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 June 30, 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.)
Interstate Corporate 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 .
Shares outstanding as of August 10, 1999: 1,060,642 shares of Common
Stock, par value $.01 per share.
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1999
Table of Contents
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended
June 30, 1999 and 1998 4
Consolidated Statement of Shareholders' Equity
(unaudited) for the six months ended
June 30, 1999 6
Consolidated Statements of Cash
Flows (unaudited) for the six months
ended June 30, 1999 and 1998 7
Notes to Consolidated Financial
Statements (unaudited) 9
Item 2.Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 19
Part II OTHER INFORMATION
Item 1.Legal Proceedings 20
Item 2.Changes in Securities 20
Item 3.Defaults Upon Senior Securities 20
Item 4.Submission of Matters to a Vote
of Security Holders 20
Item 5.Other Information 20
Item 6.Exhibits and Reports on Form 8-K 20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31,
1999 1998
---- ----
ASSETS
Cash............................................................... $ 6,686,427 $ 5,315,805
Interest-bearing deposits.......................................... 3,473,888 11,314,478
Federal funds sold and securities purchased under
agreements to resell............................................. 1,494,050 1,314,397
------------- -------------
Cash and cash equivalents..................................... 11,654,365 17,944,680
Federal Home Loan Bank stock....................................... 1,660,300 1,548,800
Securities available for sale - cost approximates market........... 18,839 18,406
Securities held for investment - market value of
$2,704,000 in 1999 and 1998...................................... 2,750,089 2,750,089
Mortgage-backed securities held for investment - market
value of $678,000 in 1999 and $1,454,000 in 1998................. 675,256 1,455,738
Loans, net of allowance for loan losses of $1,696,000
in 1999 and $1,845,000 in 1998................................... 217,095,304 192,667,763
Loans held for sale................................................ 2,835,381 4,486,271
Mortgage servicing rights.......................................... 1,267,309 831,197
Foreclosed properties, net......................................... 704,741 571,294
Accrued interest receivable........................................ 1,406,004 1,250,349
Excess of cost over net assets acquired............................ 66,662 97,692
Advances for taxes, insurance, and other........................... 1,292,020 1,572,225
Premises and equipment............................................. 3,213,255 3,183,577
Other assets....................................................... 3,236,787 2,661,487
------------- -------------
Total Assets.............................................. $247,876,312 $231,039,568
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing.............................................. $ 11,527,174 $ 16,791,063
Interest-bearing................................................. 187,101,056 170,841,193
----------- -----------
Total deposits................................................ 198,628,230 187,632,256
Federal Home Loan Bank advances.................................... 30,900,000 24,908,333
Capitalized lease obligations...................................... 231,597 268,123
Other liabilities.................................................. 2,145,266 2,395,768
------------- -------------
Total Liabilities......................................... 231,905,093 215,204,480
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................................................ (7,734,657) (7,870,790)
------------- -------------
Total Shareholders' Equity................................ 15,971,219 15,835,088
------------ ------------
Total Liabilities and Shareholders' Equity................ $247,876,312 $231,039,568
============= =============
See notes to consolidated financial statements.
3
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME
Loans, including fees.............................. $3,903,845 $3,620,691 $7,708,964 $7,108,256
Federal funds sold and securities purchased
under agreements to resell....................... 16,108 27,457 32,735 67,711
Investment securities, including
dividend income.................................. 62,713 54,753 121,968 108,886
Mortgage-backed securities......................... 12,245 31,487 30,092 62,975
Other.............................................. 97,829 59,923 201,619 134,334
----------- ----------- ---------- ----------
Total Interest Income..................... 4,092,740 3,794,311 8,095,378 7,482,162
INTEREST EXPENSE
Deposits .......................................... 2,337,387 2,052,737 4,599,396 4,052,669
Federal Home Loan Bank advances.................... 309,051 302,043 598,807 589,683
Notes payable...................................... - - - 792
Other.............................................. 11,125 14,214 23,075 29,119
----------- ----------- ---------- ----------
Total Interest Expense.................... 2,657,563 2,368,994 5,221,278 4,672,263
--------- --------- --------- ---------
Net Interest Income....................... 1,435,177 1,425,317 2,874,100 2,809,899
PROVISION FOR LOAN LOSSES.............................. - - - -
--------- --------- --------- ---------
Net Interest Income After
Provision for Loan Losses................. 1,435,177 1,425,317 2,874,100 2,809,899
NONINTEREST INCOME
Loan servicing fees................................ 394,274 286,939 758,616 562,597
Mortgage banking income, including
gain on sale of loans............................ 150,378 166,810 309,028 325,697
Other service charges and fees..................... 146,549 104,314 305,590 191,997
Other.............................................. 88,447 61,310 190,137 91,393
----------- ----------- ---------- -----------
Total Noninterest Income.................. 779,648 619,373 1,563,371 1,171,684
See notes to consolidated financial statements.
