SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/95
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 0-16143
FIRST ESSEX BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2943217
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
71 Main Street, Andover, MA 01810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 475-4313
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
The number of shares outstanding of each of the registrant's classes of common
stock as of September 30, 1995:
Title of Class Shares Outstanding
Common Stock, $.10 par value 6,020,500
<PAGE>
FIRST ESSEX BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994 3
Consolidated Statements of Operations for the
three months ended September 30, 1995 and 1994 4
Consolidated Statements of Operations for the
nine months ended September 30, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1994
and the nine months ended September 30, 1995 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and 1994 7
Note to the Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
1995 1994
---------------- -----------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 23,852 $ 18,714
Mortgage-backed securities available-for-sale 35,119 35,200
Investment securities held-to-maturity (market value -
$59,625,000 and $84,582,000) 60,195 85,310
Mortgage-backed investments held-to-maturity (market value -
$182,580,000 and $199,759,000) 186,414 209,747
Stock in Savings Bank Life Insurance Company 1,194 1,194
Stock in Federal Home Loan Bank of Boston 14,869 12,775
Loans receivable, less allowance for possible loan losses of
$6,574,000 and $7,237,000 496,252 419,644
Mortgage loans held-for-sale 7,013 2,930
Foreclosed property, net of valuation reserve of $1,312,000
and $1,934,000 2,186 3,038
Bank premises and equipment 10,208 8,347
Accrued interest receivable 5,141 4,537
Other assets 5,559 5,436
--------- ---------
Total assets $ 848,002 $ 806,872
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $ 485,019 $ 456,878
Borrowed funds 289,496 279,948
Mortgagors' escrow accounts 2,380 1,804
Other liabilities 10,971 13,485
--------- ---------
Total liabilities $ 787,866 $ 752,115
STOCKHOLDERS' EQUITY
Serial preferred stock: $.10 par value per share; 5,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.10 par value per share; 25,000,000 shares
authorized, 8,006,500 shares issued and 6,020,500 shares outstanding $ 801 $ 801
Additional paid-in capital 58,192 58,192
Retained earnings 16,680 12,638
Treasury stock, at cost, 1,986,000 shares (15,842) (15,842)
Valuation allowance for unrealized appreciation
(depreciation) of investment securities available
for sale, net of taxes 305 (1,032)
--------- ---------
Total stockholders' equity 60,136 54,757
--------- ---------
Total liabilities and stockholders' equity $ 848,002 $ 806,872
========= =========
</TABLE>
-3-
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30,
1995 1994
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest on mortgage loans $ 6,798 $ 5,539
Interest on other loans 4,029 1,667
Interest and dividends on investment securities 1,154 1,566
Interest on federal funds sold 60 20
Interest on mortgage-backed investments 3,450 3,307
----------- -----------
Total interest and dividend income 15,491 12,099
----------- -----------
Interest expense:
Interest on depositors' accounts 5,203 3,123
Interest on borrowed funds 4,422 2,939
----------- -----------
Total interest expense 9,625 6,062
----------- -----------
Net interest income 5,866 6,037
Provision for possible loan losses 209 --
----------- -----------
Net interest income after provision
for possible loan losses 5,657 6,037
Noninterest income:
Net gain on sales of mortgage loans 514 102
Loan fees 119 107
Other fee income 435 456
Other 14 10
----------- -----------
Total non-interest income 1,082 675
Noninterest expense:
Salaries and employee benefits 2,227 2,064
Building and equipment 829 625
Professional services 257 271
Computer expense 310 238
Insurance 13 308
Retail branch cost recovery -- 537
Expenses, gains and losses on
and write-downs of foreclosed property (92) 546
Other 692 619
----------- -----------
Total noninterest expenses 4,236 5,208
----------- -----------
Income before provision for income taxes 2,503 1,504
Provision for income taxes 10 1
----------- -----------
Net income $ 2,493 $ 1,503
=========== ===========
Earnings per share $ .41 $ .25
=========== ===========
Dividends declared per share $ .12 $ .08
=========== ===========
Average common stock outstanding 6,114,753 6,081,939
=========== ===========
-4-
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Nine Months Ended September 30,
1995 1994
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest on mortgage loans $ 19,598 $ 14,830
Interest on other loans 10,765 3,695
Interest and dividends on investment securities 4,122 3,761
Interest on federal funds sold 139 66
Interest on mortgage-backed investments 10,789 9,163
