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 3/31/97
---------
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, 1997:
Title of Class Shares Outstanding
-------------- ------------------
Common Stock, $.10 par value 7,484,163
<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.
2
<PAGE>
FIRST ESSEX BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 4
Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1996
and the three months ended March 31, 1997 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 7
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 21
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
----------------------------
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 21,656 $ 38,078
Investment securities available-for-sale 230,704 174,716
Investment securities held-to-maturity
(fair value $134,265,000, and $103,529,000) 134,980 104,465
Stock in Savings Bank Life Insurance Company 1,194 1,194
Stock in Federal Home Loan Bank of Boston 16,860 15,517
Mortgage loans held-for-sale 7,016 8,915
Loans receivable, less allowance for possible loan losses of
$10,126,000 and $10,538,000 695,107 685,206
Foreclosed property, net of valuation reserve of $334,000
and $834,000 941 1,880
Bank premises and equipment 11,638 11,609
Accrued interest receivable 7,290 5,970
Goodwill 11,602 11,800
Other assets 7,866 7,825
--------- --------
Total assets $1,146,854 $1,067,175
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $705,729 $690,953
Borrowed funds 339,264 274,958
Mortgagors' escrow accounts 2,247 1,116
Other liabilities 15,791 17,007
--------- ---------
Total liabilities $1,063,031 $984,034
---------- --------
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, 9,470,163 and 9,407,433 shares issued $ 947 $ 941
Additional paid-in capital 74,855 74,408
Retained earnings 24,977 23,727
Treasury stock, at cost, 1,986,000 shares (15,842) (15,842)
Valuation allowance for unrealized losses on
investment securities available-for-sale (1,114) (93)
------------ ---------
Total stockholders' equity 83,823 83,141
--------- --------
Total liabilities and stockholders' equity $1,146,854 $1,067,175
========== ==========
</TABLE>
-4-
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income:
Interest on mortgage loans $9,528 $6,284
Interest on other loans 5,615 4,686
Interest and dividends on investment securities available-for-sale 2,395 2,279
Interest and dividends on investment securities held-to-maturity 3,383 1,585
Interest on short-term investments 149 149
------- -------
Total interest and dividend income 21,070 14,983
------ ------
Interest expense
Interest on depositors' accounts 7,319 5,300
Interest on borrowed funds 4,594 3,572
------ ------
Total interest expense 11,913 8,872
------ ------
Net interest income 9,157 6,111
Provision for possible loan losses 510 489
------- -------
Net interest income after provision
for possible loan losses 8,647 5,622
Noninterest income
Net gain on sales of mortgage loans and mortgage servicing rights 362 477
Net gain on sales of investment securities 52 ---
Loan fees 180 161
Other fee income 609 450
Other -- 11
-------- -------
Total non-interest income 1,203 1,099
Noninterest expense
Salaries and employee benefits 2,866 2,501
Buildings and equipment 1,076 915
Professional services 401 217
Information processing 372 315
Insurance 91 61
Expenses, gains and losses on
and write-downs of, foreclosed property 206 192
Other 955 756
Amortization of goodwill 197 ---
------ --------
Total noninterest expenses 6,164 4,957
------ ------
Income before provision for income taxes 3,686 1,764
Provision for income taxes 1,539 10
------- -------
Net income $2,147 $ 1,754
====== =======
Earnings per share $ .28 $ .28
======= =======
Dividends declared per share $ .12 $ .12
======= =======
Average common and equivalent shares outstanding 7,706,249 6,162,469
========= =========
</TABLE>
-5-
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 1996
And The Three Months Ended March 31, 1997
-----------------------------------------
<TABLE>
<CAPTION>
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, 1995 $801 $58,208 $17,682 $(15,842) $(677) $60,172
Net income -- -- 9,113 -- -- 9,113
Cash dividends declared -- -- (3,068) -- -- (3,068)
Issuance of common stock in
conjunction with the
acquisition of
Finest Financial Corp. 136 15,871 -- -- -- 16,007
Stock options exercised 4 329 -- -- -- 333
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale -- -- -- -- 584 584
---- ------- ------- --------- ------ ------
