U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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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 small business issuer as specified in its charter)
Delaware 54-1721085
(State or other jurisdiction of) (I.R.S. Employer
incorporation or organization Identification No.)
Interstate Corporate Center
Building 9, Suite 200
Norfolk, Virginia 23502
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code (757) 893-1300
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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__.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,060,642 shares of Common
Stock, par value $.01 per share, as of August 11, 2000.
Transitional Small Business Disclosure Format (check one): Yes ___ No X .
Essex Bancorp, Inc.
Quarterly Report on Form 10-QSB for the
Quarter Ended June 30, 2000
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 June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended
June 30, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity
(unaudited) for the six months ended
June 30, 2000 5
Consolidated Statements of Cash
Flows (unaudited) for the six months
ended June 30, 2000 and 1999 6
Notes to Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote
of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31,
2000 1999
---- ----
ASSETS
Cash............................................................... $ 5,304,006 $ 6,902,398
Interest-bearing deposits.......................................... 8,159,464 9,820,129
Federal funds sold and securities purchased under
agreements to resell............................................. 1,017,289 2,228,596
------------- -------------
Cash and cash equivalents..................................... 14,480,759 18,951,123
Federal Home Loan Bank stock....................................... 2,765,000 2,230,000
Securities available for sale - cost approximates market........... 19,901 19,331
Securities held for investment - market value of
$726,000 in 2000 and $2,713,000 in 1999.......................... 750,116 2,750,116
Mortgage-backed securities held for investment - market
value of $485,000 in 2000 and $479,000
in 1999.......................................................... 479,800 479,861
Loans, net of allowance for loan losses of $1,439,000
in 2000 and $1,697,000 in 1999................................... 261,809,041 238,881,926
Loans held for sale................................................ 1,162,957 916,753
Mortgage servicing rights.......................................... 2,049,312 1,985,462
Foreclosed properties, net......................................... 484,610 445,577
Accrued interest receivable........................................ 1,900,953 1,544,665
Advances for taxes, insurance, and other........................... 702,775 981,365
Premises and equipment............................................. 3,912,722 3,399,745
Other assets....................................................... 6,011,865 5,152,986
------------- -------------
Total Assets.............................................. $296,529,811 $277,738,910
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................................... $ 15,771,681 $ 19,630,014
Interest-bearing.............................................. 204,450,650 192,579,360
------------- -------------
Total deposits............................................ 220,222,331 212,209,374
Federal Home Loan Bank advances.................................... 55,300,000 44,600,000
Capitalized lease obligations...................................... 147,844 191,613
Other liabilities.................................................. 2,398,348 2,742,741
------------- -------------
Total Liabilities......................................... 278,068,523 259,743,728
SHAREHOLDERS' EQUITY
Series B preferred stock, $6.67 stated value:
Authorized shares - 2,250,000
Issued and outstanding shares - 2,125,000........................ 14,173,750 14,173,750
Series C preferred stock, $6.67 stated value:
Authorized shares - 125,000
Issued and outstanding shares - 125,000.......................... 833,750 833,750
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 1,060,642........................ 10,606 10,606
Additional paid-in capital......................................... 8,687,761 8,687,770
Accumulated deficit................................................ (5,244,579) (5,710,694)
------------- -------------
Total Shareholders' Equity................................ 18,461,288 17,995,182
------------- -------------
Total Liabilities and Shareholders' Equity................ $296,529,811 $277,738,910
============= =============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans, including fees.............................. $5,230,090 $3,903,845 $10,101,062 $7,708,964
Federal funds sold and securities purchased
under agreements to resell....................... 19,116 16,108 35,887 32,735
