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 9/30/96
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 September 30, 1996:
Title of Class Shares Outstanding
Common Stock, $.10 par value 6,058,935
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "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 September 30, 1996
and December 31, 1995 4
Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 5
Consolidated Statements of Operations for the
nine months ended September 30, 1996 and 1995 6
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1995
and the nine months ended September 30, 1996 7
Consolidated Statements of Cash Flows for the
nine months ended September 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 10-21
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 22
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
1996 1995
-------------- -----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,395 $ 27,308
Investment securities available-for-sale 139,231 115,153
Investment securities held-to-maturity
(fair value $107,787,000, and $133,651,000) 109,534 135,098
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 7,739 5,821
Loans receivable, less allowance for possible loan losses of
$6,757,000 and $6,552,000 556,749 487,678
Foreclosed property, net of valuation reserve of $874,000
and $1,316,000 1,159 1,756
Bank premises and equipment 9,738 10,047
Accrued interest receivable 4,813 4,466
Other assets 5,747 5,402
-------- --------
Total assets $869,168 $808,792
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $512,517 $491,469
Borrowed funds 277,806 245,569
Mortgagors' escrow accounts 1,632 718
Other liabilities 12,576 10,864
-------- --------
Total liabilities $804,531 $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, 8,044,935 and 8,009,267 shares issued $ 804 $ 801
Additional paid-in capital 58,476 58,208
Retained earnings 21,913 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 (714) (677)
-------- ---------
Total stockholders' equity 64,637 60,172
-------- --------
Total liabilities and stockholders' equity $869,168 $808,792
======== ========
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30,
----------------------------------
1996 1995
-------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income:
Interest on mortgage loans $6,285 $6,798
Interest on other loans 5,576 4,029
Interest and dividends on investment securities available-for-sale 2,138 556
Interest and dividends on investment securities held-to-maturity 1,992 4,030
Interest on short-term investments 98 78
------- -------
Total interest and dividend income 16,089 15,491
------- ------
Interest expense
Interest on depositors' accounts 5,571 5,203
Interest on borrowed funds 3,989 4,422
------- ------
Total interest expense 9,560 9,625
------- ------
Net interest income 6,529 5,866
Provision for possible loan losses 240 209
------- -------
Net interest income after provision
for possible loan losses 6,289 5,657
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 222 514
Loan fees 117 119
Other fee income 471 435
Other -- 14
------- -------
Total non-interest income 810 1,082
Noninterest expense
Salaries and employee benefits 2,344 2,227
Building and equipment 832 829
Professional services 219 257
Computer expense 293 310
Insurance 58 13
Expenses, gains and losses on
and write-downs of foreclosed property 206 (92)
Other 612 692
------- -------
Total noninterest expenses 4,564 4,236
------- -------
Income before provision for income taxes 2,535 2,503
Provision for income taxes 11 10
------- -------
Net income $2,524 $ 2,493
======= =======
Earnings per share $ .41 $ .41
======= =======
Dividends declared per share $ .12 $ .12
======= =======
Average common and equivalent shares outstanding 6,176,188 6,114,753
========= =========
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
Nine Months Ended September 30,
---------------------------------
1996 1995
------ ------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income
Interest on mortgage loans $18,664 $19,598
Interest on other loans 15,469 10,765
Interest and dividends on investment securities available-for-sale 5,800 1,706
Interest and dividends on investment securities held-to-maturity 6,402 13,178
Interest on short-term investments 317 166
------- -------
Total interest and dividend income 46,652 45,413
------- -------
Interest expense
Interest on depositors' accounts 16,244 14,526
Interest on borrowed funds 11,291 13,144
------- -------
Total interest expense 27,535 27,670
------- -------
Net interest income 19,117 17,743
Provision for possible loan losses 1,055 538
------- -------
Net interest income after provision
for possible loan losses 18,062 17,205
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 1,152 809
Loan fees 400 347
Other fee income 1,382 1,335
Other 23 39
------- -------
Total non-interest income 2,957 2,530
Noninterest expense
