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 September 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
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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 November 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes No X .
----- -----
Essex Bancorp, Inc.
Quarterly Report on Form 10-QSB for the
Quarter Ended September 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 September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended
September 30, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity
(unaudited) for the nine months ended
September 30, 2000 5
Consolidated Statements of Cash
Flows (unaudited) for the nine months
ended September 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 15
Part II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote
of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Cash...................................................... $ 5,883,666 $ 6,902,398
Interest-bearing deposits................................. 8,914,106 9,820,129
Federal funds sold and securities purchased under
agreements to resell..................................... 1,086,064 2,228,596
------------ ------------
Cash and cash equivalents.............................. 15,883,836 18,951,123
Securities available for sale - cost approximates market.. 20,227 19,331
Securities held for investment - market value of
$1,750,000 in 2000 and $2,713,000 in 1999................ 1,761,454 2,750,116
Mortgage-backed securities held for investment - market
value of $485,000 in 2000 and $479,000 in 1999........... 479,769 479,861
Federal Home Loan Bank stock.............................. 2,765,000 2,230,000
Loans, net of allowance for loan losses of $1,474,000
in 2000 and $1,697,000 in 1999........................... 258,895,277 238,881,926
Loans held for sale....................................... 1,117,768 916,753
Mortgage servicing rights................................. 2,068,851 1,985,462
Foreclosed properties, net................................ 283,294 445,577
Accrued interest receivable............................... 1,975,113 1,544,665
Advances for taxes, insurance, and other.................. 649,736 981,365
Premises and equipment.................................... 3,926,447 3,399,745
Other assets.............................................. 3,111,078 5,152,986
------------ ------------
Total Assets......................................... $292,937,850 $277,738,910
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing.................................... $ 17,337,383 $ 19,630,014
Interest-bearing....................................... 213,092,526 192,579,360
------------ ------------
Total deposits....................................... 230,429,909 212,209,374
Federal Home Loan Bank advances........................... 41,150,000 44,600,000
Capitalized lease obligations............................. 124,429 191,613
Other liabilities......................................... 2,467,558 2,742,741
------------ ------------
Total Liabilities.................................... 274,171,896 259,743,728
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....................................... (4,939,913) (5,710,694)
------------ ------------
Total Shareholders' Equity........................... 18,765,954 17,995,182
------------ ------------
Total Liabilities and Shareholders' Equity........... $292,937,850 $277,738,910
============ ============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
INTEREST INCOME
Loans, including fees........................ $5,448,642 $4,364,120 $15,549,704 $12,073,084
Federal funds sold and securities purchased
under agreements to resell.................. 17,856 18,298 53,742 51,033
Investment securities, including
dividend income............................. 73,558 64,463 219,907 186,431
Mortgage-backed securities................... 9,133 8,187 25,983 38,279
Other........................................ 193,532 115,940 474,797 317,559
---------- ---------- ----------- -----------
Total Interest Income................... 5,742,721 4,571,008 16,324,133 12,666,386
INTEREST EXPENSE
Deposits..................................... 2,990,610 2,460,468 8,206,052 7,059,864
Federal Home Loan Bank advances.............. 789,088 447,271 2,368,883 1,046,078
Other........................................ 6,385 10,261 22,217 33,336
---------- ---------- ----------- -----------
Total Interest Expense.................. 3,786,083 2,918,000 10,597,152 8,139,278
---------- ---------- ----------- -----------
Net Interest Income..................... 1,956,638 1,653,008 5,726,981 4,527,108
PROVISION FOR LOAN LOSSES...................... 150,000 - 390,000 -
---------- ---------- ----------- -----------
Net Interest Income After
Provision for Loan Losses............... 1,806,638 1,653,008 5,336,981 4,527,108
NONINTEREST INCOME
Loan servicing fees.......................... 450,504 408,955 1,322,375 1,167,571
