<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/00
[ ] 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 September 30, 2000:
Title of Class Shares Outstanding
-------------- ------------------
Common Stock, $.10 par value 7,324,400
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
First Essex Bancorp, Inc. (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
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 4
Consolidated Statements of Operations for the
three months ended September 30, 2000 and 1999 5
Consolidated Statements of Operations for the
nine months ended September 30, 2000 and 1999 6
Consolidated Statements of Stockholders' Equity
for the three months ended September 30, 2000 and 1999 7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2000 and 1999 8
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 9
Notes to the Consolidated Financial Statements 10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosure
About Market Risk 21
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 22
</TABLE>
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FIRST ESSEX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 36,529 $ 41,598
Investment securities available-for-sale 412,141 434,041
Stock in Savings Bank Life Insurance Company 1,194 1,194
Stock in Federal Home Loan Bank of Boston 12,771 19,985
Mortgage loans held-for-sale 1,534 3,054
Loans receivable, less allowance for loan losses of $12,353
and $11,339 937,413 797,892
Foreclosed property 164 447
Bank premises and equipment 10,029 10,692
Accrued interest Receivable 8,915 8,672
Intangible assets 19,812 21,763
Other assets 41,023 37,980
------------- -------------
$1,481,525 $1,377,318
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,107,133 $1,002,761
Borrowed funds 261,544 268,962
Mortgagors' escrow accounts 1,445 1,162
Other liabilities 5,028 12,855
------------- -------------
Total liabilities 1,375,150 1,285,740
------------- -------------
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 9,680 --
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, 9,753,700 and 9,745,200 shares issued 975 975
Additional paid-in capital 77,962 77,851
Retained earnings 50,871 44,027
Treasury stock, at cost, 2,429,300 and 2,153,300 shares (23,535) (19,244)
Accumulated other comprehensive income (9,578) (12,031)
------------- -------------
Total stockholders' equity 96,695 91,578
------------- -------------
$1,481,525 $1,377,318
------------- -------------
------------- -------------
</TABLE>
4
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
------------------ -------------
(Dollars in thousands
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $ 21,140 $ 16,669
Investment securities available-for-sale 7,205 7,272
Short-term investments 191 319
Other earning assets 265 264
------------------ -------------
Total interest and dividend income 28,801 24,524
------------------ -------------
Interest expense
Deposits 11,497 8,937
Borrowed funds 4,150 3,879
------------------ -------------
Total interest expense 15,647 12,816
------------------ -------------
Net interest income 13,154 11,708
Provision for loan losses 1,410 600
------------------ -------------
Net interest income after provision for loan losses 11,744 11,108
------------------ -------------
Non-interest income
Net gain on sales of loans and servicing rights 701 443
Loan fees 172 234
Other fee income 1,345 1,015
------------------ -------------
Total non-interest income 2,218 1,692
------------------ -------------
Non-interest expense
Salaries and employee benefits 3,555 3,618
Buildings and equipment 1,140 1,081
Professional services 271 409
Information processing 666 608
Insurance 122 89
Expenses, gains and losses on and write-downs of,
foreclosed property 61 59
Amortization of intangible assets 652 651
Other 1,100 950
------------------ -------------
Total non-interest expenses 7,567 7,465
------------------ -------------
Minority interest 281 --
Income before provision for income taxes 6,114 5,335
Provision for income taxes 2,349 2,004
------------------ -------------
Net income $ 3,765 $ 3,331
------------------ -------------
------------------ -------------
Earnings per share - Basic $ 0.51 $ 0.44
------------------ -------------
------------------ -------------
Earnings per share - Diluted $ 0.50 $ 0.43
------------------ -------------
------------------ -------------
Dividends declared per share $ 0.18 $ 0.16
------------------ -------------
------------------ -------------
Weighted average number of shares - basic 7,320,965 7,624,433
------------------ -------------
------------------ -------------
Weighted average number of shares - diluted 7,536,380 7,787,017
------------------ -------------
------------------ -------------
</TABLE>
5
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
----------------- -------------
(Dollars in thousands
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $ 58,916 $ 48,594
Investment securities available-for-sale 21,951 21,325
