UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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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.
(Exact name of registrant as specified in its charter)
Delaware 54-1721085
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(State of organization) (I.R.S. Employer
Identification No.)
The Koger Center
Building 9, Suite 200
Norfolk, Virginia 23502
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (757) 893-1300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 Per Share American Stock Exchange
- -------------------------------------- -----------------------
(Title of Class) (Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
----
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's common stock on the
American Stock Exchange on March 24, 1999 held by nonaffiliates of the
Registrant was $2,839,336.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1998 are incorporated by reference into Parts I and II hereof.
Portions of the Proxy Statement for the Annual Meeting to be held on May 27,
1999 are incorporated by reference into Part III hereof.
1
Essex Bancorp, Inc.
Annual Report on Form 10-K for the
Year Ended December 31, 1998
Table of Contents
Page
----
Part I
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Item 1 Business............................................... 3
Item 2 Properties............................................. 36
Item 3 Legal Proceedings...................................... 37
Item 4 Submission of Matters to a Vote
of Security Holders................................ 37
Part II
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Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters.................... 37
Item 6 Selected Financial Data................................ 38
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......................... 38
Item 7A Quantitative and Qualitative Disclosures
About Market Risk.................................. 38
Item 8 Financial Statements and
Supplementary Data................................. 38
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............................... 38
Part III
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Item 10 Directors and Executive Officers
of the Registrant.................................. 39
Item 11 Executive Compensation................................. 40
Item 12 Security Ownership of Certain
Beneficial Owners and Management................... 40
Item 13 Certain Relationships and
Related Transactions............................... 40
Part IV
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Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................ 41
2
PART I
Item 1. Business
Organization and Background
General. The following organizational chart depicts Essex Bancorp, Inc.
and its subsidiaries as of December 31, 1998. It is intended to facilitate the
readers' understanding of the companies discussed in this report. Following the
chart is a glossary of terms which are used throughout this report.
Essex Bancorp, Inc. and Subsidiaries
Organizational Chart
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| The Company |
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| The Bank | | EMC |
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| 69% | 31%
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| | | |
| First Title | | Essex Home |
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| EHADC |
| |
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Unless otherwise noted, each company is owned 100% by its parent
entity.
3
Defined Term Formal Name
- ------------ -----------
Company Essex Bancorp, Inc.
Partnership Essex Financial Partners, L.P.
Bancorp Essex Bancorp.
Bank Essex Savings Bank, F.S.B.
EMC Essex Mortgage Corporation
Essex First Essex First Mortgage, a division of the Bank
First Title First Title Insurance Agency LLC
Essex Home Essex Home Mortgage Servicing Corporation
EHADC E H Asset Disposition Corporation
The Company is a Delaware corporation that is the holding company for
the Bank, a federally-chartered savings bank which operates (i) four retail
banking branches located in North Carolina and Virginia and (ii) Essex First, a
division that engages principally in the origination and sale of residential
mortgage loans. The Company's other principal operating subsidiary is Essex
Home, a majority-owned subsidiary of the Bank that is engaged primarily in the
servicing of mortgage loans owned by the Bank, governmental agencies and third
party investors. At December 31, 1998, the Company had total assets of $231.0
million, total liabilities of $215.2 million, including total deposits of $187.6
million, and total shareholders' equity of $15.8 million.
In January 1995, following approval by the holders of the Partnership's
limited partnership units ("LPUs"), both the Partnership and Bancorp were merged
with and into the Company (collectively, the "Merger"), which resulted in a
single holding company structure for the Bank and the other subsidiaries of the
Company. The Merger was undertaken, among other reasons, in order (i) to
eliminate a cumbersome business structure that no longer provided the originally
intended benefits to the Partnership's unitholders, (ii) to expand the base of
potential investors in the Company by eliminating a complicated and
nontraditional holding company structure, and (iii) to provide the Company with
greater access to public and private equity capital markets. The Company had
1,049,687 shares of Common Stock outstanding immediately following the Merger.
As a consequence of the Merger, the Company succeeded to all of the assets and
liabilities of the Partnership and Bancorp. In this report, unless the context
otherwise requires, the term "Company" refers to the Partnership prior to the
Merger and/or the Company subsequent to the Merger, in each case including all
subsidiaries thereof.
On June 30, 1995, the Company and the Bank signed an Agreement and Plan
of Reorganization (the "Agreement") with Home Bancorp, Inc. ("Home Bancorp") and
its wholly-owned subsidiary Home Savings Bank, F.S.B. ("Home Savings"), a
Norfolk, Virginia based savings institution. On September 15, 1995, the Company
and the Bank merged with Home Bancorp and Home Savings (the "Home Acquisition").
In exchange for all of the outstanding stock of Home Bancorp, the stockholders
of Home Bancorp received 2,250,000 shares of nonvoting perpetual preferred stock
of the Company with an aggregate redemption and liquidation value of $15.0
million and warrants to purchase 7,949,000 shares of the Company's common stock
at a price of $0.9375 per share, which was the price of the Company's Common
Stock as of June 30, 1995. The warrants became exercisable in September 1998 and
will expire in September 2005.
On May 28, 1998, the Company's shareholders approved an amendment of
the Company's Certificate of Incorporation whereby the Company's total
authorized capitalization increased to 30 million shares, consisting of 20
million shares of common stock and 10 million shares of preferred stock. The
4
increase in authorized capitalization increases the Company's flexibility to
issue additional shares of common stock and preferred stock to enable the
Company to engage in strategic transactions, such as possible mergers or share
exchanges with other entities. However, the Company has no present plans to
issue shares in connection with any particular transaction.
Business Strategy of the Company and the Bank
General. The Company has improved its financial, operational and
competitive position over the past three years. As of December 31, 1998, the
Company is well-capitalized and profitable on a core basis, experiencing
relatively strong growth in retail deposits and postured to be competitive
within the geographic markets served and the market niches pursued. The
Company's business strategy is to raise the core earnings level through (i)
continued asset growth, (ii) an improved net interest income ratio through
continued emphasis in a broader range of loan and deposit products and (iii)
enhanced noninterest revenues through increased cross-selling and continued
growth in mortgage lending and servicing activities.
Enhancement of Bank Franchise. In 1996, the Board of Directors of the
Company formed a Strategic Evaluation Committee (the "Committee") to explore the
possibility of further expansion or contraction by branch sales. It was
concluded, with assistance from an independent consultant, that selling
non-strategic bank branches and effectively shrinking the size of the asset base
by approximately 50% was a strategy that ultimately would be in the best
interests of the common and preferred shareholders of the Company. Accordingly,
the Bank sold its branches in Charlotte, Raleigh, Greensboro and Wilmington,
North Carolina and in Norfolk, Portsmouth, Hampton, Newport News and Grafton,
Virginia (collectively, the "Branches") in three separate transactions over a
nine-month period in 1996. The outcome of this strategy was that the Company
retained its most strategic branches with the greatest potential for significant
market share growth. See Note 5 on pages 36 and 37 of the Notes to Consolidated
Financial Statements of the 1998 Annual Report to Stockholders, which is
attached hereto as Exhibit 13 and incorporated herein by reference.
During this downsizing period in 1996, the Bank continued its efforts
to position itself as a service-oriented community-based institution to compete
against the large regional/national banking companies whose orientation is
towards larger accounts, centralized operations and higher service fees. To that
end, the Bank and its mortgage banking subsidiary introduced a wider range of
consumer and mortgage loan products to attract new business, maximize the
potential of its existing customer base and enhance yields. The Company
envisions further improving its franchise through emphasizing growth at existing
branches through increased cross-selling, increasing market penetration in
Tidewater and Richmond, Virginia and Northeastern North Carolina and opening
complementary branches, such as a new branch site in Ashland, Virginia. This
site was acquired in 1998 and a new retail bank branch is anticipated to be
completed in September 1999. In addition, the Bank expects to offer its deposit
customers a telephone information access system and debit cards.
Diversification of Loan Products. The Company continues to emphasize
the origination and purchase of residential construction and consumer loans
because of the shorter-term nature of such loans and the higher yields available
thereon when compared to permanent residential mortgage lending. However,
construction and consumer lending is generally considered to involve a higher
level of risk as compared to single-family residential lending. Notwithstanding
the higher risk aspect, the portfolio of residential construction loans has
grown steadily since the product's introduction in 1992 with a negligible loss
on one foreclosed property in 1998 constituting the first loss in this
portfolio. At this time, opportunities for consumer loan origination are limited
5
in the Bank's markets. Therefore, the Bank continues to review consumer
portfolios in the secondary market that have acceptable credit risk and yields.
For additional information, see "- Lending Activities - Construction Loans" and
"- Consumer Loans."
Maintenance of Asset Quality. The Bank has a multi-faceted program
designed to control and continually monitor the credit risks inherent in the
loan portfolio. This program consists of, among other things, a structured loan
approval process including a loan committee, the periodic assessment of loan
classifications, an annual review of all commercial real estate and builder
relationships and the periodic evaluation of the adequacy of general loan loss
allowances. By deploying these processes and adhering to predetermined
underwriting procedures, management has been successful in reducing previously
unacceptable levels of delinquencies and nonperforming assets. As a result, the
.79% ratio of nonperforming assets to total assets at December 31, 1998 is the
lowest since the Company went public in 1989.
Expansion of Subservicing Activities. In its efforts to generate fee
income, the Bank continues to pursue profitable residential mortgage loan
servicing and subservicing. Essex Home is a service corporation subsidiary
licensed by the Federal National Mortgage Association ("Fannie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Government
National Mortgage Association ("Ginnie Mae"). Essex Home also services and
subservices loans for approximately eight private investors and 47 subservicing
clients.
Through various networking and referral opportunities and advertising
efforts, Essex Home has attracted other financial institutions and mortgage
banking firms interested in outsourcing their loan servicing function. By
subservicing loans for others, the Bank will be able to utilize more fully its
available resources in a cost efficient and profitable manner. Essex Home's
largest subservicing contract was terminated effective June 1, 1997, but Essex
Home has rebuilt the portfolio and its nonaffiliate servicing/subservicing
portfolio increased from 5,500 loans totaling $354.2 million as of December 31,
1997 to 12,200 loans totaling $1.1 billion as of December 31, 1998.
Containment of Operating Expenses. Historically, the Company's
operating expenses have been high relative to those of other savings
institutions of similar asset size. Significant reductions have been made in
operating expenses and the Company has achieved a level of operating expenses
that is appropriate considering the Company's activities in both loan
origination and loan servicing. Nevertheless, management continues to evaluate
the Bank's personnel needs and operating requirements in order to identify areas
where additional measures may be taken to reduce costs. Although the Bank is
committed to achieving a lower level of operating expenses relative to the
Bank's operations, management recognizes that operating expenses will remain
higher than much of the Bank's peer group due to the relatively low level of
assets of Essex Home.
Interest Rate Risk Management. Deposit accounts typically adjust more
quickly to changes in market interest rates than mortgage loans because of the
shorter maturities of deposits. As a result, significant increases in interest
rates may adversely affect the Bank's earnings. To reduce the potential
volatility of the Bank's earnings, management has sought to improve the match
between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread. Pursuant to this strategy, the Bank has (i)
emphasized investment in adjustable-rate single-family residential loans or
shorter-term (seven years or less), fixed-rate single-family residential loans,
(ii) sold longer-term (over seven years), fixed-rate single-family residential
loans in the secondary market, (iii) maintained higher liquidity by holding
short-term investments and cash equivalents and (iv) increased the average
maturity of the Bank's interest-bearing liabilities by utilizing long-term
advances and attempting to attract longer-term retail deposits.
6
The interest rate sensitivity gap is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. The Bank's one-year interest rate sensitivity gap
amounted to a negative 17.9% at December 31, 1998, which reflects the impact of
(i) the lengthening of the initial adjustment term for adjustable-rate mortgage
loans and (ii) the shortening deposit maturities as the Bank's deposit customers
are reluctant to enter into extended maturities in the current low interest rate
environment. The negative gap also reflects near-term maturities of higher-rate
Federal Home Loan Bank advances. The Company will benefit from the lower cost of
funds as these borrowings mature and may consider extended maturities in order
to mitigate the impact of an increase in interest rates in the future. While the
Company continues to emphasize investment in adjustable-rate loan portfolios,
customer demand for such loans is lessening as borrowers' demand for lower
fixed-rate loans is increasing. Within the spectrum of loan products offered by
the Bank, the percentage of balloon payment and adjustable-rate loans with
longer initial adjustment terms has increased. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk
Management" on pages 16 through 19 of the 1998 Annual Report to Stockholders,
which is attached hereto as Exhibit 13 and incorporated herein by reference.