Investment securities, including
dividend income.................................. 62,548 62,713 146,349 121,968
Mortgage-backed securities......................... 8,775 12,245 16,850 30,092
Other.............................................. 153,683 97,829 281,265 201,619
---------- ---------- ----------- ----------
Total Interest Income..................... 5,474,212 4,092,740 10,581,413 8,095,378
INTEREST EXPENSE
Deposits .......................................... 2,686,090 2,337,387 5,215,442 4,599,396
Federal Home Loan Bank advances.................... 819,481 309,051 1,579,795 598,807
Other.............................................. 7,422 11,125 15,832 23,075
---------- ---------- ----------- ----------
Total Interest Expense.................... 3,512,993 2,657,563 6,811,069 5,221,278
---------- ---------- ----------- ----------
Net Interest Income....................... 1,961,219 1,435,177 3,770,344 2,874,100
PROVISION FOR LOAN LOSSES.............................. 140,000 - 240,000 -
---------- ---------- ----------- ----------
Net Interest Income After
Provision for Loan Losses................. 1,821,219 1,435,177 3,530,344 2,874,100
NONINTEREST INCOME
Loan servicing fees................................ 434,953 394,274 871,871 758,616
Mortgage banking income, including
gain on sale of loans............................ 41,700 150,378 74,267 309,028
Other service charges and fees..................... 171,828 146,549 339,533 305,590
Other.............................................. 102,794 88,447 194,747 190,137
---------- ---------- ----------- ----------
Total Noninterest Income.................. 751,275 779,648 1,480,418 1,563,371
NONINTEREST EXPENSE
Salaries and employee benefits..................... 1,141,007 996,036 2,273,730 1,993,232
Net occupancy and equipment........................ 239,319 210,843 463,929 444,232
Deposit insurance premiums......................... 26,448 147,471 52,205 286,227
Amortization of intangible assets.................. 144,323 131,371 293,398 279,946
Service bureau..................................... 148,503 145,748 307,867 291,654
Professional fees.................................. 69,152 71,291 117,750 138,574
Foreclosed properties, net......................... 44,452 (20,045) 54,961 4,432
Other.............................................. 386,700 421,251 771,028 884,835
---------- ---------- ----------- ----------
Total Noninterest Expense................. 2,199,904 2,103,966 4,334,868 4,323,132
---------- ---------- ----------- ----------
Income Before Income Taxes................ 372,590 110,859 675,894 114,339
PROVISION FOR (BENEFIT FROM)
INCOME TAXES....................................... 85,741 4,402 209,779 (21,794)
---------- ---------- ----------- ----------
Net Income................................ $ 286,849 $ 106,457 $ 466,115 $ 136,133
========== ========== =========== ==========
Loss available to common
shareholders (Note 2)............................ $ (240,786) $ (376,059) $ (580,827) $ (820,571)
========== ========== =========== ==========
Basic and diluted loss per
common share (Note 2)............................ $ (.23) $ (.35) $ (.55) $ (.77)
========== ========== =========== =========
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the six months ended June 30, 2000
Series B Series C
Common Preferred Preferred Additional
Stock, $.01 Stock, $6.67 Stock, $6.67 Paid-in Accumulated
Par Value Stated Value Stated Value Capital Deficit Total
--------- ------------ ------------ ------- ------- -----
Balance at January 1, 2000........... $10,606 $14,173,750 $833,750 $8,687,770 $(5,710,694) $17,995,182
Fractional share pay-outs under
the Employee Stock Purchase
Plan.............................. - - - (9) - (9)
Comprehensive net income............. - - - - 466,115 466,115
------ ---------- ------- --------- ---------- ----------
Balance at June 30, 2000............. $10,606 $14,173,750 $833,750 $8,687,761 $(5,244,579) $18,461,288
====== ========== ======= ========= ========== ==========
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net income........................................................... $ 466,115 $ 136,133
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Provisions for:
Losses on loans, foreclosed properties and other.............. 308,453 14,361
Depreciation and amortization of premises and equipment....... 176,606 171,279
Amortization (accretion) of:
Premiums and discounts on loans and securities. (9,860) 161,886
Mortgage servicing rights..................................... 262,360 248,916
Excess of costs over equity in net assets acquired............ 31,038 31,030
Mortgage banking activities:
Net (increase) decrease in loans originated for resale........ (184,622) 1,926,427
Realized gains from sale of loans............................. (61,582) (275,537)
Realized gains from sales of foreclosed properties............... (165) (16,901)