Balance at December 31, 1996 941 74,408 23,727 (15,842) (93) 83,141
Net income -- -- 2,147 -- -- 2,147
Cash dividends declared -- -- (897) -- -- (897)
Stock options exercised 6 447 -- -- -- 453
Change in valuation
allowance for unrealized losses
on investment securities
available-for-sale -- -- -- -- (1,021) (1,021)
-------- ------- ------- --------- ------- --------
Balance at March 31, 1997 $947 $74,855 $24,977 $(15,842) $(1,114) $83,823
==== ======= ======= ========= ====== =======
</TABLE>
-6-
<PAGE>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,147 $1,754
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 510 489
Provision for depreciation and amortization 515 470
Gain on sales of foreclosed property (24) (13)
Write-down of foreclosed property 35 40
Amortization of goodwill 198 ---
Amortization of investment securities discounts and premiums, net 136 412
Deferred income taxes 1,539 10
Proceeds from sales of mortgage loans and mortgage servicing rights 18,286 32,117
Mortgage loans originated for sale (16,025) (32,368)
Realized gains on the sale of investment securities (52) ---
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (362) (477)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable (1,320) (76)
Decrease (increase) in other assets (41) 134
Increase in other liabilities (1,984) 2,645
------- -------
Net cash provided by operating activities 3,558 5,137
Cash flows from investing activities
Proceeds from sales of available-for-sale securities 933 ---
Proceeds from maturities and principal payments of available-for-sale securities 11,181 6,939
Proceeds from maturities and principal payments of held-to-maturity securities 4,246 9,479
Purchases of available-for-sale securities (69,861) ---
Purchases of held-to-maturity securities (34,878) (2,962)
Purchases of Federal Home Loan Bank stock (1,343) ---
Loans originated and purchased, net of principal collected (11,690) (9,729)
Proceeds from sales of foreclosed property 2,207 612
Purchases of bank premises and equipment (544) (88)
------- ---------
Net cash (used in) provided by investing activities (99,749) 4,251
Cash flows from financing activities
Net increase in demand deposits, NOW accounts and savings accounts 14,116 4,202
Net increase of term deposits 660 5,299
Net increase in borrowed funds with maturities of three months or less 81,436 340
Proceeds from borrowed funds with maturities in excess of three months 27,000 10,000
Repayments of borrowed funds with maturities in excess of three months (44,130) (31,658)
Increase in mortgagors' escrow accounts 1,131 566
Dividends paid (897) (723)
Stock options exercised 453 90
---------- ---------
Net cash provided (used in) by financing activities 79,769 (11,884)
--------- --------
Net decrease in cash and cash equivalents (16,422) (2,496)
Cash and cash equivalents at beginning of period 38,078 27,308
-------- ------
Cash and cash equivalents at end of period $21,656 $24,812
======== =======
</TABLE>
-7-
<PAGE>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows(continued)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid during the year $10,829 $ 9,121
Income taxes paid during the year --- ---
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure $ 1,279 $ 360
</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 1996 annual report.
-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
March 31, 1997
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
- -------
Significant factors contributing to this first quarter's earnings, compared to
the same period in 1996, include the purchase of Finest Financial Corp.
("Finest") on December 30, 1996, the integration of three branches from Finest's
subsidiary, Pelham Bank and Trust Company, and the opening of two new branches
in the latter part of 1996. Net income for the three months ended March 31, 1997
was $2.1 million compared to $1.8 million for the three months ended March 31,
1996. This increase reflects the fact that the provision for income taxes
increased by $1.5 million for the first quarter of 1997 when compared to the
same period in 1996. Pretax income for the three months ended March 31, 1997
rose to $3.7 million compared to the $1.8 million for the prior year. Net
interest income totalled $9.2 million for the quarter compared to $6.1 million
for the same period in 1996. Non-interest income and non-interest expense
increased by $104,000 and $1.2 million, to $1.2 million and $6.2 million,
respectively, for the quarter when compared to the same period in 1996.