Short-term investments 467 717
Other earning assets 793 789
----------------- -------------
Total interest and dividend income 82,127 71,425
----------------- -------------
Interest expense
Deposits 31,624 26,297
Borrowed funds 12,027 10,806
----------------- -------------
Total interest expense 43,651 37,103
----------------- -------------
Net interest income 38,476 34,322
Provision for loan losses 2,735 1,800
----------------- -------------
Net interest income after provision for loan losses 35,741 32,322
----------------- -------------
Non-interest income
Net gain on sales of loans and servicing rights 1,078 978
Net gain (loss) on sale of investment securities (18) 54
Loan fees 557 581
Other fee income 4,041 2,856
----------------- -------------
Total non-interest income 5,658 4,469
----------------- -------------
Non-interest expense
Salaries and employee benefits 10,961 10,404
Buildings and equipment 3,505 3,445
Professional services 900 1,071
Information processing 1,943 1,839
Insurance 310 245
Expenses, gains and losses on and write-downs of,
foreclosed property 242 107
Amortization of intangible assets 1,951 1,980
Other 3,257 2,907
----------------- -------------
Total non-interest expenses 23,069 22,298
----------------- -------------
Minority interest 588 --
Income before provision for income taxes 17,742 14,693
Provision for income taxes 6,895 5,526
----------------- -------------
Net income $ 10,847 $ 9,167
----------------- -------------
----------------- -------------
Earnings per share - basic $ 1.46 $ 1.20
----------------- -------------
----------------- -------------
Earnings per share - diluted $ 1.42 $ 1.17
----------------- -------------
----------------- -------------
Dividends declared per share $ 0.54 $ 0.48
----------------- -------------
----------------- -------------
Weighted average number of shares - basic 7,435,798 7,624,852
----------------- -------------
----------------- -------------
Weighted average number of shares - diluted 7,615,029 7,804,904
----------------- -------------
----------------- -------------
</TABLE>
6
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Components of Stockholders' Equity
-------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Common Paid in Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income Total
------------- ------ ------- -------- -------- ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE OF JUNE 30,2000 $975 $77,885 $48,424 $(23,535) $(12,868) $90,881
COMPREHENSIVE INCOME:
NET INCOME $ 3,765 3,765 3,765
OTHER COMPREHENSIVE INCOME:
- UNREALIZED SECURITIES GAINS, NET OF
TAX BENEFIT, ARISING DURING THE
PERIOD 3,290
- RECLASSIFICATION ADJUSTMENT FOR
SECURITY LOSSES INCLUDED IN NET
INCOME, NET OF TAX BENEFIT 0
-------------
TOTAL OTHER COMPREHENSIVE INCOME
INCOME 3,290 3,290 3,290
-------------
TOTAL COMPREHENSIVE INCOME $ 7,055
-------------
-------------
CASH DIVIDENDS DECLARED (1,318) (1,318)
TREASURY STOCK REPURCHASED
STOCK OPTIONS EXERCISED 77 77
------ ------- -------- -------- ------------ -------
BALANCE AT SEPTEMBER 30, 2000 $975 $77,962 $50,871 $(23,535) $ (9,578) $96,695
------ ------- -------- -------- ------------ -------
------ ------- -------- -------- ------------ -------
Balance at June 30, 1999 $975 $77,851 $39,754 $(18,335) $ (7,790) $92,455
Comprehensive income:
Net income $ 3,331 3,331 3,331
Other comprehensive income:
- Unrealized securities losses, net of
tax benefit, arising during the
period (1,865)
- Less reclassification adjustment for
security gains included in net
income, net of tax expense --
Total other comprehensive income
income (1,865) (1,865) (1,865)
-------------
Total Comprehensive income $ 1,466
-------------
-------------
Cash dividends declared (1,216) (1,216)
Stock options exercised (909) (909)
------ ------- -------- -------- ------------ -------
Balance at September 30, 1999 $975 $77,851 $41,869 $(19,244) $ (9,655) $91,796
------ ------- -------- -------- ------------ -------
------ ------- -------- -------- ------------ -------
</TABLE>
7
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Components of Stockholders' Equity
-------------------------------------------------------------------------------
Accumulated
Other -
Comprehensive Common Paid in Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income Total
------------- ------ ------- -------- -------- ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $975 $77,851 $44,027 $(19,244) $(12,031) $91,578
COMPREHENSIVE INCOME:
NET INCOME $10,847 10,847 10,847
OTHER COMPREHENSIVE INCOME:
- UNREALIZED SECURITIES GAINS, NET OF
TAX BENEFIT, ARISING DURING THE
PERIOD 2,464
- RECLASSIFICATION ADJUSTMENT FOR
SECURITY LOSSES INCLUDED IN NET
INCOME, NET OF TAX EXPENSE (11)
-------------
TOTAL OTHER COMPREHENSIVE INCOME 2,453 2,453 2,453
-------------
TOTAL COMPREHENSIVE INCOME $13,300
-------------
-------------
CASH DIVIDENDS DECLARED (4,003) (4,003)
TREASURY STOCK REPURCHASED (4,291) (4,291)
STOCK OPTIONS EXERCISED 111 111
------ ------- -------- -------- ------------ -------