----------- -----------
Total interest and dividend income 45,413 31,515
----------- -----------
Interest expense:
Interest on depositors' accounts 14,526 8,609
Interest on borrowed funds 13,144 6,678
----------- -----------
Total interest expense 27,670 15,287
----------- -----------
Net interest income 17,743 16,228
Provision for possible loan losses 538 --
----------- -----------
Net interest income after provision
for possible loan losses 17,205 16,228
Noninterest income:
Net gain on sales of mortgage loans 809 263
Loan fees 347 288
Other fee income 1,335 1,390
Other 39 22
----------- -----------
Total non-interest income 2,530 1,963
Noninterest expense:
Salaries and employee benefits 6,706 6,069
Building and equipment 2,363 1,958
Professional services 809 923
Computer expense 894 716
Insurance 591 875
Retail branch cost recovery -- 117
Expenses, gains and losses on
and write-downs of foreclosed property 399 1,545
Other 2,218 2,022
----------- -----------
Total noninterest expenses 13,980 14,225
----------- -----------
Income before provision (benefit) for income taxes 5,755 3,966
Provision (benefit) for income taxes 30 (197)
----------- -----------
Net income $ 5,725 $ 4,163
=========== ===========
Earnings per share $ .94 $ .69
=========== ===========
Dividends declared per share $ .28 $ .20
=========== ===========
Average common stock outstanding 6,086,016 6,057,129
=========== ===========
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
(unaudited)
Year Ended December 31, 1994
And The Nine Months Ended September 30, 1995
Valuation Allowance
Additional Mortgage-Backed
Common Paid-in Retained Treasury Securities Available
Stock Capital Earnings Stock For Sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 $ 800 $ 58,152 $ 7,797 $(15,842) (158) $ 50,749
Net income -- -- 6,526 -- -- 6,526
Cash dividends declared -- -- (1,685) -- -- (1,685)
Stock options exercised 1 40 -- -- -- 41
Change in valuation allowance
for unrealized depreciation of
investment securities available-for-sale,
net of taxes -- -- -- -- (874) (874)
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1994 801 58,192 12,638 (15,842) (1,032) 54,757
Net income -- -- 5,725 -- -- 5,725
Cash dividends declared -- -- (1,683) -- -- (1,683)
Change in valuation allowance
for unrealized appreciation of
investment securities available-for-sale,
net of taxes -- -- -- -- 1,337 1,337
-------- -------- -------- -------- -------- --------
Balance at
September 30, 1995 $ 801 $ 58,192 $ 16,680 $(15,842) $ 305 $ 60,136
======== ======== ======== ======== ======== ========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
1995 1994
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,725 $ 4,163
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 538 --
Provision for depreciation and amortization 1,154 1,005
Gain on sales of foreclosed property (73) (131)
Write-down of foreclosed property 371 606
Amortization of investment securities discounts and premiums, net 1,084 1,409
Deferred income taxes -- (197)
Proceeds from sales of mortgage loans and servicing rights 52,344 34,228
Mortgage loans originated for sale (55,913) (32,744)
Realized gains on mortgage loan sales, net (514) (263)
Increase in accrued interest receivable (604) (942)
Increase in other assets (123) (1,326)
(Decrease) increase in other liabilities (2,752) 2,484
--------- ---------
Net cash provided by operating activities 1,237 8,292
Cash flows from investing activities:
Proceeds from maturities and principal payments of available-for-sale securities 1,436 3,359
Proceeds from maturities and principal payments of held-to-maturity securities 49,599 46,624
Purchases of investment securities held-to-maturity (2,253) (107,827)
Purchases of Federal Home Loan Bank stock (2,094) (3,524)
Loans originated, net of principal collected (78,888) (31,580)
Proceeds from sales of foreclosed property 2,296 4,607
Purchases of bank premises and equipment (3,015) (1,403)
--------- ---------
Net cash used in investing activities (32,919) (89,744)
Cash flows from financing activities:
Net decrease in demand deposits, NOW accounts
and savings accounts (13,327) (18,429)
Net increase of term deposits 41,468 36,171
Net increase (decrease) in borrowed funds
with maturities of three months or less (69,879) 35,501
Proceeds from borrowed funds with maturities in excess of three months 286,517 333,369
Repayments of borrowed funds with maturities in excess of three months (207,090) (307,528)
Increase in mortgagors' escrow accounts 576 775
Stock options exercised -- 41
Dividends paid (1,445) (1,083)
--------- ---------
Net cash provided by financing activities 36,820 78,817
--------- ---------
Net increase (decrease) in cash and cash equivalents 5,138 (2,635)
Cash and cash equivalents at beginning of period 18,714 15,232
--------- ---------
Cash and cash equivalents at end of period $ 23,852 $ 12,597
</TABLE>
-7-
<PAGE>
FIRST ESSEX BANCORP, INC.