Mortgage banking income, including
gain on sale of loans....................... 67,910 104,701 142,177 413,729
Other service charges and fees............... 179,557 145,853 519,090 451,443
Other........................................ 97,831 97,074 292,578 287,211
---------- ---------- ----------- -----------
Total Noninterest Income................ 795,802 756,583 2,276,220 2,319,954
NONINTEREST EXPENSE
Salaries and employee benefits............... 1,154,318 1,036,888 3,428,048 3,030,120
Net occupancy and equipment.................. 259,277 233,705 723,206 677,937
Deposit insurance premiums................... 26,071 149,513 78,276 435,740
Amortization of intangible assets............ 137,337 138,995 430,735 418,941
Service bureau............................... 155,895 153,863 463,762 445,517
Professional fees............................ 73,613 61,066 191,363 199,640
Foreclosed properties, net................... 38,126 (3,619) 93,087 813
Other........................................ 383,052 364,044 1,154,080 1,248,879
---------- ---------- ----------- -----------
Total Noninterest Expense............... 2,227,689 2,134,455 6,562,557 6,457,587
---------- ---------- ----------- -----------
Income Before Income Taxes.............. 374,751 275,136 1,050,644 389,475
PROVISION FOR (BENEFIT FROM)
INCOME TAXES................................. 70,084 (332,621) 279,863 (354,415)
---------- ---------- ----------- -----------
Net Income.............................. $ 304,667 $ 607,757 $ 770,781 $ 743,890
========== ========== =========== ===========
Income (loss) available to common
shareholders (Note 2)....................... $ (231,297) $ 116,913 $ (812,125) $ (703,658)
========== ========== =========== ===========
Income (loss) per common share (Note 2):
Basic....................................... $(.22) $.11 $(.77) $(.66)
========== ========== =========== ===========
Diluted..................................... $(.22) $.02 $(.77) $(.66)
========== ========== =========== ===========
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the nine months ended September 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)
Net income................. - - - - 770,781 770,781
----------- ------------ ------------ ---------- ----------- -----------------
Balance at September 30,
2000...................... $10,606 $14,173,750 $833,750 $8,687,761 $(4,939,913) $18,765,954
=========== ============ ============ ========== =========== =================
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
---------------------------------
2000 1999
------------- ---------------
OPERATING ACTIVITIES
Net income.................................................. $ 770,781 $ 743,890
Adjustments to reconcile net income to cash
provided by operating activities:
Provisions for:
Losses on loans, foreclosed properties and other.......... 491,319 26,121
Depreciation and amortization of premises and equipment... 279,316 259,287
Amortization (accretion) of:
Premiums and discounts on loans and securities............ (42,501) 200,214
Mortgage servicing rights................................. 395,104 372,395
Excess of costs over equity in net assets acquired........ 35,631 46,545
Mortgage banking activities:
Net (increase) decrease in loans originated for resale.... (71,163) 2,932,231
Realized gains from sale of loans......................... (129,852) (363,430)
Realized loss (gains) from sales of foreclosed properties.. 8,466 (63,129)
Changes in operating assets and liabilities:
Accrued interest receivable............................... (430,448) (294,192)
Advances for taxes, insurance and other................... 286,629 (924,509)
Other assets.............................................. 2,006,277 (776,396)
Other liabilities......................................... (302,089) (50,373)
------------- ------------
Net cash provided by operating activities................... 3,297,470 2,108,654
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock.................... (535,000) (188,700)
Purchase of securities held to maturity..................... (1,011,875) -
Proceeds from maturity of securities held to maturity....... 2,000,000 -
Purchase of securities available for sale................... (896) (671)
Principal remittances on mortgage-backed securities......... - 974,119
Purchases of loans and participations....................... (29,559,510) (31,117,238)
Net decrease (increase) in net loans........................ 9,153,434 (2,178,138)
Proceeds from sales of foreclosed properties................ 299,049 321,207
Increase in foreclosed properties........................... (155,696) (24,164)
Purchase of mortgage servicing rights....................... (478,493) (1,675,901)
Purchases of premises and equipment......................... (776,097) (330,685)
------------- ------------
Net cash used in investing activities....................... (21,065,084) (34,220,171)
FINANCING ACTIVITIES