Salaries and employee benefits 7,315 6,706
Building and equipment 2,591 2,363
Professional services 862 809
Computer expense 913 894
Insurance 153 591
Expenses, gains and losses on
and write-downs of foreclosed property 514 399
Other 2,233 2,218
------- -------
Total noninterest expenses 14,581 13,980
------- -------
Income before provision for income taxes 6,438 5,755
Provision for income taxes 30 30
------- -------
Net income $ 6,408 $ 5,725
======= =======
Earnings per share $ 1.04 $ .94
======= =======
Dividends declared per share $ .36 $ .28
======= =======
Average common and equivalent shares outstanding 6,164,322 6,086,016
========= =========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 1995
And The Nine Months Ended September 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 -- -- 6,408 -- -- 6,408
Cash dividends declared -- -- (2,177) -- -- (2,177)
Stock options exercised 3 268 -- -- -- 271
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale -- -- -- -- (37) (37)
----- ------- ------- -------- ------ -------
Balance at September 30, 1996 $804 $58,476 $21,913 $(15,842) $ (714) $64,637
===== ======= ======= ======== ======= =======
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
---------------------------------
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,408 $5,725
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 1,055 538
Provision for depreciation and amortization 1,338 1,154
Gain on sales of foreclosed property (106) (73)
Write-down of foreclosed property 83 371
Amortization of investment securities discounts and premiums, net 1,135 1,084
Income taxes 30 ---
Proceeds from sales of mortgage loans and mortgage servicing rights 75,702 52,344
Mortgage loans originated for sale (76,468) (55,913)
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (1,152) (514)
Increase in accrued interest receivable (347) (604)
Increase in other assets (345) (123)
Increase (decrease) in other liabilities 1,682 (2,752)
------- -------
Net cash provided by operating activities 9,015 1,237
Cash flows from investing activities
Proceeds from maturities and principal payments of available-for-sale securities 26,772 1,436
Proceeds from maturities and principal payments of held-to-maturity securities 50,854 49,599
Purchases of available-for-sale securities (51,447) ---
Purchases of held-to-maturity securities (25,865) (2,253)
Purchases of Federal Home Loan Bank stock --- (2,094)
Loans originated, net of principal collected (71,628) (78,888)
Proceeds from sales of foreclosed property 2,122 2,296
Purchases of bank premises and equipment (1,029) (3,015)
------- -------
Net cash used in investing activities (70,221) (32,919)
Cash flows from financing activities
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 13 (13,327)
Net increase of time deposits 21,035 41,468
Net increase (decrease) in borrowed funds with maturities of three months or less 10,514 (69,879)
Proceeds from borrowed funds with maturities in excess of three months 89,500 286,517
Repayments of borrowed funds with maturities in excess of three months (67,777) (207,090)
Increase in mortgagors' escrow accounts 914 576
Dividends paid (2,177) (1,445)
Stock options exercised 271 ---
------- -------
Net cash provided by financing activities 52,293 36,820
------- -------
Net increase (decrease) in cash and cash equivalents (8,913) 5,138
Cash and cash equivalents at beginning of period 27,308 18,714
------- -------
Cash and cash equivalents at end of period $18,395 $23,852
======= =======
Supplemental disclosure of cash flow information:
Interest paid during the year $27,501 $27,410
Income taxes paid --- ---
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure 1,502 1,743
</TABLE>
-8-
<PAGE>
FIRST ESSEX BANCORP, INC.
Notes 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.
2. Merger
On August 5, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Finest Financial Corp. ("Finest"),
the holding company of Pelham Bank and Trust Company. Pursuant to the Merger
Agreement, the Company will acquire all of the outstanding shares of Finest for
total consideration of approximately $30 million or $20.25 per share. The Merger
Agreement provides for payment of the purchase price utilizing a combination of
cash and the common stock of the Company subject to an overall limitation that a
minimum of 50% and a maximum of 62% of the total number of outstanding shares of
Finest common stock shall be converted into shares of the Company's common
stock, with the remaining outstanding shares of Finest common stock to be
converted into cash. The Merger Agreement further provides for amendment to the
purchase price if certain conditions occur. The transaction remains subject to
approval by First Essex and Finest Shareholders and the Office of Thrift
Supervision. The transaction will be accounted for as a purchase and is
anticipated to close in December 1996.