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and include the
accounts of First Essex Bancorp, Inc. (the "Company") and its subsidiary, First
Essex Bank, FSB. These financial statements reflect, in management's opinion,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position and the results of its
operations and cash flows for the periods presented. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's 1994 annual report. Certain reclassifications have
been made to the 1994 financial statements to conform to the 1995 presentation.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FIRST ESSEX BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
September 30, 1995
General
First Essex Bancorp, Inc., (the "Company"), is a Delaware corporation whose
primary activity is to act as the parent holding company for First Essex Bank,
FSB, (the "Bank").
The Company's net earnings depend to a large extent upon its net interest
income, which is the difference between interest and dividend income earned on
its loans and investments and interest expense paid on its deposits and borrowed
funds. The Company's net earnings also depend upon its provision for possible
loan loss, non-interest income, non-interest expense (including expenses
relating to foreclosed property) and income tax expense. Interest and dividend
income and interest expense are significantly affected by general economic
conditions. These economic conditions, together with conditions in the local
real estate markets, affect the levels of non-performing assets and provisions
for possible loan losses.
Results of Operations
General
Net income for the three months ended September 30, 1995 was $2.5 million
compared to $1.5 million for the same period in 1994. Net interest income
totalled $5.9 million for the quarter compared to $6.0 million for the same
period in 1994. The increase in net income is primarily due to higher
non-interest income of $407,000 and decreased non-interest expense of $972,000
offset by lower net interest income of $171,000 and an increase in the provision
for possible loan losses of $209,000. The decrease in non-interest expense in
1995 compared to 1994 reflects a decrease of $300,000 of deposit insurance
expense related to the lower rates charged by the FDIC, as well as a reduction
of $638,000 in the net costs of foreclosed property for the third quarter of
1995 and the recognition of a $537,000 non-recurring expense associated with the
closure of two branch offices in the third quarter of 1994. Other non-interest
expenses increased $503,000 due to growth in the company.
Net income for the nine months ended September 30, 1995 was $5.7 million
compared to net income of $4.2 million for the same period in 1994. The increase
in net income over the comparative nine months in 1994 was due to higher net
interest income of $1.5 million, higher non-interest income of $567,000 and
decreased non-interest expense of $245,000 offset by an increase in the
provision for possible loan losses of $538,000. The decrease in non-interest
expense reflects a decrease of $300,000 of deposit insurance expense as noted
above, as well as a reduction of $1.0 million in the net costs of foreclosed
property in the third quarter of 1995 and the recognition of $117,000
non-recurring expense associated with the closure of two branch offices as noted
above offset by $420,000 recovery of previously abandoned lease costs associated
with the opening of the Londonderry branch in the second quarter of 1994. Other
non-interest expenses increased $1.2 million to support growth in the company.
-9-
<PAGE>
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For The Three Months Ended September 30,
1995 1994
------------------------ --------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Short-term investment $ 5,485 $ 78 5.69% $1,770 $ 20 4.52%
Investment and mortgage-
backed securities 306,319 4,586 5.99 362,238 4,873 5.38
--------- ----- ------- -----
Total investments 311,804 4,664 5.98 364,008 4,893 5.38
--------- ----- ------- -----
Mortgage loans(1) 335,448 6,798 8.11 260,329 5,539 8.51
Consumer and commercial loans(1) 162,496 4,029 9.92 70,177 1,667 9.50
--------- ----- ------- -----
Total loans(1) 497,944 10,827 8.70 330,506 7,206 8.72
--------- ----- ------- -----
Total earning assets 809,748 15,491 7.65 694,514 12,099 6.97
Allowance for possible
loan losses (6,353) (7,390)
----- -----
Total earning assets less
allowance for possible loan losses 803,395 687,124
Other assets 33,753 30,190
--------- ---------
Total assets $ 837,148 $ 717,314
========= =========
Liabilities and Stockholders' Equity
Deposits:
NOW accounts $ 28,817 $ 81 1.12 $30,054 $ 91 1.21%
Money market accounts 76,263 385 2.02 103,263 546 2.11
Savings and notice accounts 50,134 202 1.61 57,959 196 1.35
Savings certificates 300,612 4,535 6.03 204,734 2,290 4.47
--------- ----- ------- -----
Total interest bearing deposits 455,826 5,203 4.57 396,010 3,123 3.15
Borrowed funds 285,399 4,422 6.20 240,668 2,939 4.88
--------- ----- ------- -----
Total interest bearing deposits and
borrowed funds 741,225 9,625 5.19 636,678 6,062 3.81
--------- ----- ------- -----
Demand deposit accounts 24,918 16,595
Other liabilities 11,794 11,084
--------- -------
Total liabilities 777,937 664,357
Stockholders' equity 59,211 52,957
--------- -------
Total liabilities and
stockholders' equity $ 837,148 $ 717,314
========= =========
Net interest income $ 5,866 $ 6,037
========= =========
Weighted average interest
rate spread 2.46% 3.16%
Net yield on average
earning assets(2) 2.90% 3.48%
</TABLE>
(1)Non-performing loans are included in the average balance.
