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 6/30/96
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 June 30, 1996:
Title of Class Shares Outstanding
Common Stock, $.10 par value 6,045,901
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This Report contains certain
"forward-looking statements" including statements concerning plans, objectives,
future events or performance, assumptions, and other statements which are other
than statements of historical fact. The Company wishes to caution readers that
the following important factors, among others, may have affected, and could in
the future affect, the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by, or on behalf of, the Company herein:
(i) the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company and its wholly owned
banking subsidiary, First Essex Bank, FSB, must comply, and the associated costs
of compliance with such laws and regulations, either currently or in the future
as applicable; (ii) the effect of changes in accounting policies and practices,
as may be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or of changes in the Company's organization,
compensation and benefit plans; (iii) the effect on the Company's competitive
position within its market area of the increasing consolidation within the
banking and financial services industries, including increased competition from
larger regional and out-of-state banking organizations as well as nonbank
providers of various financial services; (iv) the effect of unforeseen changes
in interest rates; and (v) the effect of changes in the business cycle and
downturns in the local, regional and national economies.
<PAGE>
FIRST ESSEX BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 4
Consolidated Statements of Operations for the
three months ended June 30, 1996 and 1995 5
Consolidated Statements of Operations for the
six months ended June 30, 1996 and 1995 6
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1995
and the six months ended June 30, 1996 7
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995 8
Note to the Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 21
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
1996 1995
------------ -----------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 20,573 $ 27,308
Investment securities available-for-sale 146,077 115,153
Investment securities held-to-maturity
(fair value $114,838,000, and $133,651,000) 116,808 135,098
Stock in Savings Bank Life Insurance Company 1,194 1,194
Stock in Federal Home Loan Bank of Boston 14,869 14,869
Mortgage loans held-for-sale 8,802 5,821
Loans receivable, less allowance for possible loan losses of
$6,970,000 and $6,552,000 513,560 487,678
Foreclosed property, net of valuation reserve of $1,120,000
and $1,316,000 1,513 1,756
Bank premises and equipment 9,381 10,047
Accrued interest receivable 4,589 4,466
Other assets 5,537 5,402
--------- ---------
Total assets $ 842,903 $ 808,792
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $ 508,080 $ 491,469
Borrowed funds 256,695 245,569
Mortgagors' escrow accounts 600 718
Other liabilities 15,181 10,864
--------- ---------
Total liabilities $ 780,556 $ 748,620
--------- ---------
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, 8,031,901 and 8,009,267 shares issued $ 803 $ 801
Additional paid-in capital 58,375 58,208
Retained earnings 20,116 17,682
Treasury stock, at cost, 1,986,000 shares (15,842) (15,842)
Valuation allowance for unrealized losses on
investment securities available-for-sale (1,105) (677)
--------- ---------
Total stockholders' equity 62,347 60,172
--------- ---------
Total liabilities and stockholders' equity $ 842,903 $ 808,792
========= =========
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income
Interest on mortgage loans $6,095 $6,445
Interest on other loans 5,207 3,645
Interest and dividends on investment securities held-to-maturity 2,131 3,752
Interest and dividends on investment securities available-for-sale 2,077 1,466
Interest on federal funds sold 70 34
------- -------
Total interest and dividend income 15,580 15,342
------- -------
Interest expense
Interest on depositors' accounts 5,373 5,010
Interest on borrowed funds 3,730 4,326
------- -------
Total interest expense 9,103 9,336
------- -------
Net interest income 6,477 6,006
Provision for possible loan losses 326 200
------ -------
Net interest income after provision
for possible loan losses 6,151 5,806
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 453 278
Loan fees 122 110
Other fee income 461 463
Other 12 14
------ -------
Total non-interest income 1,048 865
Noninterest expense
