<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 6/30/00
[ ] 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 June 30, 2000:
TITLE OF CLASS SHARES OUTSTANDING
------------------ ------------------
Common Stock, $.10 par value 7,318,900
<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
Page
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 4
Consolidated Statements of Operations for the
three months ended June 30, 2000 and 1999 5
Consolidated Statements of Operations for the
six months ended June 30, 2000 and 1999 6
Consolidated Statements of Stockholders' Equity
for the three months ended June 30, 2000 and 1999 7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000 and 1999 8
Consolidated Statements of Cash Flows for the
six months ended June 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 4. Submission of Matters to a Vote of Security Holders 22
ITEM 6. Exhibits and Reports on Form 8-K 22
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FIRST ESSEX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 60,624 $ 41,598
Investment securities available-for-sale 418,202 434,041
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 2,651 3,054
Loans receivable, less allowance for loan losses of
$11,424 and $11,339 897,789 797,892
Foreclosed property 193 447
Bank premises and equipment 10,316 10,692
Accrued interest receivable 9,377 8,672
Intangible assets 20,462 21,763
Other assets 40,640 37,980
------------- --------------
$ 1,474,219 $ 1,377,318
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,070,473 $ 1,002,761
Borrowed funds 290,055 268,962
Mortgagors' escrow accounts 706 1,162
Other liabilities 12,433 12,855
------------- --------------
Total liabilities 1,373,667 1,285,740
------------- --------------
Company-obligated mandatorily redeemable
trust preferred securities of subsidiary trust
holding solely junior subordinated
debentures of the Company 9,671 ----
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, 9,748,200
and 9,745,200 shares issued 975 975
Additional paid-in capital 77,885 77,851
Retained earnings 48,424 44,027
Treasury stock, at cost, 2,429,300
and 2,153,300 shares (23,535) (19,244)
Accumulated other comprehensive income (12,868) (12,031)
-------------- --------------
Total stockholders' equity 90,881 91,578
-------------- --------------
$ 1,474,219 $ 1,377,318
============== ==============
</TABLE>
4
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
--------- ------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $ 19,859 $ 16,179
Investment securities available-for-sale 7,306 7,368
Short-term investments 131 155
Other earning assets 263 262
-------- --------
Total interest and dividend income 27,559 23,964
-------- --------
Interest expense
Deposits 10,351 8,645
Borrowed funds 4,039 3,781
-------- --------
Total interest expense 14,390 12,426
-------- --------
Net interest income 13,169 11,538
Provision for loan losses 725 600
-------- --------
Net interest income after provision for loan losses 12,444 10,938
-------- --------
Non-interest income
Net gain on sales of mortgage loans and mortgage servicing rights 159 220
Net gain on sale of investment securities 0 54
Loan fees 201 171
Other fee income 1,328 927
-------- --------
Total non-interest income 1,688 1,372
-------- --------
Non-interest expense
Salaries and employee benefits 3,684 3,441
Buildings and equipment 1,229 1,185
Professional services 282 365
Information processing 642 635
Insurance 84 82
Expenses, gains and losses on
and write-downs of, foreclosed property 118 156
Amortization of intangible assets 650 665
Other 1,058 1,019
-------- --------
Total non-interest expenses 7,747 7,548
-------- --------
Minority interest 280 ----
Income before provision for income taxes 6,105 4,762
Provision for income taxes 2,388 1,797
-------- --------
Net income $ 3,717 $ 2,965
======== ========
Earnings per share - Basic $ 0.50 $ 0.39
======== ========
Earnings per share - Diluted $ 0.49 $ 0.38
======== ========
Dividends declared per share $ 0.18 $ 0.16
======== ========
Weighted average number of shares - basic 7,395,422 7,636,177
========= =========
Weighted average number of shares - diluted 7,569,962 7,819,729
========= =========
</TABLE>
5
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------- -----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $ 37,776 $ 31,925
Investment securities available-for-sale 14,746 14,053
Short-term investments 276 398
Other earning assets 528 525
--------- ---------
Total interest and dividend income 53,326 46,901
--------- ---------
