SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 6/30/98
----------
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: (978) 681-7500
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
The number of shares outstanding of each of the registrant's classes of common
stock as of June 30, 1998:
Title of Class Shares Outstanding
- ----------------------- ------------------
Common Stock, $.10 par value 7,562,336
<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
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
<S> <C> <C>
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 4
Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997 5
Consolidated Statements of Operations for the
six months ended June 30, 1998 and 1997 6
Consolidated Statements of Stockholders' Equity
for the three months ended June 30, 1997 and 1998 7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1997 and 1998 8
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 9
Notes to the Consolidated Financial Statements 10-11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-21
ITEM 3. Quantitative and Qualitative Disclosure
About Market Risk 22
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 6. Exhibits and Reports on Form 8-K 23-24
</TABLE>
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FIRST ESSEX BANCORP, INC.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- --------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $175,368 $22,542
Investment securities available-for-sale 288,147 211,903
Investment securities held-to-maturity
(fair value of $180,743 at December 31, 1997, Note 4) -- 178,999
Stock in Savings Bank Life Insurance Company 1,194 1,194
Stock in Federal Home Loan Bank of Boston 19,985 19,803
Mortgage loans held-for-sale 6,996 11,807
Loans receivable, less allowance for possible loan losses of
$11,426 and $10,570 754,469 696,338
Foreclosed property 1,024 891
Bank premises and equipment 12,212 10,545
Accrued interest receivable 8,037 8,084
Goodwill 25,722 10,991
Other assets 21,598 24,362
------------- --------------
Total assets $1,314,752 $1,197,459
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts $930,027 $744,322
Borrowed funds 263,175 343,557
Mortgagors' escrow accounts 737 561
Other liabilities 26,997 17,954
------------- --------------
Total liabilities 1,220,936 1,106,394
------------- --------------
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, 9,658,836 and 9,522,424 shares issued 966 952
Additional paid-in capital 76,791 75,303
Retained earnings 33,018 29,685
Treasury stock, at cost, 2,096,500 shares and 1,986,000 shares (18,335) (15,842)
Accumulated other comprehensive income 1,376 967
------------- --------------
Total stockholders' equity 93,816 91,065
------------- --------------
Total liabilities and stockholders' equity $1,314,752 $1,197,459
============= ==============
</TABLE>
4
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
--------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Interest on mortgage loans $9,158 $9,810
Interest on other loans 6,797 5,854
Interest and dividends on investment securities available-for-sale 4,733 3,893
Interest and dividends on investment securities held-to-maturity (Note 4) 2,111 3,094
Interest on short-term investments 284 114
Interest on other earning assets 261 --
--------- ---------
Total interest and dividend income 23,344 22,765
--------- ---------
Interest expense
Interest on depositors' accounts 8,424 7,658
Interest on borrowed funds 5,519 5,512
--------- ---------
Total interest expense 13,943 13,170
--------- ---------
Net interest income 9,401 9,595
Provision for possible loan losses 435 510
--------- ---------
Net interest income after provision for possibe loan losses 8,966 9,085
Non-interest income
Net gain on sales of mortgage loans and mortgage servicing rights 400 556
Net gain (loss) on sale of investment securities 949 (3)
Loan fees 184 124
Other fee income 739 579
--------- ---------
Total non-interest income 2,272 1,256
Non-interest expense
Salaries and employee benefits 3,256 2,832
Buildings and equipment 1,016 1,059
Professional services 420 390
Information processing 570 394
Insurance 65 63
Expenses, gains and losses on
and write-downs of, foreclosed property (35) 157
Other 1,186 912
Amortization of goodwill 197 196
--------- ---------
Total non-interest expenses 6,675 6,003
--------- ---------
Income before provision for income taxes 4,563 4,338
Provision for income taxes 1,814 1,812
--------- ---------
Net income $2,749 $2,526
========= =========
Earnings per share - Basic $0.36 $0.34
========= =========
Earnings per share - Diluted $0.35 $0.33
========= =========
Dividends declared per share $0.14 $0.12
========= =========
Weighted average number of shares - basic 7,550,697 7,493,457
========= =========
Weighted average number of shares - diluted 7,870,587 7,769,658
========= =========
</TABLE>
5
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------- -------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Interest on mortgage loans $18,405 $19,338
Interest on other loans 13,069 11,469
Interest and dividends on investment securities available-for-sale 8,721 7,276
Interest and dividends on investment securities held-to-maturity (Note 4) 5,520 5,489
Interest on federal funds sold 458 263
Interest on other earning assets 521 --
--------- ---------
Total interest and dividend income 46,694 43,835
--------- ---------
Interest expense