Salaries and employee benefits 2,470 2,141
Building and equipment 844 861
Professional services 426 329
Computer expense 305 318
Insurance 34 289
Expenses, gains and losses on
and write-downs of foreclosed property 116 258
Other 865 684
------ ------
Total noninterest expenses 5,060 4,880
------ ------
Income before provision for income taxes 2,139 1,791
Provision for income taxes 9 19
------- -------
Net income $2,130 $ 1,772
====== =======
Earnings per share $ .35 $ .29
======= =======
Dividends declared per share $ .12 $ .08
======= =======
Average common and equivalent shares outstanding 6,154,310 6,074,162
========= =========
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income
Interest on mortgage loans $12,379 $12,800
Interest on other loans 9,893 6,736
Interest and dividends on investment securities held-to-maturity 4,410 2,968
Interest and dividends on investment securities available-for-sale 3,662 7,339
Interest on federal funds sold 219 79
------- -------
Total interest and dividend income 30,563 29,922
------- -------
Interest expense
Interest on depositors' accounts 10,673 9,323
Interest on borrowed funds 7,302 8,722
------- -------
Total interest expense 17,975 18,045
------- -------
Net interest income 12,588 11,877
Provision for possible loan losses 815 329
------ -------
Net interest income after provision
for possible loan losses 11,773 11,548
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 930 295
Loan fees 283 228
Other fee income 911 900
Other 23 25
------ -------
Total non-interest income 2,147 1,448
Noninterest expense
Salaries and employee benefits 4,971 4,479
Building and equipment 1,759 1,534
Professional services 643 552
Computer expense 620 584
Insurance 95 578
Expenses, gains and losses on
and write-downs of foreclosed property 308 491
Other 1,621 1,526
------- ------
Total noninterest expenses 10,017 9,744
------- ------
Income before provision for income taxes 3,903 3,252
Provision for income taxes 19 20
------- -------
Net income $3,884 $ 3,232
====== =======
Earnings per share $ .63 $ .53
======= =======
Dividends declared per share $ .24 $ .16
======= =======
Average common and equivalent shares outstanding 6,158,390 6,071,648
========= =========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 1995
And The Six Months Ended June 30, 1996
Valuation Allowance
For Unrealized Losses
Additional On Investment Securities
Common Paid-in Retained Treasury Available-
Stock Capital Earnings Stock For-Sale Total
------ ----------- -------- -------- ------------------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $801 $58,192 $12,638 $(15,842) $(1,032) $54,757
Net income ---- ---- 7,452 ---- ---- 7,452
Cash dividends declared ---- ---- (2,408) ---- ---- (2,408)
Stock options exercised ---- 16 ---- ---- ---- 16
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale ---- ---- ---- ---- 355 355
-------- ---------- ---------- ------------ -------- --------
Balance at December 31, 1995 801 58,208 17,682 (15,842) (677) 60,172
Net income ---- ---- 3,884 ---- ---- 3,884
Cash dividends declared ---- ---- (1,450) ---- ---- (1,450)
Stock options exercised 2 167 ---- ---- ---- 169
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale ---- ---- ---- ---- (428) (428)
-------- ---------- ----------- ------------ ------- ---------
Balance at June 30, 1996 $803 $58,375 $20,116 $(15,842) $ (1,105) $62,347
==== ======= ======= ========= ========== =======
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,884 $3,232
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 815 329
Provision for depreciation and amortization 910 714
Gain on sales of foreclosed property (49) (52)
Write-down of foreclosed property 58 265
Amortization of investment securities discounts and premiums, net 792 764
Deferred income taxes 19 20
Proceeds from sales of mortgage loans and mortgage servicing rights 54,038 15,611
Mortgage loans originated for sale (56,089) (18,428)
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (930) (295)
Increase in accrued interest receivable (123) (122)
Increase in other assets (135) (307)
Increase in other liabilities 4,297 7,767
------- -------
Net cash provided by operating activities 7,487 9,498
Cash flows from investing activities
Proceeds from maturities and principal payments of available-for-sale securities 18,714 949
Proceeds from maturities and principal payments of held-to-maturity securities 43,718 33,188
Purchases of available-for-sale securities (50,421) ---
Purchases of held-to-maturity securities (25,865) (773)
Purchases of Federal Home Loan Bank stock --- (1,274)
Loans originated, net of principal collected (27,644) (55,197)