Changes in operating assets and liabilities:
Accrued interest receivable................................... (356,288) (155,655)
Advances for taxes, insurance and other....................... 248,590 268,205
Other assets.................................................. (889,917) (575,300)
Other liabilities............................................. (382,990) (250,502)
----------- ------------
Net cash (used in) provided by operating activities.................. (392,262) 1,684,342
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock............................. (535,000) (111,500)
Proceeds from maturity of securities held to maturity................ 2,000,000 -
Purchase of securities available for sale............................ (570) (433)
Principal remittances on mortgage-backed securities.................. - 779,087
Purchases of loans and participations................................ (28,592,873) (20,832,056)
Net decrease (increase) in net loans................................. 5,389,824 (4,064,266)
Proceeds from sales of foreclosed properties......................... 127,651 198,017
Increase in foreclosed properties.................................... (118,032) (8,634)
Increase in mortgage servicing rights................................ (326,210) (685,028)
Purchases of premises and equipment.................................. (689,583) (200,957)
----------- ------------
Net cash used in investing activities................................ (22,744,793) (24,925,770)
FINANCING ACTIVITIES
Net (decrease) increase in NOW, money market
and savings deposits............................................. (5,573,231) 1,816,149
Net increase in certificates of deposit.............................. 13,586,188 9,179,825
Proceeds from Federal Home Loan Bank advances........................ 29,000,000 27,000,000
Repayment of Federal Home Loan Bank advances......................... (18,300,000) (21,008,333)
Payments on capital lease obligations................................ (43,769) (36,526)
Other................................................................ (2,497) (2)
----------- ------------
Net cash provided by financing activities............................ 18,666,691 16,951,113
----------- ------------
Decrease in cash and cash equivalents................................ (4,470,364) (6,290,315)
Cash and cash equivalents at beginning of period..................... 18,951,123 17,944,680
----------- ------------
Cash and cash equivalents at end of period........................... $ 14,480,759 $ 11,654,365
=========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties......................... $ 45,855 $ 308,290
Assumption of first mortgages on foreclosed properties............... $ 41,085 -
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................................... $ 6,606,622 $ 5,221,652
Income taxes..................................................... $ - $ 3,000
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2000
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 notes to EBI's financial
statements for the year ended December 31, 1999 included in the EBI 1999 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
EBI calculates its basic and diluted earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128 - Earnings Per Share.
Accordingly, the components of EBI's EPS calculations are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 286,849 $ 106,457 $ 466,115 $ 136,133
Accumulated undeclared preferred
stock dividends (527,635) (482,516) (1,046,942) (956,704)
-------- -------- ---------- --------
Net loss available to
common shareholders $(240,786) $(376,059) $ (580,827) $(820,571)
======== ======== ========== ========
Weighted average common
shares outstanding 1,060,642 1,060,642 1,060,642 1,060,642
========= ========= ========= =========
EBI's common stock equivalents are antidilutive with respect to loss available
to common shareholders for all periods presented; therefore, basic and diluted
EPS are the same.
[intentionally blank]
7
NOTE 3 - SEGMENT INFORMATION
The following segment information for EBI for the three months and six months
ended June 30, 2000 and 1999 is presented on the same basis and for the same
segments as those presented in the EBI 1999 Annual Report.
Retail Mortgage
Community Mortgage Loan Corporate/
Banking Banking Servicing Eliminations Total
------- ------- --------- ------------ -----
(in thousands)
As of and for the three months
ended June 30, 2000:
Customer revenues $ 460 $ 1,582 $ 671 $ - $ 2,713
Affiliate revenues 4 100 120 (224) -
Depreciation and
amortization 31 14 24 20 89
Pre-tax income (loss) (301) 1,269 125 (720) 373
Total assets 227,937 64,690 7,796 (3,893) 296,530
As of and for the three months
ended June 30, 1999:
Customer revenues $ 807 $ 831 $ 557 $ 19 $ 2,214
Affiliate revenues - 97 118 (215) -
Depreciation and
amortization 26 6 20 22 74
Pre-tax income (loss) (12) 479 101 (458) 110