Interest on depositors' accounts 16,496 14,977
Interest on borrowed funds 11,026 10,106
--------- ---------
Total interest expense 27,522 25,083
--------- ---------
Net interest income 19,172 18,752
Provision for possible loan losses 870 1,020
--------- ---------
Net interest income after provision
for possible loan losses 18,302 17,732
Non-interest income
Net gain on sales of mortgage loans and mortgage servicing rights 682 918
Net gain on sale of investment securities 966 49
Loan fees 307 304
Other fee income 1,307 1,188
--------- ---------
Total non-interest income 3,262 2,459
Non-interest expense
Salaries and employee benefits 6,108 5,698
Buildings and equipment 2,012 2,135
Professional services 618 791
Information processing 1,079 766
Insurance 128 154
Expenses, gains and losses on
and write-downs of, foreclosed property 106 363
Other 2,039 1,867
Amortization of goodwill 393 393
--------- ---------
Total non-interest expenses 12,483 12,167
--------- ---------
Income before provision for income taxes 9,081 8,024
Provision for income taxes 3,634 3,351
--------- ---------
Net income $5,447 $4,673
========= =========
Earnings per share - basic $0.72 $0.63
========= =========
Earnings per share - diluted $0.69 $0.61
========= =========
Dividends declared per share $0.28 $0.24
========= =========
Weighted average number of shares - basic 7,550,633 7,472,346
========= =========
Weighted average number of shares - diluted 7,874,320 7,737,953
========= =========
</TABLE>
6
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Components of Stockholders' Equity
-----------------------------------------------------------
Unrealized Gains (Losses)
on Investment
Comprehensive Common Paid in Retained Treasury Securities Available -
Income Stock Capital Earnings Stock For - Sale, Net Total
-------- ------- ------- -------- -------- --------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $947 $74,855 $24,977 ($15,842) ($1,114) $83,823
Comprehensive income:
Net income $2,526 2,526 2,526
Other comprehensive income:
-Unrealized securities gains,
net of $852 of tax expense,
arising during the period 1,240
- Add: reclassifcation adjustment
for security losses included in
net income, net of $1 tax benefit 2
--------
Total other comprehensive income 1,242 1,242 1,242
--------
Total Comprehensive income $3,768 0
========
Cash dividends declared -- -- (907) -- -- (907)
Stock options exercised 2 159 -- -- -- 161
-------- -------- --------- --------- ---------- --------
Balance at June 30,1997 $949 $75,014 $26,596 ($15,842) $128 $86,845
======== ======== ========= ========= ========== ========
Balance at March 31, 1998 $963 $76,161 $31,328 ($18,335) $1,015 $91,132
Compehensive income:
Net income $2,749 -- -- 2,749 -- -- 2,749
Other comprehensive income:
- Unrealized securities gains,
net of $621 tax expense,
arising during the period 930
- Less: reclassifcation adjustment
for security gains included in
net income, net of $380 tax expense 569
--------
Total other comprehensive income
income 361 361 361
--------
Total Comprehense income 3,110
========
Cash dividends declared -- -- (1,059) -- -- (1,059)
Stock options exercised 3 630 633
-------- -------- --------- --------- ---------- --------
Balance at June 30, 1998 $966 $76,791 $33,018 ($18,335) $1,376 $93,816
======== ======== ========= ========= ========== ========
</TABLE>
7
<PAGE>
FIRST ESSEX BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Components of Stockholders' Equity
----------------------------------------------------------------------
Unrealized Gains (Losses)
on Investment
Comprehensive Common Paid in Retained Treasury Securities Available -
Income Stock Capital Earnings Stock For - Sale, Net Total
------------- ------ ------- -------- -------- --------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $941 $74,408 $23,727 ($15,842) ($93) $83,141
Comprehensive income:
Net income $4,673 4,673 $4,673
Other comprehensive income:
- Unrealized securities gains,
net of $172 of tax expense,
arising during the period 250
- Less: reclassifcation adjustment
for security gains included in
net income, net of $20 tax expense 29
--------
Total other comprehensive income 221 221 221
--------
Total Comprehensive income $4,894
========
Cash dividends declared -- -- (1,804) -- -- (1,804)
Stock options exercised 8 606 -- -- -- 614
------- --------- ---------- --------- ------------ ----------
Balance at June 30,1997 $949 $75,014 $26,596 ($15,842) $128 $86,845
======= ========= ========== ========= ============ ==========
Balance at December 31, 1997 $952 $75,303 $29,685 ($15,842) $967 $91,065
Compehensive income:
Net income $5,447 -- -- 5,447 -- -- 5,447
Other comprehensive income:
- Unrealized securities gains,
net of $659 tax expense,
arising during the period 989
- Less: reclassifcation adjustment
for security gains included in
net income, net of $386 tax expense 580
-------
Total other comprehensive income 409 409 409
-------
Total Comprehense income $5,856
=======
Cash dividends declared -- -- (2,114) -- -- (2,114)
Stock options exercised 14 1,488 1,502
Acquisition of treasury stock -- -- -- (2,493) -- (2,493)
------- --------- ---------- --------- ------------ ----------
Balance at June 30, 1998 $966 $76,791 $33,018 ($18,335) $1,376 $93,816
======= ========= ========== ========= ============ ==========
</TABLE>
8
<PAGE>
FIRST ESSEX BANCORP, INC
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $5,447 $4,673
