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, 2001
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------------------
Commission file number 1-10506
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Essex Bancorp, Inc.
-------------------
(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 10, 2001.
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, 2001
Table of Contents
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended
June 30, 2001 and 2000 4
Consolidated Statement of Shareholders' Equity
(unaudited) for the six months ended
June 30, 2001 5
Consolidated Statements of Cash
Flows (unaudited) for the six months
ended June 30, 2001 and 2000 6
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
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
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash.................................................... $ 8,396,350 $ 5,729,199
Interest-bearing deposits............................... 8,928,608 10,985,110
Federal funds sold...................................... 1,445,061 1,068,776
------------ ------------
Cash and cash equivalents............................. 18,770,019 17,783,085
Federal Home Loan Bank stock............................ 2,765,000 2,765,000
Securities available for sale at fair value............. 2,294,088 20,557
Securities held for investment - fair value of
$1,781,000 in 2000..................................... - 1,760,472
Mortgage-backed securities held for investment - fair
value of $481,000 in 2000.............................. - 479,738
Loans, net of allowance for loan losses of $1,789,000
in 2001 and $1,740,000 in 2000......................... 262,558,886 265,854,916
Loans held for sale..................................... 7,849,673 1,095,447
Mortgage servicing rights............................... 1,889,391 2,115,389
Foreclosed properties, net.............................. 457,807 188,148
Accrued interest receivable............................. 1,809,640 1,954,166
Advances for taxes, insurance, and other................ 492,544 904,507
Premises and equipment.................................. 3,878,773 3,971,540
Deferred tax asset, net................................. 4,494,242 4,662,558
Other assets............................................ 2,035,396 4,166,180
------------ ------------
Total Assets......................................... $309,295,459 $307,721,703
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing.................................... $ 20,542,937 $ 20,355,364
Interest-bearing....................................... 234,532,246 222,240,222
------------ ------------
Total deposits........................................ 255,075,183 242,595,586
Federal Home Loan Bank advances......................... 28,000,000 41,000,000
Capitalized lease obligations........................... 47,481 99,931
Other liabilities....................................... 2,820,005 2,158,934
------------ ------------
Total Liabilities.................................... 285,942,669 285,854,451
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 8,687,761
Fair value of derivatives indexed to common stock...... 1,192,350 -
Accumulated other comprehensive income................. 5,886 -
Accumulated deficit.................................... (1,551,313) (1,838,615)
------------ ------------
Total Shareholders' Equity........................... 23,352,790 21,867,252
------------ ------------
Total Liabilities and Shareholders' Equity........... $309,295,459 $307,721,703
============ ============
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,
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
INTEREST INCOME
Loans, including fees........................ $5,230,781 $5,230,090 $10,811,345 $10,101,062
Federal funds sold and securities purchased
under agreements to resell.................. 14,325 19,116 30,374 35,887
Investment securities, including
dividend income............................. 69,854 62,548 147,042 146,349
Mortgage-backed securities................... 7,917 8,775 16,411 16,850
Other........................................ 116,236 153,683 264,132 281,265
---------- ---------- ----------- -----------
Total Interest Income................... 5,439,113 5,474,212 11,269,304 10,581,413
INTEREST EXPENSE
Deposits..................................... 3,329,947 2,686,090 6,674,087 5,215,442
Federal Home Loan Bank advances.............. 323,453 819,481 889,807 1,579,795
Other........................................ 2,982 7,422 7,151 15,832