4
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
NONINTEREST EXPENSE
Salaries and employee benefits..................... 996,036 782,249 1,993,232 1,583,966
Net occupancy and equipment........................ 210,843 249,947 444,232 479,238
Deposit insurance premiums......................... 147,471 122,709 286,227 243,804
Amortization of intangible assets.................. 131,371 145,284 279,946 267,451
Service bureau..................................... 145,748 117,888 291,654 224,014
Professional fees.................................. 71,291 77,714 138,574 153,200
Foreclosed properties, net......................... (20,045) 33,942 4,432 80,313
Other.............................................. 421,251 377,379 884,835 714,143
---------- ---------- ---------- ----------
Total Noninterest Expense................. 2,103,966 1,907,112 4,323,132 3,746,129
---------- ---------- ---------- ----------
Income Before Income Taxes................ 110,859 137,578 114,339 235,454
PROVISION FOR (BENEFIT FROM)
income taxes....................................... 4,402 - (21,794) -
---------- ---------- ---------- ----------
Net Income................................ $ 106,457 $ 137,578 $ 136,133 $ 235,454
=========== =========== =========== ===========
Loss available to common
shareholders (Note 2)............................ $ (376,059) $ (303,711) $ (820,571) $ (638,796)
=========== =========== =========== ===========
Basic and diluted loss per
common share (Note 2)............................ $ (.35) $ (.29) $ (.77) $ (.60)
=========== =========== =========== ===========
See notes to consolidated financial statements.
5
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the six months ended June 30, 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.................. - - - - 136,133 136,133
------- ----------- -------- ---------- ----------- -----------
Balance at June 30, 1999.................. $10,606 $14,173,750 $833,750 $8,687,770 $(7,734,657) $15,971,219
======= =========== ======== ========== =========== ===========
See notes to consolidated financial statements.
6
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income........................................................... $ 136,133 $ 235,454
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provisions for:
Losses on loans, foreclosed properties and other.............. 14,361 63,339
Depreciation and amortization of premises
and equipment............................................. 171,279 191,888
Amortization (accretion) of:
Premiums and discounts on:
Loans..................................................... 160,491 48,339
Mortgage-backed securities held to maturity............... 1,395 243
Securities held to maturity............................... - (403)
Mortgage servicing rights..................................... 248,916 236,420
Excess of costs over equity in net assets
acquired.................................................. 31,030 31,031
Mortgage banking activities:
Net (increase) decrease in loans originated
for resale................................................ 1,926,427 (1,509,467)
Realized gains from sale of loans............................. (275,537) (284,589)
Realized (gains) and losses from sales of:
Premises and equipment........................................ - (525)
Foreclosed properties......................................... (16,901) (10,311)
Changes in operating assets and liabilities:
Accrued interest receivable................................... (155,655) (72,431)
Advances for taxes, insurance and other....................... 268,205 (457,006)
Other assets.................................................. (575,300) (1,127,949)
Other liabilities............................................. (250,502) (154,458)
----------- -----------
Net cash provided by (used in) operating activities.................. 1,684,342 (2,810,425)
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) (117,800)
Purchase of securities held for investment........................... - (11)
Purchase of securities available for sale............................ (433) (479)
Principal remittances on mortgage-backed securities.................. 779,087 -
Purchases of loans................................................... (20,832,056) (16,882,289)
Net (increase) decrease in net loans................................. (4,064,266) 3,446,663
Proceeds from sales of foreclosed properties......................... 198,017 697,271
Increase in foreclosed properties.................................... (8,634) (59,163)
Increase in mortgage servicing rights................................ (685,028) -
Purchases of premises and equipment.................................. (200,957) (760,729)
Proceeds from sales of premises and equipment........................ - 525
----------- -----------
Net cash used in investing activities................................ (24,925,770) (13,676,012)
See notes to consolidated financial statements.