-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
September 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 September 30, 1996 was $2.5 million which
is comparable to the level of income reported for the same period in 1995. Net
interest income totalled $6.5 million for the quarter compared to $5.9 million
for the same period in 1995. During the quarter higher net interest income of
$663,000 was offset by a reduction of non-interest income of $272,000, an
increase in the provision for possible loan losses of $31,000 and an increase in
noninterest expense of $328,000.
Net income for the nine months ended September 30, 1996 was $6.4 million
compared to net income of $5.7 million for the same period in 1995. The increase
in net income over the comparative nine months in 1995 was due primarily to
higher net interest income of $1.4 million and an increase in non-interest
income of $427,000. This was offset by an increase in the provision for possible
loan losses of $517,000 and increases in non-interest expense of $601,000.
-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 September 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 $ 7,103 $ 98 5.52% $ 5,485 $ 78 5.69%
Investment securities 270,851 4,130 6.10 306,319 4,586 5.99
-------- ------ -------- ------
Mortgage loans(1) 304,773 6,285 8.25 335,448 6,798 8.11
Consumer loans (1) 165,079 3,619 8.77 51,638 1,460 11.31
Commercial loans(1) 76,856 1,957 10.19 110,858 2,569 9.27
-------- ------ -------- ------
Total loans(1) 546,708 11,861 8.68 497,944 10,827 8.70
-------- ------ -------- ------
Total earning assets 824,662 16,089 7.80 809,748 15,491 7.65
Allowance for possible loan losses (6,863) (6,353)
-------- --------
Total earning assets less allowance
for possible loan losses 817,799 803,395
Other assets 33,048 33,753
-------- --------
Total assets $850,847 $837,148
======== ========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $33,062 $ 100 1.21% $ 28,817 $ 81 1.12%
Money market accounts 71,822 400 2.23 76,263 385 2.02
Savings accounts 49,495 207 1.67 50,134 202 1.61
Time deposits 325,829 4,864 5.97 300,612 4,535 6.03
-------- ------ -------- ------
Total interest bearing deposits 480,208 5,571 4.64 455,826 5,203 4.57
Borrowed funds 265,820 3,989 6.00 285,399 4,422 6.20
-------- ------ -------- ------
Total interest bearing deposits and borrowed funds 746,028 9,560 5.13 741,225 9,625 5.19
------ ------
Demand deposits 30,426 24,918
Other liabilities 10,817 11,794
-------- --------
Total liabilities 787,271 777,937
Stockholders' equity 63,576 59,211
-------- --------
Total liabilities and stockholders' equity $850,847 $837,148
======== ========
Net interest income $ 6,529 $ 5,866
======= =======
Weighted average interest rate spread 2.68% 2.46%
===== =====
Net yield on average earning assets(2) 3.17% 2.90%
===== =====
Return on average assets 1.19% 1.19%
====== ======
Return on average equity 15.88% 16.85%
====== ======
<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 Nine Months Ended September 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 $ 8,003 $ 317 5.28% $ 4,161 $ 166 5.32%
Investment securities 270,333 12,202 6.02 324,237 14,885 6.12
-------- ------ -------- ------
Mortgage loans(1) 301,264 18,664 8.26 322,197 19,595 8.11
Consumer loans (1) 150,229 9,866 8.76 50,086 4,337 11.55
Commercial loans(1) 71,707 5,603 10.42 94,902 6,430 9.03
-------- ------ -------- ------
Total loans(1) 523,200 34,133 8.70 467,185 30,362 8.67
-------- ------ -------- ------
Total earning assets 801,536 46,652 7.76 795,583 45,413 7.61
Allowance for possible loan losses (6,744) (6,445)
-------- --------
Total earning assets less allowance
for possible loan losses 794,792 789,138
Other assets 32,175 31,909
-------- --------
Total assets $826,967 $821,047
======== ========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $32,217 $ 291 1.20% $ 28,201 $ 238 1.13%
Money market accounts 72,922 1,191 2.18 81,138 1,192 1.96
Savings accounts 49,608 620 1.67 51,552 615 1.59
Time deposits 316,705 14,142 5.95 291,039 12,481 5.72
-------- ------ -------- ------