---------- ---------- ----------- -----------
Total Interest Expense.................. 3,656,382 3,512,993 7,571,045 6,811,069
---------- ---------- ----------- -----------
Net Interest Income..................... 1,782,731 1,961,219 3,698,259 3,770,344
PROVISION FOR LOAN LOSSES...................... 81,249 140,000 212,498 240,000
---------- ---------- ----------- -----------
Net Interest Income After
Provision for Loan Losses............... 1,701,482 1,821,219 3,485,761 3,530,344
NONINTEREST INCOME
Loan servicing fees.......................... 294,103 306,149 567,887 609,511
Mortgage banking income, including
gain on sale of loans....................... 144,167 41,700 228,305 74,267
Other service charges and fees............... 193,797 171,828 380,365 339,533
Net gain on sale of:
Securities.................................. 39,873 - 39,873 -
Loans....................................... 2,034 - 85,840 -
Other........................................ 114,559 102,794 290,393 194,747
---------- ---------- ----------- -----------
Total Noninterest Income................ 788,533 622,471 1,592,663 1,218,058
NONINTEREST EXPENSE
Salaries and employee benefits............... 1,291,876 1,141,007 2,566,579 2,273,730
Net occupancy and equipment.................. 264,213 239,319 518,941 463,929
Deposit insurance premiums................... 29,742 26,448 57,857 52,205
Amortization of intangible assets............ - 15,519 - 31,038
Service bureau............................... 166,117 148,503 324,578 307,867
Professional fees............................ 94,512 69,152 162,772 117,750
Foreclosed properties, net................... 30,054 44,452 52,011 54,961
Other........................................ 465,889 386,700 927,768 771,028
---------- ---------- ----------- -----------
Total Noninterest Expense............... 2,342,403 2,071,100 4,610,506 4,072,508
---------- ---------- ----------- -----------
Income Before Income Taxes.............. 147,612 372,590 467,918 675,894
PROVISION FOR INCOME TAXES..................... 56,977 85,741 180,616 209,779
---------- ---------- ----------- -----------
Net Income.............................. $ 90,635 $ 286,849 $ 287,302 $ 466,115
========== ========== =========== ===========
Loss available to common
shareholders (Note 2)....................... $ (486,380) $ (240,786) $ (858,400) $ (580,827)
========== ========== =========== ===========
Basic and diluted loss per
common share (Note 2)....................... $ (.46) $ (.23) $ (.81) $ (.55)
========== ========== =========== ===========
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, 2001
Series B Series C
Preferred Preferred Common Additional
Stock, $6.67 Stock, $6.67 Stock, $.01 Paid-in
Stated Value Stated Value Par Value Capital
- --------------------------- ------------ ------------ ----------- ----------
Balance at January 1, 2001. $14,173,750 $833,750 $10,606 $8,687,761
Comprehensive income
Net income................
Other comprehensive
income:
Unrealized gains on
securities available for
sale, net of tax.........
Comprehensive income......
Fair value of derivatives
indexed to common stock...
----------- -------- ----------- ----------
Balance at June 30, 2001... $14,173,750 $833,750 $10,606 $8,687,761
=========== ======== =========== ==========
Accumu-
lated Other
Compre- Compre- Fair
hensive Accumulated hensive Value of
Income Deficit Income Warrants Total
- --------------------------- ------------ ----------- ---------- ----------- -----------
Balance at January 1, 2001. $(1,838,615) $ $ $21,867,252
Comprehensive income
Net income................ $ 287,302 287,302
Other comprehensive
income:
Unrealized gains on
securities available for
sale, net of tax......... 5,886 5,886
-----------
Comprehensive income...... $ 293,188 293,188
===========
Fair value of derivatives
indexed to common stock... 1,192,350 1,192,350
----------- ---------- ----------- -----------
Balance at June 30, 2001... $(1,551,313) $5,886 $1,192,350 $23,352,790
=========== =========== ========== ===========
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
--------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income................................................... $ 287,302 $ 466,115
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Provisions for:
Losses on loans, foreclosed properties and other......... 269,739 308,453
Depreciation and amortization of premises and equipment.. 213,718 176,606
Amortization (accretion) of:
Premiums and discounts on loans and securities........... (90,526) (9,860)
