest subservicing client will transfer its portfolio to another
servicer. At March 31, 1997, Essex Home serviced approximately 7,200 loans
totaling $885.6 million for this client and servicing fee income for the first
quarter of 1997 included $114,000 attributable to servicing activities performed
for this client. Because no assurances can be made that this significant
servicing volume can be replaced in its entirety in the near term, Essex Home
has developed a plan for operating expense reductions, which will be initiated
following the transfer of the servicing.
NONINTEREST EXPENSE. The significant components of noninterest expense for
the three months ended March 31 are presented below:
INCREASE
1997 1996 (DECREASE)
------------ ------------ -------------
Salaries and employee benefits......................................... $ 771,629 $ 1,387,654 $ (616,025)
Net occupancy and equipment............................................ 292,195 386,360 (94,165)
Deposit insurance premiums............................................. 112,345 219,503 (107,158)
Amortization of intangible assets...................................... 125,426 428,619 (303,193)
Service bureau......................................................... 126,751 159,398 (32,647)
Professional fees...................................................... 69,661 147,213 (77,552)
Foreclosed properties, net............................................. (4,898) 5,017 (9,915)
Other.................................................................. 326,057 444,144 (118,087)
------------ ------------ -------------
$ 1,819,166 $ 3,177,908 $ (1,358,742)
------------ ------------ -------------
Noninterest expense decreased from $3.2 million in the first quarter of 1996
to $1.8 million in the first quarter of 1997. The Bank's sale of nine branches
during 1996 had a pervasive impact on the decrease in noninterest expense. Total
noninterest expense associated with the sold branches, including amortization of
goodwill, approximated $784,000 during the first quarter of 1996. Further, the
decline in noninterest expense during 1997 reflected (i) a decrease of $337,000
16
in compensation expense associated with EBI's stock options and (ii) the impact
of a corporate downsizing strategy, which resulted in a decrease of 20 personnel
positions, excluding positions eliminated in connection with the branch sales,
from January 1, 1996 to March 31, 1997, and the relocation of EBI's corporate
headquarters to a smaller, more economical facility.
The significant components of other noninterest expense for the three months
ended March 31 are presented below:
INCREASE
1997 1996 (DECREASE)
---------- ---------- -----------
Loan expense................................................................ $ 58,504 $ 60,265 $ (1,761)
Telephone................................................................... 40,864 59,455 (18,591)
Postage and courier......................................................... 48,245 55,072 (6,827)
Stationery and supplies..................................................... 27,647 33,624 (5,977)
Advertising and marketing................................................... 43,443 37,400 6,043
Corporate insurance......................................................... 31,246 48,177 (16,931)
Travel...................................................................... 11,196 23,613 (12,417)
Provision for servicing losses.............................................. 6,000 6,000 --
Other....................................................................... 58,912 120,538 (61,626)
---------- ---------- -----------
$ 326,057 $ 444,144 $ (118,087)
---------- ---------- -----------
INCOME TAXES. There was no income tax provision recognized for financial
reporting purposes during the quarters ended March 31, 1997 or 1996, because EBI
had significant net operating loss carryforwards, which approximated $21.1
million at December 31, 1996. Also, until consistent profitability is
demonstrated, deferred income tax assets related to EBI's net operating loss
carryforwards and temporary differences will not be recognized.
LIQUIDITY
The Office of Thrift Supervision ("OTS") has established minimum liquidity
requirements for savings associations. These regulations provide, in part, that
members of the FHLB system maintain daily average balances of liquid assets
equal to a certain percentage of net withdrawable deposits plus current
borrowings. Current regulations require a liquidity level of at least 5%. It is
management's policy to maintain greater liquidity than required. Accordingly,
the Bank's liquidity ratio at March 31, 1997 was 7.23%.
REGULATORY MATTERS
REGULATORY CAPITAL. The Bank is required pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and OTS
regulations promulgated thereunder to satisfy three separate requirements of
specified capital as a percent of the appropriate asset base. At March 31,
1997, the Bank was in compliance with the capital requirements established by
FIRREA.
Section 38 of the Federal Deposit Insurance Act, as added by the FDIC
Improvement Act ("FDICIA"), requires each appropriate agency and the Federal
Deposit Insurance Corporation to, among other things, take prompt corrective
action ("PCA") to resolve the problems of insured depository institutions that
fall below certain capital ratios. Federal regulations under FDICIA classify
savings institutions based on four separate requirements of specified capital as
a percent of the appropriate asset base. As of March 31, 1997, the Bank was
"well capitalized" for PCA purposes.
17
The Bank's capital amounts and ratios as of March 31, 1997 are presented
below (in thousands):
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES PCA PROVISIONS
-------------------- ----------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- --------------
Total capital (to
risk-weighted assets)............................ $ 16,527 14.25% $9,276 8.0% $11,595 GREATER THAN OR
EQUAL TO 10.0
Tier I capital (to
risk-weighted assets)............................ 15,075 13.00% 4,638 4.0% 6,957 GREATER THAN OR
EQUAL TO 6.0
Tier I capital (to
total assets).................................... 15,075 8.38% 7,198 4.0% 8,997 GREATER THAN OR
EQUAL TO 5.0
Tangible capital (to
total assets).................................... 15,075 8.38% 2,699 1.5% -- --
REGULATORY COMPLIANCE. While all supervisory agreements with the OTS have
been terminated, 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 1997, which was
submitted to the OTS on January 3, 1997. The business plan has not yet been
approved by the OTS. However, on February 18, 1997, the OTS granted a temporary
growth waiver while the plan is under review. Such growth must be consistent
with the assumptions detailed in the business plan.
[intentionally blank]
18
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
----------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K--None
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Essex Bancorp, Inc.
May 9, 1997 By: /s/ Gene D. Ross
- ----------- ---------------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive Officer
May 9, 1997 By: /s/ Mary-Jo Rawson
- ----------- ------------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
20
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
----------- -----------
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
E-1