Proceeds from sales of foreclosed property 1,181 1,616
Purchases of bank premises and equipment (244) (2,628)
------- -------
Net cash used in investing activities (40,561) (24,119)
Cash flows from financing activities
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 2,563 (12,013)
Net increase of time deposits 14,048 39,242
Net decrease in borrowed funds with maturities of three months or less (7,657) (63,964)
Proceeds from borrowed funds with maturities in excess of three months 60,500 185,000
Repayments of borrowed funds with maturities in excess of three months (41,717) (124,720)
Increase (decrease) in mortgagors' escrow accounts (118) 99
Dividends paid (1,449) (963)
Stock options exercised 169 ---
------- -------
Net cash provided by financing activities 26,339 22,681
------- -------
Net increse (decrease) in cash and cash equivalents (6,735) 8,060
Cash and cash equivalents at beginning of period 27,308 18,714
------- -------
Cash and cash equivalents at end of period $20,573 $26,774
======= =======
Supplemental disclosure of cash flow information:
Interest paid during the year $18,023 $18,124
Income taxes paid --- ---
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure 946 786
</TABLE>
-8-
<PAGE>
FIRST ESSEX BANCORP, INC.
Note to Consolidated Financial Statements
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 1995 annual report. Certain reclassifications have
been made to the 1995 financial statements to conform to the 1996 presentation.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST ESSEX BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1996
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 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 June 30, 1996 was $2.1 million compared to
net income of $1.8 million for the same period in 1995. Net interest income
totalled $6.5 million for the quarter compared to $6.0 million for the same
period in 1995. During the quarter higher net interest income of $471,000 and
higher non-interest income of $183,000 was offset by an increase in the
provision for possible loan losses of $126,000 and an increase in noninterest
expense of $180,000.
Net income for the six months ended June 30, 1996 was $3.9 million compared to
net income of $3.2 million for the same period in 1995. The increase in net
income over the comparative six months in 1995 was due primarily to higher net
interest income of $711,000 and higher non-interest income of $699,000. This was
offset by an increase in the provision for possible loan losses of $486,000 and
increased non-interest expense of $273,000.
-10-
<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 June 30,
1996 1995
------------------------ ------------------------
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 investments $ 5,095 $ 70 5.50% $ 3,893 $ 34 3.49%
Investment securities 278,183 4,208 6.05 326,545 5,218 6.39
-------- ----- -------- -----
Mortgage loans(1) 294,016 6,095 8.29 318,891 6,445 6.36
Consumer loans (1) 150,567 3,288 11.45 95,671 2,172 9.08
Commercial loans(1) 71,998 1,919 10.66 49,727 1,473 11.85
-------- ----- -------- -----
Total loans(1) 516,581 11,302 8.75 464,289 10,090 8.69
-------- ------ -------- ------
Total earning assets 799,859 15,580 7.79 794,727 15,342 7.72
Allowance for possible loan losses (6,738) (6,297)
-------- -------
Total earning assets less allowance
for possible loan losses 793,121 788,430
Other assets 32,215 30,001
-------- --------
Total assets $825,336 $818,431
======== ========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $32,246 $ 98 1.22% $ 28,015 $ 79 1.13%
Money market accounts 73,317 401 2.19 79,662 354 1.78
Savings accounts 50,062 210 1.68 51,515 238 1.85
Time deposits 316,073 4,664 5.90 299,665 4,339 5.79
-------- ------ ------- -----
Total interest bearing deposits 471,698 5,373 4.56 458,587 5,010 4.37
Borrowed funds 249,514 3,730 5.98 267,989 4,326 6.46
-------- ------ ------- ------
Total interest bearing deposits and
borrowed funds 721,212 9,103 5.05 726,846 9,336 5.14
-------- ----- ------- -----
Demand deposits 30,610 22,730
Other liabilities 11,017 11,631
-------- --------
Total liabilities 762,839 761,207
Stockholders' equity 62,497 57,224
-------- -------
Total liabilities and
stockholders' equity $825,336 $818,431
======== ========
Net interest income $ 6,477 $ 6,006
======= =======
Weighted average interest
rate spread 2.74% 2.58%
===== =====
Net yield on average
earning assets(2) 3.24% 3.02%
===== =====
Return on average assets 1.03% 0.87%
====== ======
Return on average equity 13.63% 12.39%
====== ======
<FN>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for possible loan losses divided by
average earning assets.