Mortgage servicing rights................................ 280,194 262,360
Excess of costs over equity in net assets acquired....... - 31,038
Mortgage banking activities:
Net increase in loans originated for resale.............. (6,547,474) (184,622)
Realized gains from sale of loans........................ (206,752) (61,582)
Realized (gains) losses from sales of:
Securities............................................... (39,873) -
Loans.................................................... (85,840) -
Foreclosed properties.................................... 2,170 (165)
Changes in operating assets and liabilities:
Accrued interest receivable.............................. 144,526 (356,288)
Advances for taxes, insurance and other.................. 386,452 248,590
Deferred tax asset, net.................................. 164,616 (209,779)
Other assets............................................. 3,323,278 (680,138)
Other liabilities........................................ 661,122 (382,990)
------------ ------------
Net cash used in operating activities........................ (1,237,348) (392,262)
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock..................... - (535,000)
Proceeds from maturity of securities......................... - 2,000,000
Proceeds from sales of securities............................ 1,048,550 -
Purchase of securities available for sale.................... (1,034,440) (570)
Purchases of loans and participations........................ (18,396,682) (28,592,873)
Proceeds from sales of loans................................. 5,963,279 -
Net decrease in net loans.................................... 15,307,182 5,389,824
Proceeds from sales of foreclosed properties................. 84,444 127,651
Increase in foreclosed properties............................ - (118,032)
Increase in mortgage servicing rights........................ (54,196) (326,210)
Purchases of premises and equipment.......................... (120,951) (689,583)
------------ ------------
Net cash provided by (used in) investing activities.......... 2,797,186 (22,744,793)
(continued)
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
---------------------------
2001 2000
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in NOW, money market
and savings deposits.................................. 4,214,135 (5,573,231)
Net increase in certificates of deposit................. 8,265,462 13,586,188
Proceeds from Federal Home Loan Bank advances........... 39,000,000 29,000,000
Repayment of Federal Home Loan Bank advances............ (52,000,000) (18,300,000)
Payments on capital lease obligations................... (52,450) (43,769)
Other................................................... (51) (2,497)
------------ ------------
Net cash (used in) provided by financing activities..... (572,904) 18,666,691
------------ ------------
Increase (decrease) in cash and cash equivalents........ 986,934 (4,470,364)
Cash and cash equivalents at beginning of period........ 17,783,085 18,951,123
------------ ------------
Cash and cash equivalents at end of period.............. $ 18,770,019 $ 14,480,759
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties............ $ 388,003 $ 45,855
Assumption of first mortgages on foreclosed properties.. $ - $ 41,085
Transfer of securities from held-to-maturity to
available-for-sale................................... $ 1,229,687 $ -
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 3,787,907 $ 3,996,162
Income taxes.......................................... $ 31,000 $ -
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2001
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, 2000 included in the EBI 2000 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,
----------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net income $ 90,635 $ 286,849 $ 287,302 $ 466,115
Accumulated undeclared preferred
stock dividends (577,015) (527,635) (1,145,702) (1,046,942)
---------- ---------- ----------- -----------
Net loss available to
common shareholders $ (486,380) $ (240,786) $ (858,400) $ (580,827)
========== ========== =========== ===========
Weighted average common
shares outstanding 1,060,642 1,060,642 1,060,642 1,060,642
========== ========== =========== ===========
Basic and diluted loss per
Common share $ (.46) $ (.23) $ (.81) $ (.55)
========== ========== =========== ===========
EBI's potential common shares are antidilutive with respect to loss available to
common shareholders for all periods presented; therefore, basic and diluted EPS
are the same.