(2)Net interest income before provision for possible loan losses divided by
average earning assets. For purposes of computing average yields on the loan
portfolio as presented in the above analysis, non-performing loans are
included in the average loan balances.
-10-
<PAGE>
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For The Nine Months Ended September 30,
1995 1994
------------------------ ------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Short-term investment $ 4,161 $ 166 5.32% $ 2,281 $ 66 3.86%
Investment and mortgage-
backed securities 324,237 14,885 6.12 341,772 12,924 5.04
-------- ------ -------- ------
Total investments 328,398 15,051 6.11 344,053 12,990 5.03
-------- ------ -------- ------
Mortgage loans(1) 322,197 19,595 8.11 246,507 14,830 8.02
Consumer and commercial loans(1) 144,988 10,767 9.90 55,893 3,695 8.81
-------- ------ -------- -----
Total loans(1) 467,185 30,362 8.67 302,400 18,525 8.17
-------- ------ -------- ------
Total earning assets 795,583 45,413 7.61 646,453 31,515 6.50
Allowance for possible
loan losses (6,445) (7,410)
-------- -------
Total earning assets less
allowance for possible loan losses 789,138 639,043
Other assets 31,909 30,022
-------- --------
Total assets $821,047 $669,065
======== ========
Liabilities and Stockholders' Equity
Deposits:
NOW accounts $28,201 $ 238 1.13% $ 30,213 $ 272 1.20%
Money market accounts 81,138 1,192 1.96 108,402 1,702 2.09
Savings and notice accounts 51,552 615 1.59 59,475 594 1.33
Savings certificates 291,039 12,481 5.72 189,576 6,041 4.25
-------- ------ ------- -----
Total interest bearing deposits 451,930 14,526 4.29 387,666 8,609 2.96
Borrowed funds 277,703 13,144 6.31 203,576 6,678 4.37
-------- ------ ------- ------
Total interest bearing deposits and
borrowed funds 729,633 27,670 5.06 591,242 15,287 3.45
-------- ------ ------- ------
Demand deposit accounts 22,095 15,445
Other liabilities 11,997 10,391
-------- --------
Total liabilities 763,725 617,078
Stockholders' equity 57,322 51,987
-------- -------
Total liabilities and
stockholders' equity $821,047 $669,065
======== ========
Net interest income $ 17,743 $16,228
======== =======
Weighted average interest
rate spread 2.55% 3.05%
Net yield on average
earning assets(2) 2.97% 3.35%
</TABLE>
(1)Non-performing loans are included in the average balance.
(2)Net interest income before provision for possible loan losses divided by
average earning assets. For purposes of computing average yields on the loan
portfolio as presented in the above analysis, non-performing loans are
included in the average loan balances.
-11-
<PAGE>
Net Interest Income
Net interest income decreased by $171,000 (2.8%) to $5.9 million for the three
months ended September 30, 1995 and increased by $1.5 million (9.3%) to $17.7
million for the nine months ended September 30, 1995 when compared to the same
periods in 1994. The comparative increases in net interest income for each
period are due to an increase in average earning assets partially offset by
declines in net yields due primarily to higher rates paid for deposits and
borrowed funds.
Interest and Dividend Income
Interest and dividend income increased by $3.4 million (28.0%) to $15.5 million,
and by $13.9 million (44.1%) to $45.4 million for the three and nine month
periods ended September 30, 1995, respectively, from $12.1 million and $31.5
million for the same periods in 1994. These increases are attributable to
increased rates and volume of earning assets, primarily from loan growth, for
both the three and nine month periods ended September 30, 1995, compared to the
same periods in 1994.
Interest Expense
Interest expense increased by $3.6 million (58.8%) to $9.6 million and by $12.4
million (81.0%) to $27.7 million for the three month and nine month periods
ended September 30, 1995, respectively, when compared to $6.1 million and $15.3
million for the same periods in 1994. The increase in interest expense was
attributable to an increase in rates paid and volume of term deposits and
borrowings used to support the increased volume of earning assets.