Interest expense
Deposits 20,127 17,360
Borrowed funds 7,877 6,927
--------- ---------
Total interest expense 28,004 24,287
--------- ---------
Net interest income 25,322 22,614
Provision for loan losses 1,325 1,200
--------- ---------
Net interest income after provision
for loan losses 23,997 21,414
--------- ---------
Non-interest income
Net gain on sales of mortgage loans and mortgage servicing rights 377 535
Net gain(loss) on sale of investment securities (18) 54
Loan fees 385 347
Other fee income 2,696 1,841
--------- ---------
Total non-interest income 3,440 2,777
--------- ---------
Non-interest expense
Salaries and employee benefits 7,406 6,786
Buildings and equipment 2,365 2,364
Professional services 629 662
Information processing 1,277 1,231
Insurance 188 156
Expenses, gains and losses on
and write-downs of, foreclosed property 181 348
Amortization of intangible assets 1,301 1,331
Other 2,155 1,955
--------- ---------
Total non-interest expenses 15,502 14,833
--------- ---------
Minority interest 307 ----
Income before provision for income taxes 11,628 9,358
Provision for income taxes 4,546 3,522
--------- ---------
Net income $ 7,082 $ 5,836
========= =========
Earnings per share - basic $ 0.95 $ 0.77
========= =========
Earnings per share - diluted $ 0.93 $ 0.75
========= =========
Dividends declared per share $ 0.36 $ 0.32
========= =========
Weighted average number of shares - basic 7,493,845 7,625,066
========= =========
Weighted average number of shares - diluted 7,654,354 7,813,847
========= =========
</TABLE>
6
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 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 MARCH 31, 2000 $ 975 $ 77,869 $ 46,026 $ (19,396) $ (12,334) $ 93,140
COMPEHENSIVE INCOME:
NET INCOME $ 3,717 ---- ---- 3,717 ---- ---- 3,717
OTHER COMPREHENSIVE INCOME:
- UNREALIZED SECURITIES LOSSES,
NET OF TAX BENEFIT, ARISING
DURING THE PERIOD (545)
- RECLASSIFICATION ADJUSTMENT
FOR SECURITY LOSSES INCLUDED IN
NET INCOME, NET OF TAX BENEFIT (11)
--------
TOTAL OTHER COMPREHENSIVE INCOME
INCOME (534) (534) (534)
--------
TOTAL COMPREHENSIVE INCOME $ 3,183
========
CASH DIVIDENDS DECLARED ---- ---- (1,319) ---- ---- (1,319)
TREASURY STOCK REPURCHASED (4,139) (4,139)
STOCK OPTIONS EXERCISED 16 16
------ -------- --------- ---------- ---------- ---------
Balance at June 30, 2000 $ 975 $ 77,885 $ 48,424 $ (23,535) $ (12,868) $ 90,881
====== ======== ========= ========== ========== =========
Balance at March 31, 1999 $ 972 $ 77,484 $ 38,011 $ (18,335) $ (703) $ 97,429
Compehensive income:
Net income $ 2,965 ---- ---- 2,965 ---- ---- 2,965
Other comprehensive income:
- Unrealized securities losses,
net of tax benefit, arising
during the period (7,053)
- Reclassification adjustment
for security gains included in
net income, net of tax expense 34
--------
Total other comprehensive income
income (7,087) (7,087) (7,087)
--------
Total Comprehensive income $ (4,122)
========
Cash dividends declared ---- ---- (1,222) ---- ---- (1,222)
Stock options exercised 3 367 370
------ -------- --------- ---------- ---------- ---------
Balance at June 30, 1999 $ 975 $ 77,851 $ 39,754 $ (18,335) $ (7,790) $ 92,455
====== ======== ========= ========== ========== =========
</TABLE>
7
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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 $ 7,082 7,082 7,082
OTHER COMPREHENSIVE INCOME:
- UNREALIZED SECURITIES LOSSES,
NET OF OF TAX BENEFIT, ARISING
DURING THE PERIOD (848)
- RECLASSIFICATION ADJUSTMENT
FOR SECURITY LOSSES INCLUDED IN
NET INCOME, NET OF TAX EXPENSE (11)
----------
TOTAL OTHER COMPREHENSIVE INCOME (837) (837) (837)
----------
TOTAL COMPREHENSIVE INCOME $ 6,245
==========
CASH DIVIDENDS DECLARED (2,685) (2,685)
TREASURY STOCK REPURCHASED (4,291) (4,291)
STOCK OPTIONS EXERCISED 34 34
-------- -------- -------- --------- ---------- ---------
BALANCE AT JUNE 30, 2000 $ 975 $77,885 $48,424 $(23,535) $ (12,868) $ 90,881
======== ======== ======== ========= ========== =========
Balance at December 31, 1998 $ 971 $77,383 $36,359 $(18,335) $ 704 $ 97,082
Comprehensive income:
Net income $ 5,836 5,836 $5,836
Other comprehensive income:
- Unrealized securities losses,
net of of tax benefit, arising
during the period (8,460)
- Reclassification adjustment
for security gains included in
net income, net of tax expense 34
----------
Total other comprehensive income (8,494) (8,494) (8,494)
----------
Total Comprehensive income $ (2,658)
==========
Cash dividends declared (2,441) (2,441)
Stock options exercised 4 468 472
-------- -------- -------- --------- ---------- ---------