8
NOTE 3 - SEGMENT INFORMATION
The following segment information for EBI for the three months and six months
ended June 30, 2001 and 2000 is presented on the same basis and for the same
segments as those presented in the EBI 2000 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, 2001:
Customer revenues $ 1,361 $ 585 $ 625 $ - $ 2,571
Affiliate revenues 4 139 120 (263) -
Depreciation and
amortization 43 17 23 26 109
Pre-tax income 570 174 142 (738) 148
Total assets 224,289 81,118 10,285 (6,397) 309,295
As of and for the three months
ended June 30, 2000:
Customer revenues $ 1,342 $ 664 $ 577 $ - $ 2,583
Affiliate revenues 4 100 120 (224) -
Depreciation and
amortization 31 14 24 20 89
Pre-tax income 617 351 125 (720) 373
Total assets 227,937 64,690 7,796 (3,893) 296,530
As of and for the six months
ended June 30, 2001:
Customer revenues $ 2,842 $ 1,192 $ 1,257 $ - $ 5,291
Affiliate revenues 7 180 247 (434) -
Depreciation and
amortization 83 32 47 52 214
Pre-tax income 1,315 299 282 (1,428) 468
Total assets 224,289 81,118 10,285 (6,397) 309,295
As of and for the six months
ended June 30, 2000:
Customer revenues $ 2,702 $ 1,161 $ 1,125 $ - $ 4,988
Affiliate revenues 7 165 241 (413) -
Depreciation and
amortization 63 28 46 39 176
Pre-tax income 1,287 485 201 (1,297) 676
Total assets 227,937 64,690 7,796 (3,893) 296,530
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 retail
community banking segment include a cost of funds allocation to its mortgage
banking division. Conversely, revenues and pre-tax income for the mortgage
banking segment have been reduced by a cost of funds allocation based on the
average cost of Essex Savings Bank, F.S.B.'s interest-bearing liabilities.
9
NOTE 4 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 - Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 became effective for fiscal years
beginning after June 15, 2000. Accordingly, EBI adopted SFAS 133 effective
January 1, 2001. Due to EBI's limited use of derivative instruments, the
adoption of SFAS 133 had no effect on its results of operations or its financial
position.
As disclosed in the EBI 2000 Annual Report, the Emerging Issues Task Force has
issued EITF No. 00-19 - Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock ("EITF 00-19"), which
applies to freestanding derivative financial instruments, such as EBI's
warrants. In accordance with EITF 00-19, EBI has recognized the fair value of
its warrants as of June 30, 2001 as a component of shareholders' equity. Fair
value was determined by an independent financial advisor utilizing commonly
accepted warrant and option valuation models subject to appropriate adjustments
to reflect the unique characteristics of EBI and the warrants. The fair value
of EBI's warrants is based on analyses that contain estimates and valuation
ranges, and does not necessarily indicate actual values or predict future
values. Further, if EBI's going-private transaction is completed, these
warrants will be exchanged for common stock in EBI's successor.
NOTE 5 - RECLASSIFICATION
Certain 2000 amounts have been restated to conform to current year presentation.
These adjustments had no effect on net income or shareholders' equity.
10
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, 2001 were $309.3
million as compared to $307.7 million at December 31, 2000. The increase in
total assets resulted primarily from increases of (i) $6.7 million in loans held
for sale resulting from the origination of fixed-rate mortgage loans in the
current lower interest rate environment, which in accordance with EBI's asset
and liability management policies have been designated as held for sale and (ii)
$987,000 in cash and cash equivalents. These increases were partially offset by
decreases of (i) $3.3 million in loans held for investment, which was
attributable to a $6.0 million sale of fixed-rate first mortgage loans in order
to maintain Essex Savings Bank, F.S.B.'s (the "Bank") regulatory well-
capitalized status, coupled with a decline in mortgage loans precipitated by
refinance activity in the lower interest rate environment, the impacts of which
were partially offset by net participation purchases of $18.4 million of builder
construction loans and (ii) $2.1 million in other assets resulting from lower
servicing-related and operating receivables. In addition, while the composition
of EBI's investment securities has not materially changed, management has
reclassified its investment securities from held-for-investment to available-
for-sale to increase flexibility to reposition the balance sheet.
Deposits, the primary source of EBI's funds, totaled $255.1 million at June
30, 2001 as compared to $242.6 million at December 31, 2000, an increase of
approximately $12.5 million or 5.1%. A $12.3 million increase in interest-
bearing deposits occurred primarily in (i) certificates of deposit at the Bank's
Elizabeth City, North Carolina and Emporia, Suffolk and Ashland, Virginia retail
banking branches and (ii) money market accounts in the Bank's Richmond, Virginia
retail banking branch. In order to minimize total asset growth and maintain the
Bank's regulatory well-capitalized status, EBI utilized the growth in deposits
to fund a reduction in Federal Home Loan Bank ("FHLB") advances, which declined
$13.0 million or 31.7% since December 31, 2000.