Provision for Possible Loan Losses
Beginning in 1995, the Company adopted Financial Accounting Standards Board
Statement No. 114, as amended by No. 118, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"). As a result of applying the standard,
certain impaired loans are being measured at net present value of the expected
future cash flows using the loan's effective interest rate, or at the fair value
of the collateral if the loan is collateral dependant. In accordance with the
standard, the Company generally considers a loan impaired when it is probable
that all amounts due, including interest, will not be collected according to the
contractual terms of the loan agreement.
Possible losses on loans are provided for under the accrual method of
accounting. Assessing the adequacy of the allowance for possible loan losses
involves substantial uncertainties and is based upon management's evaluation of
the amount required to meet estimated losses inherent in the loan portfolio
after weighing various factors, including the amounts and timing of future cash
flows expected to be received on impaired loans. Among the factors management
may consider are the quality of specific loans, risk characteristics of the loan
portfolio generally, the level of non-accruing loans, current economic
conditions, trends in delinquencies and charge-offs and collateral values of the
underlying security. Ultimate losses may vary significantly from the current
estimates.
Provisions for possible loan losses totalled $538,000 for the nine months ended
September 30, 1995. No provision for possible loan losses was recorded for the
same period in 1994. Provisions result from management's continuing internal
review of the loan portfolio as well as its judgment as to the adequacy of the
reserves in light of the condition of the regional real estate market and the
economy generally. Non-accruing loans decreased to $3.7 million at September 30,
1995 compared to $7.3 million at December 31, 1994 and $6.7 million at September
30, 1994. See also "Financial Condition - Non-Performing Assets & Allowance for
Possible Loan Losses".
The Bank's total allowance for possible loan losses was $6.6 million or 175.9%
of non-accruing loans at September 30, 1995 compared to $7.3 million or 98.8% at
December 31, 1994 and $7.3 million or 108.4% at September 30, 1994.
Non-Interest Income
Non-interest income consists of net gains from the sales of loans and loan
servicing rights, along with fee and other non-interest income.
Non-interest income increased by $407,000 (60.3%) to $1.1 million for the three
months ended September 30, 1995, and by $567,000 (28.9%) to $2.5 million for the
nine months ended September 30, 1995 when compared to $675,000 and $2.0 million
for the same periods in 1994. The increase in non-interest income is due mainly
to increased gains on the sale of loans and loan servicing rights.
-12-
<PAGE>
Non-Interest Expense
Non-interest expense decreased by $972,000 (18.7%) to $4.2 million for the three
months ended September 30, 1995, and by $245,000 (1.7%) to $14.0 million for the
nine months ended September 30, 1995 when compared to $5.2 million and $14.2
million for the same periods in 1994. The decrease in non-interest expense
reflects a decrease of $300,000 of deposit insurance expense related to lower
rates charged by the FDIC as well as the recognition of $537,000 non-recurring
expense associated with the closure of two branch offices in the third quarter
of 1994 offset by $420,000 recovery of previously abandoned lease costs in
conjunction with the opening of the Londonderry branch in the second quarter of
1994.
Salaries and employee benefits increased by $163,000 (7.9%) to $2.2 million for
the three months ended September 30, 1995, and by $637,000 (10.5%) to $6.7
million for the nine months ended September 30, 1995 when compared to $2.1
million and $6.1 million for the same periods in 1994.
Building and equipment costs increased by $204,000 (32.6%) to $829,000 for the
three months ended September 30, 1995 and by $405,000 (20.7%) to $2.4 million
for the nine months ended September 30, 1995, when compared to $625,000 and $2.0
million for the same periods in 1994.
Foreclosed property expense decreased by $638,000 (117.0%) to a $92,000 gain for
the three months ended September 30, 1995 and by $1.1 million to $399,000
(74.2%) when compared to $546,000 and $1.5 million for the comparable periods in
1994. The Company's continued success in selling foreclosed property resulted in
the lower level of foreclosed property ($2.2 million at September 30, 1995
compared to $3.0 million at December 31, 1994 and $3.5 million at September 30,
1994), which in turn resulted in lower costs associated with professional
services and operating expenses for the properties in foreclosure.
Other operating expenses decreased by $701,000 (35.5%) to $1.3 million for the
three months ended September 30, 1995, and decreased by $141,000 (3.0%) to $4.5
million for the nine months ended September 30, 1995 when compared to $2.0
million and $4.7 million for the comparable periods in 1994. The decrease in
each of the periods reflect the lower rates charged by the FDIC and the non
recurring branch expenses as noted above.