General
The Company, as a registered savings and loan holding company, is
subject to regulation by the Office of Thrift Supervision ("OTS") and is subject
to various reporting and other requirements of the Securities and Exchange
Commission (the "Commission"). The Bank, as a federally chartered savings bank,
is subject to comprehensive examination by the OTS, as its chartering authority
and primary regulator, and by the Federal Deposit Insurance Corporation
("FDIC"), which administers the Savings Association Insurance Fund ("SAIF"),
which insures the Bank's deposits to the maximum extent permitted by law. The
Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB"), which is one
of 12 regional banks comprising the Federal Home Loan Bank System. The Bank is
further subject to regulations of the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves required to be maintained
against deposits and certain other matters.
The Company's principal focus is currently on the origination (through
Essex First) of both construction and permanent single-family residential loans
(of which substantially all fixed-rate single-family residential loans with
terms to maturity in excess of seven years are being sold by Essex First in the
secondary market). Because of borrowers' preferences for fixed-rate mortgage
loans during 1998, the Company also relied upon the acquisition of
adjustable-rate residential loan portfolios to supplement Essex First's
production of loans to be retained by the Bank. Moreover, in order to provide a
full range of services to its customers and in accordance with the Company's
asset and liability management policies, the Company recently has increased its
emphasis of the origination of various types of consumer loans. In addition, the
Company generates fee income by providing to third parties residential mortgage
loan servicing and subservicing through Essex Home.
Lending Activities
General. At December 31, 1998, the Company's net loan portfolio
(excluding loans classified as held for sale) totaled $192.7 million,
representing approximately 83.4% of its $231.0 million of total assets at that
date. The principal categories of loans in the Company's portfolio are
residential real estate loans, which are secured by single-family (one-to-four
units) residences; loans for the construction of single-family properties;
commercial real estate loans, which are secured by multi-family (over five
units) residential and commercial real estate; commercial business loans; and
7
consumer loans. Substantially all of the Company's mortgage loan portfolio
consists of conventional mortgage loans, which are loans that are neither
insured by the Federal Housing Administration ("FHA") nor partially guaranteed
by the Veterans Administration ("VA").
As a federally chartered savings institution, the Bank has general
authority to originate and purchase loans secured by real estate located
throughout the United States. The Company currently originates substantially all
of its loans within Virginia and North Carolina. Nevertheless, the Company
continues to purchase from time to time loans secured by properties located
outside of its market area and continues to hold a relatively diversified
portfolio.
Federal regulations permit the Bank to invest without limitation in
residential mortgage loans and up to four times its capital in loans secured by
non-residential or commercial real estate. The Bank is also permitted to invest
in secured and unsecured consumer loans in an amount not exceeding 35% of the
Bank's total assets; however, such 35% limit may be exceeded for certain types
of consumer loans, such as home equity, property improvement and education
loans. In addition, the Bank is permitted to invest up to 20% of its total
assets in secured (by other than real estate) and unsecured loans for
commercial, corporate, business or agricultural purposes, provided that any
investments which in the aggregate total 10% may only be used for small business
loans.
Since the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), a savings institution generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. See "Regulation -
Regulation of the Bank - General." At December 31, 1998, the Bank's limit on
loans-to-one borrower was $2.6 million. The loans-to-one borrower limitation may
restrict the Bank's ability to do business with certain existing and potential
customers.
At December 31, 1998, the Bank's five largest commercial loans-to-one
borrower and their related entities amounted to $1.4 million, $1.2 million,
$789,000, $470,000 and $356,000. In addition, as of December 31, 1998, the
Bank's largest lines of credit with unaffiliated home builders consisted of one
in the amount of $2.5 million (of which no funds had been drawn as of such
date), another in the amount of $2.5 million (of which $435,000 had been drawn
upon as of such date), another in the amount of $2.4 million (of which $1.3
million had been drawn upon as of such date), another in the amount of $1.5
million (of which $361,000 had been drawn upon as of such date) and another in
the amount of $1.5 million (of which $286,000 had been drawn upon as of such
date).
At December 31, 1998, the $1.4 million commercial loan was classified
based on a rating system adopted by the Company. Refer to "-Asset Quality
Classified Assets" for a description of the classifications for problem assets.
The components of this credit are (i) a commercial real estate loan of $939,000
as of December 31, 1998, which was originated in October 1987 in the amount of
$1.0 million for the purpose of refinancing a mini-storage/office facility (76
mini-storage units and 38 office units) located in Virginia Beach, Virginia, and
(ii) a line of credit in the amount of $600,000 with an outstanding balance of
$433,000 as of December 31, 1998. The Company 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.
In addition, as of December 31, 1998, the Bank and its subsidiaries leased nine
of the mini-storage units. The property was most recently appraised in November
1992 for $915,000. As of December 31, 1998, the Bank had established a $300,000
specific reserve with respect to the loans and the remaining $1.1 million was
classified as substandard.
8
Loan Portfolio Composition. The following table sets forth information
concerning the Company's loan portfolio (excluding loans held for sale) by type
of loan at the dates indicated:
December 31,
---------------------------------------------------------------------
1998 1997 1996
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$ % $ % $ %
- - - - - -
(dollars in thousands)
Real estate:
Single-family residential:
First mortgages................ $152,891 78.6% $130,486 76.8% $103,643 70.0%
Second mortgages............... 7,525 3.9 8,699 5.1 12,384 8.3
Construction and development..... 19,430 10.0 16,583 9.8 17,190 11.6
Commercial real estate........... 6,470 3.3 5,970 3.5 6,313 4.3
--------- ------ --------- ------ --------- ------
Total real estate loans........ 186,316 95.8 161,738 95.2 139,530 94.2
Commercial business loans........... 1,601 .8 1,883 1.1 1,915 1.3
Consumer loans:
Other............................ 5,984 3.1 5,426 3.2 5,828 3.9
Secured by deposits.............. 621 .3 805 .5 842 .6
---------- ----- ---------- ----- ---------- -----
Total consumer loans........... 6,605 3.4 6,231 3.7 6,670 4.5
--------- ----- --------- ----- --------- -----
Total loans.............. 194,522 100.0% 169,852 100.0% 148,115 100.0%
===== ===== =====
Less:
Unearned loan fees and discounts. 9 29 8
Allowance for loan losses........ 1,845 2,382 2,556
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1,854 2,411 2,564
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Net Loans................ $192,668 $167,441 $145,551
======= ======= =======
1995 1994
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$ % $ %
- - - -
Real estate:
Single-family residential:
First mortgages................ $223,531 82.1% $187,607 77.7%
Second mortgages............... 13,398 4.9 18,717 7.8
Construction and development..... 15,078 5.5 15,501 6.4
Commercial real estate........... 10,611 3.9 11,499 4.8
-------- ------ -------- ------
Total real estate loans........ 262,618 96.4 233,324 96.7
Commercial business loans........... 2,171 .8 1,824 .8
Consumer loans:
Other............................ 6,488 2.4 5,320 2.2
Secured by deposits.............. 994 .4 835 .3
---------- ----- ---------- -----
Total consumer loans........... 7,482 2.8 6,155 2.5
--------- ----- --------- -----
Total loans.............. 272,271 100.0% 241,303 100.0%
===== =====
Less:
Unearned loan fees and discounts. 388 482
Allowance for loan losses........ 5,251 3,429
--------- ---------
5,639 3,911
---------
Net Loans................ $266,632 $237,392
======= =======
9
Total loans decreased by an aggregate of $46.8 million or 19.4% from
December 31, 1994 to December 31, 1998 primarily due to sales of second mortgage
loans, the sale of loans in connection with the sale of the Bank's Florida
branches in 1994 and the sale of loans in connection with the sale of the
Branches in 1996. The acquisition of $32.3 million and $22.2 million of
adjustable rate first mortgage loans in 1998 and 1997, respectively, and $3.2
million of fixed rate home improvement loans in 1998 partially offset the
decline and reflects the Company's strategy of investing proceeds from the
maturities of investment securities and funds provided by the growth in deposits
into higher yielding loans. Over the five year period ended December 31, 1998,
the Company has placed increased emphasis on single-family first mortgage loans,
which, together with construction loans secured by single-family residences,
increased from 84.1% of total loans held for investment at December 31, 1994 to
88.6% of total loans held for investment at December 31, 1998. Single-family
second mortgage loans declined substantially from 7.8% of total loans held for
investment at December 31, 1994 to 3.9% of total loans held for investment at
December 31, 1998. The decline in second mortgage loans resulted from loan sales
undertaken to reduce the regulatory risk-weighting of the Bank's assets and,
thus, improve its risk-based capital ratio, while at the same time reducing
earnings volatility associated with the amortization of deferred premiums and
the increased credit risk associated with second mortgage loans. Commercial real
estate loans decreased from 4.8% of total loans held for investment at December
31, 1994 to 3.3% of total loans held for investment at December 31, 1998, as did
commercial business loans. Consumer loans increased from 2.5% of total loans
held for investment at December 31, 1994 to 3.47% of total loans held for
investment at December 31, 1998. The Company increased its emphasis during 1998
on the origination and purchase of various types of consumer loans and,
consequently, expects the balance of such loans to increase.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories (excluding residential mortgage and
consumer loans) at December 31, 1998. Maturities are presented on a contractual
basis. Loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Scheduled contractual principal repayments
do not reflect the actual maturities of loans.
Commercial Commercial
Construction Real Estate Business Total
------------ ----------- -------- -----
(dollars in thousands)
Amounts due:
One year or less $17,756 $ 260 $ 706 $18,722
After one year through
five years 1,558 5,305 778 7,641
Beyond five years 116 905 117 1,138
-------- ------- ------ -------
Total $19,430 $6,470 $1,601 $27,501
====== ===== ===== ======
Interest rate terms on
amounts due after one
year:
Fixed $ 154 $2,698 $ 778 $ 3,630
======= ===== ====== =======
Adjustable $ 1,520 $3,512 $ 117 $ 5,149
====== ===== ====== =======
Origination, Purchase and Sale of Loans. In earlier years, the Bank
operated as a wholesale financial institution and conducted its deposit
gathering activities through a network of limited service branches that were
designed to primarily accumulate large non-transactional deposit accounts. The
Bank's lending activities were not generally conducted through its branch
offices. Instead, substantially all of the Company's loan product was either
originated by Essex First or purchased in the secondary market.
As part of management's efforts to reposition the Bank's activities
along the lines of a more traditional financial institution, the Bank converted
its existing branch offices into full-service retail facilities, which has
10
enabled the Bank to, among other things, increase its origination of both
consumer and mortgage loans directly through its branch network.
Mortgage Banking Activities. At December 31, 1998, Essex First
conducted its operations out of four offices, which are located in Norfolk,
Richmond, and Chester, Virginia, and Elizabeth City, North Carolina. Essex First
also accepts loan applications through the Bank's branch office in Emporia,
Virginia. During the years ended December 31, 1998, 1997, and 1996, Essex First
originated $98.8 million, $65.6 million and $104.2 million of loans (consisting
primarily of both permanent and construction loans secured by single-family
residential real estate). During such periods, $33.5 million, $25.9 million and
$29.3 million of such loans, respectively, were sold by Essex First to the Bank,
with the remainder being sold by Essex First primarily to other private
investors in the secondary market.
Although the majority of the Bank's loan product is currently
originated by Essex First, Essex First was established primarily to increase the
volume of loans being originated for sale to private investors in the secondary
market. Such loan sales generate fee income, while avoiding the interest rate
and credit risk associated with holding long-term fixed-rate mortgage loans in
its portfolio. Loans originated by Essex First for sale in the secondary market
are originated in accordance with terms, conditions and documentation prescribed
by the Freddie Mac, Fannie Mae and Ginnie Mae. However, Essex First does not
generally sell mortgage loans to such government agencies and, instead, sells
loans to private investors in the secondary market. Consequently, loans
originated by Essex First for sale in the secondary market must also comply with
any particular requirements of such private investors. Upon approval of a
particular loan, Essex First provides an independent title company or attorney
instructions to close the loan. Loan proceeds are disbursed and funded at the
closing by Essex First. The loan documents are generally delivered to the
private investor within 10 days of the closing and the price paid by the private
investor for purchasing the loan is generally remitted within five to 10 days
after such delivery. Although Essex First currently sells substantially all
conventional loans without recourse (so that losses incurred as a result of
nonperformance with respect to the loan become the responsibility of the
purchaser of the loan as of the date of the closing), Essex First has in the
past occasionally sold conventional loans in the secondary market with recourse,
and may continue to sell certain conventional loans in the secondary market with
recourse. As of December 31, 1998 there were $969,000 of loans outstanding which
were previously originated and sold by Essex First in the secondary market with
recourse.
A majority of all residential mortgage loans originated by Essex First
for sale in the secondary market are sold with servicing released to third party
investors. Substantially all of the loans originated by Essex First and not sold
with servicing released to third party investors are sold to the Bank, which
enables the Company to retain the servicing. When loans are sold with servicing
rights released to the buyer, the Company recognizes current income from receipt
of servicing release fees. Alternatively, when loans are sold with servicing
retained, the Company recognizes additional gains based on the estimated fair
value of the servicing retained. For additional information, see "- Loan
Servicing" and "- Loan Fee Income."