Total interest bearing deposits 471,452 16,244 4.59 451,930 14,526 4.29
Borrowed funds 251,699 11,291 5.98 277,703 13,144 6.31
-------- ------ -------- ------
Total interest bearing deposits and borrowed funds 723,151 27,535 5.08 729,633 27,670 5.06
------ ------
Demand deposits 30,195 22,095
Other liabilities 11,208 11,997
-------- --------
Total liabilities 764,554 763,725
Stockholders' equity 62,413 57,322
-------- --------
Total liabilities and stockholders' equity $826,967 $821,047
======== ========
Net interest income $19,117 $17,743
======= =======
Weighted average interest rate spread 2.68% 2.55%
===== =====
Net yield on average earning assets(2) 3.18% 2.97%
===== =====
Return on average assets 1.03% 0.93%
====== ======
Return on average equity 13.69% 13.32%
====== ======
<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 $663,000 to $6.5 million for the three months
ended September 30, 1996, and by $1.4 million to $19.1 million for the nine
months ended September 30, 1996. This represents an increase of 11.3% from $5.9
million and 7.7% from $17.7 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 $598,000 (3.9%) to $16.1 million, and
by $1.2 million (2.7%) to $46.7 million for the three and nine month periods
ended September 30, 1996, respectively, from $15.5 million and $45.4 million
recorded in the same periods in 1995. The increases are primarily attributable
to a shift from lower yielding investments to higher earning loans for the three
and nine month periods ended September 30, 1996 when compared to the same period
in 1995.
Interest Expense
Interest expense of $9.6 million and $27.5 million for the three and nine month
periods ended September 30, 1996, respectively, decreased slightly when compared
to the same periods in 1995. The decrease in interest expense in each period was
attributable to a decrease in rates paid on borrowed funds, partially offset by
higher rates paid on deposits and changes in volumes of cost liabilities.
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 $240,000 and $1.1 million for
the three and nine months ended September 30, 1996 of which $177,000 and
$523,000, respectively, related to impaired loans. The provision for possible
loan losses was $209,000 and $538,000 for the three and nine month periods ended
September 30, 1995, of which $154,000 and $274,000, respectively, 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 nine months ended September 30, 1996 the Company
capitalized mortgage servicing rights totalling $234,000, which are included in
other assets on the balance sheet.
Non-interest income decreased by $272,000 (25.1%) to $810,000 for the three
months ended September 30, 1996 compared to $1.1 million for the same period in
1995. Non-interest income increased by $427,000 (16.9%) to $3.0 million for the
nine months ended September 30, 1996, compared to $2.5 million 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
$1.2 million (including $234,000 related to capitalized mortgage servicing
rights) for the nine months ended September 30, 1996 compared to $809,000 for
the same period in 1995. The increase of $343,000 in gains from the sale of
mortgage loans and mortgage loan servicing rights in the nine month period ended
September 30, 1996 resulted from the increased volume of loans sold which
totalled $74.6 million for the nine month period ended September 30, 1996,
compared to $51.8 million for the same period in 1995.
-13-
<PAGE>
Non-Interest Expense
Non-interest expense increased by $328,000 (7.7%) to $4.6 million for the three
months ended September 30, 1996, and by $601,000 (4.3%) to $14.6 million for the
nine months ended September 30, 1996, compared to $4.2 million and $14.0 million
for the same periods in 1995.
Salaries and employee benefits increased by $117,000 (5.25%) to $2.3 million for
the three months ended September 30, 1996, and by $609,000 (9.1%) to $7.3
million for the nine months ended September 30, 1996, when compared to $2.2
million and $6.7 million for the same periods in 1995, primarily due to
increases in personnel to support business growth.