</FN>
</TABLE>
-11-
<PAGE>
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For The Six Months Ended June 30,
1996 1995
------------------------ ------------------------
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 investments $ 8,458 $ 219 5.18% $ 3,488 $ 79 4.53%
Investment securities 270,071 8,072 5.98 333,344 10,307 6.18
-------- ----- -------- ------
Mortgage loans(1) 299,490 12,379 8.27 315,462 12,800 8.12
Consumer loans (1) 142,723 6,247 8.75 86,792 3,859 8.89
Commercial loans(1) 69,104 3,646 10.55 49,297 2,877 11.67
-------- ----- -------- -----
Total loans(1) 511,317 22,272 8.71 451,551 19,536 8.65
-------- ------ -------- ------
Total earning assets 789,846 30,563 7.74 788,383 29,922 7.59
Allowance for possible loan losses (6,684) (6,492)
-------- --------
Total earning assets less allowance
for possible loan losses 783,162 781,891
Other assets 31,734 30,972
-------- --------
Total assets $814,896 $812,863
======== ========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $31,790 $ 191 1.20% $ 27,888 $ 157 1.13%
Money market accounts 73,478 791 2.15 83,616 807 1.93
Savings accounts 49,665 413 1.66 52,273 413 1.58
Time deposits 312,093 9,278 5.95 286,173 7,946 5.55
-------- ------ -------- -----
Total interest bearing deposits 467,026 10,673 4.57 449,950 9,323 4.14
Borrowed funds 244,561 7,302 5.97 273,791 8,722 6.37
-------- ------ -------- ------
Total interest bearing deposits and
borrowed funds 711,587 17,975 5.05 723,741 18,045 4.99
-------- ------ -------- ------
Demand deposits 30,078 20,660
Other liabilities 11,450 12,101
-------- --------
Total liabilities 753,115 756,502
Stockholders' equity 61,781 56,361
-------- --------
Total liabilities and
stockholders' equity $814,896 $812,863
======== ========
Net interest income $12,588 $11,877
======= =======
Weighted average interest
rate spread 2.69% 2.60%
===== =====
Net yield on average
earning assets(2) 3.19% 3.01%
===== =====
Return on average assets 0.95% 0.80%
====== ======
Return on average equity 12.57% 11.47%
====== ======
<FN>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for possible loan losses divided by
average earning assets.
</FN>
</TABLE>
-12-
<PAGE>
Net Interest Income
Net interest income increased by $471,000 to $6.5 million for the three months
ended June 30, 1996, and by $711,000 to $12.6 million for the six months ended
June 30, 1996. This represents an increase of 7.8% from $6.0 million and 6.0%
from $11.9 million when compared to the same periods in 1995. The increases in
net interest income in each period are due primarily to increased net yields on
average earning assets.
Interest and Dividend Income
Interest and dividend income increased by $238,000 (1.6%) to $15.6 million, and
by $641,000 (2.1%) to $30.6 million for the three and six month periods ended
June 30, 1996, respectively, from $15.3 million and $29.9 million recorded in
the same periods in 1995. The increases are attributable to a shift from lower
yielding investments to higher earning loans for the three and six month periods
ended June 30, 1996 when compared to the same period in 1995.