-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 March 31,
1997 1996
------------------------ ------------------------
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 $ 14,504 $ 149 4.11% $ 8,288 $ 109 5.26%
Investment securities 362,154 5,779 6.38 261,869 3,904 5.96
Total loans(1) 703,463 15,142 8.61 505,995 10,970 8.67
--------- ------ --------- ------
Total earning assets 1,080,121 21,070 7.80 776,152 14,983 7.72
Allowance for possible loan losses (9,898) (6,629)
---------- ---------
Total earning assets less allowance
for possible loan losses 1,070,223 769,523
Other assets 56,656 34,817
---------- ---------
Total assets $1,126,879 $804,340
========== ========
Liabilities and Stockholders' Equity
NOW accounts $ 41,623 $ 129 1.24% $ 31,329 $ 93 1.19%
Money market accounts 84,746 444 2.10 73,641 390 2.12
Savings accounts 89,482 626 2.80 49,264 203 1.65
Term deposits 428,971 6,120 5.71 308,069 4,614 5.99
--------- ------ ------- -----
Total interest bearing deposits 644,822 7,319 4.54 462,303 5,300 4.59
Borrowed funds 322,243 4,594 5.70 239,552 3,572 5.96
--------- ------ ------- ------
Total interest bearing deposits and
borrowed funds 967,065 11,913 4.93 701,855 8,872 5.06
------ -----
Demand deposits 59,716 29,540
Other liabilities 16,709 11,890
---------- --------
Total liabilities 1,043,490 743,285
Stockholders' equity 83,389 61,055
---------- --------
Total liabilities and
stockholders' equity $1,126,879 $804,340
========== ========
Net interest income $ 9,157 $ 6,111
======= =======
Weighted average interest
rate spread 2.88% 2.67%
===== =====
Net yield on average
earning assets(2) 3.39% 3.15%
===== =====
Return on average assets 0.76% 0.87%
====== ======
Return on average equity 10.30% 11.49%
====== ======
</TABLE>
(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.
-11-
<PAGE>
Net Interest Income
- -------------------
Net interest income increased by $3.0 million to $9.2 million for the three
months ended March 31, 1997 This represents an increase of 49.8% from $6.1
million when compared to the same period in 1996. The increase in net interest
income is a result of the $304 million increase in average earning assets, when
compared to the same period in 1996, due, in part, to the purchase of Finest.
Interest and Dividend Income
- ----------------------------
Interest and dividend income increased by $6.1 million (40.6%) to $21.1 million
for the three month period ended March 31, 1997 from $15.0 million recorded in
the same period in 1996. The majority of this increase was related to volume
changes in earning assets.
Interest Expense
- ----------------
Interest expense of $11.9 million for the three month period ended March 31,
1997 increased by $3.0 million when compared to the same period in 1996. This
increase was also attributable to volume changes primarily associated with the
Finest acquisition.
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 $510,000 for the three months
ended March 31, 1997 all of which related to impaired loans, as defined in SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118. The provision for possible loan losses totalled $489,000 for the three
month period ended March 31, 1996, of which $306,000 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 and other markets, and the economy in
general. 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 and gains on the sale of investment securities,
together with fee and other non-interest income.
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 supersedes SFAS No. 122 "Accounting for Mortgage Servicing Rights"
("SFAS 122"). SFAS 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. SFAS 125 establishes,
among other things, new criteria for determining whether a transfer of financial
assets in exchange for cash or other consideration should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. SFAS 125 also
establishes new accounting requirements for pledged collateral and is effective
for most transactions occurring after December 31, 1996. The impact of these
statements depends on the volume of mortgage loans originated and sold, and
servicing rights retained. During the three months ended March 31, 1997 the
Company capitalized mortgage servicing rights totalling $120,000, which are
reflected in net gain on sales of mortgage loans and mortgage servicing rights
on the statement of operations and are included in other assets on the balance
sheet.
Non-interest income increased by $104,000 (9.5%) to $1.2 million for the three
months ended March 31, 1997 compared to $1.1 million for the same period in
1996. The increase in non-interest income is attributable to a net increase of
$167,000 in fees collected on loans and deposit accounts and other income,
together with an increase of $52,000 in the gains on sale of
-12-
<PAGE>
investment securities, offset by a decrease of $115,000 in the gain on sales of
loans and mortgage servicing rights when compared to the same period in 1996.
Non-Interest Expense
- --------------------
Non-interest expense increased by $1.2 million (24.3%) to $6.2 million for the
three months ended March 31, 1997, compared to $5.0 million for the same period
in 1996. The increase in non-interest expense is attributable to operations at
the three branches acquired in the Finest acquisition, and the opening of two
new branches in the latter part of 1996. These expansion-related increases
included $365,000 in salaries and employee benefits; $161,000 in building and
equipment costs; $57,000 for information processing costs; and $197,000 of
goodwill amortization related to the Finest acquisition. Other expenditures
related to the overall growth of the Company amount to $427,000.