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 870 1,020
Provision for depreciation and amortization 945 953
Gain on sales of foreclosed property (214) (240)
Write-down of foreclosed property -- 34
Amortization of goodwill 393 395
Amortization of investment securities discounts and premiums, net 963 298
Deferred income taxes -- --
Proceeds from sales of mortgage loans and mortgage servicing rights 62,137 35,981
Mortgage loans originated for sale (56,642) (32,841)
Realized gains on the sale of investment securities (966) (49)
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (682) (918)
(Increase) decrease in accrued interest receivable 447 (2,159)
(Increase) decrease in other assets 2,033 (17,605)
Increase in other liabilities 8,306 2,043
-------- --------
Net cash provided by (used in) operating activities 23,037 (8,415)
Cash flows from investing activities
Acquisition of branch assets and assumed deposit liabilities, net of cash received 65,033 --
Proceeds from sales of available-for-sale securities 145,538 22,509
Proceeds from maturities and principal payments of available-for-sale securities 31,823 19,352
Proceeds from maturities and principal payments of held-to-maturity securities 37,739 9,535
Purchases of available-for-sale securities (89,554) (107,252)
Purchases of held-to-maturity securities (21,892) (86,034)
Purchases of Federal Home Loan Bank stock (182) (4,286)
Loans originated and purchased, net of principal collected 300 (20,375)
Proceeds from sales of foreclosed property 1,826 2,557
Purchases of bank premises and equipment (390) (668)
-------- --------
Net cash provided by (used in) investing activities 170,241 (164,662)
Cash flows from financing activities
Net increase in demand deposits, NOW accounts and savings accounts 39,150 35,935
Net increase of term deposits 6,256 2,055
Net increase (decrease) in borrowed funds with maturities of three months or less (78,908) 85,328
Proceeds from borrowed funds with maturities in excess of three months 103,000 150,000
Repayments of borrowed funds with maturities in excess of three months (106,875) (100,762)
Increase (decrease) in mortgagors' escrow accounts 26 (63)
Dividends paid (2,110) (1,788)
Stock options exercised 1,502 614
Common stock repurchases (2,493) --
-------- --------
Net cash provided by (used in) financing activities (40,452) 171,319
-------- --------
Net decrease in cash and cash equivalents 152,826 (1,758)
Cash and cash equivalents at beginning of period 22,542 38,078
-------- --------
Cash and cash equivalents at end of period $175,368 $36,320
======== ========
Supplemental disclosure of cash flow information:
Interest paid during the year $27,565 $24,002
Income taxes paid during the year 3,525 2,768
Cost incurred in early repayment of Federal Home Loan Bank advances 150 --
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure 540 1,965
</TABLE>
9
<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 1997 annual
report.
2. Earnings Per Share
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share" ("SFAS No. 128"). This statement was issued by the FASB in February
1997 and establishes new standards for computing and presenting earnings per
share (EPS) and makes them comparable to international EPS calculations and
standards. This statement replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of the basic and diluted
EPS computations. The statement also requires a restatement of all
prior-period EPS data presented.
Basic EPS amounts have been computed by dividing reported earnings available
to common shareholders by the weighted average number of common equivalent
shares outstanding during each year. Diluted EPS amounts have been computed
using the weighted average number of common and common equivalent shares and
the dilutive potential common shares outstanding during each year.
A reconciliation between basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net income available to common shareholders $2,749 $2,526 $5,447 $4,673
========== ========== =========== ===========
Basic EPS:
Basic Common Stock outstanding 7,551 7,493 7,551 7,472
========== ========== =========== ===========
Basic EPS $0.36 $0.34 $0.72 $0.63
========== ========== =========== ===========
Diluted EPS:
Basic Common Stock outstanding 7,551 7,493 7,551 7,472
Plus: Common Stock from options 320 276 323 266
---------- ---------- ----------- -----------
Dilutive common stock outstanding 7,871 7,769 7,874 7,738
========== ========== =========== ===========
Diluted EPS: $0.35 $0.33 $0.69 $0.61
========== ========== =========== ===========
</TABLE>
10
<PAGE>
3. Acquisition of Branch Assets and Assumption of Deposit Liabilities
Pursuant to a Purchase and Assumption Agreement, the Company purchased
certain assets from and assumed certain deposit liabilities of another
financial institution on June 19 and June 26, 1998. The assets acquired
consisted of approximately $63.9 million of loans, fixed and other assets,
real property related to the owned branches and cash at the branches. The
Company also paid a premium of approximately $15.1 million of which
approximately $10.5 million was allocated to the deposit liabilities and
repurchase agreements assumed and approximately $4.6 million was allocated
to goodwill. The core deposit premium (CDI) will be amortized over eight
years on a 125% declining balance method while the goodwill will amortized
over a twenty year life on a straight line basis.