Income Tax Expense
Deferred tax assets and liabilities are established for the temporary
differences between the accounting basis and the tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in effect when the
amounts related to such temporary differences are realized or settled. The
Company's deferred tax asset is reviewed quarterly and adjustments to such
assets is recognized as deferred income tax expense or benefit based on
management's judgments relating to the realizability of such asset. While the
Company has chosen to use a look out period of one year for purposes of valuing
the realizability of its' tax asset, it will continue to review this policy on a
quarterly basis. A provision for taxes of $30,000 was recorded for the nine
months ended September 30, 1995, compared to a benefit of $197,000 for the same
period in 1994.
-13-
<PAGE>
Financial Condition
Total assets amounted to $848.0 million at September 30, 1995 an increase of
$41.1 million or 5.1% from $806.9 million at December 31, 1994. This increase is
attributable to an increase of $80.0 million in loans, before deducting the
allowance for possible loan losses, offset by a decrease of $43.6 million in the
investment portfolio (which includes short term investments).
Loans
Loans increased $80.0 million from $429.8 million at December 31, 1994 to $509.8
million at September 30, 1995, representing 60.1% of total assets.
The following table sets forth information concerning the Company's loan
portfolio, including loans held for sale, at the dates indicated. The balances
shown in the table are net of unadvanced funds and unearned discounts and fees.
September 30, December 31,
1995 1994
Mortgage Loans:
Residential $271,196 53.2% $264,848 61.6%
Commercial 53,652 10.5 25,786 6.0
Construction 12,673 2.5 15,527 3.6
-------- ---- -------- -----
Total mortgage loans 337,521 66.2 306,161 71.2
-------- ---- -------- -----
Commercial loans: $ 53,482 10.5 55,377 12.9
Consumer loans:
Home equity 12,937 2.5 12,943 3.0
Other secured 104,784 20.6 54,463 12.7
Unsecured 1,115 .2 867 0.2
-------- ---- -------- -----
Total consumer loans: 118,836 23.3 68,273 15.9
Total loans $509,839 100.0% $429,811 100.0%
-------- ----- -------- -----
Loan Origination
Loan originations for the three and nine month periods ended September 30, 1995
totalled $73.0 million and $198.0 million, respectively, compared to $43.1
million and $139.6 million for the respective periods in 1994. The Bank's
residential loan originations during the three and nine month periods ended
September 30, 1995, totalled $42.9 million and $92.5 million, respectively,
compared to $30.6 million and $94.6 million for the respective periods in 1994.
During 1994 the Company initiated an indirect automobile lending program. This
resulted in significant growth of indirect automobile loan originations which
amounted to $12.8 million and $53.8 million for the three and nine months ended
September 30, 1995, respectively, compared to $11.4 million and $22.4 million
for the respective periods in 1994. During the third quarter of 1995 the Bank
also purchased approximately $11.8 million of loans, primarily commercial real
estate loans, at face value of the outstanding principal. The loans were
performing in accordance with the terms of the loan agreements.
-14-
<PAGE>
Non-Performing Assets and the Allowance for Possible Loan Losses
Non-performing assets consist of non-accruing loans (including loans impaired
under SFAS No. 114), foreclosed property and restructured loans. Non-performing
assets totalled $6.7 million at September 30, 1995 compared to $10.4 million at
December 31, 1994.
The following table shows the composition of non-performing assets at September
30, 1995 and December 31, 1994.
September 30, December 31,
1995 1994
(Dollars in thousands)
Non-accruing loans:
Real Estate $ 2,740 $ 6,548
Other 996 776
------- -------
Total non-accruing loans 3,736 7,324
Restructured loans 757 --
Foreclosed property 2,186 3,038
------- -------
Total non-performing assets $ 6,679 $10,362
======= =======
Percentage of non-performing assets
to total assets .79% 1.28%
Percentage of allowance for possible
loan losses to non-accruing loans 175.9% 98.8%
The following table summarizes the activity in the allowance for possible loan
losses (including amounts established for loans impaired under SFAS No. 114) for
the nine months ended September 30, 1995.