BALANCE AT SEPTEMBER 30, 2000 $975 $77,962 $50,871 $(23,535) $ (9,578) $96,695
------ ------- -------- -------- ------------ -------
------ ------- -------- -------- ------------ -------
Balance at December 31, 1998 $971 $77,383 $36,359 $(18,335) $ (704) $97,082
Comprehensive income:
Net income $ 9,167 9,167 9,167
Other comprehensive income:
- Unrealized securities losses, net of
tax benefit, arising during the
period (10,325)
- Reclassification adjustment for
security gains included in net
income, net of tax expenses 34
-------------
Total other comprehensive income (10,359) (10,359) (10,359)
-------------
Total Comprehensive income $(1,192)
-------------
-------------
Cash dividends declared (3,657) (3,657)
Acquisition of treasury stock (909) (909)
Stock options exercised 4 468 472
------ ------- -------- -------- ------------ -------
Balance at September 30, 1999 $975 $77,851 $41,869 $(19,244) $ (9,655) $91,796
------ ------- -------- -------- ------------ -------
------ ------- -------- -------- ------------ -------
</TABLE>
8
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
2000 1999
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,847 $ 9,167
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 2,735 1,800
Provision for depreciation and amortization 1,371 1,523
Gain on sales of foreclosed property (37) --
Write-down of foreclosed property -- 206
Amortization of intangible assets 1,951 1,980
Amortization of investment securities discounts and
premiums, net 371 713
Proceeds from sales of mortgage loans and mortgage
servicing rights 36,771 53,019
Mortgage loans originated for sale (34,173) (52,875)
Realized gains (losses) on the sale of investment
securities 18 (54)
Realized gains on the sale of mortgage loans and mortgage
servicing rights, net (1,078) (978)
(Increase) decrease in accrued interest receivable (243) 1,185
Increase in other assets (3,043) (223)
Decrease in other liabilities (8,778) (68)
--------- ---------
Net cash provided by operating activities 6,712 15,395
--------- ---------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 107 20,006
Proceeds from maturities and principal payments of
available-for-sale securities 29,239 67,983
Purchases of available-for-sale securities (4,384) (191,750)
Purchases of Federal Home Loan Bank stock (786) --
Redemption of Federal Home Loan Bank stock 8,000 --
Purchases of bank-owned life insurance -- (15,000)
Loans originated and purchased, net of principal collected (143,847) (62,223)
Proceeds from sales of foreclosed property 1,911 1,722
Purchases of bank premises and equipment (691) (963)
--------- ---------
Net cash used in investing activities (110,451) (180,225)
--------- ---------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts and savings
accounts 32,910 29,291
Net increase of term deposits 71,462 22,271
Net increase (decrease) in borrowed funds with maturities
of three months or less (30,052) 11,371
Proceeds from borrowed funds with maturities in excess of
three months 307,597 109,000
Repayments of borrowed funds with maturities in excess of
three months (284,963) (63,446)
Proceeds from the issuance of Company-obligated trust
preferred securities of subsidiary trust holding solely
junior subordinated debentures of the Company 9,663 --
Increase in mortgagors' escrow accounts 283 971
Dividends paid (4,050) (3,687)
Stock options exercised 111 472
Common stock repurchases (4,291) (909)
--------- ---------
Net cash provided by financing activities 98,670 105,364
--------- ---------
Net decrease in cash and cash equivalents (5,069) (59,466)
Cash and cash equivalents at beginning of period 41,598 90,383
--------- ---------
Cash and cash equivalents at end of period $ 36,529 $ 30,917
--------- ---------
--------- ---------
Interest paid during the year $ 43,688 $ 26,340
Income taxes paid during the year 7,340 5,587
Supplemental schedule of noncash financing and investing
activities:
Real estate acquired through, or deeds in lieu of,
foreclosure 1,591 2,027
</TABLE>
9
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and include
the accounts of 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 1999 Form 10-K.
EARNINGS PER SHARE
Basic EPS amounts have been computed by dividing reported earnings available
to common shareholders by the weighted average number of common and common
equivalent shares outstanding during the period. Dilutive EPS amounts have
been computed using the weighted average number of common and common
equivalent shares and the dilutive potential common shares (stock options
outstanding and exercisable) during the period. Included in diluted EPS are
215,415 and 162,584 dilutive potential shares for the quarters ended
September 30, 2000 and 1999, respectively. Excluded from diluted earnings per
share were options to purchase 273,844 and 499,051 shares at September 30,
2000 and 1999, respectively. These shares were excluded as the exercise price
was greater than average market price of the common shares during the
respective periods.
2. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
On March 23, 2000, the Company organized a wholly-owned Delaware business
trust which issued $10 million face amount of the trust's 10.875% Fixed Rate
Capital Trust Pass-Through Securities ("Capital Securities") scheduled to
mature in 2030 to a private investor. Simultaneously, the trust used the
proceeds of that sale to purchase $10 million principal amount of the
Company's 10.875% Fixed Rate Junior Subordinated Deferrable Interest
Debentures due 2030 ("Subordinated Debt"). Both the Capital Securities and
the Subordinated Debt are callable by the Company at any time after 10 years
from the issue date. The Subordinated Debt is an unsecured obligation of the
Company and is junior in right of payment to all present and future senior
indebtedness of the Company. The Capital Securities are guaranteed by the
Company on a subordinated basis. The Company intends to use the net proceeds
of approximately $9.7 million for general corporate purposes, including the
repurchase of shares of the Company's outstanding common stock.
The Trust Preferred Securities are presented in the consolidated balance
sheets of the Company titled "Company-Obligated Mandatorily Redeemable Trust
Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Company." The Company records distributions payable on the
Trust Preferred Securities as a Minority Interest Expense in its consolidated
statements of income. The cost of issuance of the Trust Preferred Securities
totaled $337 thousand and is being accreted on the effective interest rate
method.
10
<PAGE>
3. BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for
reporting operating segments of a business enterprise and descriptive
information about the operating segments in financial statements. Operating
segments are components of an enterprise which are evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision-maker is the
Chief Executive Officer and Chairman of the Board of the Company. The
adoption of SFAS No. 131 did not have a material effect on the Company's
primary financial statements, but did result in the disclosure of segment
information contained herein. The Company has identified its reportable
operating business segment as Community Banking, based on the products and
services provided to its customers.
The Company's community banking business segment consists of commercial
banking and retail banking. The community-banking segment is managed as a
single strategic unit and derives its revenues from a wide range of banking
services, including lending activities, and the acceptance of demand, savings
and time deposits.
Nonreportable operating segments of the Company's operations which do not
have similar characteristics to the community banking operations and do not
meet the quantitative thresholds requiring disclosure, are included in the
other category in the disclosure of business segments below. The
nonreportable segment represents the holding company financial information.
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies.
The consolidation adjustments reflect certain eliminations of intersegment
revenue, cash and investments in subsidiaries.
The following table provides a reconciliation of the community banking
segment information to the consolidated financials.
<TABLE>
<CAPTION>
Consolidation
Community Adjustments and Consoli-
Banking Other Eliminations dated
---------- ------- --------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
INVESTMENT SECURITIES $ 426,106 $ -- $ -- $ 426,106
NET LOANS 938,947 -- -- 938,947
LONG-LIVED ASSETS 29,841 -- -- 29,841
TOTAL ASSETS 1,481,453 56,914 (56,842) 1,481,525
TOTAL INTEREST INCOME 82,122 705 (700) 82,127
TOTAL INTEREST EXPENSE 43,762 589 (700) 43,651
NET INTEREST INCOME 38,360 116 -- 38,476
NET INCOME 10,902 (55) -- 10,847
September 30, 1999
Investment securities $ 453,672 $ -- $ -- $ 453,672
Net loans 781,852 -- -- 781,852
Long-lived assets -- -- -- --
Total assets 1,345,486 45,858 (45,316) 1,346,028
Total interest income 71,420 12 (7) 71,425
Total interest expense 37,110 -- (7) 37,103
Net interest income 34,310 12 -- 34,322
Net income 9,161 6 -- 9,167
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST ESSEX BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2000
GENERAL
First Essex Bancorp, Inc. 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
loan loss, noninterest income, noninterest 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
Net income for the three months ended September 30, 2000 was $3.8 million
compared to $3.3 million for same period in 1999, or a 13.0% increase. Net
interest income totaled $13.2 million for the quarter compared to $11.7
million for the same period in 1999. The increase in net interest income of
$1.4 million, combined with an increase in noninterest income of $526
thousand, offset by increases in the provision for loan losses of $810
thousand and noninterest expenses, including minority interest, of $383
thousand, accounts for the $779 thousand increase in pretax income.
Net income for the nine months ended September 30, 2000 was $10.8 million
compared to $9.2 million for same period in 1999, or a 18.3% increase. Net
interest income totaled $38.5 million for the period compared to $34.3
million for the same period in 1999. The increase in net interest income of
$4.2 million, combined with an increase in noninterest income of $1.2
million, offset by increases in the provision for loan losses of $935
thousand and noninterest expenses, including minority interest, of $1.4
million, accounts for the $3.0 million increase in pretax income.