Income Tax Expense
- ------------------
The provision for income taxes increased to $1.5 million for the three months
March 31, 1997 from $10,000 for the three months ended March 31, 1996. This
increase reflects the Company's return to full statutory tax rates due to the
complete utilization of loss carryovers.
-13-
<PAGE>
Financial Condition
Total assets amounted to $1,146.9 million at March 31, 1997 an increase of $79.7
million or 7.5% from $1,067.2 million at December 31, 1996.
Loans
- -----
At March 31, 1997, the loan portfolio, including mortgage loans held for sale,
and before consideration of the allowance for possible loan losses, was $712.2
million, representing 62.1% of total assets, compared to $704.7 million or 66.0%
of total assets at December 31, 1996.
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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential $295,149 41.4% $301,869 42.9%
Commercial 80,588 11.3 102,718 14.6
Construction 24,036 3.4 24,855 3.5
-------- ---- -------- ----
Total real estate loans 399,773 56.1 429,442 61.0
-------- ---- -------- ----
Owner occupied commercial
real estate (1) 49,252 6.9 29,465 4.2
Commercial loans 69,481 9.8 63,695 9.0
Aircraft loans 35,567 5.0 33,267 4.7
Consumer loans
Home equity 13,274 1.9 12,088 1.7
Automobile 98,321 13.8 92,175 13.1
Other 46,581 6.5 44,527 6.3
-------- ----- -------- ----
Total consumer loans 158,176 22.2 148,790 21.1
Total loans $712,249 100.0% $704,659 100.0%
======== ====== ======== ======
</TABLE>
(1) During 1996, management began to report this category of loans separate from
its other commercial and commercial real estate loans. Management believes this
category of loans is distinguishable from its other commercial lending products.
In 1996, the Company reclassified certain loans to this category from other more
historical classification categories.
- --------------------------------------------------------------------------------
-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. (See
"Non-Performing Assets" for a discussion of the Company's impaired loans.)
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, 1997.
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance at December 31, 1996 $10,538
Provision for possible loan losses 510
Charge-offs
Mortgage 747
Owner occupied commercial real estate ---
Construction ---
Commercial 1
Consumer 417
------
Total charge-offs 1,165
------
Recoveries
Mortgage 206
Owner occupied commercial real estate ---
Construction 2
Commercial 18
Consumer 17
------
Total recoveries 243
------
Net charge-offs 922
------
Balance at March 31, 1997 $10,126
=======
Total loans at end of period $712,249
Average loans for the period 703,463
Allowance to loans ratio 1.42%
Net charge-offs to average loans ratio .13%
During 1996 and 1997, the Company reclassified certain loans from other more
historical classification categories. In making these reclassifications, it was
determined that no restatement of charge-offs and/or recoveries, if any, would
be material or meaningful.
- --------------------------------------------------------------------------------
Non-Performing Assets
- ---------------------
Non-performing assets consist of non-accruing loans (including loans impaired
under SFAS No. 114), and foreclosed property. Non-performing assets totalled
$7.1 million at March 31, 1997 and $6.6 million at December 31, 1996.
The Bank's policy is to discontinue the accrual of interest on all loans
(including loans impaired under SFAS No. 114), for which payment of interest or
principal is 90 days or more past due or for such other loans as considered
necessary by
-15-
<PAGE>
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 (1) on which concessions have been made in light of
the debtor's financial difficulty with the objective of maximizing recovery and
(2) with respect to which the renegotiated payment terms continue to be met.
Interest income recognized on impaired loans (including restructured loans),
using the cash basis of income recognition, amounted to approximately $47,000
for the three months ended March 31, 1997, compared to $20,000 for the same
period in 1996. The average recorded investment of impaired loans for the three
months ended March 31, 1997 and 1996 was $2.4 million and $2.1 million,
respectively.