Balance at June 30, 1999 $ 975 $77,851 $39,754 $(18,335) $ (7,790) $ 92,455
======== ======== ======== ========= ========== =========
</TABLE>
8
<PAGE>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,082 $ 5,836
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,325 1,200
Provision for depreciation and amortization 847 1,020
Gain on sales of foreclosed property (27) ----
Amortization of intangible assets 1,301 1,331
Amortization of investment securities discounts and premiums, net 236 481
Proceeds from sales of mortgage loans and mortgage servicing rights 21,433 37,697
Mortgage loans originated for sale (20,653) (36,846)
Realized gains (losses) on the sale of investment securities 18 (54)
Realized gains on the sale of mortgage loans and mortgage servicing rights, net (377) (535)
Decrease in accrued interest receivable (705) 714
Increase in other assets (2,660) (182)
Increase in other liabilities 724 214
---------- ---------
Net cash provided by operating activities 8,544 10,876
---------- ---------
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 17,925 47,550
Purchases of available-for-sale securities (4,384) (176,750)
Purchases of Federal Home Loan Bank stock (786) ----
Redemption of Federal Home Loan Bank stock 8,000 ----
Loans originated and purchased, net of principal collected (102,392) (36,980)
Proceeds from sales of foreclosed property 1,451 1,229
Purchases of bank premises and equipment (463) (605)
---------- ---------
Net cash used in investing activities (80,542) (145,550)
---------- ---------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts and savings accounts 11,010 8,731
Net increase of term deposits 56,702 5,291
Net increase (decrease) in borrowed funds with maturities of three months or less (27,157) 41,617
Proceeds from borrowed funds with maturities in excess of three months 167,566 65,000
Repayments of borrowed funds with maturities in excess of three months (119,316) (22,296)
Proceeds from the issuance of Company-obligated trust preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company 9,663 ----
Decrease in mortgagors' escrow accounts (456) (64)
Dividends paid (2,731) (2,441)
Stock options exercised 34 472
Common stock repurchases (4,291) ----
---------- ---------
Net cash provided by financing activities 91,024 96,310
---------- ---------
Net increase (decrease) in cash and cash equivalents 19,026 (38,364)
Cash and cash equivalents at beginning of period 41,598 90,383
---------- ---------
Cash and cash equivalents at end of period $60,624 $ 52,019
========== =========
Supplemental disclosure of cash flow information:
Interest paid during the year $27,981 $24,390
Income taxes paid during the year 3,558 4,897
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure 1,170 48
</TABLE>
9
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 160,509 and 188,781
dilutive potential shares for the quarters ended June 30, 2000 and 1999,
respectively. Excluded from diluted earnings per share were options to purchase
493,344 and 280,484 shares at June 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
Banking Other and Eliminations Consolidated
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
JUNE 30, 2000
INVESTMENT SECURITIES $ 432,167 $ ----- $ ----- $ 432,167
NET LOANS 900,440 ----- ----- 900,440
LONG-LIVED ASSETS 30,778 ----- ----- 30,778
TOTAL ASSETS 1,473,836 57,852 (57,469) 1,474,219
TOTAL INTEREST INCOME 53,323 398 (395) 53,326
TOTAL INTEREST EXPENSE 28,091 308 (395) 28,004
NET INTEREST INCOME 25,232 90 25,322
NET INCOME 7,112 (30) 7,082
June 30, 1999
Investment securities $ 462,329 $ ----- $ ----- $ 462,329
Net loans 756,965 ----- ----- 756,965
Long-lived assets 33,616 ----- ----- 33,616
Total assets 1,336,343 47,997 (47,423) 1,336,917
Total interest income 46,898 8 (5) 46,901
Total interest expense 24,292 ----- (5) 24,287
Net interest income 22,606 8 22,614
Net income 5,831 5 5,836
</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
JUNE 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 June 30, 2000 was $3.7 million compared to
$3.0 million for same period in 1999, or a 25.4% increase. Net interest income
totaled $13.2 million for the quarter compared to $11.5 million for the same
period in 1999. The increase in net interest income of $1.6 million, combined
with an increase in noninterest income of $316 thousand, offset by increases in
the provision for loan losses of $125 thousand and noninterest expenses,
including minority interest, of $479 thousand, accounts for the $1.3 million
increase in pretax income.