Interest Expense
Interest expense decreased by $233,000 (2.5%) to $9.1 million for the quarter
ended June 30, 1996 when compared to the same period in 1995. The decrease in
interest expense for the three month period was attributable to a decrease in
rates paid on borrowed funds, partially offset by higher rates paid on deposits.
Interest expense for the six months ended June 30, 1996 and 1995 remained level
at $18.0 million.
Provision for Possible Loan Losses
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. 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.
Losses on loans, including impaired loans, are charged against the allowance
when management believes the collectability of principal is doubtful.
The provisions for possible loan losses totalled $326,000 and $815,000 for the
three and six months ended June 30, 1996 of which $40,000 and $346,000,
respectively, related to impaired loans. The provision for possible loan losses
was $329,000 for the six months ended June 30, 1995, of which $120,000 related
to impaired loans. 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. As a result of increased loans, there is an expectation that
the Bank will continue to find it necessary to make provisions for possible loan
losses in the future. See "Financial Condition - Non-Performing Assets."
Non-Interest Income
Non-interest income consists of net gains from the sales of mortgage loans and
mortgage loan servicing rights, along with fee and other non-interest income.
Beginning in 1996, the Company adopted Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122").
SFAS No. 122 requires an enterprise involved in mortgage banking activities to
recognize, as separate assets, rights to service mortgage loans for others
regardless of the manner in which the servicing rights are acquired. In
addition, capitalized mortgage servicing rights are required to be assessed for
impairment based on the fair value of those rights. The impact of this statement
depends on the volume of mortgage loans originated and sold, and servicing
rights retained. During the six months ended June 30, 1996 the Company
capitalized mortgage servicing rights totalling $100,000, which are included in
other assets on the balance sheet.
Non-interest income increased by $183,000 (21.2%) to $1.0 million, and by
$699,000 (48.3%) to $2.1 million for the three and six months ended June 30,
1996, respectively, compared to $865,000 and $1.4 million for the same periods
in 1995. The increase in non-interest income is due mainly to increased gains on
the sale of mortgage loans and mortgage servicing rights which totalled $930,000
(including $100,000 related to capitalized mortgage servicing rights) for the
six months ended June 30, 1996 compared to $295,000 for the same period in 1995.
The increase of $635,000 in gains from the sale of mortgage loans
-13-
<PAGE>
and mortgage loan servicing rights resulted from the increased volume of loans
sold which totalled $54.0 million for the six month period ended June 30, 1996,
compared to $15.3 million for the same period in 1995.
Non-Interest Expense
Non-interest expense increased by $180,000 (3.7%) to $5.1 million for the three
months ended June 30, 1996, and by $273,000 (2.8%) to $10.0 million for the six
months ended June 30, 1996, compared to $4.9 million and $9.7 million for the
same periods in 1995.
Salaries and employee benefits increased by $329,000 (15.4%) to $2.5 million for
the three months ended June 30, 1996, and by $492,000 (11.0%) to $5.0 million
for the six months ended June 30, 1996, when compared to $2.1 million and $4.5
million for the same periods in 1995, primarily due to increases in personnel to
support business growth.
Building and equipment costs decreased slightly to $844,000 for the three months
ended June 30, 1996 when compared to the same period in 1995. Building and
equipment costs increased by $225,000 to $1.8 million for the six months ended
June 30, 1996, compared to $1.5 million for the same period in 1995 as a result
of the new headquarters branch and a new operations center.
Foreclosed property expense decreased by $142,000 (55.0%) to $116,000 for the
three months ended June 30, 1996, and by $183,000 (37.3%) to $308,000 for the
six months ended June 30, 1996, when compared to $258,000 and $491,000 for the
comparable periods in 1995. The Company's continued success in managing and
selling foreclosed property has resulted in lower levels in the costs associated
with professional services and operating expenses related to the properties in
foreclosure.