Management of the Bank and Essex First believe that "pipeline risk,"
which is created by offering loan applicants agreed-upon interest rates for a
future closing, is currently being minimized because Essex First's loan officers
are compensated in accordance with pricing guidelines which are based on the
purchase price received from the third party investors purchasing the loans.
Therefore, in most cases, the loan officer will lock-in a purchase price with
the third party investor simultaneously with making the rate commitment to the
borrower and therefore eliminate any interest rate risk. If the loan is not
locked-in simultaneously with the commitment to the borrower, any market
movement that occurs prior to the third party investor locking-in the purchase
price is reflected in the loan officer's compensation and not absorbed by Essex
First or the Bank.
11
Loan Purchases and Sales. The Bank purchases from Essex First
single-family mortgage loans which generally have adjustable rates or a term to
maturity of seven years or less. In addition, the Bank continues to purchase
first mortgage loans secured by single-family residential properties from
selected financial institutions and mortgage banking companies in the secondary
market. Such loans generally consist of ARMs or fixed-rate loans with terms of
five, seven, or to a lesser extent, 15 years. Such loan purchases are secured by
properties located both within and outside the Bank's primary markets. During
the years ended December 31, 1998 and 1997, the Bank purchased $32.3 million and
$22.2 million of loans, respectively, from various financial institutions and
mortgage banking companies (other than Essex First) in the secondary market. The
Company purchased less than $600,000 of loans in the secondary market during
1996 because of its emphasis on loan sales to accommodate the sale of the
Branches.
At December 31, 1998, 1997, and 1996, loans classified by the Company
as held for sale amounted to $4.5 million, $2.2 million and $2.5 million,
respectively. Except for loans originated for sale in the secondary market by
Essex First, it is generally management's intention to hold originated and
purchased loans for investment. Under certain circumstances, however, the
Company may sell loans originally acquired for investment in order to address
needs regarding liquidity, regulatory capital, interest rate risk, or other
objectives. During 1996, the Bank sold first mortgage loans totaling $118.3
million in order to provide funds for the sale of the Branches. See Note 5 on
pages 36 and 37 of the Notes to Consolidated Financial Statements of the 1998
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.
Loan Underwriting. Applications for all types of loans offered by the
Bank are taken at all of the Bank's branch offices. Whereas Essex First limits
its applications to residential mortgage loans. Residential mortgage loan
applications are generally attributable to referrals from real estate brokers
and builders, existing customers and, to a lesser extent, non-referral
customers. Essex First also obtains applications for residential mortgage loans
through loan officers who solicit and refer mortgage loan applications to Essex
First. These loan officers are compensated in part on a commission basis and
provide convenient origination services during banking and nonbanking hours.
During 1996, Essex First established a wholesale lending program, which consists
primarily of construction/permanent ("C/P") lending. Approved brokers are
responsible for originating and processing C/P loans and submitting them to the
Bank for underwriting approval and closing.
Loans purchased by the Bank from Essex First or other financial
institutions and mortgage banking companies in the secondary market are
underwritten by the Bank in accordance with its underwriting guidelines and
procedures (which generally follow Freddie Mac and Fannie Mae guidelines). All
loans in excess of an individual's designated limits are referred to an officer
with the requisite authority. Specifically, when acting individually, the Chief
Executive Officer and the Senior Underwriter are authorized to approve secured
loans of up to $250,000 and unsecured loans of up to $25,000. When the Senior
Underwriter acts together with the Chief Executive Officer, they are authorized
to approve secured loans of up to $500,000 and unsecured loans of up to $50,000.
All secured loans greater than $500,000 but not exceeding $1,000,000 require
approval by the Bank's loan committee, which consists of the aforementioned
officers and the Executive Vice President of the Bank. All secured loans greater
than $1,000,000 and all unsecured loans greater than $50,000 must be approved by
the Bank's loan committee and the Board of Directors of the Bank. In addition,
all loans committed or approved by the Bank's loan committee are reported to the
Board of Directors on a monthly basis. Management of the Bank believes that its
relatively centralized approach to approving loan applications ensures strict
adherence to the Bank's underwriting guidelines while still allowing the Bank to
approve loan applications on a timely basis.
12
Loan Servicing. Essex Home services or subservices residential real
estate loans owned by the Bank as well as for other private mortgage investors.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making advances to cover delinquent payments, making
inspections as required of mortgaged premises, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. Funds that have been escrowed by
borrowers for the payment of mortgage related expenses, such as property taxes
and hazard and mortgage insurance premiums, are maintained in
noninterest-bearing accounts at the Bank or at nonaffiliated banks if so
required by the mortgage investors.
Essex Home receives fees for servicing and/or subservicing mortgage
loans. These fees serve to compensate Essex Home for the costs of performing the
servicing/subservicing function. Other sources of loan servicing revenues
include late charges and other ancillary fees. Servicing and subservicing fees
are collected by Essex Home out of the monthly mortgage payments made by
borrowers. For additional information concerning Essex Home and its servicing
and subservicing portfolio, see "- Loan Fee Income."
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Lending Guidelines"). The
Lending Guidelines set forth, pursuant to the mandates of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), uniform regulations
prescribing standards for real estate lending. Real estate lending is defined as
extensions of credit secured by liens on interests in real estate or made for
the purpose of financing the construction of a building or other improvements to
real estate, regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Lending Guidelines, including supervisory loan-to-value ("LTV") limits, loan
portfolio management, loan administration procedures and underwriting standards.
These policies must also be appropriate to the size of the institution and the
nature and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio, which is the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must include all
senior liens when calculating this ratio. The Lending Guidelines, among other
things, establish the following supervisory LTV limits: raw land (65%); land
development (75%); construction (commercial, multi-family and nonresidential)
(80%); improved property (85%); and one-to-four family residential (owner
occupied) (no maximum ratio; however any LTV ratio in excess of 90% should
require appropriate credit enhancement in the form of mortgage insurance or
readily marketable collateral). In most cases, the Company's loan underwriting
guidelines with respect to LTV ratios are more stringent than the Lending
Guidelines set forth above.
Single-Family Residential Real Estate Loans. As part of management's
efforts to reposition the Bank along the lines of a more traditional thrift
institution, the Bank has increased its emphasis on loans secured by first liens
on single-family residential real estate. At December 31, 1998, $152.9 million
or 78.6% of the Company's total loans held for investment consisted of such
loans.
In recent years, the Company has been emphasizing for its portfolio
single-family residential mortgage adjustable-rate loans which provide for
periodic adjustments to the interest rate. These loans have up to 30-year terms
and interest rates which adjust annually in accordance with a designated index
after a specified period has elapsed. Depending on the loan product selected by
the borrower, this period can range from one year to seven years. In order to be
13
competitive and generate production, the ARMs offered by the Company provide for
initial rates of interest below the rates which would prevail when the index
used for repricing is applied. However, the Company underwrites certain loans
(i.e., ARMs with 95% LTV) on a basis that is no less stringent than the
underwriting guidelines of the Fannie Mae. The Company has not engaged in the
practice of using a cap on the payments that could allow the loan balance to
increase rather than decrease, resulting in negative amortization. Approximately
48.3% of the permanent single-family residential loans in the Company's loan
portfolio held for investment at December 31, 1998 had adjustable interest
rates.
The demand for adjustable-rate loans in the Company's primary market
area has been a function of several factors, including the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the interest rates and loan fees offered for fixed-rate loans
and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates rise
and the loan rates adjust upward, the payment by the borrower rises to the
extent permitted by the terms of the loan, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. The Company believes that these
risks, which have not had a material adverse effect on the Company to date,
generally are less than the risks associated with holding fixed-rate loans in an
increasing interest rate environment. In addition, depending on the LTV and the
initial repricing frequency of the ARMs, the Company underwrites certain of
these loans based on a borrower's qualification at a fully-indexed interest
rate.
The Company continues to originate long-term, fixed-rate loans in order
to provide a full range of products to its customers, but generally only under
terms, conditions and documentation which permit their sale in the secondary
market. Currently, fixed-rate single-family residential loans with terms to
maturity of seven years or less are generally retained in the Company's
portfolio while fixed-rate single-family residential loans with terms to
maturity of over seven years are generally sold in the secondary market as
market conditions permit. At December 31, 1998, approximately 51.7% of the
permanent single-family residential loans held by the Company for investment
consisted of loans which provide for fixed rates of interest. Although these
loans provide for repayments of principal over a fixed period of up to 30 years,
it is the Company's experience that such loans remain outstanding for a
substantially shorter period of time.
The Company is generally permitted to lend up to 100% of the appraised
value of the real property securing a residential loan (referred to as the LTV
ratio); however, if the amount of a residential loan originated or refinanced
exceeds 90% of the appraised value, the Company is required by federal
regulations to obtain appropriate credit enhancement in the form of either
14
mortgage insurance or readily marketable collateral. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Company will lend up to 95% of
the appraised value of the property securing an owner-occupied single-family
residential loan, and generally requires borrowers to obtain private mortgage
insurance on loans which have a principal amount that exceeds 80% of the
appraised value of the security property. The extent of coverage is dependent
upon the LTV ratio at the time of origination.
The Company generally requires title insurance in order to secure the
priority of its mortgage lien, as well as fire and extended coverage casualty
insurance in order to protect the properties securing its residential and other
mortgage loans. Borrowers may be required to advance funds, with each monthly
payment of principal and interest, to a loan escrow account from which the
Company makes disbursements for items such as real estate taxes, hazard
insurance premiums and mortgage insurance premiums as they become due.
Substantially all of the properties securing all of the Company's mortgage loans
originated or closed by the Bank and/or Essex First are appraised by independent
appraisers that conform to guidelines established pursuant to FIRREA and
regulations promulgated thereunder.
Home equity line of credit loans have a maximum commitment of five
years, which may be extended within the sole discretion of the Bank, and the
interest rate is set at the Bank's prime rate plus a margin. The Company will
lend up to a 90% LTV ratio and the loan can be secured by a primary or
subordinate mortgage on the property. The Company will originate the loan even
if another institution holds the first mortgage.
Construction Loans. Construction lending activities generally are
limited to the Company's primary market, with particular emphasis in the greater
Richmond, Virginia market, the Tidewater, Virginia area and counties in
northeastern North Carolina. More recently, the Company has expanded its
construction lending presence into the Raleigh, North Carolina, Northern
Virginia and Maryland markets. At December 31, 1998, construction loans amounted
to $19.4 million or 10.0% of the Company's total loans held for investment. As
of such date, the Company's entire portfolio of construction loans consisted of
loans for the construction of single-family residences.
The Company offers construction loans to individual borrowers as well
as to local real estate builders, contractors and developers for the purpose of
constructing single-family residences. Substantially all of the Company's
construction lending to individuals is originated on a C/P mortgage loan basis.
C/P loan originations are made by Essex First loan officers or through the
wholesale C/P lending program, which is a network of 72 approved brokers. C/P
loans are made to individuals who hold a contract with a licensed general
contractor to construct their personal residence. The construction phase of the
loan currently provides for monthly payments on an interest only basis at a
designated prime rate (plus 100 basis points) for up to six months. Upon
completion of construction, the loan converts to a permanent loan at either an
adjustable or fixed interest rate, consistent with the Company's policies with
respect to residential real estate financing. Essex First's construction loan
department approves the proposed contractors and administers the loan during the
construction phase. The Company's C/P loan program has been successful due to
its ability to offer borrowers a single closing and, consequently, reduced
costs. At December 31, 1998, the Company's C/P portfolio included 65 C/P loans
with an aggregate principal balance of $9.3 million (and an additional $10.1
million was subject to legally binding commitments but had not been advanced as
of such date).
The Company also offers construction loans to real estate builders,
contractors and developers for the construction of single-family residences on
both a presold and speculative basis. Construction loans to builders generally
have a three-year note with annual renewals throughout the term, with payments
being made monthly on an interest only basis (generally, at 75 basis points to
200 basis points over a designated prime rate). Upon application, credit review
and analysis of personal and corporate financial statements, the Company will
grant builders lines of credit up to designated amounts. The Company will
generally limit the number of homes that may be built by any individual builder
or developer on a speculative basis depending on the builder's financial
strength and total exposure to other lenders. In 1998, the Company expanded its
builder construction loan portfolio to include participations, which allows the
Bank to leverage its capital in markets where Essex First does not have a mature
builder construction presence. The Company intends to pursue more participation
arrangements in the future. Although at December 31, 1998, the Company did not
have any real estate acquisition and development loans in its portfolio, the
Company may in the future, on a case-by-case basis, grant a limited amount of
real estate acquisition and development loans.
15
At December 31, 1998, the Company's builder construction loan portfolio
included 110 loans to 41 different builders with an aggregate principal balance
of $8.2 million (and an additional $37.9 million was subject to legally binding
commitments but had not been advanced as of such date). Of this $8.2 million of
builder loans, approximately $7.0 million consisted of construction loans for
which there were no contracts for sale at the time of origination. In addition,
the builder construction loan portfolio included one participation totaling $1.3
million at December 31, 1998.