7
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
FINANCING ACTIVITIES
Net increase in NOW, money market and savings deposits............... 1,816,149 10,368,149
Net increase in certificates of deposit.............................. 9,179,825 1,524,537
Proceeds from Federal Home Loan Bank advances........................ 27,000,000 34,500,000
Repayment of Federal Home Loan Bank advances......................... (21,008,333) (27,071,667)
Repayment of note payable............................................ - (72,102)
Payments on capital lease obligations................................ (36,526) (30,481)
Common stock issued under Employee Stock
Purchase Plan, net of fractional share pay-outs................... (2) 3,383
----------- -----------
Net cash used in financing activities................................ 16,951,113 19,221,819
----------- -----------
Increase (decrease) in cash and cash equivalents..................... (6,290,315) 2,735,382
Cash and cash equivalents at beginning of period..................... 17,944,680 11,032,883
----------- -----------
Cash and cash equivalents at end of period........................... $ 11,654,365 $ 13,768,265
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties......................... $ 308,290 $ 359,737
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................................... $ 5,221,652 $ 4,724,898
Income taxes..................................................... $ 3,000 $ -
See notes to consolidated financial statements.
8
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 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 and
six months ended June 30 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 106,457 $ 137,578 $ 136,133 $ 235,454
Preferred stock dividends (482,516) (441,289) (956,704) (874,250)
-------- -------- -------- --------
Net loss available to
common shareholders $(376,059) $(303,711) $(820,571) $(638,796)
======== ======== ======== ========
Weighted average common
shares outstanding 1,060,642 1,058,518 1,060,642 1,058,330
========= ========= ========= =========
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 and six months ended
June 30, 1999 and 1998 is presented on the same basis and for the same segments
as those presented in EBI's 1998 Annual Report.
9
Retail Mortgage
Community Mortgage Loan Corporate/
Banking Banking Servicing Eliminations Total
------- ------- --------- ------------ -----
(in thousands)
As of and for the three months
ended June 30, 1999:
Customer revenues $ 807 $ 831 $ 557 $ 19 $ 2,214
Affiliate revenues - 97 118 (215) -
Depreciation and
amortization 26 6 20 22 74
Pre-tax income (loss) (12) 479 101 (458) 110
Total assets 209,057 36,113 7,160 (4,454) 247,876
As of and for the three months
ended June 30, 1998:
Customer revenues $ 1,030 $ 620 $ 349 $ 45 $ 2,044
Affiliate revenues - 118 96 (214) -
Depreciation and
amortization 20 20 21 31 92
Pre-tax income (loss) 258 378 30 (529) 137
Total assets 188,238 22,989 7,351 (4,187) 214,391
As of and for the six months
ended June 30, 1999:
Customer revenues $ 1,802 $ 1,492 $1,099 $ 44 $ 4,437
Affiliate revenues - 239 237 (476) -
Depreciation and
amortization 53 28 39 51 171
Pre-tax income (loss) 188 825 151 (1,050) 114
Total assets 209,057 36,113 7,160 (4,454) 247,876
As of and for the six months
ended June 30, 1998:
Customer revenues $ 2,066 $ 1,209 $ 663 $ 43 $ 3,981
Affiliate revenues - 226 187 (413) -
Depreciation and
amortization 41 41 42 68 192
Pre-tax income (loss) 596 707 32 (1,100) 235
Total assets 188,238 22,989 7,351 (4,187) 214,391
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, 2000 (January 1, 2001 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets of Essex Bancorp, Inc. ("EBI") at June 30, 1999 were
$247.9 million as compared to $231.0 million at December 31, 1998, an increase
of approximately $16.8 million or 7.3%. The predominant factor contributing to
the increase in total assets was the growth in loans held for investment, the
comparative composition of which is presented below.