Total assets 209,057 36,113 7,160 (4,454) 247,876
As of and for the six months
ended June 30, 2000:
Customer revenues $ 1,098 $ 2,842 $1,311 $ - $ 5,251
Affiliate revenues 7 165 241 (413) -
Depreciation and
amortization 63 28 46 39 176
Pre-tax income (loss) (392) 2,164 201 (1,297) 676
Total assets 227,937 64,690 7,796 (3,893) 296,530
As of and for the six months
ended June 30, 1999:
Customer revenues $ 1,802 $ 1,492 $1,099 $ 44 $ 4,437
Affiliate revenues - 239 237 (476) -
Depreciation and
amortization 53 28 39 51 171
Pre-tax income (loss) 188 825 151 (1,050) 114
Total assets 209,057 36,113 7,160 (4,454) 247,876
Customer revenues consist of (i) net interest income, which represents the
difference between interest earned on loans and investments and interest paid on
deposits and other borrowings and (ii) noninterest income, which consists
primarily of mortgage loan servicing fees, mortgage banking income (primarily
gains on the sale of loans), and service charges and fees (primarily on deposits
and the loan servicing portfolio). Revenues and pre-tax income for the mortgage
banking segment are presented before cost of funds allocation.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- -------------------
Total assets of Essex Bancorp, Inc. ("EBI") at June 30, 2000 were
$296.5 million as compared to $277.7 million at December 31, 1999, an increase
of approximately $18.8 million or 6.8%. The increase in total assets resulted
primarily from increases of (i) $22.9 million in loans held for investment and
corresponding accrued interest receivable, which was attributable to residential
loan purchases of $6.1 million, consumer loan purchases of $2.3 million, net
participation purchases of $14.3 million of builder construction loans and net
participation purchases of $6.0 million of loans secured by residential lots,
(ii) $535,000 in Federal Home Loan Bank ("FHLB") stock resulting from the impact
of the increase in FHLB advances on Essex Savings Bank, F.S.B.'s (the "Bank")
minimum FHLB stock requirement, (iii) $513,000 in premises and equipment
resulting from capital expenditures for the Bank's new retail banking branch
located in Ashland, Virginia and (iv) $859,000 in other assets resulting from
receivables from lead banks in construction loan participations. These increases
were partially offset by decreases of (i) $4.5 million in cash and cash
equivalents resulting from a decrease in liquidity and (ii) $2.0 million in
securities held to maturity resulting from the scheduled maturity of a FHLB
note.
Deposits, the primary source of EBI's funds, totaled $220.2 million at
June 30, 2000 as compared to $212.2 million at December 31, 1999. An $11.9
million increase in interest-bearing deposits occurred primarily in certificates
of deposit at EBI's retail banking branches in Suffolk, Emporia, Richmond and
Ashland, Virginia. In addition to its usual competitive interest rates, EBI
offered interest rate specials as a means of growing deposits in 2000 in order
to fund loan growth. This increase was partially offset by a $3.9 million
decline in noninterest-bearing deposits resulting from fluctuations in loan
servicing escrow accounts maintained by Essex Home Mortgage Servicing
Corporation ("Essex Home") at the Bank. Because the growth in total deposits was
not sufficient to fund asset growth, EBI utilized FHLB advances, which increased
$10.7 million, to partially fund asset growth during the first half of 2000.
Results of Operations
- ---------------------
First Six Months of 2000 Compared to First Six Months of 1999
EBI's net income for the six months ended June 30, 2000 totaled
$466,000, compared to net income of $136,000 for the six months ended June 30,
1999. EBI's earnings improvement during the first six months of 2000 over the
comparable period in 1999 reflected (i) an $897,000 increase in net interest
income, resulting from an increase in average interest-earning assets, coupled
with an increase in the net yield on interest-earning assets and (ii) a $113,000
increase in loan servicing fees resulting from an increase in Essex Home's
mortgage loan servicing portfolio since June 30, 1999. The benefits of these
improvements were offset in part by (i) a $240,000 increase in the provision for
loan losses based on management's assessment of the allowance for loan losses in
relation to growth in the loan portfolio, (ii) a $235,000 decline in mortgage
banking income resulting from a slowdown in loan originations in conjunction
with rising interest rates since June of 1999 and (iii) a $232,000 increase in
the provision for income taxes.
Despite the increase in earnings, EBI reported a loss per common share
of $.23 and $.55 for the three months and six months ended June 30, 2000,
respectively, because EBI's net income was not sufficient to cover the unpaid
cumulative dividends on EBI's Series B and C preferred stock, which was issued
in connection with EBI's 1995 recapitalization.