All other operating expenses totalled $1.6 million for the three months ended
June 30, 1996 and 1995. Included in this amount for 1996 is $426,000 and
$225,000 of professional and marketing costs, respectively, an increase of
$97,000 and $111,000 when compared to $329,000 and $114,000 for professional and
marketing, respectively, recorded in the same quarter a year ago. This increase
was primarily due to costs associated with prospective expansion into new
markets and deposit gathering campaigns. These increased costs were primarily
offset by reductions in deposit insurance expense of $250,000 in the three
months ended June 30, 1996.
All other operating expenses decreased by $261,000 to $3.0 million for the six
months ended June 30, 1996, compared to $3.2 million recorded in the same period
in 1995. The reduction is primarily attributable to a reduction in deposit
insurance expense of $502,000, partially offset by the increases in professional
and marketing costs as described 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 assets are reviewed quarterly and adjustments to such
assets are recognized as deferred income tax expenses or benefits based on
management's judgement relating to the realizability of such assets and reflects
management's analysis of future taxable income. Management has valued the
deferred tax asset in accordance with regulatory guidelines which provide for a
one year income outlook and which resulted in a valuation reserve of $4.2
million at December 31, 1995. The net provision for income taxes amounted to
$9,000 for the second quarter of 1996 compared to $19,000 recorded for the same
period in 1995.
-14-
<PAGE>
Financial Condition
Total assets amounted to $842.9 million at June 30, 1996 an increase of $34.1
million or 4.2% from $808.8 million at December 31, 1995. This increase is
primarily attributable to an increase of $12.6 million of investment securities
and an increase of $29.3 million in loans, excluding the allowance for possible
loan losses.
Loans
At June 30, 1996, the loan portfolio, excluding the allowance for possible loan
losses, was $529.3 million, representing 62.8% of total assets, compared to
$500.1 million or 61.8% of total assets at December 31, 1995.
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.
June 30, December 31,
1996 1995
-------- ------------
(Dollars in thousands)
Mortgage Loans
Residential $228,319 43.1% $235,204 47.0%
Commercial 56,843 10.7 53,504 10.7
Construction 11,459 2.2 14,210 2.8
-------- ---- -------- ----
Total mortgage loans 296,621 56.0 302,918 60.5
-------- ---- -------- ----
Commercial loans 74,213 14.0 66,737 13.4
Consumer loans
Home equity 12,291 2.3 12,558 2.5
Automobile 87,696 16.6 76,590 15.3
Aircraft 24,857 4.7 14,478 2.9
Other 33,654 6.4 26,770 5.4
-------- ----- -------- ----
Total consumer loans 158,498 30.0 130,396 26.1
Total loans $529,332 100.0% $500,051 100.0%
======== ====== ======== ======
-15-
<PAGE>
Loan Origination
Loan originations for the three and six months ended June 30, 1996 totalled
$88.9 million and $164.4, respectively, compared to $71.4 million and $123.7
million for the same periods in 1995. The Bank's mortgage loan originations for
the three and six month periods totalled $47.5 million and $86.9 million,
respectively, compared to $42.8 million and $59.6 million for the same periods
in 1995. Included in the three and six month periods were mortgage loans
originated for sale of $23.7 million and $56.1 million in 1996, and $14.5
million and $18.4 million in 1995, respectively. Originations of aircraft loans,
a lending activity initiated in 1995, totalled $9.5 million and $14.4 million
for the three and six month periods, respectively, in 1996 compared to $3.4
million and $4.9 million for the comparable periods in 1995. During the second
quarter of 1995 the Bank also purchased approximately $7.0 million of loans,
primarily commercial real estate loans, at face value of the outstanding
principal amount.