June 30, December 31,
1999 1998
---- ----
Real estate:
First mortgages $162,100 $151,890
Second mortgages 9,037 7,462
Construction and development 32,212 19,447
Commercial 5,017 6,470
Consumer 6,911 5,959
Commercial - other 1,993 1,601
Secured by deposits 482 621
-------- --------
217,752 193,450
Net premiums, deferred and unearned
loan fees and discounts 1,039 1,063
Allowance for loan losses (1,696) (1,845)
-------- --------
Net Loans $217,095 $192,668
======== ========
The increase in construction loans, second mortgages and consumer loans
was strategically designed to further enable EBI to reposition its balance sheet
in order to improve its net interest margin over the long-term partially through
higher-yielding and interest-rate-sensitive assets. The increase in loans
resulted primarily from $21.4 million of secondary market purchases of
residential first mortgage loans. EBI has been experiencing significant
accelerated prepayments in its first mortgage loan portfolio as a result of the
lower interest rate environment. The increase in net loans was funded through a
partial utilization of EBI's excess liquidity coupled with deposit growth and an
increase in borrowings from the Federal Home Loan Bank ("FHLB").
Deposits, the primary source of EBI's funds, totaled $198.6 million at
June 30, 1999 as compared to $187.6 million at December 31, 1998, an increase of
$11.0 million or 5.9%. 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 Mortgage Servicing Corporation ("Essex Home")
at Essex Savings Bank, F.S.B. (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 Six Months of 1999 Compared to First Six Months of 1998
EBI's net income for the six months ended June 30, 1999 totaled
$136,000, compared to net income of $235,000 for the six months ended June 30,
1998. The decline in EBI's earnings for the first six months of 1999 reflected
the impact of the lower interest rate environment, coupled with accelerated
11
prepayment activity, which has led to net interest margin compression. EBI's
comparative results also reflected increases in (i) loan servicing fees
resulting from a 70 percent increase since the second quarter of 1998 in the
size of Essex Home's nonaffiliate mortgage loan servicing portfolio, (ii) other
noninterest income resulting from service charges and fees on the higher
servicing volume at Essex Home and (iii) noninterest expenses associated with
the increase in EBI's loan origination and servicing volumes and deposit levels,
as well as the impact of technology enhancements on telecommunications expense.
Net Interest Income. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the six months ended June 30:
1999 1998
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $201,836 $7,709 7.64% $172,185 $7,108 8.26%
Investment securities.......... 4,379 122 5.57 3,748 109 5.81
Mortgage-backed
securities................. 1,074 30 5.60 1,905 63 6.61
Federal funds sold and
securities purchased under
agreements to resell......... 1,410 33 4.64 2,487 68 5.44
Other.......................... 8,616 201 4.68 4,928 134 5.45
-------- ------ -------- -------
Total interest-earning
assets (1)................ $217,315 8,095 7.45 $185,253 7,482 8.08
======== ========
Interest-bearing liabilities:
Deposits....................... $177,541 4,599 5.22 $150,607 4,052 5.43
FHLB advances.................. 21,964 599 5.50 20,903 590 5.69
Notes payable.................. - - - 17 1 9.32
Other.......................... 251 23 18.56 319 29 18.41
-------- ------ -------- ------
Total interest-bearing
liabilities............... $199,756 5,221 5.27 $171,846 4,672 5.48
======== ------ ======== ------
Net interest earnings............. $2,874 $2,810
====== ======
Net interest spread (1)........... 2.18% 2.60%
==== ====
Net yield on interest-earning
assets (1)..................... 2.65% 3.03%
==== ====
(1) Nonaccrual loans are included in the average balance of loans.
12
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From the First Six Months
of 1998 to the First Six Months of 1999 Due to
----------------------------------------------
Volume (1) Rate (1) Net
---------- -------- ---
(in thousands)
Interest income on:
Loans (2)................................ $1,160 $(559) $601
Investment securities.................... 18 (5) 13
Mortgage-backed securities............... (24) (9) (33)
Federal funds sold and
securities purchased under
agreements to resell.................. (26) (9) (35)
Other interest-earning assets............ 88 (21) 67
------- ----- -----
Total interest income (2)............. 1,216 (603) 613
Interest expense on:
Deposits................................. 674 (127) 547
FHLB advances............................ 26 (17) 9
Notes payable............................ (1) - (1)
Other interest-bearing liabilities....... (6) - (6)
------- ----- -----
Total interest expense................ 693 (144) 549
------- ----- -----
Net interest income................... $ 523 $(459) $ 64
======= ===== =====
(1) Changes attributable to the combined impact of volume and rate have
been allocated proportionately to changes due to volume and changes
due to rate.