The Company intends to continue to increase its involvement in
construction lending. Such loans afford the Company the opportunity to increase
the interest rate sensitivity of its loan portfolio. Construction lending is
generally considered to involve a higher level of risk as compared to
single-family residential lending, due to the concentration of principal in a
limited number of loans and borrowers and the effects of general economic
conditions on real estate developers and managers. Moreover, a construction loan
can involve additional risks because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost
(including interest) of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. In addition, speculative
construction loans to a builder are not necessarily pre-sold and thus pose a
greater potential risk to the Company than construction loans to individuals on
their personal residences.
The Company has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Company has adopted underwriting guidelines which
impose stringent LTV (80% during the construction phase with respect to
single-family residential real estate), debt service and other requirements for
loans which are believed to involve higher elements of credit risk, by limiting
the geographic area in which the Company will do business and by working with
builders with whom it has established relationships or knowledge thereof.
Commercial Real Estate Loans. The Company has also originated mortgage
loans secured by multi-family residential and commercial real estate. At
December 31, 1998, $6.5 million or 3.3% of the Company's total loans held for
investment consisted of such loans.
Commercial real estate loans originated by the Company are primarily
secured by office buildings, retail stores, warehouses and general purpose
industrial space. Commercial real estate loans also include multi-family
residential loans, substantially all of which are secured by small apartment
buildings. At December 31, 1998, $1.2 million or 19.3% of the Company's total
commercial real estate loans were comprised of multi-family residential loans.
Although terms vary, commercial real estate loans generally are
amortized over a period of up to 20 years and mature in seven years or less. The
Company will originate these loans either with fixed interest rates or with
interest rates which adjust in accordance with a designated index, which
generally is negotiated at the time of origination. LTV ratios on the Company's
commercial real estate loans are currently limited to 80% or lower. As part of
the criteria for underwriting commercial real estate loans, the Company
generally imposes a specified debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service). It is also the
Company's general policy to seek additional protection to mitigate any
weaknesses identified in the underwriting process, which may be provided via
mortgage insurance, secondary collateral and/or personal guarantees from the
principals of the borrower.
16
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Company attempts to minimize
its risk exposure by limiting the extent of its commercial lending. In addition,
the Company imposes stringent LTV ratios, requires conservative debt coverage
ratios, and continually monitors the operation and physical condition of the
collateral.
Commercial Business Loans. From time to time, and in connection with
its community bank activities, the Company has originated secured or unsecured
loans for commercial, corporate, business and agricultural purposes. At December
31, 1998, $1.6 million or .8% of the Company's total loans held for investment
consisted of commercial business loans. The Company's commercial business loans
consist primarily of loans and lines of credit secured by various equipment,
machinery and other corporate assets.
Consumer Loans. Subject to restrictions contained in applicable federal
laws and regulations, the Company is authorized to make loans for a wide variety
of personal or consumer purposes. The Company continues to emphasize the
origination and purchase of consumer loans in order to provide a full range of
financial services to its customers and because such loans generally have
shorter terms and higher interest rates than mortgage loans. At this time,
however, opportunities for consumer loan origination are limited in the Bank's
markets. Therefore, the Bank continues to review consumer portfolios in the
secondary market that have acceptable credit risks and yields. At December 31,
1998, $6.6 million or 3.4% of the Company's total loans held for investment
consisted of consumer loans. The consumer loans offered by the Company include
automobile loans, boat and recreational vehicle loans, mobile home loans, loans
secured by deposit accounts and unsecured personal loans.
The Company currently offers loans secured by deposit accounts, which
amounted to $621,000 at December 31, 1998. Such loans are originated for up to
90% of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance. At December 31, 1998, the Company's loan
portfolio also included $1.3 million of automobile loans, $329,000 of mobile
home loans and $32,000 of boat and recreational vehicle loans.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans and generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency may not warrant further substantial collection efforts against the
borrower.
Loan Fee Income. In addition to interest earned on loans, the Company
receives income through servicing of loans, unamortized loan fees in connection
with loan sales and fees in connection with loan modifications, late payments,
prepayments and miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and types of loans made
and competitive conditions.
In connection with its loan origination activities, the Company often
charges loan origination fees that are calculated as a percentage of the amount
borrowed. The Company generally charges a borrower on a single-family home loan
a loan origination fee based on the principal amount of the loan, with the
actual amount being dependent upon, among other things, the interest rate and
market conditions at the time the loan application is taken. These fees are in
addition to appraisal and other fees paid by the borrower to the Company at the
17
time of the application. The Company's policy is to defer all loan origination
fees net of direct origination costs and amortize those fees over the
contractual lives of the related loans. Amortization of loan fees is included in
interest income. Nevertheless, the predominant portion of the Company's loans
are originated for resale and, consequently, related net loan fees are
recognized as mortgage banking income upon consummation of the loan sales.
When loans are sold with servicing rights released to the buyer, the
Company also recognizes current income from receipt of servicing release fees in
addition to receiving a premium or deducting a discount based on the market
value of the loan, which is dependent upon, among other things, the interest
rate and market conditions at the time the sales price is locked-in with the
buyer. Sales prices for loans originated for resale are generally locked-in with
a buyer at the time of origination in order to minimize the Company's interest
rate risk. When loans are sold with servicing retained, the Company recognizes
additional gains based on the estimated fair value of the servicing retained.
Recognition of such gains creates originated mortgage servicing rights ("OMSRs")
for the Company, which are capitalized and amortized in proportion to, and over
the period of, the estimated future net servicing income stream of the
underlying mortgage loans. OMSRs amounted to $484,000, $782,000 and $1.1 million
at December 31, 1998, 1997 and 1996, respectively. For additional information
regarding the Company's servicing assets, see Note 2 of the Notes to
Consolidated Financial Statements on pages 33 through 36 of the 1998 Annual
Report to Stockholders, which is attached hereto as Exhibit 13 and incorporated
herein by reference.
Through Essex Home, the Company services loans that are owned by the
Bank and other investors. At December 31, 1998, approximately 15,100 loans with
principal balances of $1.2 billion were serviced or subserviced by Essex Home as
compared to approximately 8,400 loans with principal balances of $482.7 million
as of December 31, 1997. Notwithstanding the cancellation of its largest
subservicing client (with approximately 7,000 loans totaling $858.9 million as
of December 31, 1996) effective May 1997, Essex Home more than doubled its
mortgage loan subservicing portfolio during 1998. The Company intends to further
increase its servicing volume through the negotiation of new subservicing
contracts (generally for two year terms) and the acquisition of servicing
rights. Purchased mortgage servicing rights amounted to $347,000, $387,000 and
$207,000 at December 31, 1998, 1997 and 1996, respectively. There are risks,
however, associated with the acquisition of servicing rights because their value
(i.e., future servicing revenues) is dependent upon the underlying loans being
serviced. The Company amortizes its mortgage servicing rights in proportion to,
and over the period of, the estimated future net servicing revenues of the
underlying mortgage loans, taking into consideration market-based prepayment
estimates. However, there can be no assurance that impairments will not be
required in future periods if the lower interest rate environment results in the
acceleration of prepayment activity in excess of current expectations.
Asset Quality
Delinquent Loans. When a borrower fails to make a required payment on a
loan, the Company attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made on the 15th day after a payment is
due and a late charge is assessed at such time. In most cases, deficiencies are
cured promptly. If a delinquency extends beyond 30 days, the loan and payment
history is carefully reviewed, additional notices are sent to the borrower and
additional efforts are made to collect the loan. While the Company generally
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Company institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
18
The following table sets forth information concerning the principal
balances and percent of the total loan portfolio held for investment represented
by delinquent loans at the dates indicated:
December 31,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
30-59 days..................... $ 662 .34% $ 645 .38% $1,156 .78%
60-89 days..................... 46 .02 295 .17 335 .23
90 or more days (1)............ 1,166 .60 1,577 .93 2,938 1.98
----- --- ----- ---- ----- ----
$1,874 .96% $2,517 1.48% $4,429 2.99%
===== === ===== ==== ===== ====
(1) Includes $21,000 and $30,000 of loans that were accruing interest
at December 31, 1997 and 1996, respectively. There were no loans
90 days or more past due accruing interest at December 31, 1998.
Nonperforming Assets. All loans are reviewed on a regular basis and are
placed in nonaccrual status based on the loan's delinquency status, an
evaluation of the related collateral, and the borrower's ability to repay the
loan. Generally, loans past due more than 90 days are placed in nonaccrual
status; however, in instances where the borrower has demonstrated an ability to
make timely payments, loans past due more than 90 days are returned to an
accruing status. Such loans may be returned to accruing status, even though the
loans have not been brought fully current, provided two criteria are met: (i)
all principal and interest amounts contractually due (including arrearages) are
reasonably assured of repayment within a reasonable period, and (ii) there is a
sustained period of repayment performance (generally a minimum of six months) by
the borrower. Consumer loans generally are charged-off or fully reserved for
when the loan becomes over 120 days delinquent. When a loan is placed in
nonaccrual status, interest accruals cease and uncollected accrued interest is
reversed and charged against current income. Additional interest income on such
loans is recognized only when received.
In certain circumstances, for reasons related to a borrower's financial
difficulties, the Company may grant a concession to the borrower that it would
not otherwise consider. Such restructuring of troubled debt may include a
modification of loan terms and/or a transfer of assets (or equity interest) from
the borrower to the Company.
If a foreclosure action is instituted with respect to a particular loan
and the loan is not reinstated, paid in full or refinanced, the property is sold
at a foreclosure sale in which the Company may participate as a bidder. If the
Company is the successful bidder, the acquired property is classified as
foreclosed property until it is sold. Properties acquired in settlement of loans
are initially recorded at fair value less estimated costs to sell. Valuations
are periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a property
exceeds its fair market value less the estimated costs to sell. Costs incurred
in connection with ownership of the property, including interest on senior
indebtedness, are expensed to the extent not previously allowed for in
calculating fair value less estimated costs to sell. Costs relating to the
development or improvement of the property are capitalized to the extent these
costs increase fair value less estimated costs to sell. Sales of foreclosed
properties are recorded under the accrual method of accounting. Under this
method, a sale is not recognized unless the buyer has assumed the risks and
rewards of ownership, including an adequate cash down payment. Until the
contract qualifies as a sale, all collections are recorded as deposits.
19
The following table sets forth information regarding nonperforming
assets held by the Company at the dates indicated (dollars in thousands):
December 31,
--------------------------------------------------------------------
1998 1997 1996
---- ---- ----
% of % of % of
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Nonaccrual loans, net:
Single-family residential................ $ 697 .36% $1,203 .71% $2,513 1.70%
Construction............................. - - 133 .08 220 .15
Commercial............................... 328 .17 132 .08 22 .01
Consumer................................. 141 .07 88 .05 153 .10
------- --- ------ ---- ------ ----
Total nonaccrual loans................. 1,166 .60 1,556 .92 2,908 1.96
Accruing loans 90 days or more past due..... - - 21 .01 30 .02
Troubled debt restructurings................ 98 .05 209 .12 223 .15
------- --- ------ ---- ------ ----
Total nonperforming loans.............. 1,264 .65 1,786 1.05 3,161 2.13
Foreclosed properties, net.................. 571 .29 1,512 .89 2,054 1.39
------- --- ------ ---- ------ ----
Total nonperforming assets............. $1,835 .94% $3,298 1.94% $5,215 3.52%
===== === ===== ==== ===== ====
Nonperforming loans to total loans.......... .65% 1.05% 2.13%
Nonperforming assets to total assets........ .79 1.69 2.99
Allowance for loan losses to total loans.... .95 1.40 1.73
Allowance for loan losses to nonaccrual
loans.................................... 158.23 153.09 87.90
Allowance for loan losses to nonperforming
loans.................................... 145.97 133.37 80.86
1995 1994
---- ----
% of % of
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
Nonaccrual loans, net:
Single-family residential................ $ 2,959 1.09% $ 3,158 1.31%
Construction............................. 378 .14 1,253 .52
Commercial............................... 2,636 .97 2,306 .96
Consumer................................. 108 .04 57 .02
------- ---- ------- ----
Total nonaccrual loans................. 6,081 2.24 6,774 2.81
Accruing loans 90 days or more past due..... 177 .06 539 .22
Troubled debt restructurings................ 143 .05 1,049 .44
------- ---- ------- ----
Total nonperforming loans.............. 6,401 2.35 8,362 3.47
Foreclosed properties, net.................. 4,856 1.78 5,290 2.19
------- ---- ------- ----
Total nonperforming assets............. $11,257 4.13% $13,652 5.66%
====== ==== ====== ====
Nonperforming loans to total loans.......... 2.35% 3.47%
Nonperforming assets to total assets........ 3.32 4.61
Allowance for loan losses to total loans.... 1.93 1.42
Allowance for loan losses to nonaccrual
loans.................................... 86.35 50.62
Allowance for loan losses to nonperforming
loans.................................... 82.03 41.01
20
The decrease in nonperforming assets consisted of a $522,000 decline in
nonperforming loans and a $941,000 decline in foreclosed properties. The
decrease in nonaccrual loans was attributable to the improvement in asset
quality evidenced by the decline in delinquencies from $940,000 at December 31,
1997 to $708,000 at December 31, 1998. Gross interest income that would have
been recorded during the years ended December 31, 1998, 1997, and 1996 if the
Company's nonaccrual loans at the end of such periods had been performing in
accordance with their terms during such periods was $115,000, $171,000 and
$291,000, respectively.