Because the acquisition of the branches represents the acquisition of
assets and does not represent the acquisition of a business, separate
entity or a subsidiary, no historical financial statements or pro forma
financial statements are required. Because the deposit liabilities assumed
exceed the assets acquired, there was a cash payment made to the Company as
a result of this transaction. The following is a summarization of the
components of the transaction based on estimates of fair value at the date
of acquisition (in thousands):
<TABLE>
<S> <C>
Loans net $ 60,425
Bank premises and equipment 2,222
Core deposit intangible 10,544
Goodwill 4,580
Prepaid expenses and other assets 434
Deposit and repurchase agreement liabilities assumed (142,701)
Accrued expenses and other liabilities (537)
---------
Net cash received $ 65,033
=========
</TABLE>
4. Investment Securities
During the second quarter of 1998, all securities previously classified as
"Held-to-Maturity" in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" were reclassified to
"Available-for-Sale". This reclassification was the result of an analysis
of the strategic alternatives for the securities portfolio and had no
impact on the reported earnings for the period. On a prospective basis, the
Company will no longer classify investment securities as held-to-maturity.
The amortized cost basis of the held-to-maturity securities transferred to
the available-for-sale classification was $162.3 million. Subsequent to
this reclassification, and as part of the balance sheet realignment,
approximately $231 thousand of gains on the sale of some of these
transferred investment securities were realized. Also as a result of this
reclassification, approximately $612 thousand of unrealized gains, net of
$408 thousand of tax expense, were reflected in other comprehensive income
and on the balance sheet.
11
<PAGE>
ITEM 2. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST ESSEX BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1998
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 losses, 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
provision for possible loan losses.
Results of Operations
General
The most significant event of the second quarter was the completion, at the end
of June, of the purchase of five branches with approximately $143 million of
deposit liabilities. Activities associated with the conversion of these branches
to the Bank's processing systems, as well as a realignment of the balance sheet
in anticipation of the purchase, resulted in some non-recurring income and
expense in the quarter. The realignment involved the sale of investment
securities and the repayment of Federal Home Loan Bank advances.
Net income for the three months ended June 30, 1998 was $2.7 million compared to
$2.5 million for same period in 1997, or a 9% increase. Net interest income
totaled $9.4 million for the quarter compared to $9.6 million for the same
period in 1997. Net interest income was lower by $194 thousand compared to the
prior comparable period due mainly to the impact of the balance sheet
realignment. Non-interest income and non-interest expense increased $1.0 million
and $672 thousand, respectively, due primarily to the balance sheet realignment
and the one-time costs associated with the conversion of the branches.
Net income for the six months ended June 30, 1998 was $5.4 million compared to
$4.7 million for the same period in 1997, or a 17% increase. The increase in net
income over the comparative six months in 1997 was comprised of higher net
interest income of $420 thousand and higher non-interest income of $803 thousand
and a decrease in the provision for loan losses of $150 thousand, offset by
increases in non-interest expense and income tax expense of $316 thousand and
$283 thousand respectively.
12
<PAGE>
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1998 1997
---------------------------------------------- ------------------------------------
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 $21,363 $286 5.35% $15,152 $114 3.01%
Investment securities 429,395 6,842 6.37 425,615 6,987 6.57
Total loans (1) 718,367 15,955 8.88 713,786 15,664 8.78
Other earning assets 17,324 261 6.03 -- --
----------- ------ ---------- ------
Total earning assets 1,186,449 23,344 7.87 1,154,553 22,765 7.89
Allowance for possible loan losses (10,507) (10,192)
----------- ----------
Total earning assets less
allowance for
possible loan losses 1,175,942 1,144,361
Other assets 67,230 57,503
---------- ----------
Total assets $1,243,172 $1,201,864
========== ==========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $44,320 $152 1.37% $39,956 $129 1.29%
Money market accounts 67,537 382 2.26 73,902 432 2.34
Savings accounts 180,737 1,754 3.88 116,821 921 3.15
Time deposits 420,954 6,136 5.83 429,613 6,176 5.75
---------- ------ ---------- ------
Total interest bearing deposits 713,548 8,424 4.72 660,292 7,658 4.64
Borrowed funds 351,569 5,519 6.28 378,508 5,512 5.82
---------- ------ ---------- ------
Total interest bearing deposits and
borrowed funds 1,065,117 13,943 5.24 1,038,800 13,170 5.07
---------- ------ ---------- ------
Demand deposits 66,293 63,684
Other liabilities 18,932 14,302
---------- ----------
Total liabilities 1,150,342 1,116,786
Stockholders' equity 92,830 85,078
---------- ----------
Total liabilities and
stockholders' equity $1,243,172 $1,201,864
========== ==========
Net interest income $9,401 $9,595
====== ======
Weighted average interest
rate spread 2.63% 2.82%
===== ======
Net yield on average
earning assets (2) 3.17% 3.32%
===== ======
Return on average assets 0.88% 0.84%
===== ======
Return on average equity 11.84% 11.88%
===== ======
</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
13
<PAGE>
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
------------------------------------------ -------------------------------------
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 $16,533 $458 3.56% $14,830 $263 3.55%
Investment securities 441,611 14,241 6.45 394,060 12,766 6.48
Total loans (1) 718,786 31,474 8.76 708,653 30,806 8.69
Other earning assets 17,312 521 6.00 -- --
---------- ------- ---------- -------
Total earning assets
Total earning assets 1,194,242 46,694 7.82 1,117,543 43,835 7.84
Allowance for possible loan losses (10,545) (10,046)
---------- ----------
Total earning assets less
allowance for
possible loan losses 1,183,697 1,107,497
Other assets 61,275 57,082
---------- ----------
Total assets $1,244,972 $1,164,579
========== ==========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $43,644 $298 1.37% $40,785 $258 1.27%
Money market accounts 67,123 813 2.42 79,294 876 2.21
Savings accounts 172,658 3,303 3.83 103,227 1,547 3.00
Time deposits 417,549 12,082 5.79 429,294 12,296 5.73
---------- ------- ---------- -------
Total interest bearing deposits 700,974 16,496 4.71 652,600 14,977 4.59
Borrowed funds 369,790 11,026 5.96 350,531 10,106 5.77
---------- ------- ---------- -------
Total interest bearing deposits and
borrowed funds 1,070,764 27,522 5.14 1,003,131 25,083 5.00
---------- ------- -------
Demand deposits 62,913 61,711
Other liabilities 19,075 15,503
---------- ----------
Total liabilities 1,152,752 1,080,345
Stockholders' equity 92,220 84,234
---------- ----------
Total liabilities and
stockholders' equity $1,244,972 $1,164,579
========== ==========
Net interest income $19,172 $18,752
======= =======
Weighted average interest
rate spread 2.68% 2.84%
===== =====
Net yield on average
earning assets (2) 3.21% 3.36%
===== =====
Return on average assets 0.87% 0.80%
===== =====
Return on average equity 11.81% 11.08%
===== =====
</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.