(2) Interest income includes the amortization of premiums and the
accretion of net deferred loan fees.
Net interest income increased from $2.810 million for the first six
months of 1998 to $2.874 million for the first six months 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 because the lower
interest rate environment throughout the first six months of 1999 continued to
result in significant 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, like the present period, EBI can expect an increase in the
volume of refinancings to lower fixed-rate loans. EBI continues to emphasize
investment in adjustable-rate loan portfolios, but customer demand has shifted
to lower fixed-rate loans. Accordingly, within the residential loan product line
offered by the Bank, the percentage of balloon payment and adjustable-rate loans
with longer initial adjustment terms has increased. While EBI will continue to
emphasize the origination and secondary market purchase of residential first
mortgage loans, it is expanding its loan growth focus to construction and
consumer-type loans, which are generally higher-yielding and more
interest-rate-sensitive than residential loans.
Provision for Loan Losses. Changes in the allowance for loan losses for
the six months ended June 30 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............. (149) (318)
------ ------
Balance at end of period......................... $1,696 $2,064
====== ======
13
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At June 30,
1999, nonperforming assets as a percentage of total assets was .66% as compared
to .79% at December 31, 1998. In addition, nonperforming assets totaled $1.63
million at June 30, 1999 as compared to $1.84 million at December 31, 1998. Loan
loss reserve coverage, expressed as the ratio of the allowance for loan losses
to nonperforming loans, improved from 145.97% as of December 31, 1998 to 183.95%
as of June 30, 1999. Based on the favorable trends in nonperforming assets 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 six months of 1999.
Noninterest Income. Noninterest income for the first six months of 1999
totaled $1.6 million, a $392,000 or 33.4% increase over $1.2 million for the
first six months of 1998. This increase was primarily attributable to increases
of $196,000 in loan servicing fees, $114,000 in other service charges and fees
and $99,000 in other noninterest income resulting primarily from the increase in
Essex Home's nonaffiliate mortgage loan servicing portfolio from 9,400 loans
totaling $780.1 million as of June 30, 1998 to 13,800 loans totaling $1.3
billion as of June 30, 1999.
Noninterest Expense. Noninterest expense for the first six months of
1999 totaled $4.3 million, a $577,000 or 15.4% increase over $3.7 million for
the first six months of 1998. This increase was primarily attributable to
increases of (i) $409,000 in salaries and employee benefits because of the
increase in full-time-equivalent employees from 106 at June 30, 1998 to 117 at
June 30, 1999, the majority of which occurred at Essex Home in connection with
the growth in servicing volume, (ii) $68,000 in service bureau expense resulting
from the higher loan servicing volume and number of deposit accounts and (iii)
$171,000 in other noninterest expense, the significant components of which are
presented below.
Increase
1999 1998 (Decrease)
---- ---- ----------
Loan expense............................ $131,030 $ 73,390 $ 57,640
Telephone............................... 223,470 93,685 129,785
Postage and courier..................... 162,433 87,379 75,054
Stationery and supplies................. 71,221 58,053 13,168
Advertising and marketing............... 75,054 102,740 (27,686)
Corporate insurance..................... 41,116 49,208 (8,092)
Travel.................................. 28,350 34,449 (6,099)
Franchise and other taxes............... 59,308 39,793 19,515
Bank charges............................ 6,389 49,750 (43,361)
Year 2000 compliance.................... 6,656 20,016 (13,360)
Other................................... 79,808 105,680 (25,872)
-------- ------- --------
$884,835 $714,143 $170,692
======= ======= =======
The increase in noninterest expense was partially offset by a decrease
of $76,000 in foreclosed properties expense resulting from lower provisions for
losses in 1999.
Income Taxes. EBI recognized a $22,000 income tax benefit during the
first six months of 1999 resulting from a refund of previously-recognized income
taxes.
14
Second Quarter of 1999 Compared to Second Quarter of 1998
EBI's net income for the three months ended June 30, 1999 totaled
$106,000, compared to net income of $138,000 for the three months ended June 30,
1998. Factors contributing to the second quarter decline in 1999 parallel the
factors described in the six-month comparison.
