FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 1-10506
Essex Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1721085
(State of organization) (I.R.S. Employer
Identification No.)
The Koger Center
Building 9, Suite 200
Norfolk, Virginia 23502
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (757) 893-1300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1999
Table of Contents
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1999
and 1998 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the three months ended
March 31, 1999 7
Consolidated Statements of Cash
Flows (unaudited) for the three months
ended March 31, 1999 and 1998 8
Notes to Consolidated Financial
Statements (unaudited) 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
1999 1998
---- ----
ASSETS
Cash .................................................. $ 5,791,732 $ 5,315,805
Interest-bearing deposits.............................. 5,566,474 11,314,478
Federal funds sold and securities purchased under
agreements to resell................................. 1,706,407 1,314,397
------------- -------------
Cash and cash equivalents......................... 13,064,613 17,944,680
Federal Home Loan Bank stock........................... 1,660,300 1,548,800
Securities available for sale - cost approximates market 18,620 18,406
Securities held for investment - market value of
$2,709,000 in 1999 and $2,704,000 in 1998............ 2,750,089 2,750,089
Mortgage-backed securities held for investment - market
value of $1,045,000 in 1999 and $1,454,000 in 1998... 1,047,633 1,455,738
Loans, net of allowance for loan losses of $1,802,000
in 1999 and $1,845,000 in 1998....................... 195,223,507 192,667,763
Loans held for sale.................................... 4,002,011 4,486,271
Mortgage servicing rights.............................. 1,382,711 831,197
Foreclosed properties, net............................. 442,997 571,294
Accrued interest receivable............................ 1,242,327 1,250,349
Excess of cost over net assets acquired................ 82,177 97,692
Advances for taxes, insurance, and other............... 919,580 1,572,225
Premises and equipment................................. 3,158,996 3,183,577
Other assets........................................... 3,850,820 2,661,487
------------- -------------
Total Assets................................... $ 228,846,381 $ 231,039,568
============= =============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
1999 1998
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing............................... $ 13,953,394 $ 16,791,063
Interest-bearing.................................. 177,722,186 170,841,193
------------- -------------
Total deposits................................. 191,675,580 187,632,256
Federal Home Loan Bank advances........................ 18,550,000 24,908,333
Capitalized lease obligations.......................... 250,273 268,123
Other liabilities...................................... 2,505,766 2,395,768
------------- -------------
Total Liabilities.............................. 212,981,619 215,204,480
SHAREHOLDERS' EQUITY
Series B preferred stock, $6.67 stated value:
Authorized shares - 2,250,000
Issued and outstanding shares - 2,125,000............ 14,173,750 14,173,750
Series C preferred stock, $6.67 stated value:
Authorized shares - 125,000
Issued and outstanding shares - 125,000.............. 833,750 833,750
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 1,060,642............ 10,606 10,606
Capital in excess of par............................... 8,687,770 8,687,772
Accumulated deficit.................................... (7,841,114) (7,870,790)
------------- -------------
Total Shareholders' Equity..................... 15,864,762 15,835,088
------------- -------------
Total Liabilities and Shareholders' Equity..... $ 228,846,381 $ 231,039,568
============= =============
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
INTEREST INCOME
Loans, including fees.................................... $3,805,119 $3,487,565
Federal funds sold and securities purchased
under agreements to resell............................. 16,627 40,254
Investment securities, including dividend income......... 59,255 54,133
Mortgage-backed securities............................... 17,847 31,488
Other.................................................... 103,790 74,411
---------- -----------
Total Interest Income............................ 4,002,638 3,687,851
---------- -----------
INTEREST EXPENSE
Deposits................................................. 2,262,009 1,999,932
Federal Home Loan Bank advances.......................... 289,756 287,640
Other.................................................... 11,950 15,697
----------- -----------
Total Interest Expense........................... 2,563,715 2,303,269
----------- -----------
Net Interest Income.............................. 1,438,923 1,384,582
PROVISION FOR LOAN LOSSES................................... - -
----------- -----------
Net Interest Income After
Provision for Loan Losses........................ 1,438,923 1,384,582
NONINTEREST INCOME
Loan servicing fees...................................... 364,342 275,658
Mortgage banking income, including
gain on sale of loans.................................. 158,650 158,887
Other service charges and fees........................... 159,041 87,683
Other.................................................... 101,690 30,083
----------- -----------
Total Noninterest Income.......................... 783,723 552,311
----------- -----------
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
NONINTEREST EXPENSE
Salaries and employee benefits........................... 997,196 801,718
Net occupancy and equipment.............................. 233,389 229,291
