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 3/31/96
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 March 31, 1996:
Title of Class Shares Outstanding
Common Stock, $.10 par value 6,034,867
<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 March 31, 1996
and December 31, 1995 4
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 5
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1995
and the three months ended March 31, 1996 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 7
Note to the Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 19
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
1996 1995
-------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,812 $ 27,308
Investment securities available-for-sale 108,198 115,153
Investment securities held-to-maturity
(fair value $126,768,000, and $133,651,000) 128,323 135,098
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 6,549 5,821
Loans receivable, less allowance for possible loan losses of
$6,709,000 and $6,552,000 496,558 487,678
Foreclosed property, net of valuation reserve of $1,353,000
and $1,316,000 1,477 1,756
Bank premises and equipment 9,665 10,047
Accrued interest receivable 4,542 4,466
Other assets 5,268 5,402
--------- ---------
Total assets $801,455 $808,792
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $500,970 $491,469
Borrowed funds 224,251 245,569
Mortgagors' escrow accounts 1,284 718
Other liabilities 13,520 10,864
--------- ---------
Total liabilities $740,025 $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, 8,020,867 and 8,009,267 shares issued $ 802 $ 801
Additional paid-in capital 58,297 58,208
Retained earnings 18,712 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 (539) (677)
--------- ---------
Total stockholders' equity 61,430 60,172
--------- ---------
Total liabilities and stockholders' equity $801,455 $808,792
========= =========
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income
Interest on mortgage loans $6,284 $6,355
Interest on other loans 4,686 3,091
Interest and dividends on investment securities held-to-maturity 2,279 1,502
Interest and dividends on investment securities available-for-sale 1,585 3,587
Interest on federal funds sold 149 45
------- -------
Total interest and dividend income 14,983 14,580
------- -------
Interest expense
Interest on depositors' accounts 5,300 4,313
Interest on borrowed funds 3,572 4,396
------- -------
Total interest expense 8,872 8,709
------- -------
Net interest income 6,111 5,871
Provision for possible loan losses 489 129
------- -------
Net interest income after provision
for possible loan losses 5,622 5,742
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 477 17
Loan fees 161 118
Other fee income 450 437
Other 11 11
------- -------
Total non-interest income 1,099 583
Noninterest expense
Salaries and employee benefits 2,501 2,338
Building and equipment 915 673
Professional services 217 223
Computer expense 315 266
Insurance 61 289
Expenses, gains and losses on
and write-downs of foreclosed property 192 233
Other 756 842
------- -------
Total noninterest expenses 4,957 4,864
------- -------
Income before provision for income taxes 1,764 1,461
Provision for income taxes 10 1
------- -------
Net income $1,754 $ 1,460
======= =======
Earnings per share $ .28 $ .24
======= =======
Dividends declared per share $ .12 $ .08
======= =======
Average common stock outstanding 6,162,469 6,069,134
========= =========
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 1995
And The Three Months Ended March 31, 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 -- -- 1,754 -- -- 1,754
Cash dividends declared -- -- (724) -- -- (724)
Stock options exercised 1 89 -- -- -- 90
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale -- -- -- -- 138 138
-------- -------- -------- -------- -------- --------
Balance at March 31, 1996 $ 802 $ 58,297 $ 18,712 $(15,842) $ (539) $ 61,430
======== ======== ======== ======== ======== ========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,754 $1,460
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 489 129
Provision for depreciation and amortization 470 311
Gain on sales of foreclosed property (13) (44)
Write-down of foreclosed property 40 115
Amortization of investment securities discounts and premiums, net 412 379
Deferred income taxes 10 ---
Proceeds from sales of mortgage loans and mortgage servicing rights 32,117 5,360
Mortgage loans originated for sale (32,368) (3,896)
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (477) (17)
Decrease (increase) in accrued interest receivable (76) (1,068)
Decrease (increase) in other assets 134 (197)
Increase (decrease) in other liabilities 2,645 (922)
------- -------
Net cash provided by operating activities 5,137 1,610
Cash flows from investing activities
Proceeds from maturities and principal payments of available-for-sale securities 6,939 470
Proceeds from maturities and principal payments of held-to-maturity securities9,479 9,740
Purchases of investment securities held-to-maturity (2,962) ---
Purchases of Federal Home Loan Bank stock --- (1,274)
Loans originated, net of principal collected (9,729) (26,187)
Proceeds from sales of foreclosed property 612 816
Purchases of bank premises and equipment (88) (1,219)
------- -------
Net cash provided by (used in) investing activities 4,251 (17,654)
Cash flows from financing activities
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 4,202 (12,391)
Net increase of time deposits 5,299 33,749
Net increase (decrease) in borrowed funds
with maturities of three months or less 340 (53,437)
Proceeds from borrowed funds with maturities in excess of three months 10,000 104,000
Repayments of borrowed funds with maturities in excess of three months (31,658) (58,037)
Increase in mortgagors' escrow accounts 566 555
Dividends paid (723) (482)
Stock option exercised 90 ---
------- -------
Net cash (used in) provided by financing activities (11,884) 13,957
------- -------
Net decrease in cash and cash equivalents (2,496) (2,087)
Cash and cash equivalents at beginning of period 27,308 18,714
------- -------
Cash and cash equivalents at end of period $24,812 $16,627
======= =======
</TABLE>
-7-
<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 1 reclassifications have
been made to the 1995 financial statements to conform to the 1996 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
March 31, 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 March 31, 1996 was $1.8 million compared
to net income of $1.5 million for the same period in 1995. The increase in net
income over the comparative quarter in 1995 was due primarily to the increase in
non-interest income.