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, 1997 December 31, 1996
--------------- -----------------
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 $1,289 $ 642 $ 25 $ 25
Not requiring a valuation allowance 613 --- 286 ---
------- ------ ------- -----
1,902 642 311 25
Restructured Loans 963 460 1,042 466
------- ------ ------- ------
Total impaired 2,865 $1,102 1,353 $ 491
====== =====
Residential Mortgage 2,591 2,458
Other 679 928
------- --------
Total non-accruing 6,135 4,739
Foreclosed property, net 941 1,880
------- --------
Total non-performing assets $7,076 $ 6,619
====== =======
Percentage of non-performing assets
to total assets 0.62% 0.62%
Percentage of allowance for possible
loan losses to non-accruing loans 165.1% 222.4%
</TABLE>
The valuation allowance for impaired loans is included in the allowance for
possible loan losses on the balance sheet.
- --------------------------------------------------------------------------------
-16-
<PAGE>
Investments
- -----------
At March 31, 1997, 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 $383.7 million or 33.5% of total assets, compared to
$295.9 million or 27.7% of total assets at December 31, 1996. The change in the
size of the investment portfolio reflects the general increase in the Company's
balance sheet. Interest and dividend income on the investment portfolio
generated 28.1% of total interest and dividend income for the three months ended
March 31, 1997 compared to 26.8% for the comparable period in 1996.
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 are 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 March 31, 1997
the Bank had total deposits of $705.7 million representing a net increase of
$14.7 million compared to total deposits of $691.0 million at December 31, 1996.
This increase is attributable to an increase of $30.6 million in savings and
term deposits due primarily to promotional activities to increase savings
product volumes. This was offset by a reduction of $15.8 million in NOW, demand
and money market accounts which reflects, in part, movement from business demand
accounts into business investment products.
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 $339.3 million at March 31, 1997 compared to $275.0 million at December
31, 1996.
-17-
<PAGE>
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.
Net cash provided by operating activities totalled $3.6 million for the three
months ended March 31, 1997 compared to $5.1 million for the same period in
1996.
Net cash used for investing activities totalled $99.7 million for the three
months ended March 31, 1997 compared to cash provided of $4.3 million for the
comparable period in 1996. The increase in investing activities primarily
reflects the increased level of purchases of investment securities during the
first quarter of 1997 compared to a year ago.
Net cash provided by financing activities totalled $79.8 million for the three
months ended March 31, 1997, compared to net cash used of $11.9 million for the
comparable period in 1996. The change reflects increases in borrowed funds and
the net growth of deposits when compared to the prior period.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of March 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision ("OTS")
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institutions's category.
The Bank's actual capital amounts and ratios are also presented in the table. As
of March 31, 1997, the OTS did not deem it necessary for an interest-rate risk
component to be deducted from capital in determining risk-based capital
requirements.
The Bank may not declare or pay cash dividends on its shares of common stock if
the effect thereof would cause stockholders' equity to be reduced below
applicable capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
-18-
<PAGE>
- --------------------------------------------------------------------------------
The following table displays the Bank's capital calculations as defined under
prompt corrective action for the periods indicated:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under Prompt
Actual Actual Adequacy Purposes Corrective Action
Provisions: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997
Tangible Capital (to Adjusted Assets)
First Essex Bank, FSB $63,697 6.05% $16,943 (greater than 1.50% n/a
or equal to)
Tier 1 (Core) Capital (to Adjusted Assets)
First Essex Bank, FSB 63,697 5.64 33,887 3.00 $56,478 (greater than 5.00%
or equal to)
Tier 1 Capital (to Risk Weighted Assets)
First Essex Bank, FSB 63,697 9.49 26,862 4.00 40,292 6.00
Total Risk Based Capital (to Risk Weighted Assets)
First Essex Bank, FSB 72,113 10.74 53,723 8.00 67,154 10.00
December 31, 1996
Tangible Capital (to Adjusted Assets)
First Essex Bank, FSB $62,216 5.91% $15,790 (greater than 1.50% n/a
or equal to)
Tier 1 (Core) Capital (to Adjusted Assets)
First Essex Bank, FSB 62,216 5.91 31,396 3.00 $52,327 (greater than 5.00%
or equal to)
Tier 1 Capital (to Risk Weighted Assets)
First Essex Bank, FSB 62,216 9.67 25,736 4.00 38,604 6.00
Total Risk Based Capital (to Risk Weighted Assets)
First Essex Bank, FSB 70,289 10.92 51,471 8.00 64,339 10.00
</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.