Deposit insurance premiums............................... 138,756 121,095
Amortization of intangible assets........................ 148,575 122,167
Service bureau........................................... 145,906 106,126
Professional fees........................................ 67,283 75,485
Foreclosed properties, net............................... 24,477 46,371
Other.................................................... 463,584 336,764
----------- ----------
Total Noninterest Expense........................ 2,219,166 1,839,017
----------- ----------
Income Before Income Taxes....................... 3,480 97,876
BENEFIT FROM INCOME TAXES................................... (26,196) -
----------- ----------
Net Income....................................... $ 29,676 $ 97,876
=========== ==========
Loss available to common shareholders (Note 2)........... $ (444,512) $ (335,085)
=========== ==========
Basic and diluted loss per common share (Note 2)......... $ (.42) $ (.32)
=========== ==========
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Series B Series C
Common Preferred Preferred Additional
Stock, $.01 Stock, $6.67 Stock, $6.67 Paid-in Accumulated
Par Value Stated Value Stated Value Capital Deficit Total
--------- ------------ ------------ ------- ------- -----
Balance at January 1, 1999......... $10,606 $14,173,750 $833,750 $8,687,772 $(7,870,790) $15,835,088
Fractional share pay-outs under
the Employee Stock Purchase
Plan............................. - - - (2) - (2)
Comprehensive net income........... - - - - 29,676 29,676
------- ----------- -------- ---------- ---------- -----------
Balance at March 31, 1999.......... $10,606 $14,173,750 $833,750 $8,687,770 $(7,841,114) $15,864,762
======= =========== ======== ========== ========== ===========
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income............................................... $ 29,676 $ 97,876
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provisions for:
Losses on loans, foreclosed properties and other... 25,681 35,665
Depreciation and amortization of premises
and equipment................................... 97,457 100,459
Amortization (accretion) of:
Premiums and discounts on:
Loans........................................... 53,777 34,048
Mortgage-backed securities held to maturity..... 751 121
Securities held to maturity..................... - (200)
Mortgage servicing rights.......................... 133,059 106,652
Excess of costs over equity in net assets
acquired........................................ 15,515 15,516
Mortgage banking activities:
Net (increase) decrease in loans originated
for resale...................................... 625,670 (1,652,222)
Realized gains from sale of loans.................. (141,410) (142,217)
Realized (gains) and losses from sales of:
Premises and equipment............................. - (225)
Foreclosed properties.............................. (16,688) 1,155
Changes in operating assets and liabilities:
Accrued interest receivable........................ 8,022 38,336
Advances for taxes, insurance and other............ 646,645 (63,231)
Other assets....................................... (1,189,333) (395,762)
Other liabilities.................................. 109,998 (212,516)
----------- ----------
Net cash provided by (used in) operating activities...... 398,820 (2,036,545)
See notes to consolidated financial statements.
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank certificates of
deposit............................................... - (4,000,000)
Redemption of Federal Home Loan Bank certificates of
deposit............................................... - 4,000,000
Purchase of Federal Home Loan Bank stock................. (111,500) -
Purchase of securities held for investment............... - (5)
Purchase of securities available for sale................ (214) (238)
Principal remittances on mortgage-backed securities...... 407,354 -
Purchases of loans....................................... (5,592,191) (5,404,807)
Net decrease in net loans................................ 2,912,053 4,658,016
Proceeds from sales of foreclosed properties............. 197,116 299,597
Increase in foreclosed properties........................ (1,195) (20,570)
Increase in mortgage servicing rights.................... (684,573) -
Purchase of premises and equipment....................... (72,876) (386,335)
Proceeds from sales of premises and equipment............ - 225
----------- ----------
Net cash used in investing activities.................... (2,946,026) (854,117)
FINANCING ACTIVITIES
Net increase in NOW and savings deposits................. 1,312,120 1,674,835
Net increase (decrease) in certificates of deposit....... 2,731,204 (229,188)
Proceeds from Federal Home Loan Bank advances............ - 5,000,000
Repayment of Federal Home Loan Bank advances............. (6,358,333) (8,285,834)
Repayment of note payable................................ - (72,102)
Payments on capital lease obligations.................... (17,850) (14,896)
Common stock issued under Employee Stock
Purchase Plan, net of fractional share pay-outs....... (2) 1,550
----------- ----------
Net cash used in financing activities.................... (2,332,861) (1,925,635)
----------- ----------
Decrease in cash and cash equivalents.................... (4,880,067) (4,816,297)
Cash and cash equivalents at beginning of period......... 17,944,680 11,032,883
---------- ----------
Cash and cash equivalents at end of period............... $13,064,613 $ 6,216,586
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties............. $ 70,617 $ 287,375
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 2,555,305 $ 2,348,288
Income taxes.......................................... $ 3,000 $ -
See notes to consolidated financial statements.