The Company's decrease in foreclosed properties reflected the impact of
the continuing decline in nonperforming and delinquent loans during 1998 and the
sale of 12 of the 13 properties held at December 31, 1997.
For additional information about the Company's nonperforming assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Nonperforming Assets" on pages 7 and 8 and
Notes 8 and 9 of the Notes to Consolidated Financial Statements on pages 38
through 40 of the 1998 Annual Report to Stockholders, which is attached hereto
as Exhibit 13 and incorporated herein by reference.
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified as loss, the insured institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge-off such amount. General
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's risk-based capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners may disagree with
an insured institution's classifications and amounts reserved.
In addition to the nonperforming assets discussed above, at December
31, 1998, the Company had classified for regulatory and internal purposes an
additional $2.0 million of assets, $1.5 million of which were classified
substandard, $152,000 of which were classified doubtful and $336,000 of which
were classified loss.
Allowance for Losses on Loans and Foreclosed Properties. An allowance
for loan losses is maintained at a level that management considers adequate to
provide for potential losses based upon an evaluation of the inherent risks in
the loan portfolio. Management's determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past loss experience, current
economic conditions, volume, growth and composition of the portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses which
are charged against income. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be necessary
21
if economic conditions differ substantially from the assumptions used in making
the evaluations. For additional information, see Notes 8 and 9 of the Notes to
Consolidated Financial Statements on pages 38 through 40 of the 1998 Annual
Report to Stockholders, which is attached hereto as Exhibit 13 and incorporated
herein by reference.
The following table sets forth information concerning the activity in
the Company's allowance for loan losses during the years indicated:
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Loans, net of unearned fees and discounts:
Year-end.................................. $194,513 $169,823 $148,107 $271,883 $240,821
Average outstanding during period......... 172,760 156,217 216,803 251,108 218,806
Allowance for loan losses:
Balance, beginning of year................ $2,382 $2,556 $5,251 $3,429 $3,039
Allowance transferred in connection
with the Home Acquisition............. - - - 500 -
Provision for loan losses................. 13 113 1,411 2,477 1,604
------- ------ ----- ----- -----
2,395 2,669 6,662 6,406 4,643
Charge-offs, net of recoveries (1):
Commercial (2)........................ 40 (366) 2,892 644 -
Real estate - mortgage................ 288 535 894 494 1,255
Real estate - land.................... 133 - - - -
Consumer ............................. 89 118 320 17 (41)
------- ------ ----- ----- -----
Total (2)........................ 550 287 4,106 1,155 1,214
------- ------ ----- ----- -----
Balance, end of year...................... $1,845 $2,382 $2,556 $5,251 $3,429
===== ===== ===== ===== =====
Ratio of net charge-offs to average
outstanding loans (2)........................ .32% .18% 1.89% .46% .55%
Allowance for loan losses to year-end
total nonperforming loans.................... 145.97% 133.37% 80.86% 82.03% 41.01%
Allowance for loan losses to year-end
loans, net of unearned fees and discounts.... .95% 1.40% 1.73% 1.93% 1.42%
(1) Except as noted in (2) below, recoveries of prior loan
charge-offs were not significant for the periods presented.
(2) Charge-offs during 1997 include a $329,000 recovery on a loan
guarantee associated with the Richmond Apartments loan and a
$39,000 recovery associated with claims against the estate of a
deceased borrower. Excluding the impact of these recoveries, the
ratio of net charge-offs to average outstanding loans for 1997
was .42%. Charge-offs during 1996 include the $2.8 million
write-off of the Richmond Apartments loan. Excluding the impact
of this charge-off, the ratio of net charge-offs to average
outstanding loans for 1996 was .59%.
The following table sets forth information concerning the allocation of
the Company's allowance for loan losses by loan categories at the dates
indicated.
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars in thousands)
Residential mortgage $ 855 92.5% $1,139 91.7% $1,636 89.9% $2,607 92.5% 2,068 91.9%
Commercial (1) 560 4.1 545 4.6 505 5.6 1,530 4.7 861 5.6
Consumer 285 3.4 254 3.7 299 4.5 323 2.8 467 2.5
Unallocated 145 - 444 - 116 - 791 - 33 -
------ ---- ------ ----- ------ ----- ------ ----- ----- -----
$1,845 100.0% $2,382 100.0% $2,556 100.0% $5,251 100.0% $3,429 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
(1) Includes commercial real estate and commercial business loans.
22
The Company also maintains an allowance for losses on foreclosed
properties. The following table sets forth information concerning the activity
in the Company's allowance for losses on foreclosed properties during the
periods indicated:
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Balance at beginning of year..................... $ 155 $ 179 $199
Provision for losses on
foreclosed properties.......................... 126 159 (21)
---- ---- ----
281 338 178
Charge-offs, net of recoveries................... (167) (183) 1
---- ---- -----
Balance at end of year........................... $ 114 $ 155 $179
==== ==== ===
Investment Activities
Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government agencies
and government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include Freddie Mac,
Fannie Mae and Ginnie Mae.
Freddie Mac is a public corporation chartered by the U.S. Government
and owned by the 12 Federal Home Loan Banks and federally-insured member
institutions of the Federal Home Loan Bank system. Freddie Mac issues
participation certificates backed principally by conventional mortgage loans.
Freddie Mac guarantees the timely payment of interest and the ultimate return of
principal. Fannie Mae is a private corporation chartered by the U.S. Congress
with a mandate to establish a secondary market for conventional mortgage loans.
Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae
securities. Freddie Mac and Fannie Mae securities are not backed by the full
faith and credit of the United States, but because Freddie Mac and Fannie Mae
are quasi-Government and U.S. Government-sponsored enterprises, respectively,
these securities are considered to be among the highest quality investments with
minimal credit risks. Ginnie Mae is a government agency within the Department of
Housing and Urban Development which is intended to help finance
government-assisted housing programs. Ginnie Mae securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on Ginnie Mae securities are guaranteed by Ginnie Mae and backed by the
full faith and credit of the U.S. Government. Because Freddie Mac, Fannie Mae
and Ginnie Mae were established to provide support for low- and middle-income
housing, there are limits to the maximum size of loans that qualify for these
programs. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of independent companies have
established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
23
The Company's mortgage-backed securities include collateralized
mortgage obligations ("CMOs"), which include securities issued by entities which
have qualified under the Internal Revenue Code (the "Code") as Real Estate
Mortgage Investment Conduits ("REMICs"). CMOs and REMICs (collectively, CMOs)
have been developed in response to investor concerns regarding the uncertainty
of cash flows associated with the prepayment option of the underlying mortgagor
and are typically issued by government agencies, government sponsored
enterprises and special purpose entities, such as trusts, corporations or
partnerships, established by financial institutions or other similar
institutions. A CMO can be collateralized by loans or securities which are
insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. In contrast to
pass-through mortgage-backed securities, in which cash flow is received pro rata
by all security holders, the cash flow from the mortgages underlying a CMO is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash flows
from the underlying collateral among the separate CMO classes, different classes
of bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company.
The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated:
At or For the Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Balance at beginning of year............ $1,905 $1,905 $15,650
Sales................................... - - (9,915) (1)
Repayments.............................. (448) - (3,668) (2)
Amortization............................ (1) - (8)
Valuation adjustments................... - - (154)
-------- -------- -------
Balance at end of year.................. $1,456 $1,905 $ 1,905
===== ===== ======
Weighted average coupon at end
of year.............................. 5.90% 6.65% 6.40%
==== ==== ====
(1) Represents sale of mortgage-backed securities in connection with
the sale of branches during 1996.
(2) Includes the termination and reclassification of a Company-issued
second mortgage REMIC totaling $2.7 million from mortgage-backed
securities to loans.
The Company's investment in mortgage-backed securities at December 31,
1998 consists solely of a $1.5 million Fannie Mae guaranteed adjustable rate
REMIC. The Company's mortgage-backed securities are carried in accordance with
generally accepted accounting principles. See Note 7 of the Notes to
Consolidated Financial Statements on page 38 of the 1998 Annual Report to
Stockholders, which is attached hereto as Exhibit 13 and incorporated herein by
reference.
Investment Securities. Federally-chartered savings institutions have
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various Federal agencies and of state and
municipal governments, certificates of deposit at federally-insured banks and
savings and loan associations, certain bankers' acceptances and Federal funds.
Subject to various restrictions, federally-chartered savings institutions may
also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments that
federally-chartered savings institutions are otherwise authorized to make
directly.
24
The Bank's investment securities portfolio is managed by the Treasurer
of the Bank in accordance with a comprehensive investment policy which addresses
strategies, types and levels of allowable investments and which is reviewed and
approved by the Board of Directors on an annual basis and by the Asset and
Liability Management Committee as circumstances warrant. The Bank currently
emphasizes lending activities in order to increase the weighted average yield on
the Bank's interest-earning assets. The Bank's investment securities are carried
in accordance with generally accepted accounting principles. See Note 6 of the
Notes to Consolidated Financial Statements on page 37 of the 1998 Annual Report
to Stockholders, which is attached hereto as Exhibit 13 and incorporated herein
by reference.
The following table sets forth certain information relating to the
Company's investment securities held for investment at the dates indicated:
December 31,
1998 1997 1996
----------------------- ----------------------- ------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
(dollars in thousands)
U.S. Government securities...... $ - $ - $ - $ - $1,003 $1,003
U.S. Government agency
securities (1)............... 2,750 2,704 2,299 2,217 5,000 4,887
FHLB stock...................... 1,549 1,549 1,431 1,431 2,540 2,540
----- ----- ----- ----- ----- -----
Total (2)................... $4,299 $4,253 $3,730 $3,648 $8,543 $8,430
===== ===== ===== ===== ===== =====
(1) The $2.8 million of U.S. Government agency securities held for
investment at December 31, 1998 consists of two notes issued by the
FHLB. A $2.0 million FHLB note adjusts semi-annually based on the
yield of three-year constant maturity treasury notes and matures in
the year 2000. A $750,000 fixed-rate FHLB note matures in the year
2002 provided the one-time call option is not exercised in October
1999.
(2) Does not include investment securities classified as available for
sale which consisted of an $18,000, $17,000 and $9,000 investment in a
money market mutual fund at December 31, 1998, 1997 and 1996,
respectively.
Information regarding the carrying values, contractual maturities and
weighted average yield of the Company's investment securities held for
investment (excluding FHLB stock) at December 31, 1998 is presented below. FHLB
stock is neither a debt nor an equity security because its ownership is
restricted and it lacks a market. FHLB stock can be sold at its par of $100 per
share only to the FHLBs or to another member institution.
One Year After One to After Five to Over 10
or Less Five Years 10 Years Years Total
------- ---------- -------- ----- -----
(dollars in thousands)
U.S. Government agency securities...... $750 $2,000 $ - $ - $2,750
=== ===== ====== ======= =====
Weighted average yield................. 5.03% 4.21% -% -% 4.43%
==== ====== ======= ======= =====
Sources of Funds
General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments, prepayments, advances from the
FHLB and other borrowings. Loan repayments are a relatively stable source of
funds, while deposits inflows and outflows are significantly influenced by
25
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes, including market risk management.
Deposits. Deposits obtained through bank branch offices of the Company
have traditionally been the principal source of the Company's funds for use in
lending and for other general business purposes. The Company's current deposit
products include regular passbook and statement savings accounts, negotiable
order of withdrawal ("NOW") accounts, money market accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from 90 days to
60 months, mini-jumbo (generally $25,000 - $99,999) and jumbo (generally equal
to or greater than $100,000) certificates of deposit and individual retirement
accounts.
The Bank's deposits are currently obtained primarily from residents in
its primary market area. The principal methods currently used by the Company to
attract deposit accounts include offering a wide variety of services and
accounts and competitive interest rates. The Company utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising. Currently, the Company does not advertise for retail deposits
outside of its local market area or utilize the services of deposit brokers.
Management estimates that as of December 31, 1998, deposit accounts totaling
$4.0 million or 2.1% of the Bank's total deposits were held by nonresidents of
Virginia or North Carolina. These out-of-market deposits include jumbo
certificates of deposits owned largely by financial institutions which totaled
$1.2 million at December 31, 1998, and represented a decline from the $1.9
million of such certificates at December 31, 1997. These jumbo certificates of
deposit were obtained through the posting of deposit rates on national
computerized bulletin boards at no cost to the Company and were not obtained
through deposit brokers.