9
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 six months ended June 30:
2000 1999
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $250,909 $10,101 8.05% $201,836 $7,709 7.64%
Investment securities.......... 4,489 147 6.52 4,379 122 5.57
Mortgage-backed
securities................. 480 17 7.02 1,074 30 5.60
Federal funds sold and
securities purchased under
agreements to resell......... 1,216 36 5.90 1,410 33 4.64
Other.......................... 9,431 281 5.96 8,616 201 4.68
--------- -------- --------- -------
Total interest-earning
assets (1)................ $266,525 10,582 7.94 $217,315 8,095 7.45
======= =======
Interest-bearing liabilities:
Deposits....................... $195,953 5,215 5.35 $177,541 4,599 5.22
FHLB advances.................. 51,673 1,580 6.15 21,964 599 5.50
Other.......................... 171 16 18.67 251 23 18.56
---------- -------- ---------- -------
Total interest-bearing
liabilities............... $247,797 6,811 5.53 $199,756 5,221 5.27
======= ------ ======= -----
Net interest earnings............. $ 3,771 $2,874
====== =====
Net interest spread (1)........... 2.41% 2.18%
==== ====
Net yield on interest-earning
assets (1)..................... 2.83% 2.65%
==== ====
(1) Nonaccrual loans are included in the average balance of loans.
[intentionally blank]
10
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From the First Six Months
of 1999 to the First Six Months of 2000 Due to
----------------------------------------------
Volume (1) Rate (1) Net
------ ---- ---
(in thousands)
Interest income on:
Loans (2)................................ $1,957 $435 $2,392
Investment securities.................... 3 22 25
Mortgage-backed securities............... (19) 6 (13)
Federal funds sold and
securities purchased under
agreements to resell.................. (5) 8 3
Other interest-earning assets............ 21 59 80
------- ---- -------
Total interest income (2)............. 1,957 530 2,487
Interest expense on:
Deposits................................. 498 118 616
FHLB advances............................ 902 79 981
Other interest-bearing liabilities....... (7) - (7)
------- ----- -------
Total interest expense................ 1,393 197 1,590
----- --- -----
Net interest income................... $ 564 $333 $ 897
====== === ======
(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 $2.9 million for the first six
months of 1999 to $3.8 million for the first six months of 2000, which reflected
the favorable impact of a 24.3% increase in average loans, coupled with a 41
basis point increase in the average yield on loans. The increasing interest rate
environment since June of 1999 has resulted in a slowdown in refinancings, which
has stabilized prepayments in the loan portfolio, and EBI has been diversifying
its loan portfolio by investing in higher-yielding, adjustable-rate products,
including construction loans to residential builders and participations in such
loans. However, net interest margin compression can occur in the current
environment of rising interest rates because of the repricing of deposits at
higher interest rates, coupled with the impact of competition for deposits as a
funding source for growth.
Provision for Loan Losses. Changes in the allowance for loan losses
for the six months ended June 30 are as follows (in thousands):
2000 1999
---- ----
Balance at beginning of period................... $1,697 $1,845
Provision for loan losses........................ 240 -
------ --------
1,937 1,845
Loans charged-off, net of recoveries............. (498) (149)
------ ------
Balance at end of period......................... $1,439 $1,696
===== =====
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. This review
incorporates charge-off history and loan classification status into a loss
migration analysis in order to arrive at an estimate of the required allowance
for loan losses. At June 30, 2000, nonperforming assets of $1.2 million was .42%
as a percentage of total assets as compared to nonperforming assets at December
31, 1999 of $1.3 million, which was .48% as a percentage of total assets.
Despite the decline in the allowance for loan losses, EBI's loan loss coverage,
expressed as the ratio of the allowance for loan losses to nonperforming loans,
improved from 182.88% as of December 31, 1999 to 185.92% as of June 30, 2000.
Further credit quality improvements were evidenced by a decline in loans past
due 30-89 days from $1.1 million at December 31, 1999 to $495,000 at June 30,
2000.
11
Net charge-offs during the first six months of 2000 included $247,000
for one borrower resulting from a default on floor plan loans made to a used car
dealer ("dealer loans"). A $100,000 specific loss allowance had been established
for these loans as of December 31, 1999. The charge-off of the remaining balance
of the dealer loans and the overall growth of the loan portfolio was the basis
for management's determination to add to the allowance for loan losses during
the first six months of 2000.