9
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Essex Bancorp,
Inc. and subsidiaries ("EBI") have been prepared in accordance with generally
accepted accounting principles for condensed interim financial statements and,
therefore, do not include all information required by generally accepted
accounting principles for complete financial statements. The notes included
herein should be read in conjunction with the notes to EBI's financial
statements for the year ended December 31, 1998 included in the EBI 1998 Annual
Report.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments (including normal recurring entries) necessary for a
fair presentation of EBI's financial condition and interim results of
operations. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 - EARNINGS PER SHARE
EBI calculates its basic and diluted earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128 - Earnings Per Share.
Accordingly, the components of EBI's EPS calculations for the three months ended
March 31 are as follows:
1999 1998
---- ----
Net income $ 29,676 $ 97,876
Preferred stock dividends (474,188) (432,961)
-------- --------
Net loss available to common shareholders $(444,512) $(335,085)
======== ========
Weighted average common shares outstanding 1,060,642 1,058,144
========= =========
EBI's common stock equivalents are antidilutive with respect to loss available
to common shareholders for all periods presented; therefore, basic and diluted
EPS are the same.
NOTE 3 - SEGMENT INFORMATION
EBI adopted Statement of Financial Accounting Standards No. 131 - Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131") for the
year ended December 31, 1998. SFAS 131 requires companies to report information
about the revenues derived from the enterprise's segments, about the
geographical divisions in which the enterprise earns revenues and holds assets
and about major customers. SFAS 131 further requires the disclosure of interim
period information after the initial year of application. Accordingly, the
following segment information for EBI for the three months ended March 31, 1999
and 1998 is presented on the same basis and for the same segments as those
presented in EBI's 1998 Annual Report.
10
Retail Mortgage
Community Mortgage Loan Corporate/
Banking Banking Servicing Eliminations Total
------- ------- --------- ------------ -----
(in thousands)
1999 SEGMENT INFORMATION
Customer revenues $ 995 $ 661 $ 542 $ 25 $ 2,223
Affiliate revenues - 142 119 (261) -
Depreciation and amortization 27 22 19 29 97
Pre-tax income (loss) 200 346 50 (592) 4
Total assets 201,911 24,661 7,591 (5,317) 228,846
1998 SEGMENT INFORMATION
Customer revenues $ 1,036 $ 589 $ 314 $ (2) $ 1,937
Affiliate revenues - 108 91 (199) -
Depreciation and amortization 21 21 21 37 100
Pre-tax income (loss) 338 329 2 (571) 98
Total assets 169,656 21,353 6,710 (4,672) 193,047
Customer revenues consist of (i) net interest income, which represents the
difference between interest earned on loans and investments and interest paid on
deposits and other borrowings and (ii) noninterest income, which consists
primarily of mortgage loan servicing fees, mortgage banking income (primarily
gains on the sale of loans), and service charges and fees (primarily on deposits
and the loan servicing portfolio).
NOTE 4 - ACCOUNTING FOR DERIVATIVES
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 - Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
EBI). SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. EBI's management anticipates that,
due to its limited use of derivative instruments, the adoption of SFAS 133 will
not have a significant effect on EBI's results of operations or its financial
position.
[intentionally blank]
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Total assets of Essex Bancorp, Inc. ("EBI") at March 31, 1999 were
$228.8 million as compared to $231.0 million at December 31, 1998, a decrease of
approximately $2.2 million or .9%. The decline in total assets resulted from
fluctuations in noninterest-bearing escrow accounts maintained by Essex Home
Mortgage Servicing Corporation ("Essex Home") at Essex Savings Bank, F.S.B. (the
"Bank") and the use of available funds to reduce the level of higher-costing
Federal Home Loan Bank ("FHLB") advances. Notwithstanding the decline in total
assets, EBI recognized increases in (i) FHLB stock resulting from the impact of
loan growth on the Bank's minimum FHLB stock requirement, (ii) loans held for
investment resulting from the acquisition of an adjustable-rate mortgage loan
portfolio, (iii) mortgage servicing rights resulting from purchases by Essex
Home, and (iv) other assets resulting from fluctuations in servicing-related and
other miscellaneous accounts receivable.