Building and equipment costs of $832,000 for the three months ended September
30, 1996 were comparable to the same period in 1995. Building and equipment
costs increased by $228,000 to $2.6 million for the nine months ended September
30, 1996, compared to $2.4 million for the same period in 1995 as a result of
the new headquarters branch and a new operations center, which were placed in
service in the first half of 1995.
Foreclosed property expense increased by $298,000 to $206,000 for the three
months ended September 30, 1996, and by $115,000 to $514,000 for the nine months
ended September 30, 1996, when compared to a $92,000 net gain for the three
months ended September 30, 1995 and $399,000 of net expenses for the nine months
ended September 30, 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 decreased by $90,000 (7.1%) to $1.2 million for the
three months ended September 30, 1996 when compared to $1.3 for the same period
in 1995. This decrease was primarily due to costs associated with prospective
expansion into new markets and deposit gathering campaigns. All other operating
expenses decreased by $351,000 (7.8%) to $4.2 million for the nine months ended
September 30, 1996, compared to $4.5 million recorded in the same period in
1995. The reduction is primarily attributable to a reduction in deposit
insurance of $480,000, 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 bases and the tax bases 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 allow for an
income projection utilizing a one year look forward and which resulted in a
valuation reserve of $4.2 million at December 31, 1995. The net provision for
income taxes amounted to $30,000 for the nine months ended September 30, 1996
and 1995. Beginning in 1997, the Company will begin to provide for income taxes
based on the federal and state tax rates that would be generally applicable to
it.
-14-
<PAGE>
Financial Condition
Total assets amounted to $869.2 million at September 30, 1996 an increase of
$60.4 million or 7.5% from $808.8 million at December 31, 1995. This increase is
primarily attributable to an increase of $69.3 million in loans, excluding the
allowance for possible loan losses.
Loans
At September 30, 1996, the loan portfolio, excluding the allowance for possible
loan losses, was $563.5 million, representing 64.8% of total assets, compared to
$494.2 million or 61.1% of total assets at December 31, 1995.
The following table sets forth information concerning the Company's loan
portfolio at the dates indicated. The balances shown in the table are net of
unadvanced funds and unearned discounts and fees.
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995
------------- ------------
(Dollars in thousands)
Mortgage Loans
Residential $225,922 40.1% $229,383 46.4%
Commercial 61,171 10.9 53,504 10.8
Construction 20,479 3.6 14,210 2.9
-------- ----- -------- -----
Total mortgage loans 307,572 54.6 297,097 60.1
-------- ----- -------- -----
Commercial loans 85,505 15.2 66,737 13.5
Aircraft loans 30,083 5.3 14,478 2.9
Consumer loans
Home equity 12,319 2.2 12,558 2.6
Automobile 89,656 15.9 76,590 15.5
Other 38,371 6.8 26,770 5.4
-------- ----- -------- -----
Total consumer loans 140,346 24.9 115,918 23.5
Total loans $563,506 100.0% $494,230 100.0%
-------- ------ -------- ------
- --------------------------------------------------------------------------------
-15-
<PAGE>
Loan Origination
Loan originations for the three and nine months ended September 30, 1996
totalled $99.5 million and $263.9, respectively, compared to $73.0 million and
$196.7 million for the same periods in 1995. The Bank's mortgage loan
originations for the three and nine month periods totalled $65.2 million and
$152.1 million, respectively, compared to $43.5 million and $103.1 million for
the same periods in 1995. Included in the three and nine month periods were
mortgage loans originated for sale of $20.4 million and $76.5 million in 1996,
and $37.5 million and $55.9 million in 1995, respectively. Originations of
aircraft loans, a lending activity initiated in 1995, totalled $7.1 million and
$21.4 million for the three and nine month periods, respectively, in 1996
compared to $4.6 million and $9.5 million for the comparable periods in 1995.