14
<PAGE>
Net Interest Income
Net interest income decreased by $194 thousand to $9.4 million for the three
months ended June 30, 1998, and increased by $420 thousand to $19.2 million for
the six months ended June 30, 1998. The decrease in net interest income for the
quarter is primarily related to the impact of the balance sheet realignment
which included the sale of $139 million in investment securities.
Interest and Dividend Income
Interest and dividend income increased by $579 thousand (2.5%) to $23.3 million,
and by $2.9 million (6.5%) to $46.7 million for the three and six month periods
ended June 30, 1998, respectively, from $22.8 million and $43.8 million recorded
in the same periods in 1997. The changes relate to volume increases in earning
assets primarily related to the Company's decision to more fully utilize capital
by enlarging its investment portfolio during the 1998 reporting period.
Interest Expense
Interest expense increased by $773 thousand (5.9%) to $13.9 million, and by $2.4
million (9.7%) to $27.5 million, for the three and six month periods ended June
30, 1998 when compared to the same periods in 1997. These increases were
attributable to volume increases associated with the additional borrowings to
fund the growth in the Company's investment portfolio during the 1998 reporting
period.
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 totaled $435 thousand and $870 thousand
for the three and six months ended June 30, 1998. The provision for possible
loan losses totaled $510 thousand and $1.0 million for the comparable three and
six month periods in 1997. The entire provision for the first quarter of 1997
related to impaired loans as defined in SFAS No. 114,"Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118. There was no impaired
provision in 1998 or the second quarter of 1997. 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.
Non-interest income increased by $1.0 million (80.9%) to $2.3 million and by
$803 thousand (32.7%) to $3.3 million for the three and six months ended June
30, 1998, respectively, compared to $1.3 million and $2.5 million for the same
periods in 1997. The increase in non-interest income is due mainly to the second
quarter gain on the sale of investment securities of $949 thousand that resulted
from the balance sheet realignment.
Non-Interest Expense
Non-interest expense increased by $672 thousand (11.2%) to $6.7 million for the
three months ended June 30, 1998, and by $316 thousand (2.6%) to $12.5 million
for the six months ended June 30, 1998, compared to $6.0 million and $12.2
million for the same periods in 1997. The second quarter increase is primarily
attributable to one-time costs associated with the conversion of the purchased
branches to the Company's operating systems.
15
<PAGE>
Income Tax Expense
The provision for income taxes for the three and six month periods ended June
30, 1998 reflects an effective tax rate that is consistent with the comparable
periods in 1997. The effective tax rate in 1998 is lower due to favorable tax
rates on certain investment income.