Deposits, the primary source of EBI's funds, totaled $191.7 million at
March 31, 1999 as compared to $187.6 million at December 31, 1998, an increase
of $4.1 million or 2.2%. An increase in interest-bearing deposits, primarily in
money market accounts and certificates of deposit, was partially offset by a
decrease in noninterest-bearing deposits resulting from fluctuations in escrow
accounts maintained by Essex Home at the Bank. The increase in interest-bearing
deposits occurred primarily at EBI's Suffolk, Virginia retail banking branch,
which was relocated from a leased facility to a newly-constructed Bank-owned
branch in April 1998, and at EBI's Richmond, Virginia retail banking branch.
Results of Operations
FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER OF 1998
EBI's net income for the three months ended March 31, 1999 totaled
$30,000, compared to net income of $98,000 for the three months ended March 31,
1998. The earnings decline in the first quarter of 1999 was primarily
attributable to (i) the impact of the sustained lower interest rate environment
on EBI's net yield on interest earning assets, which declined from 3.00% for the
first quarter of 1998 to 2.70% for the first quarter of 1999, (ii) the impact of
accelerated mortgage loan prepayments on the carrying value of Bancorp's
mortgage servicing rights and purchased loan premiums, and (iii) a loss incurred
in connection with a branch robbery in the first quarter of 1999. In addition,
an increase in EBI's operating expenses associated with EBI's higher loan
origination and servicing volumes and deposit levels during the first quarter of
1999 offset the benefit of an increase in noninterest income.
12
NET INTEREST INCOME. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the three months ended March
31:
1999 1998
------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)................. $196,873 $3,805 7.73% $170,411 $3,488 8.19%
Investment securities..... 4,328 59 5.48 3,748 54 5.78
Mortgage-backed
securities............ 1,263 18 5.65 1,905 32 6.61
Federal funds sold and
securities purchased under
agreements to resell.... 1,442 17 4.61 2,949 40 5.46
Other..................... 8,929 104 4.65 5,497 74 5.41
--------- ------ -------- ------
Total interest-earning
assets (1)............ $212,835 4,003 7.52 $184,510 3,688 7.99
========= ------ ======== ------
Interest-bearing liabilities:
Deposits.................. $174,423 2,262 5.26 $148,908 2,000 5.45
FHLB advances............. 21,157 290 5.55 20,514 287 5.69
Other..................... 259 12 18.67 360 16 17.66
--------- ------ -------- ------
Total interest-bearing
liabilities........... $195,839 2,564 5.31 $169,782 2,303 5.50
========= ------ ======== ------
Net interest earnings....... $1,439 $1,385
====== ======
Net interest spread (1)..... 2.21% 2.49%
==== ====
Net interest margin (1)..... 2.70% 3.00%
==== ====
(1) Nonaccrual loans are included in the average balance of loans. Yield
calculation includes the accretion of net deferred loan fees.
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From First Quarter of 1998
to First Quarter of 1999 Due to
----------------------------------------------
Volume (1) Rate (1) Net
---------- -------- ---
(in thousands)
Interest income on:
Loans (2)......................... $519 $(202) $317
Investment securities............. 8 (3) 5
Mortgage-backed securities........ (10) (4) (14)
Federal funds sold and
securities purchased under
agreements to resell............ (5) (18) (23)
Other interest-earning assets..... (11) 41 30
--- ----- ----
Total interest income (2)....... 501 (186) 315
Interest expense on:
Deposits.......................... 334 (72) 262
FHLB advances..................... 9 (6) 3
Other interest-bearing liabilities (3) (1) (4)
--- ----- ------
Total interest expense.......... 340 (79) 261
--- ----- ---
Net interest income............. $161 $(107) $ 54
=== ==== ====
(1)Changes attributable to the combined impact of volume and rate have
been allocated proportionately to changes due to volume and changes
due to rate.
(2)Interest income includes the amortization of premiums and the
accretion of net deferred loan fees.