Results of Operations
- ---------------------
First Six Months of 2001 Compared to First Six Months of 2000
EBI's net income for the six months ended June 30, 2001 totaled $287,000,
compared to net income of $466,000 for the six months ended June 30, 2000.
EBI's earnings during the first six months of 2001 reflected (i) a $73,000
decrease in net interest income over the comparable period in 2000 resulting
from a 29 basis point decline in the net interest margin, (ii) a $154,000
increase in mortgage banking income resulting from an increase in the volume of
loan originations and refinancings, (iii) an $86,000 gain on the sale of loans,
(iv) a $40,000 gain on the sale of investment securities, (v) a $96,000 increase
in other noninterest income resulting from higher ancillary fees associated with
loan servicing operations and (vi) a $538,000 increase in noninterest expenses.
The explanations of these changes are presented below.
EBI reported basic and diluted losses per common share of $.46 and $.81 for
the three months and six months ended June 30, 2001, 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.
11
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:
2001 2000
-------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)..................... $274,656 $10,811 7.87% $250,909 $10,101 8.05%
Investment securities......... 4,440 147 6.62 4,489 147 6.52
Mortgage-backed
securities................... 535 17 6.13 480 17 7.02
Federal funds sold............ 1,267 30 4.80 1,216 36 5.90
Other......................... 10,698 264 4.94 9,431 281 5.96
-------- ------- -------- -------
Total interest-earning
assets (1)................. $291,596 11,269 7.73 $266,525 10,582 7.94
======== ========
Interest-bearing liabilities:
Deposits...................... $231,491 6,674 5.81 $195,953 5,215 5.35
FHLB advances................. 33,503 890 5.36 51,673 1,580 6.15
Other......................... 75 7 19.29 171 16 18.67
-------- ------- -------- -------
Total interest-bearing
liabilities................ $265,069 7,571 5.76 $247,797 6,811 5.53
======== ------- ======== -------
Net interest earnings.......... $ 3,698 $ 3,771
======= =======
Net interest spread (1)........ 1.97% 2.41%
===== =====
Net yield on interest-earning
assets (1).................... 2.54% 2.83%
===== =====
(1) Nonaccrual loans are included in the average balance of loans.
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 2000 to the First Six Months of 2001 Due to
----------------------------------------------
Volume (1) Rate (1) Net
--------- -------- ----
(in thousands)
Interest income on:
Loans (2).................................. $ 939 $(229) $ 710
Investment securities..................... (2) 2 -
Mortgage-backed securities................ 2 (2) -
Federal funds sold........................ 1 (7) (6)
Other interest-earning assets............. 35 (52) (17)
----- ----- ------
Total interest income (2)................ 975 (288) 687
Interest expense on:
Deposits................................... 989 470 $1,459
FHLB advances............................. (505) (185) (690)
Other interest-bearing liabilities........ (10) 1 (9)
----- ----- ------
Total interest expense................... 474 286 760
----- ----- ------
Net interest income...................... $ 501 $(574) $ (73)
===== ===== ======
(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.
12
Net interest income decreased from $3.8 million for the first six months of
2000 to $3.7 million for the six months of 2001 as a result of a 29 basis point
decline in net interest margin, which reflected the impact of the Federal
Reserve Bank's 275 basis point reduction in its discount rate since December 31,
2000 on the yield of EBI's prime-rate-indexed assets, primarily construction
loans, coupled with a lagging decline in EBI's cost of funds. Management
expects that, based on the Bank's current deposit rate offerings and the rates
on maturing certificates of deposit, the repricing of deposits to lower interest
rates will favorably impact the net interest margin in future periods. However,
lower interest rates are also contributing to an increase in the volume of
refinancings to lower fixed-rate loans. Therefore, in order to reduce its
sensitivity during a period of relatively low market rates, EBI will continue
investing in construction and development loans.