The following table sets forth the average balances and rates of the
Company's deposits for the periods indicated:
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars in thousands)
Noninterest-bearing deposits... $ 9,504 -% $ 3,143 -% $ 1,433 -%
Passbook savings............... 4,225 3.49 3,839 3.48 6,782 3.33
NOW accounts................... 4,361 2.81 4,344 2.83 5,332 2.80
Money market accounts.......... 26,845 4.91 21,401 4.87 21,104 4.50
Certificates of deposit:
Consumer................... 51,747 5.68 53,256 5.78 92,771 5.83
Mini-jumbo................. 55,524 5.65 44,932 5.65 71,269 5.69
Jumbo...................... 14,481 5.73 13,206 5.78 19,670 5.86
-------- -------- --------
$166,687 $144,121 $218,361
======= ======= =======
26
The following table shows the interest rate and maturity information
for the Company's time deposits at December 31, 1998:
Maturity Date
--------------------------------------------------------------------------
One Year Over
or Less 1-2 Years 2-3 Years 3 Years Total
------- --------- --------- ------- -----
(dollars in thousands)
4.01% to 5.00%............. $12,728 $ 462 $ 58 $ - $ 13,248
5.01% to 6.00%............. 75,572 13,912 5,790 4,881 100,155
6.01% to 7.00%............. 5,573 6,347 628 4,854 17,402
7.01% to 8.00%............. 266 2,709 - - 2,975
8.01% to 9.00%............. - 6 - - 6
------- -------- ------- ------ --------
$94,139 $23,436 $6,476 $9,735 $133,786
====== ====== ===== ===== =======
The following table shows the Company's certificates of deposit of
$100,000 or more outstanding at the dates indicated:
December 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
3 months or less........................ $ 3,914 $ 4,624 $ 2,709
Over 3 through 6 months................. 5,002 4,785 3,505
Over 6 through 12 months................ 7,698 3,747 2,625
Over 12 months ......................... 6,072 5,365 5,919
------ ------ ------
Total.......................... $22,686 $18,521 $14,758
====== ====== ======
The ability of the Company to attract and maintain deposits and the
Company's cost of funds on these deposit accounts have been, and will continue
to be, significantly affected by economic and competitive conditions.
Borrowings. The Bank is a member of the FHLB System, which consists of
12 regional FHLBs subject to supervision and regulation by the Federal Housing
Finance Board. The FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Atlanta, is required to hold
shares of common stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and
mortgage-backed securities, 3/10 of 1% of total assets at the end of the
calendar year, or 5% of its advances (borrowings) from the FHLB, whichever is
greater. The Bank had a $1.5 million investment in stock of the FHLB at December
31, 1998, which was in compliance with this requirement. At December 31, 1998,
the Bank had $24.9 million of advances outstanding from the FHLB.
The following table presents certain information regarding the
Company's FHLB advances at the dates and for the periods indicated:
At or For the Year Ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Balance at end of period.................. $24,908 $23,547 $25,690
Weighted average interest rate
at end of period..................... 5.89% 5.75% 6.14%
Maximum amount outstanding
at any month's end................... $30,975 $28,118 $29,833
Average amount outstanding
during the period.................... $21,553 $24,885 $27,137
Weighted average interest rate
during the period.................... 5.71% 5.92% 5.99%
27
The outstanding FHLB advances at December 31, 1998 mature as follows
(in thousands):
1999.................................... $17,308
2000.................................... 7,600
-------
$24,908
The Company's notes payable amounted to $72,000 and $96,000 at December
31, 1997 and 1996, respectively. Notes payable on these dates consisted solely
of a note payable to the former president of an acquired savings institution and
its holding company. The note accrued interest at 9.50% per annum. Originally,
the note was due in five equal annual installments, plus accrued interest
thereon. However, in conjunction with a severance settlement with the former
employee, the Company repaid this note in its entirety in February 1998.
During 1989 and 1990, the Bank sold $3.3 million of subordinated
capital notes with a ten-year maturity. The notes were issued in minimum
denominations of $2,500 at interest rates ranging between 11.5% and 12.0%. In
July 1993, the Bank redeemed $2.8 million of the subordinated capital notes. The
Company's subordinated capital notes amounted to $628,000 at December 31, 1995.
In August 1996, the Bank redeemed the remaining subordinated capital notes at
par in their entirety
Other Liabilities. As of December 31, 1998 and 1997, other liabilities
of the Company included a $703,000 obligation to the Company's Chief Executive
Officer resulting from the exercise of his stock appreciation rights in November
1997. A determination has not yet been made as to the date and method of payment
to satisfy this obligation. See Note 19 of the Notes to Consolidated Financial
Statements on pages 46 and 47 of the 1998 Annual Report to Stockholders, which
is attached hereto as Exhibit 13 and incorporated herein by reference.
Year 2000 Readiness
For information about the Company's Year 2000 readiness and associated
costs, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000 Readiness" on pages 21 and 22 of the 1998
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.
Competition
The Company faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in Virginia and North Carolina, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, the Company has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of the Company to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Company experiences strong competition for real estate and other
loans principally from other savings institutions, commercial banks, mortgage
banking companies, insurance companies and other institutional lenders. The
Company competes for loans principally through the interest rates and loan fees
it charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
28
Employees
As of December 31, 1998, the Company employed 108 full-time employees
and 11 part-time employees.
Regulation of the Company
General. The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"). As such, the Company is subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to, the
restrictions applicable to, a bank holding company. See "- Regulation of the
Bank - Qualified Thrift Lender Test."
Limitations on Transactions with Affiliates. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions between a savings institution and its subsidiaries and an
affiliate. In addition to the restrictions imposed by Sections 23A and 23B, no
savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
29
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the institution and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
association to all insiders cannot exceed the association's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 1998, the Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
Regulation of the Bank
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
FIRREA imposed limitations on the aggregate amount of loans that a
savings association could make to any one borrower, including related entities.
See "- Lending Activities - General" for a discussion of such limitations.
The OTS's enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties. FIRREA requires,
except under certain circumstances, public disclosure of final enforcement
actions by the OTS.
Insurance of Accounts. The deposits of the Bank are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF
administered by the FDIC and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions. It also
30
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Under FDIC regulations, institutions are assigned to one of three
capital groups for insurance premium purposes - "well capitalized," "adequately
capitalized" and "undercapitalized" - which are defined in the same manner as
the regulations establishing the prompt corrective action system under Section
38 of the Federal Deposit Insurance Act ("FDIA"), as discussed under "-Prompt
Corrective Action" below. These three groups are then divided into subgroups
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Effective January 1,
1998, assessment rates for SAIF-insured institutions range (except as described
below) from 0 basis points of insured deposits for well-capitalized institutions
with minor supervisory concerns to 27 basis points of insured deposits for
undercapitalized institutions with substantial supervisory concerns. In
addition, an additional assessment approximating 6.1 basis points is added to
the regular SAIF-assessment until December 31, 1999 in order to cover Financing
Corporation ("FICO") debt service payments.
Both the SAIF and the Bank Insurance Fund ("BIF"), the deposit
insurance fund that covers most commercial bank deposits, are statutorily
required to be recapitalized to a ratio of 1.25% of insured reserve deposits.
The BIF previously achieved the required reserve ratio, and as a result, the
FDIC reduced the average deposit insurance premium paid by BIF-insured banks to
a level substantially below the average premium paid by savings institutions.
Banking legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. However, as a result of the Bank's financial condition, on
November 8, 1996, the Bank was notified by the FDIC that its application for
exemption had been approved. As a result, the Bank was exempt from paying the
special one-time assessment (which would have amounted to $1.8 million).
Instead, the Bank is continuing to pay future assessments through 1999 at the
assessment rate schedule in effect as of June 30, 1995. Therefore, as of
December 31, 1998, the Bank's annual assessment for deposit insurance was 26
basis points of insured deposits as opposed to three basis points of insured
deposits (the assessment rate otherwise charged to "well capitalized" savings
institutions such as the Bank).
Another component of the SAIF recapitalization plan provided for the
merger of the SAIF and the BIF on January 1, 1999, provided no insured
depository institution is a savings association on that date. The merger of the
SAIF and the BIF did not occur on such date as there continue to be savings
associations. Such a merger of the SAIF and the BIF may occur in the future if
legislation containing such a provision is enacted. If legislation is enacted
which required the Bank to convert to a bank charter, the Company would become a
bank holding company subject to the more restrictive activity limits imposed on
31
bank holding companies unless special grandfather provisions are included in the
legislation. The Company does not believe that its activities would be
materially affected in the event that it was required to become a bank holding
company.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings institution to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based
capital requirement of total capital (core capital plus supplementary capital)
equal to 8% of risk-weighted assets (which includes the credit risk equivalents
of certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS regulations,
all but the most highly-rated institutions must maintain a minimum leverage
ratio of 4% in order to be adequately capitalized. See " Prompt Corrective
Action.") A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
At December 31, 1998, the Bank's actual capital ratios and the minimum
requirements under FIRREA were as follows (dollars in thousands):
Minimum
Actual Requirement Excess
------ ----------- ------
Tangible capital $16,071 6.97% $3,459 1.5% $12,612
Core capital 16,071 6.97 6,917 3.0 9,154
Risk-based capital 17,364 13.09 10,609 8.0 6,755
For further information regarding the Bank's actual capital ratios and
minimum requirements under FDICIA, see Note 21 of the Notes to Consolidated
Financial Statements on pages 49 and 50 of the 1998 Annual Report to
Stockholders, which is attached hereto as Exhibit 13 and incorporated herein by
reference. At December 31, 1998, the Bank exceeded all of its capital
requirements under FDICIA.
The foregoing capital requirements are viewed as minimum standards by
the OTS, and most institutions are expected to maintain capital levels well
above the minimum. In addition, the OTS regulations provide that minimum capital
levels higher than those provided in the regulations may be established by the
OTS for individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (i) a
savings institution has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk, (ii) a savings institution is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations and (iii) a savings
institution may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings institutions with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
32
In March 1999, the federal banking agencies amended their risk-based
and leverage capital standards to make uniform their regulations. In particular,
the agencies made risk-based capital treatments for construction loans on
presold residential properties, real estate loans secured by junior liens on
1-to-4 family residential properties, and investments in mutual funds consistent
among the agencies, and simplified and made uniform the agencies' Tier 1
leverage capital standards. The most highly-rated institutions must maintain a
minimum Tier 1 leverage ratio of 3%, with all other institutions required to
maintain a minimum leverage ratio of 4%. The OTS regulations now state that
higher-than-minimum capital levels may be required if warranted, and that
institutions should maintain capital levels consistent with their risk
exposures.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar regulations to
implement Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0% and does not meet the definition of "critically undercapitalized," and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
December 31, 1998, the Bank was considered a "well capitalized" institution
under the prompt correction action provisions of FDIA.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets (including cash, certain time
deposits and savings accounts, bankers' acceptances, certain government
obligations and certain other investments) equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 4%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at December 31, 1998, had a liquidity ratio of
12.74%.
Qualified Thrift Lender Test. All savings associations are required to
meet a QTL test set forth in Section 10(m) of HOLA and regulations of the OTS
thereunder in order to avoid certain restrictions on their operations. A savings
association that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the association may not engage
in any new activity or make any new investment, directly or indirectly, unless
such activity or investment is permissible for a national bank, (ii) the
33
branching powers of the association shall be restricted to those of a national
bank, (iii) the association shall not be eligible to obtain any advances from
its FHLB and (iv) payment of dividends by the association shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Under applicable regulations, any savings institution is a QTL if (i)
it qualifies as a domestic building and loan association under Section
7701(a)(19) of the Code (which generally requires that at least 60% of the
institution's assets constitute housing-related and other qualifying assets) or
(ii) at least 65% of the institution's "portfolio assets" (as defined) consist
of certain housing and consumer-related assets on a monthly average basis in at
least nine out of every 12 months. At December 31, 1998, the Bank was in
compliance with the QTL test.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions.