13
Net interest income increased from $1.385 million for the first quarter
of 1998 to $1.439 million for the first quarter of 1999, which reflected the
favorable impact of the increase in average loans during 1999. However, there
was a decline in the net interest spread resulting from the impact of the lower
interest rate environment continuing through the first quarter of 1999 on the
volume of refinancings to lower fixed rate loans. Typically, declining interest
rates favorably impact EBI's earnings due to the repricing of deposits with
shorter maturities as compared to interest-earning assets, predominantly loans,
which have either fixed interest rates or interest rates that adjust over longer
periods. However, in an extended period of lower interest rates, EBI can expect
an increase in the volume of refinancings to lower fixed-rate loans. While EBI
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. Therefore, in order to provide higher-yielding
asset growth, the Bank has committed to purchasing in April 1999 a participation
in builder construction loans aggregating approximately $11.7 million.
PROVISION FOR LOAN LOSSES. Changes in the allowance for loan losses for
the three months ended March 31 are as follows (in thousands):
1999 1998
---- ----
Balance at beginning of period......... $1,845 $2,382
Provision for loan losses.............. - -
-------- --------
1,845 2,382
Loans charged-off, net of recoveries... (43) (60)
------- -------
Balance at end of period............... $1,802 $2,322
===== =====
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At March 31,
1999, nonperforming assets as a percentage of total assets was .78% as compared
to .79% at December 31, 1998. In addition, nonperforming assets totaled $1.78
million at March 31, 1999 as compared to $1.84 million at December 31, 1998.
Based on the favorable trends in nonperforming assets and delinquent loans and
the coverage of the general loan loss reserves, management considered the loan
loss allowance sufficient to absorb losses and did not provide for additional
losses during the first quarter of 1999.
NONINTEREST INCOME. Noninterest income for the first quarter of 1999
totaled $784,000, a $232,000 or 41.9% increase over $552,000 for the first
quarter of 1998. This increase was primarily attributable to increases of
$89,000 in loan servicing fees, $71,000 in other service charges and fees and
$72,000 in other noninterest income resulting from Essex Home more than doubling
its mortgage loan servicing portfolio since the first quarter of 1998.
NONINTEREST EXPENSE. Noninterest expense for the first quarter of 1999
totaled $2.2 million, a $380,000 or 20.7% increase over $1.8 million for the
first quarter of 1998. This increase was primarily attributable to increases of
(i) $195,000 in salaries and employee benefits because of the increase in
full-time-equivalent employees from 100 at March 31, 1998 to 116 at March 31,
1999, the majority of which occurred at Essex Home in connection with the growth
in servicing volume, (ii) $26,000 in amortization of intangible assets resulting
from the purchase of additional mortgage servicing rights since the first
quarter of 1998 and the recognition of valuation adjustments to reduce the
carrying value of EBI's mortgage servicing rights to their approximate fair
value as of March 31, 1999, (iii) $40,000 in service bureau expense resulting
from the higher loan servicing volume and number of deposit accounts and (iv)
$127,000 in other noninterest expense, the significant components of which are
presented below.
14
Three Months Ended March 31, Increase
1999 1998 (Decrease)
---- ---- ----------
Loan expense.................... $ 69,371 $ 36,056 $ 33,315
Telephone....................... 115,255 44,426 70,829
Postage and courier............. 53,897 41,691 12,206
Stationery and supplies......... 35,254 24,921 10,333
Advertising and marketing....... 32,631 43,199 (10,568)
Corporate insurance............. 19,658 23,968 (4,310)
Travel.......................... 12,308 12,713 (405)
Licensing fees.................. 10,799 11,706 (907)
Franchise and other taxes....... 32,971 19,749 13,222
Other........................... 81,440 78,335 3,105
-------- -------- --------
$463,584 $336,764 $126,820
======== ======== ========
INCOME TAXES. EBI recognized a $26,000 income tax benefit during the
first quarter of 1999 resulting from a refund of previously-recognized income
taxes.
Year 2000 Readiness
As previously reported, the Company has established a company-wide task
force to assess and remediate business risks associated with the Year 2000. This
task force has developed and implemented a seven-phase Year 2000 plan consisting
of the following components:
o Awareness - communication of the Year 2000 issue throughout the Company,
including the Company's board of directors and senior management;
o Assessment - development of inventories and analysis and evaluation of
hardware, software, services, forms, agencies and business partnerships and
the assignment of rankings of business risk (the highest being
"mission-critical") associated with each;
o Planning - development of comprehensive strategies and timelines for
correcting non-compliant items, testing and documenting results,
implementing and migrating enhancements and monitoring implementation
results;
o Renovation - implementation of the required software and hardware changes,
systems and interface modifications and conversions to replacement systems;
o Validation - completion of formal unit, system and integration testing
and documentation of results;
o Implementation - integration of all corrected and validated items into the
production environment;
o Post-Implementation - monitoring implementation results and responding to
situations that invalidate corrections as implemented.