Net (decrease) increase in NOW, money market
and savings deposits....................................... (7,397,601) 8,074,635
Net increase in certificates of deposit..................... 25,618,136 9,937,033
Proceeds from Federal Home Loan Bank advances............... 112,000,000 41,000,000
Repayment of Federal Home Loan Bank advances................ (115,450,000) (31,158,333)
Payments on capital lease obligations....................... (67,184) (56,066)
Other....................................................... (3,024) (2)
------------- ------------
Net cash provided by financing activities................... 14,700,327 27,797,267
------------- ------------
Decrease in cash and cash equivalents....................... (3,067,287) (4,314,250)
Cash and cash equivalents at beginning of period............ 18,951,123 17,944,680
------------- ------------
Cash and cash equivalents at end of period.................. $ 15,883,836 $ 13,630,430
============= ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer from loans to foreclosed properties................ $ 45,855 $ 308,290
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................... $ 10,516,107 $ 8,046,213
Income taxes............................................... - 3,000
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 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. Results for the nine months ended September 30, 2000 are not
necessarily indicative of anticipated results for the year ended December 31,
2000.
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 Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
Net income $ 304,667 $ 607,757 $ 770,781 $ 743,890
Accumulated undeclared preferred
stock dividends (535,964) (490,844) (1,582,906) (1,447,548)
---------- ---------- ----------- -----------
Net income (loss) available to
common shareholders $ (231,297) $ 116,913 $ (812,125) $ (703,658)
========== ========== =========== ===========
Weighted average common
shares outstanding:
Basic 1,060,642 1,060,642 1,060,642 1,060,642
Diluted 1,060,642 5,093,858 1,060,642 1,060,642
EBI's potential common shares are antidilutive with respect to loss available to
common shareholders for the three months ended September 30, 2000 and for the
nine months ended September 30, 2000 and 1999; therefore, basic and diluted EPS
are the same. EBI's potential common shares are dilutive for the three months
ended September 30, 1999 and diluted income per share is computed under the
treasury stock method.
7
NOTE 3 - SEGMENT INFORMATION
The following segment information for EBI for the three months and nine months
ended September 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 September 30, 2000:
Customer revenues $ 430 $ 1,620 $ 702 $ - $ 2,752
Affiliate revenues 4 56 124 (184) -
Depreciation and
amortization 43 14 24 22 103
Pre-tax income (loss) (281) 1,236 102 (682) 375
Total assets 231,215 58,694 7,904 (4,875) 292,938
As of and for the three months
ended September 30, 1999:
Customer revenues $ 908 $ 921 $ 574 $ 7 $ 2,410
Affiliate revenues - 80 118 (198) -
Depreciation and
amortization 28 14 20 26 88
Pre-tax income (loss) 124 548 137 (534) 275
Total assets 217,538 37,130 7,198 (2,336) 259,530
As of and for the nine months
ended September 30, 2000:
Customer revenues $ 1,528 $ 4,462 $2,013 $ - $ 8,003
Affiliate revenues 11 221 365 (597) -
Depreciation and
amortization 106 42 70 61 279
Pre-tax income (loss) (673) 3,400 303 (1,979) 1,051
Total assets 231,215 58,694 7,904 (4,875) 292,938
As of and for the nine months
ended September 30, 1999:
Customer revenues $ 2,710 $ 2,413 $1,673 $ 51 $ 6,847
Affiliate revenues - 319 355 (674) -
Depreciation and
amortization 81 42 59 77 259
Pre-tax income (loss) 312 1,373 288 (1,584) 389
Total assets 217,538 37,130 7,198 (2,336) 259,530
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 September 30, 2000 were
$292.9 million as compared to $277.7 million at December 31, 1999, an increase
of approximately $15.2 million or 5.5%. The increase in total assets resulted
primarily from increases of (i) $20.4 million in the aggregate for loans held
for investment and corresponding accrued interest receivable, which was
attributable to residential loan purchases of $10.1 million, consumer loan
purchases of $2.3 million, net participation purchases of $11.2 million of
builder construction loans and net participation purchases of $5.9 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 and
(iii) $527,000 in premises and equipment resulting from capital expenditures for
the Bank's new retail banking branch located in Ashland, Virginia. These
increases were partially offset by decreases of (i) $3.1 million in cash and
cash equivalents resulting from a decrease in liquidity, (ii) $989,000 in
securities held to maturity resulting from the scheduled maturity of a FHLB note
and (iii) $2.0 million in other assets resulting from the realization of cash
value upon the surrender of certain life insurance policies.