12
<PAGE>
ANALYSIS OF AVERAGE YIELDS EARNED AND RATES PAID
The following table presents an analysis of average yields earned and rates
paid for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 1999
----------------------------------------- ----------------------------------------
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 $ 14,526 $ 191 5.26% $ 25,771 $ 319 4.95%
Investment securities 429,199 7,205 6.71 459,066 7,272 6.34
Total loans(1) 928,088 21,140 9.11 773,147 16,669 8.62
Other earning assets 17,556 265 6.04 17,449 264 6.05
------------ ----------- ------------ ------------
Total earning assets 1,389,369 28,801 8.29 1,275,433 24,524 7.69
Allowance for loan losses (11,740) (11,356)
------------ ------------
Total earning assets less allowance
for loan losses 1,377,629 1,264,077
Other assets 84,997 77,413
------------ ------------
Total assets $1,462,626 $1,341,490
============ ============
Liabilities and Stockholders' Equity
Deposits
NOW accounts $ 59,870 $ 184 1.23% $ 52,434 $ 122 0.93%
Money market accounts 86,880 731 3.37 88,222 729 3.31
Savings accounts 272,993 2,544 3.73 247,947 2,082 3.36
Time deposits 557,194 8,038 5.77 473,017 6,004 5.08
------------ ----------- ------------ ------------
Total interest bearing deposits 976,937 11,497 4.71 861,620 8,937 4.15
Borrowed funds 266,371 4,150 6.23 283,449 3,879 5.47
------------ ----------- ------------ ------------
Total interest bearing deposits and
borrowed funds 1,243,308 15,647 5.03 1,145,069 12,816 4.48
------------ ----------- ------------ ------------
Demand deposits 108,531 94,908
Other liabilities 8,627 7,766
------------ ------------
Total liabilities 1,360,466 1,247,743
Trust preferred securities 9,333 0
Stockholders' equity 92,827 93,747
------------ ------------
Total liabilities, trust preferred
securities and stockholders' equity $1,462,626 $1,341,490
============ ============
Net interest income $ 13,154 $ 11,708
=========== ============
Weighted average interest
rate spread 3.26% 3.21%
======== ========
Net yield on average
earning assets(2) 3.79% 3.67%
======== ========
Return on average assets 1.03% 0.99%
======== ========
Return on average equity 16.22% 14.21%
======== ========
</TABLE>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for loan losses divided by average
earning assets.
13
<PAGE>
ANALYSIS OF AVERAGE YIELDS EARNED AND RATES PAID
The following table presents an analysis of average yields earned and rates paid
for the periods indicated:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
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 $ 14,281 $ 467 4.37% $ 20,940 $ 717 4.57%
Investment securities 438,570 21,951 6.69 456,727 21,325 6.23
Total loans(1) 879,852 58,916 8.94 751,855 48,594 8.62
Other earning assets 17,528 793 6.04 17,423 789 6.04
----------- ----------- ----------- -----------
Total earning assets
Total earning assets 1,350,231 82,127 8.12 1,246,945 71,425 7.64
Allowance for loan losses (11,439) (11,298)
----------- -----------
Total earning assets less allowance
for loan losses 1,338,792 1,235,647
Other assets 84,025 76,431
----------- -----------
Total assets $1,422,817 $1,312,078
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Deposits
NOW accounts $ 56,202 $ 417 0.99% $ 52,134 $ 348 0.89%
Money market accounts 89,949 2,173 3.23 95,752 2,253 3.14
Savings accounts 266,496 7,144 3.58 231,832 5,518 3.17
Time deposits 534,256 21,890 5.47 467,824 18,178 5.18
----------- ----------- ----------- -----------
Total interest bearing deposits 946,903 31,624 4.46 847,542 26,297 4.14
Borrowed funds 265,849 12,027 6.04 264,836 10,806 5.44
----------- ----------- ----------- -----------
Total interest bearing deposits and
borrowed funds 1,212,752 43,651 4.81 1,112,378 37,103 4.45
----------- ----------- ----------- -----------
Demand deposits 103,599 91,803
Other liabilities 6,956 10,806
----------- -----------
Total liabilities 1,323,307 1,214,987
Trust preferred securities 6,783 0
Stockholders' equity 92,727 97,091
----------- -----------
Total liabilities, trust preferred
securities and stockholders' equity $1,422,817 $1,312,078
=========== ===========
Net interest income $ 38,476 $ 34,322
=========== ===========
Weighted average interest
rate spread 3.32% 3.19%
========= =========
Net yield on average
earning assets(2) 3.80% 3.67%
========= =========
Return on average assets 1.02% 0.93%
========= =========
Return on average equity 15.60% 12.59%
========= =========
</TABLE>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for loan losses divided by average
earning assets.