-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 March 31,
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 $ 8,288 $ 109 5.26% $ 3,078 $ 45 5.85%
Investment securities 261,869 3,904 5.96 340,219 5,089 5.98
-------- ------ -------- ------
Mortgage loans(1) 305,026 6,284 8.24 311,995 6,355 8.15
Consumer loans (1) 134,791 2,959 8.78 77,814 1,687 8.67
Commercial loans(1) 66,178 1,727 10.44 48,863 1,404 11.49
-------- ------ -------- ------
Total loans(1) 505,995 10,970 8.67 438,672 9,446 8.61
-------- ------ -------- ------
Total earning assets 776,152 14,983 7.72 781,969 14,580 7.46
Allowance for possible loan losses (6,629) (6,689)
-------- --------
Total earning assets less allowance
for possible loan losses 769,523 775,280
Other assets 34,817 31,953
-------- --------
Total assets $804,340 $807,233
======== ========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $31,329 $ 93 1.19% $ 27,760 $ 78 1.12%
Money market accounts 73,641 390 2.12 87,614 453 2.07
Savings accounts 49,264 203 1.65 53,039 175 1.32
Time deposits 308,069 4,614 5.99 272,531 3,607 5.29
-------- ------ -------- ------
Total interest bearing deposits 462,303 5,300 4.59 440,944 4,313 3.91
Borrowed funds 239,552 3,572 5.96 279,657 4,396 6.29
-------- ------ -------- ------
Total interest bearing deposits and
borrowed funds 701,855 8,872 5.06 720,601 8,709 4.83
-------- ------ -------- ------
Demand deposits 29,540 18,567
Other liabilities 11,890 12,577
-------- --------
Total liabilities 743,285 751,745
Stockholders' equity 61,055 55,488
-------- --------
Total liabilities and
stockholders' equity $804,340 $807,233
======== ========
Net interest income $ 6,111 $ 5,871
======= =======
Weighted average interest
rate spread 2.67% 2.62%
===== =====
Net yield on average
earning assets(2) 3.15% 3.00%
===== =====
Return on average assets 0.87% 0.72%
====== ======
Return on average equity 11.49% 10.52%
====== ======
<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>
-10-
<PAGE>
Net Interest Income
Net interest income increased by $240,000 to $6.1 million for the three months
ended March 31, 1996. This represents an increase of 4.1% from $5.9 million for
the same period in 1995. The increases in net interest income are due to
increased yields on average earning assets partially offset by higher rates paid
for deposits and borrowed funds.
Interest and Dividend Income
Interest and dividend income increased by $403,000 (2.8%) to $15.0 million for
the three months ended March 31, 1996 from $14.6 million for the same period in
1995. The increases are attributable to a shift from lower yielding investments
to higher earning loans for the three month period ended March 31, 1996 when
compared to the same period in 1995.
Interest Expense
Interest expense increased by $163,000 (1.9%) to $8.9 million for the three
months ended March 31, 1996 when compared to $8.7 for the same period in 1995.
The increase in interest expense was attributable to an increase in rates paid
on deposits and borrowed funds.
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 was $489,000 for the quarter ended March
31, 1996 of which $306,000 related to impaired loans. The provisions for
possible loan losses was $129,000 for the quarter ended March 31, 1995, all of
which was 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 three months ended March 31, 1996 the Company
capitalized mortgage servicing rights totalling $30,000, which are included in
other assets on the balance sheet.
Non-interest income increased by $516,000 (88.5%) to $1.1 million for the three
months ended March 31, 1996, compared to $583,000 for the same period 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 $477,000
(including $30,000 related to capitalized mortgage servicing rights) for the
three months ended March 31, 1996 when compared to $17,000 for the same period
in 1995.