Deposits, the primary source of EBI's funds, totaled $230.4 million at
September 30, 2000 as compared to $212.2 million at December 31, 1999. A $20.5
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 $2.3 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
exceeded the amount of asset growth, EBI reduced higher-costing FHLB advances by
$3.5 million.
Results of Operations
- ---------------------
First Nine Months of 2000 Compared to First Nine Months of 1999
EBI's net income for the nine months ended September 30, 2000 totaled
$771,000, compared to net income of $744,000 for the nine months ended September
30, 1999. EBI's 1999 net income included a $500,000 tax benefit resulting from
the expected utilization of tax loss carryforwards. Excluding this benefit,
EBI's net income for the first nine months of 2000 increased $527,000 over the
comparable period in 1999. EBI's earnings improvement during the first nine
months of 2000 over the comparable period in 1999 reflected (i) a $1.2 million
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 $155,000 increase in loan servicing fees resulting from an
increase in Essex Home's mortgage loan servicing portfolio since the beginning
of 1999. The benefits of these improvements were offset in part by (i) a
$390,000 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 $272,000 decline in mortgage banking income resulting from a
slowdown in loan originations in conjunction with rising interest rates, which
began in July 1999 and (iii) a $134,000 increase in the provision for income
taxes (exclusive of the $500,000 tax benefit previously discussed).
9
Despite the increase in earnings, EBI reported a loss per common share of
$.77 for the nine months ended September 30, 2000 because EBI's net income was
not sufficient to cover the unpaid and undeclared cumulative dividends on EBI's
Series B and C preferred stock, which was issued in connection with EBI's 1995
recapitalization.
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 nine months ended
September 30:
2000 1999
-------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)....................... $254,275 $15,550 8.15% $209,671 $12,073 7.68%
Investment securities........... 4,362 220 6.72 4,434 186 5.61
Mortgage-backed
securities.................... 480 26 7.22 903 38 5.65
Federal funds sold and
securities purchased under
agreements to resell........... 1,175 54 6.10 1,414 51 4.81
Other........................... 10,191 474 6.21 8,727 318 4.85
-------- ------- -------- -------
Total interest-earning
assets (1).................. $270,483 16,324 8.05 $225,149 12,666 7.50
======== ========
Interest-bearing liabilities:
Deposits........................ $200,511 8,206 5.47 $181,056 7,060 5.21
FHLB advances................... 49,976 2,369 6.33 25,577 1,046 5.47
Other........................... 159 22 18.65 240 33 18.56
-------- ------- -------- -------
Total interest-bearing
liabilities................. $250,646 10,597 5.65 $206,873 8,139 5.26
======== ------- ======== -------
Net interest earnings............ $ 5,727 $ 4,527
======= =======
Net interest spread (1).......... 2.40% 2.24%
===== =====
Net yield on interest-earning
assets (1)...................... 2.82% 2.68%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities..................... 107.91% 108.83%
======= =======
(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 Nine Months
of 1999 to the First Nine Months of 2000 Due to
-----------------------------------------------
Volume (1) Rate (1) Net
--------- ------------- ------
(in thousands)
Interest income on:
Loans (2)............................................ $2,692 $785 $3,477