In January 1999, the OTS amended its capital distribution regulation to
bring such regulations into greater conformity with the other bank regulatory
agencies. Under the regulation, certain savings associations would not be
required to file with the OTS. Specifically, savings associations that would be
well capitalized following a capital distribution would not be subject to any
requirement for notice or application unless the total amount of all capital
distributions, including any proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings association's net
income for that year to date plus the savings association's retained net income
for the preceding two years. Because the Bank is a subsidiary of the Company,
the regulation, however, would require the Bank to provide notice to the OTS of
its intent to make a capital distribution, unless an application is otherwise
required.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB in an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At December 31, 1998, the Bank had $1.5 million in FHLB stock,
which was in compliance with this requirement.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At December 31, 1998, the
Bank was in compliance with applicable requirements. However, because required
reserves must be maintained in the form of vault cash or a noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
Safety and Soundness. Effective August 9, 1995, the federal banking
regulatory agencies jointly implemented Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") for all insured depository
institutions relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, fees and benefits, and employment
contracts and other compensation arrangements of executive officers, employees,
directors and principal stockholders of insured depository institutions that
34
would prohibit compensation and benefits and arrangements that are excessive or
that could lead to a material financial loss for the institution. The federal
banking regulatory agencies also adopted asset quality and earnings standards
within the Guidelines, which became effective October 1, 1996. The Interagency
Guidelines Establishing Year 2000 Standards for Safety and Soundness ("Year 2000
Guidelines") were implemented in 1998 and set forth safety and soundness
standards to ensure that insured depository institutions will be able to
successfully continue business operating after January 1, 2000. If an insured
depository institution fails to meet any of its prescribed standards as
described above, it may be required to submit to the appropriate federal banking
agency a compliance plan specifying the steps that will be taken to cure the
deficiency and the time within which these steps will be taken. If an
institution fails to submit an acceptable plan or fails to implement the plan,
the appropriate federal banking agency will require the institution or holding
company to correct the deficiency and until corrected, may impose restrictions
on the institution or holding company, including any of the restrictions
applicable under the prompt corrective action provisions of FDICIA. At December
31, 1998, the Bank was in compliance with the Guidelines and the Year 2000
Guidelines.
Taxation
Federal Taxation. The Company and its subsidiaries are subject to those
rules of federal income taxation generally applicable to corporations under the
Code. The Company and its principal subsidiary, the Bank, as members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
file a consolidated federal income tax return, which has the effect of
eliminating or deferring the tax consequences of intercompany transactions and
distributions, including dividends, in the computation of consolidated taxable
income.
In addition to regular corporate income tax, corporations are subject
to an alternative minimum tax which generally is equal to 20% of alternative
minimum taxable income (taxable income, increased by certain tax preference
items and determined with adjustments to certain regular tax items). The
adjustments which are generally applicable include an amount equal to a
percentage of the amount by which a financial institution's adjusted current
earnings (generally alternative minimum taxable income computed without regard
to this adjustment and prior to reduction for alternative tax net operating
losses) exceeds its alternative minimum taxable income without regard to this
adjustment. Alternative minimum tax paid can be credited against regular tax due
in later years. See Note 14 of the Notes to Consolidated Financial Statements on
pages 43 and 44 of the 1998 Annual Report to Stockholders, which is attached
hereto as Exhibit 13 and incorporated herein by reference.
State Taxation. The Commonwealth of Virginia imposes a tax at the rate
of 6.0% on the combined "Virginia taxable income" of the Bank and its
subsidiaries and EMC. Virginia taxable income is equal to federal taxable income
with certain adjustments. Significant modifications include the subtraction from
federal taxable income of interest or dividends on obligations or securities of
the United States that are exempt from state income taxes, and a recomputation
of the bad debt reserve deduction on reduced modified taxable income.
Because consolidated or combined income tax returns are not allowed
under North Carolina law, the Bank and its subsidiaries that conduct business in
North Carolina are separately subject to an annual corporate income tax of 7.75%
of their federal taxable income as computed under the Code, subject to certain
prescribed adjustments. In addition to the state corporate income tax, the Bank
and its subsidiaries are subject to an annual state franchise tax, which is
imposed at a rate of .15% applied to the greater of the respective entity's (i)
capital stock, surplus, and undivided profits, (ii) investments in tangible
property in North Carolina or (iii) appraised valuation of property in North
Carolina.
35
Furthermore, the Company is separately subject to an annual state
franchise tax in Delaware.
Item 2. Properties
The following table sets forth information with respect to offices of
the Company and its subsidiaries as of December 31, 1998.
Lease Date Total Net Book
Owned/ Expiration Date Acquired/ Office Value at
Location Leased Including Options Leased Square Ft.(1) 12/31/98 (2)
- -------- ------ ----------------- ------ -------------- ----------
The Company
Executive Office:
The Koger Center Leased 01/31/02 10/96 7,328 $ 20,772
Building 9, Suite 200
Norfolk, VA 23502
The Bank
Main Office:
400 W. Ehringhaus Street Owned - 11/78 3,805 189,805
Elizabeth City, NC 27906
Branch Offices:
520 South Main Street Owned - 05/86 6,517 670,855
Emporia, VA 23847
1401 Gaskins Road Owned (3) - 09/98 6,782 663,374
Richmond, VA 23233
2825 Godwin Boulevard Owned (4) - 04/98 3,245 762,819
Suffolk, VA 23434
Essex First
The Koger Center Leased 01/31/02 10/96 5,554 -
Building 9, Suite 200
Norfolk, VA 23502
1401 Gaskins Road Leased (3), (5) - 09/98 3,078 -
Richmond, VA 23233
2430 Southland Drive, 3rd Floor Leased 05/31/99 06/93 2,000 -
Chester, VA 23831
400 W. Ehringhaus Street Leased (5) - 07/94 750 -
Elizabeth City, NC 27906
Essex Home
2420 Virginia Beach Blvd. Leased 12/31/01 12/91 11,950 5,770
Virginia Beach, VA 23454
(1) Total office square feet excludes leased common area.
(2) Consists of the net book value of land and buildings if owned, or leasehold
improvements if leased.
(3) In September 1998, the Bank completed the purchase of this
previously-leased facility (since May 1995).
(4) The Bank's Suffolk, Virginia branch was relocated from a facility that had
been leased since September 1995 to a newly-constructed, Bank-owned branch
in April 1998.
(5) Leased from the Bank.
The Bank has acquired land with a carrying value of $146,516 at
December 31, 1998 for the construction of a new branch in Ashland, Virginia. The
Bank anticipates completion of construction in September 1999.
36
Item 3. Legal Proceedings
The Company and its subsidiaries are involved in routine legal
proceedings occurring in the ordinary course of business which in the aggregate
are believed by management to be immaterial to the financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company
through the solicitation of proxies, or otherwise, during the fourth quarter of
the year ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Common Stock is currently traded on the American Stock Exchange
("AMEX") under the symbol "ESX." The information contained on page 54 of the
1998 Annual Report to Stockholders, which is attached hereto as Exhibit 13,
under the caption "Stock Price Information," is incorporated herein by
reference. As a company listed on the AMEX, the Company is subject to the AMEX
rules regarding continued listing, and does not fully satisfy those continued
listing guidelines. Accordingly, there can be no assurance that the listing of
the Common Stock on the AMEX will be continued. In this regard, however, the
Company believes that its recently improved operating results will favorably
impact the AMEX's evaluation.
As of March 31, 1999, there were 1,060,642 shares of Common Stock
outstanding, which were held by approximately 2,000 persons. The number of
persons holding shares of Common Stock reflects an estimate of the number of
persons or entities holding their stock in nominee or "street" name through
various brokerage firms or other entities.
Dividends
Neither the Company nor its predecessor (the Partnership) has declared
any capital distributions since the fourth quarter of 1991. The Company does not
anticipate the payment of dividends on the Common Stock in the foreseeable
future.
The Company's ability to pay dividends on the Common Stock will depend
primarily on the receipt of dividends from the Bank. While the Company and the
Bank are not operating under any supervisory agreements, the Bank must seek a
letter of nonobjection from the OTS prior to making dividend payments to the
Company.
In connection with the Home Acquisition, the Company issued 2,250,000
shares of nonvoting perpetual preferred stock with an aggregate redemption and
liquidation value of $15.0 million in exchange for all of the outstanding stock
of Home Bancorp. The preferred stock is redeemable at the option of the Company.
The 2,125,000 shares of Series B preferred stock bear a cumulative annual
dividend rate of 9.5% (based on redemption value) and the 125,000 shares of
Series C preferred stock bear a cumulative annual dividend rate of 8.0% (based
on redemption value). The Series C preferred stock is senior to Series B
preferred stock with respect to the payment of dividends, and the holders of the
37
Series C preferred stock may, in their discretion, from time to time in whole or
in part, elect to convert such shares of Series C preferred stock into a like
amount of Series B preferred stock. At December 31, 1998, dividends and accrued
interest thereon in arrears on the Series B and Series C preferred stock were
$4,997,493 and $242,613, respectively.
Also in connection with the Home Acquisition, the stockholders of Home
Bancorp received warrants to purchase 7,949,000 shares of Common Stock at a
price of $0.9375 per share, which was the price of the Common Stock as of June
30, 1995. The warrants became exercisable beginning in September 1998 and will
expire in September 2005.
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1998,
which appears on page 4 of the 1998 Annual Report to Stockholders attached
hereto as Exhibit 13, is incorporated by reference in this Form 10-K Annual
Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information contained on pages 5 through 23 of the 1998 Annual
Report to Stockholders, which is attached hereto as Exhibit 13, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained on pages 16 through 19 of the 1998 Annual
Report to Stockholders, which is attached hereto as Exhibit 13, under the
caption "Market Risk Management" is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets of the Company as of December 31, 1998
and 1997 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998, along with the related notes to consolidated financial
statements and the report of PricewaterhouseCoopers LLP, independent
accountants, are incorporated herein by reference from pages 24 through 53 of
the Company's 1998 Annual Report to Stockholders, which is attached hereto as
Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
38
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors of the Company is included in the
Company's Proxy Statement for the Annual Meeting to be held on May 27, 1999
under the heading "Information with Respect to Continuing Directors," and the
information included therein is incorporated herein by reference.
Set forth below is information with respect to the executive officers
of the Company and its subsidiaries who do not serve as directors of the
Company.
Name Age Title
---- --- -----
Earl C. McPherson 45 President of Essex First and Executive
Vice President of Loan Production and
Secondary Marketing of the Bank
Roy H. Rechkemmer, Jr. 36 Senior Vice President of Finance and Treasurer
of the Company and the Bank
Mary-Jo Rawson 45 Vice President and Chief Accounting
Officer of the Company and the Bank
Earl C. McPherson. Mr. McPherson presently serves as President of Essex
First and as Executive Vice President of Loan Production and Secondary Marketing
of the Bank. Mr. McPherson served as director, President and Chief Executive
Officer of Essex First Mortgage Corporation until its merger with the Bank on
December 31, 1998. Mr. McPherson served as President of Essex Industrial Loan
Association/Virginia Beach from January 1992 through May 1992. From January 1990
through December 1991, Mr. McPherson served as President of Mortgage Centers,
Inc. ("MCI"). Prior to his employment with MCI, Mr. McPherson served as
Divisional, Regional, and Training Director for Security Pacific Financial
Services, Inc. Mr. McPherson has a Bachelor of Arts from the University of
Richmond. Mr. McPherson also attended the American Financial Services
Association Management program at the University of North Carolina at Chapel
Hill.
Roy H. Rechkemmer, Jr. Mr. Rechkemmer presently serves as Senior Vice
President of Finance and Treasurer of the Company and the Bank. Mr. Rechkemmer
also serves as chairman of the Bank's Asset and Liability Management Committee,
manager of the Bank's investment portfolio and administrator of the Bank's
branches. Mr. Rechkemmer received a Bachelor of Science Degree in Finance from
the University of Wisconsin-La Crosse in 1985 and is a Chartered Financial
Analyst. He has been employed by the Bank and subsidiaries since 1987.
Mary-Jo Rawson. Ms. Rawson presently serves as Vice President and Chief
Accounting Officer of the Company and the Bank. Prior to her employment with the
Company, Ms. Rawson served in various accounting officer positions at
NationsBank Corporation and its predecessor institution C&S/Sovran. Ms. Rawson's
primary responsibilities emphasized regulatory reporting and accounting policies
and procedures. At the time of her departure from NationsBank in 1992, Ms.
Rawson was a Senior Vice President and the controller of the Bankcard Division.
Ms. Rawson received a Bachelor of Science Degree in Business Administration from
Old Dominion University in 1976.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act is included in the Company's Proxy Statement for the Annual Meeting
39
to be held on May 27, 1999 under the heading "Compliance with Section 16(a) of
the Exchange Act," and the information included therein is incorporated herein
by reference.
Item 11. Executive Compensation
Information regarding compensation of executive officers and directors
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting to be held on May 27, 1999 under the headings "Directors Fees"
and "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is included in the Company's Proxy Statement for the Annual
Meeting to be held on May 27, 1999 under the headings "Securities Ownership of
Certain Beneficial Owners" and "Information with Respect to Continuing
Directors," and the information included therein is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
included in the Company's Proxy Statement for the Annual Meeting to be held on
May 27, 1999 under the heading "Transactions with Certain Related Persons," and
the information included therein is incorporated herein by reference.