(Dollars in thousands)
Balance at December 31, 1994 $7,237
Provision for possible loan losses 538
Charge-offs:
Mortgage 1,247
Construction 56
Commercial 204
Consumer 465
------
Total charge-offs: 1,972
Recoveries:
Mortgage 202
Construction 239
Commercial 274
Consumer 56
------
Total recoveries 771
Net charge-offs 1,202
Balance at September 30, 1995 $6,574
======
Ratio of net charge-offs to average loans outstanding .26%
-15-
<PAGE>
The bank's policy is to discontinue the accrual of interest on all loans for
which payment of interest or principal is 90 days or more past due or for such
other loans as considered necessary by management if collection of interest and
principal is doubtful. When a loan is placed on non-accrual status, all
previously accrued but uncollected interest is reversed against the current
period interest income.
Restructured loans are loans on which concessions have been made in light of the
debtor's financial difficulty with the objective of maximizing recovery and with
respect to which the renegotiated payment terms are met. At September 30, 1995,
the Bank had restructured loans of $757,000.
Foreclosed property consists mainly of real estate collateral from loans which
were foreclosed.
At September 30, 1995 the recorded investment in loans that are considered to be
impaired under SFAS No. 114 totalled $1.7 million of which $539,000 had a
related allowance for possible loan losses of $215,000. The remaining $1.1
million of impaired loans did not require a related allowance for possible loan
losses. The average recorded investment in impaired loans during the three and
nine month periods ended September 30, 1995 was approximately $1.7 million and
$1.2 million, respectively.
Interest income recognized on impaired loans, using the cash basis of income
recognition, amounted to approximately $21,000 and $93,000, for the three and
nine month periods ending September 30, 1995, respectively.
Investments
At September 30, 1995 the investment portfolio, consisting of short-term
investments, investment securities, mortgage-backed securities, Federal Home
Loan Bank ("FHLB") stock and stock in the Savings Bank Life Insurance Company of
Massachusetts, totalled $306.8 million or 36.2% of total assets, compared to
$346.9 million or 43.0% of total assets at December 31, 1994. Interest and
dividend income on the investment portfolio generated 33.1% of total interest
and dividend income for the nine months ended September 30, 1995 compared to
41.2% for the comparable period in 1994.
The Company has established policies and procedures designed to identify and
reduce risks associated with the investment portfolio. These policies and
procedures include stop loss limits and stress testing on a periodic basis.
Deposits
Deposits have historically been the primary source of funds for lending and
investment activities. Deposit flows vary significantly and are influenced by
prevailing interest rates, money market conditions, economic conditions and
competition. At September 30, 1995 the Bank had total deposits of $485.0 million
representing a net increase of $28.1 million compared to total deposits of
$456.9 million at December 31, 1994. This increase is attributable to an
increase of $41.5 million in term deposits and $8.3 million in Demand Deposits
offset by a decrease of $21.7 million in Savings, NOW and Money Market accounts.
While deposit flows are by nature unpredictable, the Bank attempts to manage its
deposits through selective pricing. Due to the uncertainty of market conditions,
it is not possible for the Bank to predict how aggressively it will compete for
deposits in future quarters or the likely effect of any such decision on deposit
levels, interest expense and net interest income. Strategies are currently in
place to aggressively market more stable deposit sources in such accounts as NOW
and Demand Deposits.
-16-
<PAGE>
Borrowed Funds
The Bank is a member of the FHLB and is entitled to borrow from the FHLB by
pledging certain assets. The Bank also utilizes short term repurchase agreements
with maturities less than three months, as an additional source of funds.
Repurchase agreements are secured by U.S. government and agency securities.
These borrowings are an alternative source of funds compared to deposits and
totalled $289.5 million at September 30, 1995 compared to $280.0 million at
December 31, 1994.
Liquidity and Capital Resources
The Bank's principal sources of liquidity are customer deposits, borrowings from
the FHLB, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments and loan sales.
Management believes it is prudent to maintain an investment portfolio that not
only provides a source of income, but also provides a potential source of
liquidity to meet lending demand and deposit flows. The Bank adjusts the level
of its liquid assets and the mix of its loans and investments based upon
management's judgment as to the quality of specific investment opportunities and
the relative attractiveness of their maturities and yields.
At September 30, 1995 the Bank had outstanding commitments to loan funds, under
mortgage, construction, commercial and home equity lines of credit amounting to
$52.1 million compared to $53.7 million at September 30, 1994. Management
believes the sources of liquidity previously discussed are sufficient to meet
its commitments.
Net cash provided by operating activities totalled $4.5 million for the nine
months ended September 30, 1995 compared to $8.3 million for the same period in
1994.
Net cash used in investing activities totalled $36.2 million for the nine months
ended September 30, 1995 compared to $89.7 million for the comparable period in
1994. The change reflects the Bank's reduction in investment securities and
increase in loans.