Net Interest Income. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the three months ended June
30:
1999 1998
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $206,746 $3,904 7.55% $173,938 $3,621 8.33%
Investment securities.......... 4,429 62 5.66 3,748 55 5.84
Mortgage-backed
securities................. 887 12 5.52 1,905 31 6.61
Federal funds sold and
securities purchased under
agreements to resell......... 1,378 16 4.68 2,031 27 5.41
Other.......................... 8,306 98 4.71 4,366 60 5.49
-------- ------ -------- ------
Total interest-earning
assets (1)................ $221,746 4,092 7.38 $185,988 3,794 8.16
======== ========
Interest-bearing liabilities:
Deposits....................... $180,626 2,337 5.19 $152,287 2,053 5.41
FHLB advances.................. 22,762 309 5.45 21,288 302 5.69
Other.......................... 242 11 18.45 312 14 18.28
-------- ------ -------- ------
Total interest-bearing
liabilities............... $203,630 2,657 5.23 $173,887 2,369 5.46
======== ------ ======== ------
Net interest earnings............. $1,435 $1,425
====== ======
Net interest spread (1)........... 2.15% 2.70%
==== ====
Net yield on interest-earning
assets (1)..................... 2.59% 3.07%
==== ====
(1) Nonaccrual loans are included in the average balance of loans.
15
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From the Second Quarter of
1998 to the Second Quarter of 1999 Due to
-----------------------------------------
Volume (1) Rate (1) Net
---------- -------- ---
(in thousands)
Interest income on:
Loans (2)................................ $640 $(357) $283
Investment securities.................... 10 (3) 7
Mortgage-backed securities............... (15) (4) (19)
Federal funds sold and
securities purchased under
agreements to resell.................. (8) (3) (11)
Other interest-earning assets............ 48 (10) 38
---- ----- ----
Total interest income (2) 675 (377) 298
Interest expense on:
Deposits................................. 365 (81) 284
FHLB advances............................ 20 (13) 7
Other interest-bearing liabilities....... (3) - (3)
---- ----- ----
Total interest expense................ 382 (94) 288
---- ----- ----
Net interest income................... $293 $(283) $ 10
==== ===== =====
(1) Changes attributable to the combined impact of volume and rate have
been allocated proportionately to changes due to volume and changes
due to rate.
(2) Interest income includes the amortization of premiums and the
accretion of net deferred loan fees.
Net interest income increased from $1.425 million for the second
quarter of 1998 to $1.435 million for the second quarter of 1999, primarily as a
result of the increase in the ratio of average interest-earning assets to
average interest-bearing liabilities. However, there was a decline in the net
interest spread resulting from a 78 basis point decrease in yield on loans. This
decline reflected the impact of the continuing lower interest rate environment
in 1999 on the volume of refinancings to lower fixed rate loans.
Provision for Loan Losses. Changes in the allowance for loan losses for
the three months ended June 30 are as follows (in thousands):
1999 1998
---- ----
Balance at beginning of period................... $1,802 $2,322
Provision for loan losses........................ - -
------ ------
1,802 2,322
Loans charged-off, net of recoveries............. (106) (258)
------ ------
Balance at end of period......................... $1,696 $2,064
====== ======
As previously described, based on the improving trends in nonperforming
assets and the level of general loss reserves, management determined that a
provision for loan losses was not necessary during the second quarter of 1999 in
order to maintain the loan loss reserves at adequate levels to absorb losses.
Noninterest Income. Noninterest income for the second quarter of 1999
totaled $780,000 as compared to $619,000 for the second quarter of 1998. This
increase was primarily attributable to increases of $107,000 in loan servicing
fees, $42,000 in other service charges and fees and $27,000 in other noninterest
income resulting primarily from Essex Home's 70% increase in its nonaffiliate
mortgage loan servicing portfolio since the second quarter of 1998.
16
Noninterest Expense. Noninterest expense for the second quarter of 1999
totaled $2.1 million, a $197,000 or 10.3% increase over $1.9 million for the
second quarter of 1998. This increase was primarily attributable to increases of
(i) $214,000 in salaries and employee benefits because of the
previously-described increase in full-time-equivalent employees, in particular
at Essex Home in connection with the growth in servicing volume, (ii) $28,000 in
service bureau expense resulting from the higher loan servicing volume and
number of deposit accounts and (iii) $44,000 in other noninterest expense, the
significant components of which are presented below.