Noninterest Income. Noninterest income for the first six months of 2000
decreased $83,000 from the first six months of 1999. This decrease was primarily
attributable to a $235,000 decline in mortgage banking income resulting from a
slowdown in loan originations in conjunction with rising interest rates since
June of 1999. This decrease was partially offset by a $113,000 increase in loan
servicing fees and a $34,000 increase in other service charges and fees
resulting from an 18.7% increase in Essex Home's mortgage loan servicing
portfolio since June 30, 1999. EBI intends to pursue opportunities to increase
its loan servicing revenues in order to mitigate the impact of the decline in
mortgage banking income.
Noninterest Expense. Noninterest expense for the first six months of
2000 increased $12,000 over the first six months of 1999. This increase was
primarily attributable to a $280,000 increase in salaries and employee benefits
resulting from an increase in the number of full-time equivalent employees,
coupled with a lower deferral of fixed loan origination costs, such as personnel
costs for loan processors, underwriters and closers, because of the decline in
loan origination volume in 2000. The increase in personnel expenses was
partially offset by a $234,000 decrease in deposit insurance premiums resulting
from a lower deposit insurance assessment rate in 2000.
Income Taxes. EBI recognized a $210,000 provision for income taxes
during the first six months of 2000, representing 31% of pre-tax income. In 1999
and 1998, EBI had recognized a portion of the income tax benefits arising from
net tax operating loss carryforwards expected to be realized for the year 2000.
Second Quarter of 2000 Compared to Second Quarter of 1999
EBI's net income for the three months ended June 30, 2000 totaled
$287,000, compared to net income of $106,000 for the three months ended June 30,
1999. Factors contributing to the second quarter increase in 2000 parallel the
factors described in the six-month comparison.
12
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 June
30:
2000 1999
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $255,278 $5,230 8.20% $206,746 $3,904 7.55%
Investment securities.......... 3,593 62 6.96 4,429 62 5.66
Mortgage-backed
securities................. 480 9 7.32 887 12 5.52
Federal funds sold and
securities purchased under
agreements to resell......... 1,230 19 6.22 1,378 16 4.68
Other.......................... 9,767 154 6.29 8,306 98 4.71
--------- ------ --------- -------
Total interest-earning
assets (1)................ $270,348 5,474 8.10 $221,746 4,092 7.38
======= =======
Interest-bearing liabilities:
Deposits....................... $198,631 2,686 5.44 $180,626 2,337 5.19
FHLB advances.................. 51,224 820 6.43 22,762 309 5.45
Other.......................... 160 7 18.74 242 11 18.45
---------- -------- ---------- -------
Total interest-bearing
liabilities............... $250,015 3,513 5.65 $203,630 2,657 5.23
======= ----- ======= -----
Net interest earnings............. $1,961 $1,435
===== =====
Net interest spread (1)........... 2.45% 2.15%
==== ====
Net yield on interest-earning
assets (1)..................... 2.90% 2.59%
==== ====
(1) Nonaccrual loans are included in the average balance of loans.
[intentionally blank]
13
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 Second Quarter of
1999 to the Second Quarter of 2000 Due to
-----------------------------------------
Volume (1) Rate (1) Net
------ ---- ---
(in thousands)
Interest income on:
Loans (2)................................ $973 $353 $1,326
Investment securities.................... (13) 13 -
Mortgage-backed securities............... (6) 3 (3)
Federal funds sold and
securities purchased under
agreements to resell.................. (2) 5 3
Other interest-earning assets............ 19 37 56
---- ---- -------
Total interest income (2) 971 411 1,382
Interest expense on:
Deposits................................. 235 114 349
FHLB advances............................ 446 65 511
Other interest-bearing liabilities....... (4) - (4)
----- ------ -------
Total interest expense................ 677 179 856
--- --- -----
Net interest income................... $294 $232 $ 526
=== === =====
(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 $1.4 million for the second quarter
of 1999 to $2.0 million for the second quarter of 2000, which reflected the
favorable impact of a 23.5% increase in average loans, coupled with a 65 basis
point increase in the average yield on loans.