During the third quarter of 1996 the Bank also purchased approximately $5.0
million of commercial loans at face value. During the third quarter of 1995 the
Bank purchased approximately $11.8 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 September 30,
----------------------------------
1996 1995
------ ------
(Dollars in thousands)
Mortgage
Residential $ 35,335 $ 30,008
Commercial Real Estate 5,995 3,403
Construction 23,877 10,133
-------- ---------
Total Mortgage 65,207 43,544
Commercial 10,508 8,260
Aircraft 7,073 4,638
Consumer
Automobile 12,196 12,757
Other Consumer 4,518 3,808
-------- ---------
Total Consumer 16,714 16,565
Total Loan Originations $ 99,502 $ 73,007
======== ========
Nine Months Ended September 30,
---------------------------------
1996 1995
------ ------
(Dollars in thousands)
Mortgage
Residential $ 97,035 $ 66,827
Commercial Real Estate 11,485 8,832
Construction 43,546 27,490
-------- ---------
Total Mortgage 152,066 103,149
Commercial 35,590 20,466
Aircraft 21,424 9,497
Consumer
Automobile 41,810 53,761
Other Consumer 12,997 9,792
-------- ---------
Total Consumer 54,807 63,553
Total Loan Originations $263,887 $196,665
======== ========
- --------------------------------------------------------------------------------
-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 nine months
ended September 30, 1996.
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance at December 31, 1995 $6,552
Provision for possible loan losses 1,055
Charge-offs
Mortgage 712
Construction 1
Commercial 66
Consumer 772
------
Total charge-offs 1,551
------
Recoveries
Mortgage 182
Construction 4
Commercial 459
Consumer 56
------
Total recoveries 701
------
Net charge-offs 850
------
Balance at September 30, 1996 $6,757
======
Ratio of net charge-offs to average loans outstanding .16%
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 $4.8 million at September 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 $47,000
and $183,000 for the three and nine months ended September 30, 1996, compared to
$21,000 and $93,000 for the same periods in 1995, respectively. The average
recorded investment of impaired loans for the three and nine months ended
September 30, 1996 was $1.9 million and $2.0 million compared to $1.7 million
and $1.3 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>
- ------------------------------------------------------------------------------------------------------------------------------------
September 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 440 --- 541 ---
------ ------ ------- -----
661 123 859 120
Restructured Loans 1,242 609 1,043 152
------ ------ ------- -----
Total impaired and restructured loans 1,903 $ 732 1,902 $ 272
====== =====
Residential Mortgage 1,185 2,039
Other 548 475
------ -------
Total non-accruing 3,636 4,416
Foreclosed property, net 1,159 1,756
------ -------
Total non-performing assets $4,795 $ 6,172
====== =======
Percentage of non-performing assets
to total assets 0.55% 0.76%
Percentage of allowance for possible
loan losses to non-accruing loans 185.9% 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 September 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 $268.7 million or 30.9% 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 nine months ended September 30, 1996 compared to
33.1% 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, market conditions, economic conditions and
competition. At September 30, 1996 the Bank had total deposits of $512.5 million
representing a net increase of $21.0 million compared to total deposits of
$491.5 million at December 31, 1995. This increase is attributable to an
increase of $21.0 million in term deposits.
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 $277.8 million at September 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 September 30, 1996 the Bank had outstanding commitments to loan funds, under
mortgage, construction, commercial and home equity lines of credit amounting to
$47.9 million compared to $52.1 million at September 30, 1995. Management
believes the sources of liquidity previously discussed are sufficient to meet
its commitments.
Net cash provided by operating activities totalled $9.0 million for the nine
months ended September 30, 1996 compared to $1.2 million for the same period in
1995.
Net cash used for investing activities totalled $70.2 million for the nine
months ended September 30, 1996 compared to cash used of $32.9 million for the
comparable period in 1995. The increase in investing activities for the
comparable period primarily reflects the purchase of investment securities
during 1996.