Financial Condition
Total assets amounted to $1,314.8 million at June 30, 1998, an increase of
$117.3 million or 9.8% from $1,197.5 million at December 31, 1997
Loans
At June 30, 1998, the loan portfolio, including mortgage loans held for sale,
and before consideration of the allowance for possible loan losses, was $772.9
million, representing 58.8% of total assets, compared to $718.7million or 60.0%
of total assets at December 31, 1997
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>
June 30, 1998 December 31, 1997
------------------------ ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential $227,237 29.4% $274,865 38.2%
Commercial 83,106 10.8 83,077 11.6
Construction 49,063 6.3 31,851 4.4
-------- ----- -------- -----
Total Real Estate Loans 359,406 46.5 389,793 54.2
-------- ----- -------- -----
Owner occupied Commercial Real Estate 78,843 10.2 52,335 7.3
Commercial loans 91,957 11.9 67,018 9.3
Aircraft loans 48,735 6.3 41,220 5.8
Consumer loans
Home Equity, Home Improvement
& Second Mortgage 66,914 8.7 59,897 8.3
Automobile 119,648 15.5 103,551 14.4
Other 7,388 0.9 4,901 0.7
-------- ----- -------- -----
Total consumer loans 193,950 25.1 168,349 23.4
Total loans $772,891 100.0% $718,715 100.0%
======== ===== ======== =====
</TABLE>
- --------------------------------------------------------------------------------
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. (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 six months
ended June 30, 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance at December 31, 1997 $10,570
Acquired Allowance - Branch Acquisition 765
Provision for possible loan losses 870
Charge-offs
Mortgage 758
Owner occupied commercial real estate --
Construction --
Commercial 206
Consumer 997
--------
Total charge-offs 1,961
--------
Recoveries
Mortgage 878
Owner occupied commercial real estate --
Construction 8
Commercial 142
Consumer 154
--------
Total recoveries 1,182
--------
Net charge-offs 779
--------
Balance at June 30, 1998 $11,426
========
Total loans at end of period $772,891
Average loans for the period 718,786
Allowance to loans ratio 1.48%
Net charge-offs to average loans ratio 0.22%
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
Non-Performing Assets
Non-performing assets consist of non-accruing loans (including loans impaired
under SFAS No. 114), and foreclosed property. Non-performing assets totaled $6.0
million at June 30, 1998 and $6.4 million at December 31, 1997.
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 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 $129 and
$168 thousand for the three and six months ended June 30, 1998, compared to $101
and $148 thousand for the same periods in 1997. The average recorded investment
of impaired loans for the three and six months ended June 30, 1998 was $2.8
compared to $2.8 and $2.6 million for the same periods in 1997, and $2.6 million
for the twelve month period ended December 31, 1997.
Foreclosed property consists mainly of real estate collateral from loans which
were foreclosed.
The following table indicates the recorded investment of non-performing assets
and the related valuation allowance for impaired loans.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
---------------------------------- --------------------------------
Impaired Loan Impaired Loan
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Non-accruing Loans
Impaired Loans
Requiring a valuation allowance $ 725 $591 $1,577 $ 590
Not requiring a valuation allowance 1,721 -- 309 --
------- ----- ------- --------
$2,446 591 1,886 590
Restructured Loans 345 155 905 420
------- ----- ------- --------
Total impaired 2,791 $746 2,791 $1,010
===== ========
Residential Mortgage 1,381 1,525
Other 777 1,228
------- -------
Total non-accruing 4,949 5,544
Foreclosed property, net 1,025 891
------- -------
Total non-performing assets $5,974 $6,435
======= =======
Percentage of non-performing assets
to total assets 0.45% 0.54%
Percentage of allowance for possible
loan losses to non-accruing loans 230.9% 190.7%
</TABLE>
The valuation allowance for impaired loans is included in the allowance for
possible loan losses on the balance sheet
- --------------------------------------------------------------------------------
18
<PAGE>
Investments
At June 30, 1998, 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, totaled $309.3 million or 23.5% of total assets, compared to
$411.9 million or 34.4% of total assets at December 31, 1997.
To identify and control market 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.
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 June 30, 1998
the Bank had total deposits of $930.0 million representing a net increase of
$185.7 million compared to total deposits of $744.3 million at December 31,
1997. Approximately $143 million of deposit increase is attributed to the
deposit liabilities assumed in the branch acquisition.
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
decreased from $343.6 million at December 31, 1997 to $263.2 million at June 30,
1998.
Regulatory Capital Requirements
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
19
<PAGE>
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 June 30, 1998, 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 institution's category.
The Bank's actual capital amounts and ratios are also presented in the table. As
of June 30, 1998, 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.
The following table displays the Bank's capital calculations as defined under
prompt corrective action for the periods indicated:
<TABLE>
<CAPTION>
To Be Well
First Essex Bank, FSB For Capital Capitalized Under Prompt
Actual Actual Adequacy Purposes Corrective Action Provision:
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998 (unaudited)
Tangible Capital (to Adjusted Assets) $65,378 5.06% $19,392 [gte] 1.50% n/a
Tier 1 (Core) Capital (to Adjusted Assets) 65,378 5.06 38,785 3.00 $64,642 [gte] 5.00%
Tier 1 (Core) (to Risk Weighted Assets) 65,378 8.81 29,668 4.00 44,501 6.00
Total Risk Based Capital
(to Risk Weighted Assets) 74,667 10.07 59,335 8.00 74,169 10.00
December 31, 1997
Tangible Capital (to Adjusted Assets) $72,319 5.91% $17,822 [gte] 1.50% n/a
Tier 1 (Core) Capital (to Adjusted Assets) 72,319 5.91 35,644 3.00 $59,408 [gte] 5.00%
Tier 1 Capital (to Risk Weighted Assets) 72,319 9.67 28,372 4.00 42,559 6.00
Total Risk Based Capital
(to Risk Weighted Assets) 81,194 10.92 56,744 8.00 70,931 10.00
</TABLE>
[gte] = greater than or equal to symbol
Year 2000
The Company began in mid-1997 to address the issues inherent in the impending
change of century, otherwise known as "Year 2000". The potential problem with
year 2000, which is common to most corporations, concerns the inability of
information systems, primarily software programs, to properly recognize and
process date sensitive information for the year 2000 and beyond. The Company has
20
<PAGE>
organized a bank-wide project team empowered to address and resolve all Year
2000 issues, using a comprehensive project plan. Awareness and assessment phases
have been completed. Renovation, testing and implementation phases are in
process.