The following tables summarize the activity for loan originations for the
periods indicated:
Three Months Ended June 30,
----------------------------
1996 1995
---- ----
(Dollars in thousands)
Mortgage
Residential $ 31,530 $ 21,178
Commercial Real Estate 1,770 5,029
Construction 14,156 9,655
-------- --------
Total Mortgage 47,456 35,862
Commercial 11,322 7,674
-------- --------
Consumer
Aircraft 9,488 3,436
Automobile 14,770 19,786
Other Consumer 5,821 4,627
-------- --------
Total Consumer 30,079 27,849
Total Loan Originations $ 88,857 $ 71,385
======== ========
Six Months Ended June 30,
--------------------------
1996 1995
---- ----
(Dollars in thousands)
Mortgage
Residential $ 61,700 $ 36,819
Commercial Real Estate 5,490 5,429
Construction 19,669 17,357
-------- --------
Total Mortgage 86,859 59,605
Commercial 25,082 12,206
-------- --------
Consumer
Aircraft 14,351 4,859
Automobile 29,614 41,004
Other Consumer 8,479 5,984
-------- --------
Total Consumer 52,444 51,847
Total Loan Originations $164,385 $123,658
======== ========
-16-
<PAGE>
Allowance for Possible Loan Losses
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. 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.
Losses on loans, including impaired loans, are charged against the allowance
when management believes the collectability of principal is doubtful.
The following table summarizes the activity in the allowance for possible loan
losses (including amounts established for impaired loans) for the six months
ended June 30, 1996.
(Dollars in thousands)
Balance at December 31, 1995 $6,552
Provision for possible loan losses 815
Charge-offs
Mortgage 487
Construction ---
Commercial 66
Consumer 467
------
Total charge-offs 1,020
------
Recoveries
Mortgage 123
Construction --
Commercial 457
Consumer 43
------
Total recoveries 623
------
Net charge-offs 397
------
Balance at June 30, 1996 $6,970
======
Ratio of net charge-offs to average loans outstanding .17%
See "Non-Performing Assets" for a discussion of the Company's impaired loans.
-17-
<PAGE>
Non-Performing Assets
Non-performing assets consist of non-accruing loans and foreclosed property.
Non-performing assets totalled $5.1 million at June 30, 1996 and $6.2 million at
December 31, 1995.
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.
Interest income recognized on impaired loans (including restructured loans),
using the cash basis of income recognition, amounted to approximately $20,000
and $136,000 for the three and six months ended June 30, 1996, compared to
$27,000 and $72,000 for the same periods in 1995, respectively. The average
recorded investment of impaired loans for the three and six months ended June
30, 1996 was $2.1 million compared to $1.2 million and $1.1 million for the same
periods in 1995 and $1.4 million for the twelve month period ended December 31,
1995.
Foreclosed property consists mainly of real estate collateral from loans which
were foreclosed.
The following table indicates the recorded investment of non-performing assets
and the related valuation allowance for impaired loans.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- -----------------
Impaired Loan Impaired Loan
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- -------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accruing Loans
Impaired Loans
Requiring a valuation allowance $ 221 $ 123 $ 318 $ 120
Not requiring a valuation allowance 632 -- 541 --
------ ------ ------ ------
853 123 859 120
Restructured Loans 975 432 1,043 152
------ ------ ------ ------
Total impaired and restructured loans 1,828 $ 555 1,902 $ 272
====== ======
Residential Mortgage 1,361 2,039
Other 399 475
------ ------
Total non-accruing 3,588 4,416
Foreclosed property, net 1,513 1,756
------ ------
Total non-performing assets $5,101 $6,172
====== ======
Percentage of non-performing assets
to total assets 0.61% 0.76%
Percentage of allowance for possible
loan losses to non-accruing loans 194.26% 148.3%
<FN>
The valuation allowance for impaired loans is included in the allowance for
possible loan losses on the balance sheet.
</FN>
</TABLE>
-18-
<PAGE>
Investments
At June 30, 1996 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 $283.0 million or 33.6% of total assets, compared to
$275.9 million or 34.1% of total assets at December 31, 1995. Interest and
dividend income on the investment portfolio generated 27.1% of total interest
and dividend income for the six months ended June 30, 1996 compared to 34.7% for
the comparable period in 1995.
To identify and control risks associated with the investment portfolio, the
Company has established policies and procedures, which include stop loss limits
and stress testing on a periodic basis, to control market risk on the investment
portfolio.