-11-
<PAGE>
Non-Interest Expense
Non-interest expense increased by $93,000 (1.9%) to $5.0 million for the three
months ended March 31, 1996 compared to $4.9 million for the same period in
1995.
Salaries and employee benefits increased by $163,000 (7.0%) to $2.5 million for
the three months ended March 31, 1996 compared to $2.3 million for the same
period in 1995, primarily due to increases in personnel to support business
growth.
Building and equipment costs increased by $242,000 to $915,000 for the three
months ended March 31, 1996, compared to $673,000 for the same period in 1995 as
a result of the new headquarters branch and a new operations center.
Foreclosed property expense decreased by $41,000 (17.6%) to $192,000 for the
three months ended March 31, 1996 compared to $233,000 for the comparable period
in 1995. The Company's success in selling foreclosed property resulted in the
lower level of foreclosed property ($1.5 million at March 31, 1996 compared to
$1.8 million at December 31, 1995 and $2.6 million at March 31, 1995), which
resulted in lower costs associated with professional services and lower
operating expense related to the properties in foreclosure.
All other operating expenses decreased by $271,000 (16.7%) to $1.3 million for
the three months ended March 31, 1996 compared to $1.6 million for the
comparable period in 1995 primarily due to decreased deposit insurance expense,
partially offset by updated systems to service customers.
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 net
provision for income taxes amounted to $10,000 for the first quarter of 1996
compared to $1,000 recorded for the same period in 1995. The amounts recorded in
each period were based on management's quarterly review of the realizability of
the deferred tax asset, 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.
-12-
<PAGE>
Financial Condition
Total assets amounted to $801.5 million at March 31, 1995 a decrease of $7.3
million or 0.9% from $808.8 million at December 31, 1995. This decrease is
primarily attributable to a decrease of $13.7 million of investment securities
partially offset by an increase of $9.6 million in loans net of reserves.
Loans
At March 31, 1996, the loan portfolio, excluding the allowance for possible loan
losses, was $509.8 million, representing 63.6% 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.
March 31, December 31,
1996 1995
------------------ -------------------
Mortgage Loans
Residential $225,540 44.2% $235,204 47.0%
Commercial 61,434 12.1 53,504 10.7
Construction 13,877 2.7 14,210 2.8
-------- ----- -------- -----
Total mortgage loans 300,851 59.0 302,918 60.5
-------- ----- -------- -----
Commercial loans 67,265 13.2 66,737 13.4
Consumer loans
Home equity 12,389 2.4 12,558 2.5
Automobile 82,361 16.2 76,590 15.3
Aircraft 17,264 3.4 14,478 2.9
Other 29,686 5.8 26,770 5.4
-------- ----- -------- -----
Total consumer loans 141,700 27.8 130,396 26.1
Total loans $509,816 100.0% $500,051 100.0%
-------- ----- -------- -----
-13-
<PAGE>
Loan Origination
Loan originations for the three months ended March 31, 1996 totaled $75.5
million compared to $52.3 million for the same period in 1995. The Bank's
mortgage loan originations during the period totalled $39.4 million compared to
$23.7 million for the same period in 1995. Included in each period were mortgage
loans originated for sale of $32.4 million and $3.9 million in 1996 and 1995,
respectively. Indirect automobile loan originations amounted to $14.8 million
for the three months ended March 31, 1996 compared to $21.2 million for the same
period in 1995. Originations of aircraft loans, a new lending activity for the
Bank, totalled $4.9 million for the first quarter of 1996 compared to $1.4
million for the comparable period in 1995.
The following table summarizes the activity for loan originations for the three
months ended March 31,:
1996 1995
---- ----
(Dollars in thousands)
Mortgage
Residential $30,170 $15,641
Commercial Real Estate 3,720 400
Construction 5,513 7,702
------- -------
Total Mortgage 39,403 23,743
Commercial 13,760 4,532
------- -------
Consumer
Aircraft 4,863 1,423
Automobile 14,844 21,218
Other Consumer 2,658 1,357
------- -------
Total Consumer 22,365 23,998
Total Loan Originations $75,528 $52,273
======= =======
-14-
<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 three months
ended March 31, 1996.
(Dollars in thousands)
Balance at December 31, 1995 $6,552
Provision for possible loan losses 489
Charge-offs
Mortgage 236
Construction --
Commercial 1
Consumer 226
------
Total charge-offs 463
Recoveries
Mortgage 85
Construction --
Commercial 24
Consumer 22
------
Total recoveries 131
Net charge-offs 332
Balance at March 31, 1996 $6,709
======
Ratio of net charge-offs to average loans outstanding .13%
See "Non-Performing Assets" for a discussion of the Company's impaired loans.