The majority of the Company's principal software applications are provided by
third party vendors. These vendors service numerous financial institution
customers all of whom have the same, or similar, Year 2000 issues. These vendors
have informed the Company that they are currently working to bring, their
software programs into compliance. Anticipated spending by the Company for
compliance maintenance and modification will be expensed as incurred, while the
cost of new hardware or software will be capitalized, and depreciated or
amortized over the useful life of the asset acquired. The Company has not yet
completed testing of its computer software and hardware, but expects to have
done so by the 4th quarter of 1998. Based on information now available to it,
the Company does not believe the changes by it or its third party vendors will
have a material effect on the ongoing results of operations.
In addition, the Board has established a Year 2000 Compliance Committee to
oversee activities of management and others in dealing with Year 2000 issues.
The Committee is working together with the management committee previously
established to deal with these issues. Among the tasks the Board Compliance
Committee is undertaking are the following: determining the scope of the problem
to be solved and issues to be addressed; establishing priorities for the various
tasks; working with management and professional consultants as required to
design solutions to problems as they are discovered; monitoring, on behalf of
the Board, progress made from time to time; and, reporting to the Board on a
regular basis as to actions taken and progress achieved.
Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which requires the
display of comprehensive income and its components. The Company has chosen, as
permitted by SFAS No. 130, to disclose comprehensive income, which is comprised
of net income and unrealized gains or losses on securities classified as
available-for-sale, in the Consolidated Statements of Stockholders' Equity. All
prior year data has been restated to conform to the SFAS No. 130 requirements.
Recent Accounting Developments
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This pronouncement, if applicable, is
effective for the Company's 1998 financial statements. SFAS No. 131 requires
additional disclosures regarding segments of an enterprise, if any, that are
used by the enterprise for making operating decisions and assessing performance.
Management continues to evaluate the applicability of this statement to the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on our
financial statements, and has not determined the timing of or method of our
adoption of the Statement. The adoption of SFAS No. 133 could have the effect of
increasing the volatility in reported earnings and other comprehensive income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate
21
<PAGE>
risk. The ongoing monitoring and management of this risk is an important
component of the Company's asset/liability management process which is governed
by policies established by the Board of Directors that are reviewed and approved
annually. The Board of Directors delegates responsibility for carrying out the
asset/liability management policies to the Asset/Liability Committee (ALCO). In
this capacity, ALCO develops guidelines and strategies impacting the Company's
asset/liability related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also changes thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk. There have been no material changes in the interest rate
risk reported at the conclusion of the Company's December 31, 1997 year end.
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 from operating activities totaled $23.0 million for the six
months ended June 30, 1998 compared to $8.4 million that was used in operating
activities for the same period in 1997. The change is primarily related to the
decrease in other assets and the growth in other liabilities together with the
increased sales of mortgage loans experienced during the first six months of
1998 compared to the prior period.
Net cash provided by investing activities totaled $170.2 million for the six
months ended June 30, 1998 compared to cash used of $164.7 million for the
comparable period in 1997. The change is due primarily to the sale of investment
securities, and the cash received as part of the assumption of deposit
liabilities in connection with the branch acquisition.
Net cash used in financing activities totaled $40.5 million for the six months
ended June 30, 1998, compared to net cash provided of $171.3 million for the
comparable period in 1997. The period to period change in the amount of cash
provided from this funding source is primarily related to the repayment of
borrowed funds incident to the sale of investment securities offset by the
growth in deposit liabilities during the period.
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.
22
<PAGE>
FIRST ESSEX BANCORP, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the registrant was held on May 7, 1998.
All nominees of the Board of Directors of the registrant were re-elected for a
three-year term. Votes were cast as follows:
1. Election of Three Class II Directors
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Augustine J. Fabiani 6,550,121 86,461
Walter W. Topham 6,551,221 85,361
Leonard A. Wilson 6,548,000 88,582
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(3) Articles of Incorporation and By-laws:
3.1 The Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.1 to Amendment
No. 1 to the Company's Registration Statement on Form S-1,
Registration No. 33-10966, filed with the Securities and
Exchange commission on April 17, 1987 ("Amendment No. 1 to
Form S-1");
3.2 The Amended and Restated By-laws of the Company are
incorporated herein by reference to Exhibit 4.1 of the
Company's current report on Form 8-K filed on December 28,
1992.
(10) Material Contracts
* 10.1- The First Essex Bancorp, Inc. 1987 Stock Option Plan
incorporated herein by reference to Appendix B to the
prospectus included in the Company's Registration Statement on
Form S-8, Registration No. 33-21292, filed on April 15, 1988;
10.2- The Shareholder Rights Agreement incorporated herein by
reference to the exhibit to the company's Current Report on
Form 8-K filed on October 12, 1989, as amended by the Amendment
to the Shareholder Rights Plan, incorporated herein by
reference to Exhibit 28.2 to the company's Current Report on
Form 8-K filed on February 12, 1990.