Increase
1999 1998 (Decrease)
---- ---- ----------
Loan expense............................ $ 61,657 $ 37,334 $ 24,323
Telephone............................... 108,215 49,259 58,956
Postage and courier..................... 57,032 45,688 11,344
Stationery and supplies................. 35,968 33,132 2,836
Advertising and marketing............... 42,424 59,541 (17,117)
Corporate insurance..................... 21,459 25,240 (3,781)
Travel.................................. 16,043 21,736 (5,693)
Franchise and other taxes............... 26,338 20,044 6,294
Bank charges............................ 3,471 30,468 (26,997)
Year 2000 compliance.................... 1,984 11,850 (9,866)
Other................................... 46,660 43,087 3,573
-------- -------- --------
$421,251 $377,379 $ 43,872
======== ======== ========
The increase in noninterest expense was partially offset by a decrease
of (i) $39,000 in occupancy and equipment expense resulting from lower
facilities rent because of the acquisition of the previously-leased retail
banking and mortgage loan production branch in Richmond, Virginia and (ii)
$54,000 in foreclosed properties expense resulting from lower provisions for
losses on foreclosed properties and favorable property valuation adjustments
based on independent appraisals.
Year 2000 Readiness
As previously reported, EBI 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 EBI, including
EBI'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;
17
o Implementation - integration of all corrected and validated items into the
production environment; and
o Post-Implementation - monitoring implementation results and responding to
situations that invalidate corrections as implemented.
EBI has completed all phases of its Year 2000 readiness plan through
the implementation phase for all mission-critical internal and external systems
and operations. Because EBI outsources substantially all of its data processing
for loans, deposits and loan servicing, a significant component of the Year 2000
plan entailed working with external vendors to test and certify their systems as
Year 2000 compliant. Concurrently with the readiness measures described above,
EBI has developed contingency plans intended to mitigate the possible disruption
in business operations that may result from the Year 2000 issue.
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 have
been developed and will be tested by September 30, 1999. Capitalized costs are
associated with technology changes that will enhance EBI's ability to provide
competitive services. During the first six months of 1999, EBI recognized $6,700
of expense associated with this project, which brings the total expense incurred
by EBI since beginning this project to $55,000. This amount does not include the
implicit costs associated with the reallocation of internal staff hours to the
Year 2000 project. Management believes EBI 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 EBI's mission
critical applications, cannot be fully known even though EBI monitors their Year
2000 readiness disclosures and solicits validation of their renovations. As a
result, EBI is unable to determine the impact that any system interruption would
have on its results of operations, financial position and cash flows. Such
impact could be material. Further, an inability of EBI's integral third party
suppliers and networks to reach substantial Year 2000 compliance could result in
interruption of telecommunications services, interruption or failure of EBI'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 EBI'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
June 30, 1999, had a liquidity ratio of 6.75%.
18
Regulatory Matters
Regulatory Capital. The Bank is required pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and OTS
regulations promulgated thereunder to satisfy three separate requirements of
specified capital as a percent of the appropriate asset base. At June 30, 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 June 30, 1999, the Bank was "well
capitalized" for PCA purposes.
The Bank's capital amounts and ratios as of June 30, 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) $17,479 11.95% $11,700 8.0% $14,624 =>10.0%
Tier I capital (to
risk-weighted assets) 16,410 11.22% 5,850 4.0% 8,775 =>6.0%
Tier I capital (to
total assets) 16,410 6.59% 9,961 4.0% 12,451 =>5.0%
Tangible capital (to
total assets) 16,410 6.59% 3,735 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.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 27, 1999, an annual meeting of stockholders of EBI was held for
the purpose of considering and voting upon the election of two directors for a
term of three years. At the meeting, (i) Mr. Robert G. Hecht was approved by a
vote of 935,260 EBI common shares voting in favor and 28,222 abstaining, and
(ii) Mr. Roscoe D. Lacy, Jr. was approved by a vote of 934,710 voting in favor
and 28,772 abstaining. No other business was conducted at the meeting.
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibits are filed as part of this Part
II:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Essex Bancorp, Inc.
August 10, 1999 By: /s/ Gene D. Ross
--------------- ------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
August 10, 1999 By: /s/ Mary-Jo Rawson
--------------- ------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
21