Net income for the six months ended June 30, 2000 was $7.1 million compared to
$5.8 million for same period in 1999, or a 21.4% increase. Net interest income
totaled $25.3 million for the period compared to $22.6 million for the same
period in 1999. The increase in net interest income of $2.7 million, combined
with an increase in noninterest income of $663 thousand, offset by increases in
the provision for loan losses of $125 thousand and noninterest expenses,
including minority interest, of $976 thousand, accounts for the $2.3 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 June 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 $ 16,019 $ 131 3.27% $ 14,129 $ 155 4.39%
Investment securities 438,330 7,306 6.67 479,474 7,368 6.15
Total loans (1) 881,152 19,859 9.02 750,176 16,179 8.63
Other earning assets 17,528 263 6.00 17,422 262 6.02
----------- --------- ----------- ---------
Total earning assets 1,353,029 27,559 8.15 1,261,201 23,964 7.60
Allowance for loan losses (11,303) (11,252)
----------- -----------
Total earning assets
less allowance
for loan losses 1,341,726 1,249,949
Other assets 81,993 79,215
----------- -----------
Total assets $1,423,719 $1,329,164
=========== ===========
Liabilities and Stockholders' Equity
Deposits
NOW accounts $ 56,322 $ 129 0.92% $ 53,781 $ 106 0.79%
Money market accounts 88,582 691 3.12 99,722 754 3.02
Savings accounts 262,207 2,292 3.50 224,764 1,757 3.13
Time deposits 535,150 7,239 5.41 466,812 6,028 5.17
----------- --------- ----------- ---------
Total interest bearing deposits 942,261 10,351 4.39 845,079 8,645 4.09
Borrowed funds 267,026 4,039 6.05 282,247 3,781 5.36
----------- --------- ----------- ---------
Total interest bearing deposits and
borrowed funds 1,209,287 14,390 4.76 1,127,326 12,426 4.41
----------- --------- ----------- ---------
Demand deposits 103,933 91,616
Other liabilities 8,412 11,199
----------- -----------
Total liabilities 1,321,632 1,230,141
Trust preferred securities 9,999 0
Stockholders' equity 92,088 99,023
----------- -----------
Total liabilities, trust preferred
securities and stockholders'
equity $1,423,719 $1,329,164
=========== ===========
Net interest income $13,169 $ 11,538
========= ==========
Weighted average interest
rate spread 3.39% 3.19%
======= ======
Net yield on average
earning assets (2) 3.89% 3.66%
======= ======
Return on average assets 1.04% 0.89%
======= ======
Return on average equity 16.15% 11.98%
======= ======
</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 Six Months Ended June 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 $ 14,157 $ 276 3.92% $ 18,511 $ 398 4.30%
Investment securities 443,307 14,746 6.69 455,551 14,053 6.17
Total loans (1) 855,469 37,776 8.88 741,150 31,925 8.61
Other earning assets 17,514 528 6.06 17,410 525 6.03
------------ ---------- ------------- ---------
Total earning assets
Total earning assets 1,330,447 53,326 8.06 1,232,622 46,901 7.61
Allowance for loan losses (11,287) (11,269)
------------ -------------
Total earning assets less allowance
for loan losses 1,319,160 1,221,353
Other assets 83,534 75,938
------------ -------------
Total assets $1,402,694 $1,297,291
------------ -------------
Liabilities and Stockholders' Equity
Deposits
NOW accounts $ 54,348 $ 233 0.86% $ 51,983 $ 226 0.87%
Money market accounts 91,500 1,442 3.17 99,538 1,524 3.06
Savings accounts 263,212 4,600 3.51 223,730 3,436 3.07
Time deposits 522,661 13,852 5.33 465,213 12,174 5.23
------------ ---------- -------------- ----------
Total interest bearing deposits 931,721 20,127 4.34 840,464 17,360 4.13
Borrowed funds 265,585 7,877 5.96 255,478 6,927 5.42
------------ ---------- -------------- ----------
Total interest bearing deposits and
borrowed funds 1,197,306 28,004 4.70 1,095,942 24,287 4.43
------------ ---------- -------------- ----------