Net cash provided by financing activities totalled $36.8 million for the nine
months ended September 30, 1995, compared to $78.8 million for the comparable
period in 1994. The change reflects the decrease in the amount of borrowings,
and an increase in term deposits.
As a federal savings institution regulated by the Office of Thrift Supervision,
the Bank is required to meet certain minimum regulatory capital requirements:
tangible capital, total capital, core/leverage capital, Tier 1 risk-based
capital and total risk- based capital. In addition, under the Prompt Corrective
Action provisions of the Federal Deposit Insurance Corporation Improvement Act
of 1991, (FDICIA), the Bank's capital position may be classified in one of five
different capital categories ranging from critically undercapitalized to well
capitalized. As of September 30, 1995, the Bank met all of the minimum
regulatory requirements of the well capitalized category under FDICIA. The
Company's core/leverage, Tier 1 risk-based and total risk-based capital together
with related regulatory minimum requirements are summarized below. The Company's
total capital, tangible capital and tangible equity ratios were equal to the
core/leverage capital ratio.
<TABLE>
<CAPTION>
Core Tier 1 Total
Leverage Risk-based Risk-based
Capital Capital Capital
(Dollars in thousands)
<S> <C> <C> <C>
Core Capital $ 59,831 $ 59,831 $ 59,831
General Valuation Allowance ---- ---- 5,866
----------- ----------- ---------
Regulatory Capital Measure $ 59,831 $ 59,831 $ 65,697
======== ======== ========
Total Assets $848,002 $848,002 $848,002
Adjusted Assets $848,002 $ --- $ ---
Risk-based Assets (unaudited) $ ---- $468,565 $468,565
Capital Ratio (unaudited) 7.06% 12.77% 14.02%
Regulatory minimum requirement 3.00% 4.00% 8.00%
</TABLE>
-17-
<PAGE>
Impact of Inflation
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
An important concept in understanding the effect of inflation on financial
institutions is the distinction between monetary and non-monetary items. In a
stable environment, monetary items are those assets and liabilities which are or
will be converted into a fixed amount of dollars regardless of changes in
prices. Examples of monetary items include cash, investment securities, loans,
deposits and borrowings. Non-monetary items are those assets and liabilities
which gain or lose general purchasing power as a result of the relationships
between specific prices for the items and price change levels. Examples of
non-monetary items include premises and equipment and real estate in
foreclosure. In the current environment in the New England region, where real
estate values have dramatically decreased, the deflationary impact of changing
prices of real estate securing loans significantly affects a financial
institution's performance. Additionally, interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of goods and
services as measured by the consumer price index. In a volatile interest rate
environment, liquidity and the management of the maturity structure of assets
and liabilities are critical in maintaining acceptable profitability levels.
-18-
<PAGE>
SIGNATURES
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.
FIRST ESSEX BANCORP, INC.
(Registrant)
Date: November 13, 1995 /s/ Sametta A. Glass
--------------------
Sametta A. Glass
Senior Vice President, Controller
and Principal Accounting Officer
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 14,889
<INT-BEARING-DEPOSITS> 2,463
<FED-FUNDS-SOLD> 6,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,119
<INVESTMENTS-CARRYING> 297,791
<INVESTMENTS-MARKET> 293,387
<LOANS> 506,110
<ALLOWANCE> 6,574
<TOTAL-ASSETS> 848,002
<DEPOSITS> 485,019
<SHORT-TERM> 153,243
<LIABILITIES-OTHER> 13,351
<LONG-TERM> 136,253
<COMMON> 801
0
0
<OTHER-SE> 59,335
<TOTAL-LIABILITIES-AND-EQUITY> 848,002
<INTEREST-LOAN> 30,363
<INTEREST-INVEST> 14,911
<INTEREST-OTHER> 139
<INTEREST-TOTAL> 45,413
<INTEREST-DEPOSIT> 14,526
<INTEREST-EXPENSE> 27,670
<INTEREST-INCOME-NET> 17,743
<LOAN-LOSSES> 538
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,980
<INCOME-PRETAX> 5,755
<INCOME-PRE-EXTRAORDINARY> 5,725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,725
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
<YIELD-ACTUAL> 2.97
<LOANS-NON> 3,736
<LOANS-PAST> 0
<LOANS-TROUBLED> 757
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,237
<CHARGE-OFFS> 1,972
<RECOVERIES> 771
<ALLOWANCE-CLOSE> 6,574
<ALLOWANCE-DOMESTIC> 6,574
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