Net cash provided by financing activities totalled $52.3 million for the nine
months ended September 30, 1996, compared to net cash provided of $36.8 million
for the comparable period in 1995. The change reflects increases in net
borrowings, and decreases in the net growth of deposits when compared to the
prior period.
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-
-19-
<PAGE>
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, 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 September 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Core/ Tier 1 Total
Leverage Risk-based Risk-based
Capital Capital Capital
-------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Core Capital $ 64,637 $ 64,637 $ 64,637
Unrealized loss on investment securities
available-for-sale not included in
regulatory capital 714 714 714
General Valuation Allowance ---- ---- 6,701
-------- -------- --------
Regulatory Capital Measure $ 65,351 $ 65,351 $ 72,052
======== ======== ========
Total Assets $869,168 $869,168 $869,168
Adjusted Assets $869,168 $ --- $ ---
Risk-based Assets (unaudited) $ ---- $536,010 $536,010
Capital Ratio (unaudited) 7.52% 12.19% 13.44%
Regulatory minimum requirement 3.00% 4.00% 8.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Statement of Financial Accounting
Standards ("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.
In December, 1995, the FASB issued SFAS No. 123, "Stock-Based Compensation",
which became effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 requires employee stock-based compensation be either recorded or
disclosed at its fair value. Management will continue to account for employee
stock-based compensation under Accounting Principles Board Opinion No. 25 and
will not adopt the new accounting provisions for employee stock-based
compensation under SFAS No. 123, but will include the additional required
disclosures in the 1996 consolidated financial statements.
-20-
<PAGE>
Merger
On August 5, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Finest Financial Corp. ("Finest"),
the holding company of Pelham Bank and Trust Company. Pursuant to the Merger
Agreement, the Company will acquire all of the outstanding shares of Finest for
total consideration of approximately $30 million or $20.25 per share. The Merger
Agreement provides for payment of the purchase price utilizing a combination of
cash and the common stock of the Company subject to an overall limitation that a
minimum of 50% and a maximum of 62% of the total number of outstanding shares of
Finest common stock shall be converted into shares of the Company's common
stock, with the remaining outstanding shares of Finest common stock to be
converted into cash. The Merger Agreement further provides for amendment to the
purchase price if certain conditions occur. The transaction remains subject to
approval by First Essex and Finest Shareholders and the Office of Thrift
Supervision. The transaction will be accounted for as a purchase and is
anticipated to close in December 1996.
-21-
<PAGE>
FIRST ESSEX BANCORP, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) A current report on Form 8-K, dated August 5, 1996, was filed
during the quarter ended September 30, 1996 in conjunction with the signing of a
definitive agreement to purchase Finest Financial Corp.
-22-
<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, 1996 /s/ Thomas P. Coursey
---------------------
Thomas P. Coursey
Vice President and Principal Accounting Officer
-23-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of First Essex Bancorp, Inc. for the period ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,257
<INT-BEARING-DEPOSITS> 4,138
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,231
<INVESTMENTS-CARRYING> 125,597
<INVESTMENTS-MARKET> 123,850
<LOANS> 556,749
<ALLOWANCE> 6,757
<TOTAL-ASSETS> 869,168
<DEPOSITS> 512,517
<SHORT-TERM> 277,806
<LIABILITIES-OTHER> 14,208
<LONG-TERM> 0
0
0
<COMMON> 804
<OTHER-SE> 63,833
<TOTAL-LIABILITIES-AND-EQUITY> 869,168
<INTEREST-LOAN> 34,133
<INTEREST-INVEST> 12,519
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,652
<INTEREST-DEPOSIT> 16,244
<INTEREST-EXPENSE> 27,535
<INTEREST-INCOME-NET> 19,117
<LOAN-LOSSES> 1,055
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,851
<INCOME-PRETAX> 6,438
<INCOME-PRE-EXTRAORDINARY> 6,438
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,408
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.18
<LOANS-NON> 4,795
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,242
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,552
<CHARGE-OFFS> 1,551
<RECOVERIES> 701
<ALLOWANCE-CLOSE> 6,757
<ALLOWANCE-DOMESTIC> 6,757
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