The Company has completed the awareness, assessment, planning and
renovation phases of its Year 2000 plan and is now proceeding with the
validation phase. Because the Company outsources substantially all of its data
processing for loans, deposits and loan servicing, a significant component of
the Year 2000 plan entails working with external vendors to test and certify
their systems as Year 2000 compliant. The Company has completed its validation
of mission-critical internal systems and operations and external systems and
operations will be completed by June 30, 1999. Concurrently with the readiness
measures described above, the Company is developing contingency plans intended
to mitigate the possible disruption in business operations that may result from
the Year 2000 issue.
15
The total cost of the Year 2000 project (including the capitalized cost
of new hardware and software approximating $280,000) is estimated to be $350,000
and is being funded through operating cash flows. This estimate does not include
any costs associated with the implementation of contingency plans, which are in
the process of being developed. Capitalized costs are associated with technology
changes that will enhance the Company's ability to provide competitive services.
During the first quarter of 1999, the Company recognized $4,700 of expense
associated with this project, which brings the total expense incurred by the
Company since beginning this project to $53,000. This amount does not include
the implicit costs associated with the reallocation of internal staff hours to
the Year 2000 project. Management believes the Company can incur Year 2000
project costs without adversely affecting future operating results. However,
because of the complexity of the issue and possible unidentified risks, actual
costs may vary from the estimate. Furthermore, the Year 2000 compliance status
of integral third party suppliers and networks, which could adversely impact the
Company's mission critical applications, cannot be fully known even though the
Company monitors their Year 2000 readiness disclosures and solicits validation
of their renovations. As a result, the Company is unable to determine the impact
that any system interruption would have on its results of operations, financial
position and cash flows. However, such impact could be material.
Inability to reach substantial Year 2000 compliance in the Company's
systems and integral third party systems could result in interruption of
telecommunications services, interruption or failure of the Company's ability to
service customers, failure of operating and other information systems and
failure of certain date-sensitive equipment. Such failures could result in loss
of revenue due to service interruption, delays in the Company's ability to
service its customers accurately and timely and increased expenses associated
with stabilization of operations following such failures or execution of
contingency plans.
Liquidity
The Office of Thrift Supervision ("OTS") has established minimum
liquidity requirements for savings associations. These regulations provide, in
part, that members of the FHLB system maintain daily average balances of liquid
assets equal to a certain percentage of net withdrawable deposits plus current
borrowings. Current regulations require a liquidity level of at least 4%. The
Bank has consistently exceeded such regulatory liquidity requirement and, at
March 31, 1999, had a liquidity ratio of 8.56%.
Regulatory Matters
REGULATORY CAPITAL. The Bank is required pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and OTS
regulations promulgated thereunder to satisfy three separate requirements of
specified capital as a percent of the appropriate asset base. At March 31, 1999,
the Bank was in compliance with the capital requirements established by FIRREA.
Section 38 of the Federal Deposit Insurance Act, as added by the FDIC
Improvement Act ("FDICIA"), requires each appropriate agency and the Federal
Deposit Insurance Corporation to, among other things, take prompt corrective
action ("PCA") to resolve the problems of insured depository institutions that
fall below certain capital ratios. Federal regulations under FDICIA classify
savings institutions based on four separate requirements of specified capital as
a percent of the appropriate asset base. As of March 31, 1999, the Bank was
"well capitalized" for PCA purposes.
16
The Bank's capital amounts and ratios as of March 31, 1999 are presented
below (in thousands):
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes PCA Provisions
------ ----------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to
risk-weighted assets) $17,182 12.78% $10,754 8.0% $13,442 =>10.0%
Tier I capital (to
risk-weighted assets) 16,061 11.95% 5,377 4.0% 8,065 =>6.0%
Tier I capital (to
total assets) 16,061 7.01% 9,166 4.0% 11,458 =>5.0%
Tangible capital (to
total assets) 16,061 7.01% 3,437 1.5% - -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk exposures that affect
the quantitative or qualitative disclosures presented as of December 31, 1998 in
the EBI 1998 Annual Report.
[intentionally blank]
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -- Not Applicable
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibits are filed as part of this Part
II:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Essex Bancorp, Inc.
May 11, 1999 By: /s/ Gene D. Ross
------------ ----------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
May 11, 1999 By: /s/ Mary-Jo Rawson
------------ ------------------
(Date) Mary-Jo Rawson
Chief Accounting
Officer
19