-19-
<PAGE>
Recent Accounting Developments
- ------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 supersedes SFAS No. 122 and establishes, among other things, new
criteria for determining whether a transfer of financial assets in exchange for
cash or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS 125 also establishes new accounting
requirements for pledged collateral. SFAS 125 is effective for most transactions
occurring after December 31, 1996 with other provisions of the statement
deferred for one year. The Company has determined that the adoption of SFAS 125
will not have a material impact on its consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
establishes new standards for computing earnings per share (EPS) and makes them
comparable to international earnings per share calculations and standards. This
statement is effective for the Company's 1997 financial statements and has no
significant impact on reported financial results.
The pro forma effect of this accounting change on reported earnings per share
(EPS) is as follows:
For the Three Months Ended March 31,
Per share amounts 1997 1996
-------- ------
Primary EPS as reported $0.28 $0.28
Effect of SFAS No. 128 0.01 0.01
----------- ---------
Basic EPS as restated $0.29 $0.29
============ ==========
Fully diluted EPS as reported $0.28 $0.28
Effect of SFAS No. 128 0.00 0.00
----------- ---------
Diluted EPS as restated $0.28 $0.28
============ ==========
-20-
<PAGE>
FIRST ESSEX BANCORP, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The 1997 Annual Meeting of Shareholders of the registrant was held on May 1,
1997. All nominees of the Board of Directors of the registrant were re-elected
for a three-year term. Other matters voted on at the annual meeting included the
approval of the First Essex Bancorp, Inc. 1997 Stock Incentive Plan. Votes were
cast as follows:
1. Election of two Class I Directors
Nominee For Withheld
------- --- --------
Frank J. Leone, Jr. 5,908,887 505,107
Robert H. Pangione 5,898,087 515,907
2. Approval of the First Essex Bancorp, Inc. 1997 Stock Incentive Plan
Broker
For Against Abstain Non Vote
--- ------- ------- --------
3,150,333 737,339 120,823 2,405,499
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(b) REPORTS ON FORM 8-K:
1. An Item 2 Form 8-K reporting the consummation of the acquisition of
Finest Financial Corp. was filed on January 14, 1997.
2. Amendment No. 1 to this Item 2 Form 8-K reflecting financial
information as of September 30, 1996 was filed on February 3, 1997.
3. Amendment No. 2 to this Item 2 Form 8-K with minor technical changes
was filed on February 21, 1997.
(c) EXHIBITS:
*10.12 First Essex Bancorp, Inc. 1997 Stock Incentive Plan incorporated
herein by reference to Appendix A to the Company's proxy statement
for the 1997 annual meeting of shareholders.
(27) Financial Data Schedule is attached hereto as Exhibit 27.
* Management contract or compensatory plan.
-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: May 15, 1997 /s/ Thomas P. Coursey
---------------------
Thomas P. Coursey
Senior Vice President and Principal Accounting Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,415
<INT-BEARING-DEPOSITS> 3,241
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 230,704
<INVESTMENTS-CARRYING> 134,980
<INVESTMENTS-MARKET> 134,265
<LOANS> 702,123
<ALLOWANCE> 10,126
<TOTAL-ASSETS> 1,146,854
<DEPOSITS> 705,729
<SHORT-TERM> 339,264
<LIABILITIES-OTHER> 18,036
<LONG-TERM> 0
0
0
<COMMON> 947
<OTHER-SE> 82,876
<TOTAL-LIABILITIES-AND-EQUITY> 1,146,854
<INTEREST-LOAN> 15,133
<INTEREST-INVEST> 5,927
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,070
<INTEREST-DEPOSIT> 7,319
<INTEREST-EXPENSE> 11,913
<INTEREST-INCOME-NET> 8,647
<LOAN-LOSSES> 510
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 6,164
<INCOME-PRETAX> 3,686
<INCOME-PRE-EXTRAORDINARY> 3,686
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,147
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<YIELD-ACTUAL> 3.39
<LOANS-NON> 6,135
<LOANS-PAST> 0
<LOANS-TROUBLED> 963
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,538
<CHARGE-OFFS> 1,165
<RECOVERIES> 243
<ALLOWANCE-CLOSE> 10,126
<ALLOWANCE-DOMESTIC> 10,126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