Investment securities............................... (3) 37 34
Mortgage-backed securities.......................... (21) 9 (12)
Federal funds sold and
securities purchased under
agreements to resell............................... (9) 12 3
Other interest-earning assets....................... 58 98 156
------ ---- ------
Total interest income (2).......................... 2,717 941 3,658
Interest expense on:
Deposits............................................ 789 357 1,146
FHLB advances....................................... 1,135 188 1,323
Other interest-bearing liabilities.................. (11) - (11)
------ ---- ------
Total interest expense............................. 1,913 545 2,458
------ ---- ------
Net interest income................................ $ 804 $396 $1,200
====== ==== ======
(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 $4.5 million for the first nine months
of 1999 to $5.7 million for the first nine months of 2000, which reflected the
favorable impact of a 21.3% increase in average loans, coupled with a 47 basis
point increase in the average yield on loans. The increasing interest rate
environment beginning in July 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 higher interest rate environment 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 nine months ended September 30 are as follows (in thousands):
2000 1999
------ ------
Balance at beginning of period........ $1,697 $1,845
Provision for loan losses............. 390 -
------ ------
2,087 1,845
Loans charged-off, net of recoveries.. (613) (226)
------ ------
Balance at end of period.............. $1,474 $1,619
====== ======
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 September 30, 2000, nonperforming assets of $751,000 was
.26% 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 288.45% as
of September 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
$423,000 at September 30, 2000.
11
Net charge-offs during the first nine 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 decision to add to the allowance for
loan losses during the first nine months of 2000.
Noninterest Income. Noninterest income for the first nine months of 2000
decreased $44,000 from the first nine months of 1999. This decrease was
primarily attributable to a $272,000 decline in mortgage banking income
resulting from a slowdown in loan originations in conjunction with rising
interest rates beginning in July 1999. This decrease was partially offset by a
$155,000 increase in loan servicing fees and a $68,000 increase in other service
charges and fees resulting from a 16.5% increase in Essex Home's average
mortgage loan servicing portfolio for the comparable nine-month periods. 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 nine months of 2000
increased $105,000 over the first nine months of 1999. This increase was
primarily attributable to (i) a $398,000 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 and (ii) a $92,000 increase in
foreclosed properties expense resulting from net gains on disposals in 1999 that
did not recur in 2000. These increases were partially offset by a $357,000
decrease in deposit insurance premiums resulting from a lower deposit insurance
assessment rate in 2000.
Income Taxes. EBI recognized a $280,000 provision for income taxes during
the first nine months of 2000, which represented 26.6% of pre-tax income and
included a $90,000 tax benefit resulting from the recognition of a portion of
EBI's net operating tax loss ("NOL") carryforwards for 2001. In 1999 and 1998,
EBI had recognized a portion of the income tax benefits arising from NOL
carryforwards expected to be realized for the year 2000.