* 10.3- Executive Salary Continuation Agreement between First Essex
Bancorp, Inc., First Essex Bank, FSB and Leonard A. Wilson
incorporated herein by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1988;
* 10.4- Amended and Restated Employment Agreement dated as of
October 9, 1997 between Leonard A. Wilson and First Essex
Bancorp, Inc., incorporated herein by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
* 10.5- Amended and Restated Employment Agreement dated as of
October 9, 1997 between Leonard A. Wilson and First Essex Bank,
FSB, incorporated herein by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
* 10.6- Amended and Restated Employment Agreement dated as of
October 9, 1997 between David W. Dailey and First Essex
Bancorp, Inc., incorporated herein by reference to Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
* 10.7- Amended and Restated Employment Agreement dated as of
October 9, 1997 between David W. Dailey and First Essex Bank,
FSB, incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
* 10.8- Amended and Restated Employment Agreement dated as of
October 9, 1997 between Brian W. Thompson and First Essex
Bancorp, Inc., incorporated herein by reference to Exhibit 10.8
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
23
<PAGE>
* 10.9- Amended and Restated Employment Agreement dated as of
October 9, 1997 between Brian W. Thompson and First Essex Bank,
FSB, incorporated herein by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
* 10.10- Special Termination Agreement dated January 1, 1994 and
restated as of October 9, 1997 between Leonard A. Wilson
and First Essex Bancorp, Inc. incorporated by reference to
Exhibit 10.10 to the Company's Quarterly report on
Form 10-Q for the quarter ended September 30, 1997.
* 10.11- Special Termination Agreement dated January 1, 1994 and
restated as of October 9, 1997 between David W. Dailey and
First Essex Bancorp, Inc. incorporated by reference to Exhibit
10.11 to the Company's Quarterly report on Form 10-Q
for the quarter ended September 30, 1997.
* 10.12- Special Termination Agreement dated January 1, 1994 and
restated as of October 9, 1997 between Brian W. Thompson and
First Essex Bancorp, Inc. incorporated by reference to Exhibit
10.12 to the Company's Quarterly report on Form 10-Q for the
quarter ended September 30, 1997.
* 10.13- Form of Special Termination Agreement between First Essex
Bancorp, Inc., First Essex Bank, FSB, and each of John M.
DiGaetano, Wayne C. Golon, David L. Savoie and William F. Burke
incorporated herein by reference to Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
* 10.14- First Essex Bancorp, Inc. Senior Management Incentive
Compensation Plan incorporated herein by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994;
* 10.15- Common Stock Option Plan for Brian W. Thompson incorporated
herein by reference to Form S-8, Registration No.
333-22183, filed on February 21, 1997;
* 10.16- First Essex Bancorp, Inc. 1997 Stock Incentive Plan
incorporated herein by reference to Form S-8, Registration No.
333-35057, filed on September 5, 1997.
(27) Financial Data Schedule
* Management contract or compensatory plan
(b) Reports on Form 8-K
An Item 5 Form 8-K reporting a Purchase and Assumption
Agreement with CFX Bank, a subsidiary of CFX Corporation, for
the acquisition of five branch offices was filed on April 9,
1998.
An Item 2 Form 8-K reporting the consummation of the Purchase
and Assumption Agreement with CFX Bank was filed on July 9,
1998.
24
<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: August 19, 1998 By /s/ Thomas P. Coursey
-----------------------------
Thomas P. Coursey
Senior Vice President
and Principal Accounting Officer
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 173,973
<INT-BEARING-DEPOSITS> 870
<FED-FUNDS-SOLD> 525
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 288,147
<INVESTMENTS-CARRYING> 21,179
<INVESTMENTS-MARKET> 21,179
<LOANS> 772,891
<ALLOWANCE> 11,426
<TOTAL-ASSETS> 1,314,752
<DEPOSITS> 930,027
<SHORT-TERM> 92,000
<LIABILITIES-OTHER> 27,734
<LONG-TERM> 171,175
0
0
<COMMON> 966
<OTHER-SE> 92,850
<TOTAL-LIABILITIES-AND-EQUITY> 1,314,752
<INTEREST-LOAN> 31,474
<INTEREST-INVEST> 14,241
<INTEREST-OTHER> 979
<INTEREST-TOTAL> 46,694
<INTEREST-DEPOSIT> 16,496
<INTEREST-EXPENSE> 11,026
<INTEREST-INCOME-NET> 19,172
<LOAN-LOSSES> 870
<SECURITIES-GAINS> 966
<EXPENSE-OTHER> 12,483
<INCOME-PRETAX> 9,081
<INCOME-PRE-EXTRAORDINARY> 9,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,447
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 3.21
<LOANS-NON> 4,605
<LOANS-PAST> 0
<LOANS-TROUBLED> 345
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,570
<CHARGE-OFFS> 1,961
<RECOVERIES> 1,182
<ALLOWANCE-CLOSE> 11,426
<ALLOWANCE-DOMESTIC> 11,426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