-15-
<PAGE>
Non-Performing Assets
Non-performing assets consist of non-accruing loans and foreclosed property.
Non-performing assets totalled $6.2 million at March 31, 1996 and 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, using the cash basis of income
recognition, amounted to approximately $20,000 and $73,000 for the three months
ended March 31, 1996 and 1995, respectively. The average recorded investment of
impaired loans for the three months ended March 31, 1996 was $2.1 million
compared to $1.0 million for the same period 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>
March 31, 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 $ 400 $ 182 $ 318 $ 120
Not requiring a valuation allowance 1,250 --- 541 ---
------ ------ ------- ------
1,650 182 859 120
Restructured Loans 767 396 1,043 152
------ ------ ------- ------
Total impaired and restructured loans 2,417 $ 578 1,902 $ 272
====== ======
Residential Mortgage 1,859 2,039
Other 412 475
------ -------
Total non-accruing 4,688 4,416
Foreclosed property, net 1,477 1,756
------ -------
Total non-performing assets $6,165 $ 6,172
====== =======
Percentage of non-performing assets
to total assets 0.77% 0.76%
Percentage of allowance for possible
loan losses to non-accruing loans 143.1% 148.3%
<FN>
The valuation allowance for impaired loans is included in the allowance for
possible loan losses on the balance sheet.
</FN>
</TABLE>
-16-
<PAGE>
Investments
At March 31, 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 $261.6 million or 32.6% 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 26.8% of total interest
and dividend income for the three months ended March 31, 1996 compared to 35.2%
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 March 31, 1996 the Bank had total deposits of $501.0 million
representing a net increase of $9.5 million compared to total deposits of $491.5
million at December 31, 1995. This increase is attributable to an increase of
$5.3 million in term deposits and by an increase of $4.2 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 $224.3 million at March 31, 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 March 31, 1996 the Bank had outstanding commitments to loan funds, under
mortgage, construction, commercial and home equity lines of credit amounting to
$36.5 million compared to $38.9 million at March 31, 1995. Management believes
the sources of liquidity previously discussed are sufficient to meet its
commitments.
Net cash provided by operating activities totalled $5.1 million for the three
months ended March 31, 1996 compared to $1.6 million for the same period in
1995.
Net cash provided by investing activities totalled $4.3 million for the three
months ended March 31, 1996 compared to cash used of $17.7 million for the
comparable period in 1995.
Net cash used in financing activities totalled $11.9 million for the three
months ended March 31, 1996, compared to net cash provided of $14.0 million for
the comparable period in 1995. The change reflects an increase in the repayment
of borrowings, and a decrease in the net growth of deposits when compared to the
prior period.
-17-
<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 March 31, 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 March 31, 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 $ 61,430 $ 61,430 $ 61,430
Unrealized loss on investment securities
available-for-sale not included in
regulatory capital 539 539 539
General Valuation Allowance -- -- 6,051
-------- -------- --------
Regulatory Capital Measure $ 61,969 $ 61,969 $ 68,020
======== ======== ========
Total Assets $801,455 $801,455 $801,455
Adjusted Assets $801,455 $ -- $ --
Risk-based Assets (unaudited) $ -- $483,753 $483,753
Capital Ratio (unaudited) 7.73% 12.81% 14.06%
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.
-18-
<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 March 31, 1996.
-19-
<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: May 10, 1996 /s/ David W. Dailey
-------------------
David W. Dailey
Executive Vice President
and Chief Financial Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,547
<INT-BEARING-DEPOSITS> 204
<FED-FUNDS-SOLD> 9,061
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,198
<INVESTMENTS-CARRYING> 144,386
<INVESTMENTS-MARKET> 142,831
<LOANS> 509,816
<ALLOWANCE> 6,709
<TOTAL-ASSETS> 801,455
<DEPOSITS> 500,970
<SHORT-TERM> 224,251
<LIABILITIES-OTHER> 14,804
<LONG-TERM> 0
0
0
<COMMON> 802
<OTHER-SE> 60,628
<TOTAL-LIABILITIES-AND-EQUITY> 801,455
<INTEREST-LOAN> 10,970
<INTEREST-INVEST> 4,013
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,983
<INTEREST-DEPOSIT> 5,300
<INTEREST-EXPENSE> 8,872
<INTEREST-INCOME-NET> 6,111
<LOAN-LOSSES> 489
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,957
<INCOME-PRETAX> 1,764
<INCOME-PRE-EXTRAORDINARY> 1,754
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,754
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<YIELD-ACTUAL> 3.15
<LOANS-NON> 4,688
<LOANS-PAST> 0
<LOANS-TROUBLED> 767
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,552
<CHARGE-OFFS> 463
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 6,709
<ALLOWANCE-DOMESTIC> 6,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