Third Quarter of 2000 Compared to Third Quarter of 1999
EBI's net income for the three months ended September 30, 2000 totaled
$305,000, compared to net income of $608,000 for the three months ended
September 30, 1999. EBI's 1999 net income included a $500,000 tax benefit
resulting from the expected utilization of tax loss carryforwards. Excluding
this benefit, EBI's net income for the third quarter of 2000 increased $197,000
over the comparable period in 1999. Factors contributing to the third quarter
increase in 2000 parallel the factors described in the nine-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
September 30:
2000 1999
-------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)....................... $260,933 $5,449 8.35% $225,083 $4,364 7.76%
Investment securities........... 4,111 74 7.16 4,543 65 5.38
Mortgage-backed
securities.................... 480 9 7.61 573 8 5.72
Federal funds sold and
securities purchased under
agreements to resell........... 1,092 18 6.54 1,439 18 5.09
Other........................... 11,695 193 6.62 9,043 116 5.13
-------- ------ -------- ------
Total interest-earning
assets (1).................. $278,311 5,743 8.26 $240,681 4,571 7.60
======== ========
Interest-bearing liabilities:
Deposits........................ $209,529 2,991 5.68 $190,037 2,461 5.14
FHLB advances................... 46,619 789 6.73 33,044 447 5.37
Other........................... 136 6 18.61 222 10 18.36
-------- ------ -------- ------
Total interest-bearing
liabilities................. $256,284 3,786 5.88 $223,303 2,918 5.24
======== ------ ======== ------
Net interest earnings............ $1,957 $1,653
====== ======
Net interest spread (1).......... 2.38% 2.36%
===== =====
Net yield on interest-earning
assets (1)...................... 2.81% 2.75%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities..................... 108.60% 107.78%
====== ======
(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 Third Quarter of
1999 to the Third Quarter of 2000 Due to
----------------------------------------------
Volume (1) Rate (1) Net
--------- ---------- -----
(in thousands)
Interest income on:
Loans (2).................................... $731 $354 $1,085
Investment securities........................ (7) 16 9
Mortgage-backed securities................... (1) 2 1
Federal funds sold and
securities purchased under
agreements to resell........................ (5) 5 -
Other interest-earning assets................ 39 38 77
---- ---- ------
Total interest income (2) 757 415 1,172
Interest expense on:
Deposits..................................... 261 269 530
FHLB advances................................ 211 131 342
Other interest-bearing liabilities........... (4) - (4)
---- ---- ------
Total interest expense...................... 468 400 868
---- ---- ------
Net interest income......................... $289 $ 15 $ 304
==== ==== ======
(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 $1.7 million for the third quarter of
1999 to $2.0 million for the third quarter of 2000 reflecting the favorable
impact of a 15.9% increase in average loans, coupled with a 59 basis point
increase in the average yield on loans, which was partially offset by a 14.8%
increase in 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):
2000 1999
------ -----
Balance at beginning of period........ $1,439 $1,696
Provision for loan losses............. 150 -
------ ------
1,589 1,696
Loans charged-off, net of recoveries.. (115) (77)
------ ------
Balance at end of period.............. $1,474 $1,619
====== ======
As previously described, the overall growth of the loan portfolio was the
basis for management's decision to continue to add to the allowance for loan
losses during the third quarter of 2000.
Noninterest Income. Noninterest income for the third quarter of 2000
totaled $796,000 as compared to $757,000 for the third quarter of 1999. This
increase was attributable to increases of $42,000 in loan servicing fees and
$34,000 in other service charges and fees resulting primarily from Essex Home's
9.9% increase in its average nonaffiliate mortgage loan servicing portfolio for
the comparable quarters. These increases were partially offset by a $37,000
decrease in mortgage banking income resulting from a slowdown in loan
originations in conjunction with rising interest rates beginning in July 1999.
14
Noninterest Expense. Noninterest expense for the third quarter of 2000
totaled $2.2 million, a $93,000 or 4.4% increase over $2.1 million for the third
quarter of 1999. This increase was primarily attributable to increases of (i)
$117,000 in salaries and employee benefits resulting from higher personnel
expenses at Essex Home and the Bank and (ii) $42,000 in foreclosed properties
expense resulting from net gains on dispositions in 1999 that did not recur in
2000. These increases were partially offset by lower deposit insurance premiums
attributable to a lower deposit insurance assessment rate in 2000.
Provision for Income Taxes. The provision for income taxes for the three
months ended September 30, 2000 and 1999 included tax benefits of $90,000 and
$500,000, respectively, resulting from the recognition of a portion of EBI's NOL
carryforwards.
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
September 30, 2000, had a liquidity ratio of 7.49%.
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 September 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 September 30, 2000, the Bank was
"well capitalized" for PCA purposes.
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.
15
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) Not Applicable
16
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 10, 2000 By: /s/ Gene D. Ross
----------------- ---------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
November 10, 2000 By: /s/ Mary-Jo Dawson
- ----------------- -----------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
17