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 June 30, 1996 the Bank had total deposits of $508.1 million
representing a net increase of $16.6 million compared to total deposits of
$491.5 million at December 31, 1995. This increase is attributable to an
increase of $14.0 million in term deposits and by a net increase of $2.5 million
in Demand Deposits, 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.
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 $256.7 million at June 30, 1996 compared to $245.6 million at December
31, 1995.
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 June 30, 1996 the Bank had outstanding commitments to loan funds, under
mortgage, construction, commercial and home equity lines of credit amounting to
$48.4 million compared to $39.9 million at June 30, 1995. Management believes
the sources of liquidity previously discussed are sufficient to meet its
commitments.
Net cash provided by operating activities totalled $7.5 million for the six
months ended June 30, 1996 compared to $9.5 million for the same period in 1995.
Net cash used for investing activities totalled $40.6 million for the six months
ended June 30, 1996 compared to cash used of $24.1 million for the comparable
period in 1995.
Net cash provided by financing activities totalled $26.3 million for the six
months ended June 30, 1996, compared to net cash provided of $22.7 million for
the comparable period in 1995. The change reflects an increase in net
borrowings, and a decrease in the net growth of deposits when compared to the
prior period.
-19-
<PAGE>
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 June 30, 1996, 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 at June 30, 1996,
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.
Core/ Tier 1 Total
Leverage Risk-based Risk-based
Capital Capital Capital
-------- ---------- ----------
(Dollars in thousands)
Core Capital $ 62,437 $ 62,437 $ 62,437
Unrealized loss on investment securities
available-for-sale not included in
regulatory capital 1,105 1,105 1,105
General Valuation Allowance -- -- 6,314
-------- -------- --------
Regulatory Capital Measure $ 63,542 $ 63,542 $ 69,856
======== ======== ========
Total Assets $842,903 $842,903 $842,903
Adjusted Assets $842,903 $ -- $ --
Risk-based Assets (unaudited) $ -- $504,474 $504,474
Capital Ratio (unaudited) 7.54% 12.60% 13.85%
Regulatory minimum requirement 3.00% 4.00% 8.00%
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 equipment and real estate. 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.
Recent Accounting Developments
Beginning in 1996, the Company adopted SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long- Lived Assets to be Disposed Of". SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. The application of the new
statement has not had a significant impact on the results of operations or
financial condition.
-20-
<PAGE>
FIRST ESSEX BANCORP, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1996.
-21-
<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: July 26, 1996 /s/ Sametta A. Glass
Sametta A. Glass
Senior Vice President
and Principal Accounting Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,552
<INT-BEARING-DEPOSITS> 1,521
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,077
<INVESTMENTS-CARRYING> 132,871
<INVESTMENTS-MARKET> 130,901
<LOANS> 513,560
<ALLOWANCE> 6,970
<TOTAL-ASSETS> 842,903
<DEPOSITS> 508,080
<SHORT-TERM> 256,695
<LIABILITIES-OTHER> 15,781
<LONG-TERM> 0
0
0
<COMMON> 803
<OTHER-SE> 61,544
<TOTAL-LIABILITIES-AND-EQUITY> 842,903
<INTEREST-LOAN> 22,272
<INTEREST-INVEST> 8,291
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,563
<INTEREST-DEPOSIT> 10,673
<INTEREST-EXPENSE> 17,975
<INTEREST-INCOME-NET> 12,588
<LOAN-LOSSES> 815
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,017
<INCOME-PRETAX> 3,903
<INCOME-PRE-EXTRAORDINARY> 3,903
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,884
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
<YIELD-ACTUAL> 3.22
<LOANS-NON> 5,101
<LOANS-PAST> 0
<LOANS-TROUBLED> 975
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,552
<CHARGE-OFFS> 1,020
<RECOVERIES> 623
<ALLOWANCE-CLOSE> 6,970
<ALLOWANCE-DOMESTIC> 6,970
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