40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Page in
Annual
Report*
-------
The following documents are filed as part of this report:
Report of Independent Accountants ............................... 24
Consolidated Balance Sheets at December 31, 1998
and 1997......................................................... 25
Consolidated Statements of Operations for the three
years ended December 31, 1998.................................... 27
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1998.......................... 29
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998.................................... 30
Notes to Consolidated Financial Statements.......................... 33
*Incorporated by reference from the indicated pages of the
1998 Annual Report to Stockholders.
The financial statements, together with the report
thereon of PricewaterhouseCoopers LLP dated February
19, 1999, appearing on pages 24 through 53 of the
accompanying 1998 Annual Report to Stockholders are
incorporated by reference in this Form 10-K Annual
Report. With the exception of the aforementioned
information and the information incorporated in Items
1, 6, 7, 7A and 8, the 1998 Annual Report to
Stockholders is not to be deemed filed as part of
this Form 10-K Annual Report.
2. Financial Statement Schedules:
All schedules are omitted because they are not required or
are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
41
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
3. Exhibits:
The following exhibits are either filed as part of this Part
IV or are incorporated herein by reference:
Exhibit No. Description
----------- -----------
3.1* Certificate of Incorporation of Essex Bancorp, Inc., dated
June 21, 1994. Filed as Exhibit 3.1 to the Registrant's Form
S-4 Registration Statement under the Securities Act of 1933
as filed on August 15, 1994.
3.2* Certificate of Amendment of Essex Bancorp, Inc., dated
August 10, 1994. Filed as Exhibit 3.2 to the Registrant's
Form S-4 Registration Statement under the Securities Act of
1933 as filed on August 15, 1994.
3.3 Certificate of Amendment to the Certificate of Incorporation
of Essex Bancorp, Inc., dated November 5, 1998. Filed as an
exhibit to this report.
3.4* Bylaws of Essex Bancorp, Inc., effective July 25, 1994.
Filed as Exhibit 3.3 to the Registrant's Form S-4
Registration Statement under the Securities Act of 1933 as
filed on August 15, 1994.
4.1* Certificate of Designation of the Series A Preferred Stock
of Essex Bancorp, Inc. Filed as Exhibit 4.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
4.2* Certificate of Designations of Cumulative Perpetual
Preferred Stock, Series B of Essex Bancorp, Inc. Filed as
Exhibit 4.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
4.3* Certificate of Designations of Cumulative Perpetual
Preferred Stock, Series C of Essex Bancorp, Inc. Filed as
Exhibit 4.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
4.4* Form of Common Stock Purchase Warrant Certificate. Filed as
Exhibit 4.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
4.5* Specimen Common Stock Certificate of Essex Bancorp, Inc.
Filed as Exhibit 4.1 to the Registrant's Pre-Effective
Amendment No. 1 to Form S-4 Registration Statement under the
Securities Act of 1933, as filed on October 12, 1994.
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
42
4.6* Specimen Series B 9.5% Cumulative Preferred Stock
Certificate of Essex Bancorp, Inc. Filed as Exhibit 4.6 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
4.7* Specimen Series C 8% Cumulative Preferred Stock Certificate
of Essex Bancorp, Inc. Filed as Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.1* Essex Savings Bank, F.S.B. Supplemental Executive Retirement
Plan dated August 26, 1993. Filed as exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.2* First Amendment to the Essex Savings Bank, F.S.B.
Supplemental Executive Retirement Plan dated June 5, 1997.
Filed as exhibit 10.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.3* Second Amendment to the Essex Savings Bank, F.S.B.
Supplemental Executive Retirement Plan dated November 1,
1997. Filed as exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10.4 Third Amendment to the Essex Savings Bank, F.S.B.
Supplemental Executive Retirement Plan dated December 1,
1998. Filed as an exhibit to this report.
10.5* Fannie Mae/Freddie Mac/Private Investor Mortgage Servicing
Purchase and Sale Agreement by and between Essex Mortgage
Corporation and Chase Home Mortgage Corporation dated June
8, 1993. Filed as Exhibit 10.19 to Essex Financial Partners,
L.P.'s Annual Report on the Second Amended and Restated Form
10-K for the year ended December 31, 1992.
10.6* Essex Bancorp, Inc. Non-Employee Directors Stock Option
Plan. Filed as Exhibit 10.18 to the Registrant's Form 10-K
for the year ended December 31, 1994.
10.7* First Amendment to the Essex Bancorp, Inc. Non-Employee
Directors Stock Option Plan dated July 29, 1995. Filed as
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.8* Essex Bancorp, Inc. Stock Option Plan. Filed as Exhibit
10.19 to the Registrant's Form 10-K for the year ended
December 31, 1994.
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
43
10.9* First Amendment to the Essex Bancorp, Inc. Stock Option Plan
dated as of June 29, 1995. Filed as Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.10* Second Amendment to the Essex Bancorp, Inc. Stock Option
Plan dated as of May 23, 1996. Filed as Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.11* Essex Bancorp, Inc. Employee Stock Purchase Plan. Filed as
Exhibit 10.20 to the Registrant's Form 10-K for the year
ended December 31, 1994.
10.12* First Amendment to the Essex Bancorp, Inc. Employee Stock
Purchase Plan dated as of June 29, 1995. Filed as Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.13 Second Amendment to the Essex Bancorp, Inc. Employee Stock
Purchase Plan dated as of October 1, 1998. Filed as an
exhibit to this report.
10.14* Restated Employment Agreement dated as of January 1, 1998 by
and among Essex Bancorp, Inc., Essex Savings Bank, F.S.B.,
Essex Mortgage Corporation and Gene D. Ross. Filed as
exhibit 10.12 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.15 First Amendment to the Restated Executive Services Agreement
dated as of January 1, 1998 by and among Essex Bancorp,
Inc., Essex Savings Bank, F.S.B., Essex Mortgage Corporation
and Gene D. Ross. Filed as an exhibit to this report.
10.16 Change in Control Agreement dated as of January 1, 1998 by
and among Essex Bancorp, Inc. and Gene D. Ross. Filed as an
exhibit to this report.
10.17* Restated Executive Services Agreement dated as of January 1,
1998 by and among Essex Savings Bank, F.S.B., Essex First
Mortgage Corporation and Earl C. McPherson. Filed as exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
44
10.18 First Amendment to the Restated Executive Services Agreement
dated as of January 1, 1998 by and among Essex Savings Bank,
F.S.B., Essex First Mortgage Corporation and Earl C.
McPherson. Filed as an exhibit to this report.
10.19 Second Amendment to the Restated Executive Services
Agreement dated as of January 1, 1999 by and among Essex
Savings Bank, F.S.B., Essex First Mortgage Corporation and
Earl C. McPherson. Filed as an exhibit to this report.
10.20 Change in Control Agreement dated as of January 1, 1998 by
and among Essex Bancorp, Inc. and Earl C. McPherson. Filed
as an exhibit to this report.
10.21 First Amendment to Change in Control Agreement dated as of
January 1, 1999 by and among Essex Bancorp, Inc. and Earl C.
McPherson. Filed as an exhibit to this report.
10.22 Subservicing Agreement between Essex Home Mortgage Servicing
Corporation and Continental Capital Corp. dated as of April
15, 1998. Filed as an exhibit to this report.
13 The 1998 Annual Report is attached as Exhibit 13. Portions
of the 1997 Annual Report are incorporated by reference into
this Form 10-K.
21 Subsidiaries of the Registrant. Filed as an exhibit to this
report.
27 Financial Data Schedule.
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
45
(b) Reports on Form 8-K Filed in the Fourth Quarter of 1998
Not applicable.
(c) Exhibits
See Exhibit Index contained herein.
(d) Financial Statements Excluded from Annual Report to
Shareholders Pursuant to Rule 14a3(b)
Not applicable.
[intentionally blank]
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Gene D. Ross
-----------------------
Gene D. Ross
Chairman, President,
and Chief Executive
Officer
March 30, 1999
--------------
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Gene D. Ross March 30, 1999
------------------------- --------------
Gene D. Ross (Date)
Chairman, President, Chief
Executive Officer and
Principal Financial Officer
By: /s/ Mary-Jo Rawson March 30, 1999
------------------------- --------------
Mary-Jo Rawson (Date)
Chief Accounting Officer
By: /s/ Robert G. Hecht March 30, 1999
------------------------- --------------
Robert G. Hecht (Date)
Director
By: /s/ Roscoe D. Lacy, Jr. March 30, 1999
------------------------- --------------
Roscoe D. Lacy, Jr. (Date)
Director
By: /s/ Harry F. Radcliffe March 30, 1999
------------------------- --------------
Harry F. Radcliffe (Date)
Director
47
Exhibit Index
Exhibit No. Description
3.1* Certificate of Incorporation of Essex Bancorp, Inc., dated
June 21, 1994.
3.2* Certificate of Amendment of Essex Bancorp, Inc., dated
August 10, 1994.
3.3 Certificate of Amendment to the Certificate of Incorporation
of Essex Bancorp, Inc., dated November 5, 1998.
3.4* Bylaws of Essex Bancorp, Inc., effective July 25, 1994.
4.1* Certificate of Designation of the Series A Preferred Stock
of Essex Bancorp, Inc.
4.2* Certificate of Designations of Cumulative Perpetual
Preferred Stock, Series B of Essex Bancorp, Inc.
4.3* Certificate of Designations of Cumulative Perpetual
Preferred Stock, Series C of Essex Bancorp, Inc.
4.4* Form of Common Stock Purchase Warrant Certificate
4.5* Specimen Common Stock Certificate of Essex Bancorp, Inc.
4.6* Specimen Series B 9.5% Cumulative Preferred Stock
Certificate of Essex Bancorp, Inc.
4.7* Specimen Series C 8% Cumulative Preferred Stock Certificate
of Essex Bancorp, Inc.
10.1* Essex Savings Bank, F.S.B. Supplemental Executive Retirement
Plan.
10.2* First Amendment to the Savings Bank, F.S.B. Supplemental
Executive Retirement Plan.
10.3* Second Amendment to the Savings Bank, F.S.B. Supplemental
Executive Retirement Plan.
10.4 Third Amendment to the Essex Savings Bank, F.S.B.
Supplemental Executive Retirement Plan dated December 1,
1998.
- ----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated by reference.
10.5* Fannie Mae/Freddie Mac/Private Investor Mortgage Servicing
Purchase and Sale Agreement by and between Essex Mortgage
Corporation and Chase Home Mortgage Corporation dated June
8, 1993.
10.6* Essex Bancorp, Inc. Non-Employee Directors Stock Option
Plan.
10.7* First Amendment to the Essex Bancorp, Inc. Non-Employee
Directors Stock Option Plan dated July 29, 1995.
10.8* Essex Bancorp, Inc. Stock Option Plan.
10.9* First Amendment to the Essex Bancorp, Inc. Stock Option Plan
dated June 29, 1995.
10.10* Second Amendment to the Essex Bancorp, Inc. Stock Option
Plan dated May 23, 1996.
10.11* Essex Bancorp, Inc. Employee Stock Purchase Plan.
10.12* First Amendment to the Essex Bancorp, Inc. Employee Stock
Purchase Plan dated June 29, 1995.
10.13 Second Amendment to the Essex Bancorp, Inc. Employee Stock
Purchase Plan dated as of October 1, 1998.
10.14* Restated Employment Agreement dated January 1, 1998 by an
among Essex Bancorp, Inc., Essex Savings Bank, F.S.B., Essex
Mortgage Corporation and Gene D. Ross.
10.15 First Amendment to the Restated Executive Services Agreement
dated as of January 1, 1998 by and among Essex Bancorp,
Inc., Essex Savings Bank, F.S.B., Essex Mortgage Corporation
and Gene D. Ross.
10.16 Change in Control Agreement dated as of January 1, 1998 by
and among Essex Bancorp, Inc. and Gene D. Ross.
10.17* Restated Executive Services Agreement dated January 1, 1998
by and among Essex Savings Bank, F.S.B., Essex First
Mortgage Corporation and Earl C. McPherson.
- ----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated by reference.
10.18 First Amendment to the Restated Executive Services Agreement
dated as of January 1, 1998 by and among Essex Savings Bank,
F.S.B., Essex First Mortgage Corporation and Earl C.
McPherson.
10.19 Second Amendment to the Restated Executive Services
Agreement dated as of January 1, 1999 by and among Essex
Savings Bank, F.S.B., Essex First Mortgage Corporation and
Earl C. McPherson.
10.20 Change in Control Agreement dated as of January 1, 1998 by
and among Essex Bancorp, Inc. and Earl C. McPherson.
10.21 First Amendment to Change in Control Agreement dated as of
January 1, 1999 by and among Essex Bancorp, Inc. and Earl C.
McPherson.
10.22 Subservicing Agreement between Essex Home Mortgage Servicing
Corporation and Continental Capital Corp. dated as of April
15, 1998.
13 The 1998 Annual Report is attached as Exhibit 13. Portions
of the 1998 Annual Report are incorporated by reference into
this Form 10-K.
21 Subsidiaries of the Registrant, as updated.
27 Financial Data Schedule.
- ----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated by reference.