Demand deposits 101,106 90,242
Other liabilities 6,112 12,317
------------ --------------
Total liabilities 1,304,524 1,198,501
Trust preferred securities 5,494 0
Stockholders' equity 92,676 98,790
------------ --------------
Total liabilities, trust preferred
securities and stockholders' equity $1,402,694 $1,297,291
------------ --------------
------------ --------------
Net interest income $25,322 $ 22,614
------------ --------------
------------ --------------
Weighted average interest
rate spread 3.36% 3.18%
---------- ----------
---------- ----------
Net yield on average
earning assets (2) 3.81% 3.67%
---------- ----------
---------- ----------
Return on average assets 1.01% 0.90%
---------- ----------
---------- ----------
Return on average equity 15.28% 11.81%
---------- ----------
---------- ----------
</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 $1.6 million or 14.1% to $13.2 million for
the three months ended June 30, 2000 and by $2.7 million or 12.0% to $25.3
million for the six months ended June 30, 2000 when compared to the same
periods of 1999.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $3.6 million or 15.0% to $27.6
million for the three month period ended June 30, 2000, from $24.0 million in
the same period in 1999. Interest and dividend income also increased by $6.4
million or 13.7% to $53.3 million for the six months ended June 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 $131.0 million and $114.3 million for the thre and six months ended
June 30, 2000, respectively. Offsetting the volume increases in loans were
decreases of $39.1 million and $16.5 million in the average balance of
investments. The average yield on earning assets also increased to 8.15% and
8.06% for the three and six months ended June 30, 2000, respectively, as
compared to 7.60% and 7.61 for the same periods of 1999.
INTEREST EXPENSE
Interest expense increased by $2.0 million or 15.8 % and $3.7 million or
15.3% to $14.4 million and $28.0 million for the three and six months ended
June 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 $97.2 million and $91.3 million for the three
and six months ended June 30, 2000, respectively. The average cost of funds
also increased to 4.76% and 4.70% for the three and six months ended Jun 30,
2000, respectively, as compared to 4.41% and 4.43% 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 $725 thousand and $1.3 million for the
three and six month periods ended June 30, 2000, respectively, as compared to
$600 thousand and $1.2 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. See "Financial Condition - Non-Performing Assets."
NONINTEREST INCOME
Noninterest 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 noninterest income.
Noninterest income increased by $316 thousand or 23.0% and $663 thousand or
23.9% to $1.7 million and $3.4 million for the three and six months ended
June 30, 2000, respectively, as compared to $1.4 million and $2.8 million for
the same periods in 1999. These increases in noninterest income are primarily
attributable to income of approximately $230 thousand and $460 thousand for
the three and six month periods ended June 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 $199 thousand or 2.6% and $669 thousand or 4.5%
to $7.8 million and $15.5 million for the three and six months ended June 30,
2000, respectively, as compared to $7.5 million and $14.8 million for the
same periods in 1999. These increases are primarily attributable to increased
salary and benefit costs of $243 thousand and $620 thousand for the three and
six months ended June 30, 2000, respectively. 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 $1,474.2 million at June 30, 2000, an increase of $96.9
million or 7.0% from $1,377.3 million at December 31, 1999.