14
<PAGE>
NET INTEREST INCOME
Net interest income increased by $1.4 million or 12.4% to $13.2 million for
the three months ended September 30, 2000 and by $4.2 million or 12.1% to
$38.5 million for the nine months ended September 30, 2000 when compared to
the same periods of 1999.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $4.3 million or 17.4% to $28.8
million for the three month period ended September 30, 2000, from $24.5
million in the same period in 1999. Interest and dividend income also
increased by $10.7 million or 15.0% to $82.1 million for the nine months
ended September 30, 2000 as compared to the same period of 1999. The
increases primarily relate to volume increases in the average earning assets.
The average balance of loans increased $154.9 million and $128.0 million for
the three and nine months ended September 30, 2000, respectively. Offsetting
the volume increases in loans were decreases of $41.1 million and $24.8
million in the average balance of investments. The average yield on earning
assets also increased to 8.29% and 8.12% for the three and nine months ended
September 30, 2000, respectively, as compared to 7.69% and 7.64 for the same
periods of 1999.
INTEREST EXPENSE
Interest expense increased by $2.8 million or 22.1 % and $6.5 million or
17.6% to $15.6 million and $43.7 million for the three and nine months ended
September 30, 2000 when compared to the same periods in 1999. This increase
is primarily attributable to increases in the average balance of
interest-bearing deposits of $115.3 million and $99.4 million for the three
and nine months ended September 30, 2000, respectively. The average cost of
funds also increased to 5.03% and 4.81% for the three and nine months ended
September 30, 2000, respectively, as compared to 4.48% and 4.45% for the same
periods in 1999.
PROVISION FOR LOAN LOSSES
Losses on loans are provided for under the accrual method of accounting.
Assessing the adequacy of the allowance for 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 loan losses totaled $1.4 million and $2.7 million for the
three and nine month periods ended September 30, 2000, respectively, as
compared to $600 thousand and $1.8 million for the same periods of 1999.
Provisions result from management's continuing internal review of the loan
portfolio as well as its judgement 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 loan
losses in the future.
NONINTEREST INCOME
Noninterest income consists of net gains from the sales of loans and loan
servicing rights and gains on the sale of investment securities, together
with fee and other noninterest income.
Noninterest income increased by $526 thousand or 31.1% and $1.2 million or 26.6%
to $2.2 million and $5.7 million for the three and nine months ended September
30, 2000, respectively, as compared to $1.7 million and $4.5 million for the
same periods in 1999. These increases in noninterest income are primarily
attributable to increased gains on sales of loans and servicing rights and to
income of approximately $230 thousand and $690 thousand for the three and nine
month periods ended September 30, 2000 on bank-owned life insurance policies
purchased during the third quarter of 1999 and a special dividend received from
the Depositors Insurance Fund of Massachusetts of $86 thousand.
NONINTEREST EXPENSE
Noninterest expense increased $102 thousand or 1.4% and $771 thousand or 3.5% to
$7.6 million and $23.1 million for the three and nine months ended September 30,
2000, respectively, as compared to $7.5 million and $22.3 million for the same
periods in 1999. These increases are primarily attributable to increased salary
and benefit costs of $557 thousand for the nine months ended September 30, 2000.
The remaining increase was spread throughout the components of noninterest
expense, offset by reductions in professional fees and costs associated with
foreclosed properties.
15
<PAGE>
FINANCIAL CONDITION
Total assets amounted to $1,481.5 million at September 30, 2000, an increase of
$104.2 million or 7.6% from $1,377.3 million at December 31, 1999.
LOANS
At September 30, 2000, the loan portfolio, including mortgage loans held for
sale, and before consideration of the allowance for loan losses, was $951.3
million, representing 64.2% of total assets, compared to $812.3 million or 59.0%
of total assets at December 31, 1999.
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>
September 30, 2000 December 31, 1999
-------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential $ 126,127 13.1% $ 144,021 17.7%
Commercial 117,112 12.3 111,272 13.7
Construction 81,830 8.6 51,353 6.3
----------- ------ ----------- ------
Total Real Estate Loans 325,069 34.0 306,646 37.7
----------- ------ ----------- ------
Owner occupied Commercial Real Estate 69,577 7.3 63,367 7.8
Commercial loans 115,399 12.2 98,701 12.1
Aircraft loans 155,667 16.4 107,007 13.2
Consumer loans
Home Equity, Home Improvement
& Second Mortgage 53,791 5.7 51,622 5.4
Automobile 227,615 24.0 180,075 22.2
Other 4,182 0.4 4,867 0.6
----------- ------ ----------- ------
Total consumer loans 285,588 30.1 236,564 29.2
----------- ------ ----------- ------
Total loans $ 951,300 100.0% $ 812,285 100.0%
----------- ------ ----------- ------
----------- ------ ----------- ------
</TABLE>
16
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined by management
to be adequate to provide for probable losses inherent in the loan portfolio
including commitments to extend credit. The allowance for loan losses is
maintained through the provision for loan losses, which is a charge to
operations. The potential for loss in the portfolio reflects the risks and
uncertainties inherent in the extension of credit.
The determination of the adequacy of the allowance of loan losses is based upon
management's assessment of risk elements in the portfolio, factors affecting
loan quality and assumptions about the economic environment in which the Company
operates. The methodology includes a formula allowance based on identification
and analysis of loss potential in various portfolio segments utilizing a credit
risk grading process and specific reviews and evaluations of significant
individual problem credits, a valuation allowance for impaired loans and an
unallocated allowance. The unallocated allowance, based in part on credit
policy, approximates 20% to 25% of the formula and valuation allowances. In
addition, it reflects management's review of overall portfolio quality and
analysis of current levels and trends in charge-off, delinquency and nonaccruing
loan data, forecasted economic conditions and the overall banking environment.
These reviews are of necessity dependent upon estimates, appraisals and
judgments, which may change quickly because of changing economic conditions and
the Company's perception as to how these factors may affect the financial
condition of debtors. When an evaluation of these conditions signifies a change
in the level of risk, the Company adjusts the formula allowance. Periodic credit
reviews enable further adjustment to the allowance through the risk-rating of
loans and identification of loans requiring a valuation allowance. In, addition,
the formula model is designed to be self-correcting by taking into account
recent loss experience. The provision for loan losses is set based on the
factors discussed above. In addition, it is management's intent to maintain the
allowance at a level consistent with the Company's peers in the banking
industry.
The following table summarizes the activity in the allowance for loan losses
(including amounts established for impaired loans) for the three and six months
ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
---------------- ---------------
September 30, 2000
-----------------------------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 11,424 $ 11,339
Provision for loan losses 1,410 2,735
---------------- ---------------
Charge-offs 598 2,102
Recoveries 117 381
---------------- ---------------
Net charge-offs 481 1,721
---------------- ---------------
Balance at end of period $ 12,353 $ 12,353
---------------- ---------------
---------------- ---------------
Total loans at end of period $ 951,300 $ 951,300
Average loans for the period 928,088 879,852
Allowance to loans ratio 1.30% 1.30%
Net charge-offs to average loans ratio (annualized) 0.21% 0.26%
</TABLE>
17
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccruing loans (including loans impaired
under SFAS No. 114), and foreclosed property. Nonperforming assets totaled $3.0
million at September 30, 2000 and $3.9 million at December 31, 1999.
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 nonaccrual status, all previously accrued but
uncollected interest is reversed against the current period interest income.
The following table indicates the recorded investment of nonperforming assets
and the related valuation allowance for impaired loans.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------------- ---------------------------
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 $129 $129 $312 $229
Not requiring a valuation allowance 0 -- 242 --
---------- ------------- ---------- -------------
129 129 554 229
Restructured Loans 105 -- 303 75
---------- ------------- ---------- -------------
Total impaired 234 $129 857 $304
============= =============
Residential Mortgage 607 1,187
Other 1,961 1,381
---------- ----------
Total non-accruing 2,802 3,425
Foreclosed property, net 164 447
---------- ----------
Total non-performing assets $2,966 $3,872
========== ==========
Percentage of non-performing assets
to total assets 0.20% 0.28%
Percentage of allowance for loan
losses to non-accruing loans 440.9% 331.1%
</TABLE>
The valuation allowance for impaired loans is included in the allowance for loan
losses on the balance sheet.
18
<PAGE>
INVESTMENTS
At September 30, 2000, 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 $426.1 million or 28.8% of total assets, compared to
$455.2 million or 33.1% of total assets at December 31, 1999. Interest and
dividend income on the investment portfolio generated 25.7% and 27.3% of total
interest and dividend income for the three and nine months ended September 30,
2000 compared to 31.0% and 30.9% for the same periods in 1999.
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 September 30,
2000 the Bank had total deposits of $1,107.1 million representing a net increase
of $104.4 million or 10.4% compared to total deposits of $1,002.8 million at
December 31, 1999.
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 products such
accounts as savings accounts.
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 $269.0 million at December 31, 1999 to $261.5 million at
September 30, 2000.
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 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 September 30, 2000, 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.
The Bank's actual capital amounts and ratios are also presented in the table. As
of September 30, 2000, 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.
19
<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
FIRST ESSEX BANK, FSB FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISION:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000
(UNAUDITED)
TANGIBLE CAPITAL GREATER
(TO ADJUSTED ASSETS) $95,526 6.46% $22,091 THAN OR 1.50% N/A N/A
EQUAL TO
TIER 1 (CORE) CAPITAL GREATER
(TO ADJUSTED ASSETS) 95,526 6.46 58,910 4.00 $73,638 THAN OR 5.00%
EQUAL TO
TIER 1 (CORE)
(TO RISK WEIGHTED ASSETS) 95,526 9.07 42,087 4.00 63,130 6.00
TOTAL RISK BASED CAPITAL
(TO RISK WEIGHTED ASSETS) 107,749 10.23 84,173 8.00 105,217 10.00
December 31, 1999
Tangible Capital GREATER
(to Adjusted Assets) $81,565 5.93% $20,648 THAN OR 1.50% n/a n/a
EQUAL TO
Tier 1 (Core) Capital GREATER
(to Adjusted Assets) 81,565 5.93 41,296 4.00 $68,826 THAN OR 5.00%
EQUAL TO
Tier 1 Capital
(to Risk Weighted Assets) 81,565 9.00 36,250 4.00 54,375 6.00
Total Risk Based Capital
(to Risk Weighted Assets) 92,570 10.21 72,500 8.00 90,625 10.00
</TABLE>
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 as amended by SFAS No. 137 is effective for fiscal years beginning
after June 15, 2000. 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 will adopt SFAS No. 133 on the financial statements in the first
quarter of 2001. Management does not believe that the adoption of SFAS No. 133
will have a material effect on the consolidated financial statements, but could
have the effect of increasing the volatility in reported earnings and
accumulated other comprehensive income.
20
<PAGE>
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 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 change 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 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, 1999 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 $6.7 million for the nine
months ended September 30, 2000 compared to $15.4 million that was provided by
operating activities for the same period in 1999. The change is primarily
related to increases in accrued income receivable and other assets and a
decrease in other liabilities as compared to the prior period.
Net cash used for investing activities totaled $110.5 million for the nine
months ended September 30, 2000 compared to net cash used of $180.2 million for
the comparable period in 1999. The decrease in net cash used by investing
activities during the first nine months of 2000 as compared to the same period
of 1999 is primarily attributable to the decrease in purchases of investment
securities, offset by the growth in loans and the reductions in the proceeds
from sales and principal payments on investment securities.
Net cash provided by financing activities totaled $98.7 million for the nine
months ended September 30, 2000, compared to net cash provided of $105.4 million
for the comparable period in 1999. The change primarily reflects the reduced
level of borrowed funds offset by the growth in deposits and the issuance of
trust preferred securities.
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 that 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
that 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.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS:
<TABLE>
<CAPTION>
<C> <S>
(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 the
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 is
incorporated herein by reference to Appendix B to the
prospectus included in the Company's Registration Statement on
Form S-8, registration number 33-21292, filed on April 15,
1988;
10.2- The Shareholder Rights Agreement is 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 the 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 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.
*10.7- 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.
*10.8- 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.
*10.9- 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.
22
<PAGE>
*10.10- Form of Special Termination Agreement between First Essex
Bancorp, Inc., First Essex Bank, FSB, and each of
William F. Burke, John M. DiGaetano, and Wayne C. Golon,
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.
*10.11- Common Stock Option Agreement with Brian W. Thompson
incorporated herein by reference to Form S-8, Registration
No.333-22183, filed on February 21, 1997.
*10.12- 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.
*10.13- Deferred Compensation Plan for Directors of First Essex
Bancorp, Inc. and Its Subsidiaries incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
*10.14- First Essex Bancorp, Inc. Senior Management Incentive
Compensation Plan incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
*10.15- Agreement between First Essex Bancorp, Inc., First Essex Bank,
FSB and David W. Dailey incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
*10.16- Agreement between First Essex Bank, FSB and David L. Savoie
incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998.
(27) Financial Data Schedule
</TABLE>
* Management contract or compensatory plan.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 2000.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST ESSEX BANCORP, INC.
-------------------------
(Registrant)
Date: November 8, 2000 By /s/ Douglas E. Moisan
-------------------------
Douglas E. Moisan
Senior Vice President
and Principal Accounting Officer
24