Provision for Loan Losses. Changes in the allowance for loan losses for
the six months ended June 30 are as follows (in thousands):
2001 2000
------ ------
Balance at beginning of period........ $1,740 $1,697
Provision for loan losses............. 212 240
------ ------
1,952 1,937
Loans charged-off, net of recoveries.. (163) (498)
------ ------
Balance at end of period.............. $1,789 $1,439
====== ======
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At June 30,
2001, nonperforming assets of $1.1 million as a percentage of total assets were
.34% as compared to nonperforming assets of $749,000, or .24% of total assets,
at December 31, 2000. The increase in the balance of nonperforming assets was
the basis for management's determination to add to the allowance for loan losses
during the first six months of 2001.
EBI's commercial real estate loans include two loans to one borrower
totaling $1.3 million as of June 30, 2001. These loans are primarily secured by
a mini-storage/office facility located in Virginia Beach, Virginia. EBI
occupies approximately 12,000 square feet of the office facility. The lease
payments largely service the principal and interest on the two loans. The term
of the lease coincides with the maturity of the loans, which are scheduled to
mature on December 31, 2001. EBI has advised the borrower that EBI will not
renew the lease for the office facility beyond December 31, 2001. Therefore,
EBI, with the borrower's consent, is currently marketing the property to
prospective tenants, although no prospects have yet been identified. If a
satisfactory leasing arrangement is not executed with a third party in the near
future, EBI will investigate alternatives for preserving its investment in these
loans.
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.
Noninterest Income. Noninterest income for the first six months of 2001
totaled $1.6 million, a $375,000 or 30.8% increase over $1.2 million for the
first six months of 2000. This increase was primarily attributable to (i) a
$154,000 increase in mortgage banking income, primarily gains on sales of loans
held for sale, resulting from an increase in loan originations in the lower
interest rate environment, (ii) an $86,000 gain on sale of fixed-rate mortgage
loans required to maintain the Bank's regulatory well-capitalized status, (iii)
a $40,000 gain on the sale of investment securities and (iv) a $96,000 increase
in other noninterest income resulting from higher ancillary fees on Essex Home
Mortgage Servicing Corporation's nonaffiliated servicing portfolio.
13
Noninterest Expense. Noninterest expense for the first six months of 2001
totaled $4.6 million, a $538,000 or 13.2% increase over $4.1 million for the
first six months of 2000. This increase was primarily attributable to increases
of (i) $293,000 in personnel expenses resulting from new staffing for the Bank's
retail banking branch in Ashland, Virginia that opened in May 2000 and higher
loan officer commissions reflecting the impact of an increase in loan
origination volume, coupled with the impact of a reduction in the deferred loan
origination cost per loan, (ii) $45,000 in professional fees resulting from a
non-recurring expense reversal recognized in 2000 for the adjudicated recovery
of legal fees previously paid in connection with a servicing client's bankruptcy
and (iii) $157,000 in other noninterest expenses resulting from higher operating
expenses associated with a 4.3% increase in total assets and a 15.8% growth in
total deposits since June 30, 2000. Excluding the impact of the decline in
yield, EBI's efficiency ratio remained level during the comparable periods.
Income Taxes. The provision for income taxes was $181,000 for the first
six months of 2001 as compared to $210,000 for the first six months of 2000,
primarily attributable to lower pre-tax income in 2001.
Second Quarter of 2001 Compared to Second Quarter of 2000
EBI's net income for the three months ended June 30, 2001 totaled $90,000,
compared to net income of $287,000 for the three months ended June 30, 2000.
Factors contributing to the second quarter decrease in 2001 parallel the factors
described in the six-month comparison.
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:
2001 2000
-------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(dollars in thousands)
Interest-earning assets:
Loans (1)..................... $273,231 $5,231 7.66% $255,278 $5,230 8.20%
Investment securities......... 4,335 70 6.45 3,593 62 6.96
Mortgage-backed
securities................... 590 8 5.36 480 9 7.32
Federal funds sold............ 1,359 14 4.22 1,230 19 6.22
Other......................... 10,858 116 4.28 9,767 154 6.29
-------- ------ -------- ------
Total interest-earning
assets (1)................. $290,373 5,439 7.49 $270,348 5,474 8.10
======== ========
Interest-bearing liabilities:
Deposits...................... $233,916 3,330 5.73 $198,631 2,686 5.44
FHLB advances................. 27,923 323 4.66 51,224 820 6.43
Other......................... 61 3 19.56 160 7 18.74
-------- ------ -------- ------
Total interest-bearing
liabilities................ $261,900 3,656 5.61 $250,015 3,513 5.65
======== ------ ======== ------
Net interest earnings.......... $1,783 $1,961
====== ======
Net interest spread (1)........ 1.88% 2.45%
===== =====
Net yield on interest-earning
assets (1).................... 2.46% 2.90%
===== =====
(1) Nonaccrual loans are included in the average balance of loans.
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 the Second Quarter of
2000 to the Second Quarter of 2001 Due to
-----------------------------------------------
Volume (1) Rate (1) Net
--------- -------- -----
(in thousands)
Interest income on:
Loans (2)................................ $ 355 $(354) $ 1
Investment securities................... 12 (4) 8
Mortgage-backed securities.............. 2 (3) (1)
Federal funds sold...................... 2 (7) (5)
Other interest-earning assets........... 16 (54) (38)
----- ----- -----
Total interest income (2) 387 (422) (35)
Interest expense on:
Deposits................................. 497 147 644
FHLB advances........................... (309) (188) (497)
Other interest-bearing liabilities...... (5) 1 (4)
----- ----- -----
Total interest expense................. 183 (40) 143
----- ----- -----
Net interest income.................... $ 204 $(382) $(178)
===== ===== =====
(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.
Provision for Loan Losses. Changes in the allowance for loan losses for
the three months ended June 30 are as follows (in thousands):
2001 2000
------ ------
Balance at beginning of period........ $1,801 $1,697
Provision for loan losses............. 81 140
------ ------
1,882 1,837
Loans charged-off, net of recoveries.. (93) (398)
------ ------
Balance at end of period.............. $1,789 $1,439
====== ======
As previously described, net charge-offs during the second quarter of 2000
included $247,000 for the dealer loans.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets. Statement 141 requires that purchase method accounting
be used for all business combinations initiated or completed after June 30,
2001. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to
their estimated useful values. As EBI has no recorded goodwill or other
intangible assets with indefinite useful lives covered by these standards,
their adoption will have no impact on the financial position or results
of operations of EBI.
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 - None
(b) Reports on Form 8-K - EBI filed a Form 8-K on June 28, 2001 in
which EBI reported under Item 5 - Other Events that the Board or
Directors of EBI had established July 2, 2001 as the record date
for the determination of stockholders entitled to notice of and to
vote at EBI's Annual Meeting (the "Meeting"), which will be held on
August 31, 2001 at 10:00 a.m. at Interstate Corporate Center,
Building #11, 1st Floor Conference Room, Norfolk, VA. The Meeting
is for the purpose of considering and voting upon the following
matters:
1. A proposal to approve an Agreement and Plan of Merger pursuant
to which EBI will be merged with and into Essex Acquisition
Corp., a newly-formed Virginia corporation that is a
wholly-owned subsidiary of EBI and each outstanding share of
EBI's common stock (other than shares held by stockholders who
have properly perfected their dissenters' rights) will be
exchanged for the right to receive $1.45 in cash, without
interest.
2. The approval of adjournments of the Meeting in order to allow
EBI to continue to solicit proxies from holders of common stock
who have not cast a vote by proxy with respect to the proposed
merger, or whose proxies have not been voted in favor of the
merger.
16
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Essex Bancorp, Inc.
August 10, 2001 By: /s/ Gene D. Ross
- --------------- ----------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
August 10, 2001 By: /s/ Mary-Jo Rawson
- --------------- ------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
17