LOANS
At June 30, 2000, the loan portfolio, including mortgage loans held for sale,
and before consideration of the allowance for loan losses, was $911.9 million,
representing 61.9% 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>
June 30, 2000 December 31, 1999
------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential $133,982 14.8% $ 144,021 17.7%
Commercial 118,005 12.9 111,272 13.7
Construction 58,685 6.4 51,353 6.3
----------- ------- ----------- --------
Total Real Estate Loans 310,672 34.1 306,646 37.7
----------- ------- ----------- --------
Owner occupied Commercial Real Estate 68,456 7.5 63,367 7.8
Commercial loans 116,128 12.7 98,701 12.1
Aircraft loans 146,204 16.0 107,007 13.2
Consumer loans
Home Equity, Home Improvement
& Second Mortgage 54,291 6.0 51,622 6.4
Automobile 211,777 23.2 180,075 22.2
Other 4,336 0.5 4,867 0.6
----------- ------- ----------- --------
Total consumer loans 270,404 29.7 236,564 29.2
Total loans $911,864 100.0% $ 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, whic 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 b 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 June 30, 2000:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
---------------- ---------------
June 30, 2000
-------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 11,344 $ 11,339
Provision for loan losses 725 1,325
---------------- ---------------
Charge-offs 775 1,504
Recoveries 130 264
---------------- ---------------
Net charge-offs 645 1,240
---------------- ---------------
Balance at end of period $ 11,424 $ 11,424
---------------- ---------------
---------------- ---------------
Total loans at end of period $ 911,864 $ 911,864
Average loans for the period 881,152 855,469
Allowance to loans ratio 1.25% 1.25%
Net charge-offs to average loans ratio (annualized) 0.29% 0.29%
</TABLE>
17
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccruing loans (including loans impaired
under SFAS No. 114), and foreclosed property. Nonperforming assets totaled $3.2
million at June 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>
June 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 $ 144 $ 141 $ 312 $ 229
Not requiring a valuation allowance 0 -- 242 --
------------ --------------- ------------- ---------------
144 141 554 229
Restructured Loans 190 23 303 75
------------ --------------- ------------- ---------------
Total impaired 334 $ 164 857 $ 304
--------------- ---------------
--------------- ---------------
Residential Mortgage 1,355 1,187
Other 1,276 1,381
----------- ------------
Total non-accruing 2,965 3,425
Foreclosed property, net 193 447
----------- ------------
Total non-performing assets $ 3,158 $ 3,872
----------- ------------
----------- ------------
Percentage of non-performing assets
to total assets 0.21% 0.28%
Percentage of allowance for loan
losses to non-accruing loans 385.3% 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 June 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 $432.2 million or 29.3% 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 27.9% and 29.2% of total
interest and dividend income for the three and six months ended June 30, 2000
compared to 32.5% and 31.9% 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 June 30, 2000
the Bank had total deposits of $1,070.5 million representing a net increase of
$67.7 million or 6.8% 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
increased from $269.0 million at December 31, 1999 to $290.1 million at June 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 June 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 June 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.
The following table displays the Bank's capital calculations as defined under
prompt corrective action for the periods indicated:
19
<PAGE>
<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>
JUNE 30, 2000 (UNAUDITED)
TANGIBLE CAPITAL (TO ADJUSTED ASSETS) $91,078 6.18 % $22,091 > 1.50 % n/a n/a
=
TIER 1 (CORE) CAPITAL (TO ADJUSTED ASSETS) 91,078 6.18 58,910 4.00 $73,638 > 5.00%
=
TIER 1 (CORE) (TO RISK WEIGHTED ASSETS) 91,078 8.97 40,614 4.00 60,922 6.00
TOTAL RISK BASED CAPITAL
(TO RISK WEIGHTED ASSETS) 102,335 10.08 81,229 8.00 101,536 10.00
December 31, 1999
Tangible Capital ( to Adjusted Assets) $81,565 5.93 $20,648 > 1.50% n/a n/a
=
Tier 1 (Core) Capital (to Adjusted Assets) 81,565 5.93 41,296 4.00 $68,826 > 5.00%
=
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 has not yet quantified the impact of adopting SFAS No. 133 on the
financial statements, and has not determined the timing of or method of the
adoption of the statement. The adoption of SFAS No. 133 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 NI 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 $8.5 million for the six
months ended June 30, 2000 compared to $10.9 million that was provided by
operating activities for the same period in 1999. The change is primarily
related to an increase in other assets partially offset by the increase in other
liabilities as compared to the prior period.
Net cash used for investing activities totaled $80.5 million for the six months
ended June 30, 2000 compared to net cash used of $145.6 million for the
comparable period in 1999. The decrease in net cash used by investing activities
during the first six 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 $91.0 million for the six
months ended June 30, 2000, compared to net cash provided of $96.3 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 a 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the registrant was held on May 4, 2000.
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 III Directors
NOMINEE FOR WITHHELD
Frank J. Leone, Jr. 6,501,885 144,143
Robert H. Pangione 6,500,040 145,988
Brian W. Thompson 6,501,740 144,288
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 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
* 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 June 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: August 2, 2000 By /s/ Douglas E. Moisan
---------------------------
Douglas E. Moisan
Senior Vice President
and Principal Accounting Officer
24