Provision for Loan Losses. Changes in the allowance for loan losses
for the three months ended June 30 are as follows (in thousands):
2000 1999
---- ----
Balance at beginning of period................... $1,697 $1,802
Provision for loan losses........................ 140 -
------ --------
1,837 1,802
Loans charged-off, net of recoveries............. (398) (106)
------ ------
Balance at end of period......................... $1,439 $1,696
===== =====
As previously described, net charge-offs during the second quarter of
2000 included $247,000 for the dealer loans, which coupled with the overall
growth of the loan portfolio was the basis for management's determination to
continue to add to the allowance for loan losses during the second quarter of
2000.
Noninterest Income. Noninterest income for the second quarter of 2000
totaled $751,000 as compared to $780,000 for the second quarter of 1999. This
decrease was primarily attributable to a $109,000 decrease in mortgage banking
income resulting from a slowdown in loan originations in conjunction with rising
interest rates since the second quarter of 1999, which was partially offset by
increases of $41,000 in loan servicing fees, $25,000 in other service charges
and fees and $14,000 in other noninterest income resulting primarily from Essex
Home's 18.7% increase in its nonaffiliate mortgage loan servicing portfolio
since June 30, 1999.
14
Noninterest Expense. Noninterest expense for the second quarter of 2000
totaled $2.2 million, a $96,000 or 4.6% increase over $2.1 million for the
second quarter of 1999. This increase was primarily attributable to increases of
(i) $145,000 in salaries and employee benefits resulting from higher personnel
expenses at Essex Home and the Bank and (ii) $64,000 in foreclosed properties
expense resulting from lower provisions in 1999 for losses on foreclosed
properties and favorable property valuation adjustments in 1999 based on
independent appraisals. These increases were partially offset by lower deposit
insurance premiums attributable to a lower deposit insurance assessment rate in
2000.
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 4%. The
Bank has consistently exceeded such regulatory liquidity requirement and, at
June 30, 2000, had a liquidity ratio of 7.15%.
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 June 30, 2000,
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 June 30, 2000, the Bank was "well
capitalized" for PCA purposes.
Audit Committee Matters. The Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees (the "Committee") was created in
October 1998 in order to make recommendations to the Securities and Exchange
Commission ("SEC"), self-regulatory organizations, auditors and corporations on
how best to improve board oversight of the financial reporting process of public
companies. The Committee issued its recommendations early in 1999, and in
December self-regulatory bodies, including the American Stock Exchange ("AMEX"),
as well as the SEC and the American Institute of Certified Public Accountants'
Auditing Standards Board issued rules implementing the Committee's
recommendations. The AMEX rules cover the corporate governance areas addressed
by the Committee, namely, audit committee independence, qualifications,
composition and charter. The Auditing Standards Board's new standards, while
directed to outside auditors, also impact activities of the audit committee,
requiring new communications about annual and quarterly financial reporting. The
SEC's rules require timely quarterly reviews by auditors as well as disclosures
about audit committees in companies' annual proxy statements.
To date, EBI has undertaken compliance with these rules by (i)
increasing the membership of its Audit Committee from two to three independent
directors, (ii) adopting a formal written Audit Committee charter and (iii)
initiating formal communication between the Audit Committee and EBI's
independent accountants of their review of EBI's interim financial statements
prior to their filing with the SEC. In addition, during the second quarter of
2000, EBI certified to AMEX its compliance with Section 121 of the AMEX Company
Guide.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk exposures that
affect the quantitative or qualitative disclosures presented as of December 31,
1999 in the EBI 1999 Annual Report.
[intentionally blank]
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 16, 2000, an annual meeting of stockholders of EBI was held for
the purpose of considering and voting upon the election of two directors for a
term of three years. At the meeting, (i) Mr. Harry F. Radcliffe was approved by
a vote of 979,982 EBI common shares voting in favor and 45,768 abstaining, and
(ii) Mr. Gene D. Ross was approved by a vote of 980,124 voting in favor and
45,626 abstaining. No other business was conducted at the meeting.
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibits are filed as part of this Part II:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Essex Bancorp, Inc.
August 11, 2000 By: /s/ Gene D. Ross
--------------- ----------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
August 11, 2000 By: /s/ Mary-Jo Rawson
--------------- ------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer