<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10506
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Essex Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 54-1721085
----------------------- ----------------
(State of organization) (I.R.S. Employer
Identification No.)
9 The Koger Center, Suite 200
Norfolk, Virginia 23502
----------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (757) 893-1300
--------------
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 .
--- ---
Shares outstanding as of November 6, 1997: 1,057,682 shares of Common Stock,
par value $.01 per share.
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Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended
September 30, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the nine months ended
September 30, 1997 7
Consolidated Statements of Cash
Flows (unaudited) for the nine months
ended September 30, 1997 and 1996 8
Notes to Consolidated Financial
Statements (unaudited) 11
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote
of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------------- --------------
<S> <C> <C>
ASSETS
Cash.......................................... $2,048,073 $1,824,160
Interest-bearing deposits..................... 7,001,029 1,727,091
Federal funds sold and securities purchased
under agreements to resell.................. 2,352,000 2,644,000
---------- ---------
Cash and cash equivalents................. 11,401,102 6,195,251
Federal Home Loan Bank stock.................. 1,431,000 2,540,000
Securities available for sale--cost
approximates market......................... 17,211 9,162
Securities held to maturity--market value of
$5,229,443 in 1997 and $5,890,000 in 1996... 5,298,938 6,003,219
Mortgage-backed securities held to maturity--
market value of $1,888,000 in 1997 and
$1,869,000 in 1996.......................... 1,905,155 1,905,327
Loans, net of allowance for loan losses of
$2,090,000 in 1997 and $2,556,000 in 1996... 160,093,223 145,550,845
Loans held for sale........................... 2,163,254 2,462,525
Mortgage servicing rights..................... 1,283,081 1,349,160
Foreclosed properties, net of allowance of
$208,000 in 1997 and $179,000 in 1996....... 1,937,562 2,054,213
Accrued interest receivable................... 1,261,240 1,147,933
Excess of cost over net assets acquired....... 175,269 221,815
Advances for taxes, insurance, and other...... 530,645 790,928
Premises and equipment........................ 1,951,893 2,485,122
Other assets.................................. 2,436,965 1,551,352
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Total Assets.............................. $191,886,538 $ 174,266,852
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements.
3
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ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing......................... $ 4,763,271 $ 1,070,037
Interest-bearing............................ 146,200,852 129,963,341
----------------- --------------
Total deposits............................ 150,964,123 131,033,378
Federal Home Loan Bank advances............... 23,332,500 25,690,000
Notes payable................................. 96,142 96,142
Capitalized lease obligations................. 346,207 385,251
Mortgages payable on foreclosed properties.... -- 10,391
Other liabilities............................. 2,119,361 1,945,988
---------------- --------------
Total Liabilities......................... 176,858,333 159,161,150
SHAREHOLDERS' EQUITY
Series B preferred stock, $.01 par value:
Authorized shares-- 2,250,000
Issued and outstanding shares--2,125,000.... 21,250 21,250
Series C preferred stock, $.01 par value:
Authorized shares-- 125,000
Issued and outstanding shares--125,000...... 1,250 1,250
Common stock, $.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--1,057,682
in 1997 and 1,053,379 in 1996............... 10,577 10,534
Capital in excess of par...................... 23,665,226 23,659,333
Accumulated deficit........................... (8,670,098) (8,586,665)
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Total Shareholders' Equity................ 15,028,205 15,105,702
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Total Liabilities and Shareholders'
Equity.................................. $ 191,886,538 $ 174,266,852
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</TABLE>
See notes to consolidated financial statements.
4
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ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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<S> <C> <C> <C> <C>
1997 1996 1997 1996
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INTEREST INCOME
Loans, including fees............................... $ 3,475,437 $ 4,148,568 $ 10,028,224 $ 14,723,873
Federal funds sold and securities purchased under
agreements to resell.............................. 38,739 108,070 112,372 278,853
Investment securities, including dividend income.... 89,845 151,449 297,090 494,647
Mortgage-backed securities.......................... 31,552 105,734 93,071 466,110
Other............................................... 105,933 186,051 235,546 510,856
------------- ------------ ------------- -------------
Total Interest Income........................... 3,741,506 4,699,872 10,766,303 16,474,339
INTEREST EXPENSE
Deposits............................................ 1,999,927 2,782,114 5,643,931 10,173,269
Federal Home Loan Bank advances..................... 369,672 393,062 1,130,097 1,249,096
Notes payable....................................... 2,303 2,728 6,883 8,422
Subordinated capital notes.......................... -- 15,567 -- 52,444
Other............................................... 16,651 30,031 53,204 96,653
------------- ------------ ------------- -------------
Total Interest Expense.......................... 2,388,553 3,223,502 6,834,115 11,579,884
------------- ------------ ------------- -------------
Net Interest Income............................. 1,352,953 1,476,370 3,932,188 4,894,455
PROVISION FOR LOAN LOSSES............................. 29,539 575,064 114,246 1,378,116
------------- ------------ ------------- -------------
Net Interest Income After
Provision for Loan Losses....................... 1,323,414 901,306 3,817,942 3,516,339
NONINTEREST INCOME
Loan servicing fees................................. 278,345 417,726 1,038,957 1,252,841
Mortgage banking income, including gain on sale of
loans............................................. 133,166 185,640 317,124 456,761
Other service charges and fees...................... 73,174 111,957 286,644 389,482
Net gain (loss) on sale of:
Securities........................................ -- -- -- 153,188
Loans............................................. 14 (1,027,070) 14 (1,026,482)
Deposits.......................................... -- 833,376 -- 1,898,031
Other............................................... 36,716 311,088 287,671 398,304
------------- ------------ ------------- -------------
Total Noninterest Income........................ 521,415 832,717 1,930,410 3,522,125
</TABLE>
See notes to consolidated financial statements.
5
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ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---------- ---------- ---------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits............................ 1,290,666 1,120,978 2,751,430 3,796,847
Net occupancy and equipment............................... 261,628 364,553 800,394 1,145,880
Deposit insurance premiums................................ 119,904 146,980 350,598 584,906
Amortization of intangible assets......................... 135,310 143,798 401,878 6,877,041
Service bureau............................................ 108,142 148,818 349,785 470,386
Professional fees......................................... 86,989 118,836 231,504 402,716
Foreclosed properties, net................................ 88,902 14,124 142,672 100,231
Other..................................................... 244,322 429,725 803,524 1,334,620
---------- ---------- ---------- -------------
Total Noninterest Expense............................. 2,335,863 2,487,812 5,831,785 14,712,627
---------- ---------- ---------- -------------
Loss Before Income Taxes.............................. (491,034) (753,789) (83,433) (7,674,163)
PROVISION FOR INCOME TAXES.................................. -- -- -- --
---------- ---------- ---------- -------------
Net Loss.............................................. $ (491,034) $ (753,789) $ (83,433) $ (7,674,163)
---------- ---------- ---------- -------------
Loss per common share (Note 2).............................. $ (.85) $ (.72) $ (1.23) $ (7.30)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the nine months ended September 30, 1997
<TABLE>
<CAPTION>
SERIES B SERIES C
COMMON PREFERRED PREFERRED CAPITAL IN
STOCK, $.01 STOCK, $.01 STOCK, $.01 EXCESS ACCUMULATED
PAR VALUE PAR VALUE PAR VALUE OF PAR DEFICIT TOTAL
----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... $ 10,534 $ 21,250 $ 1,250 $ 23,659,333 $ (8,586,665) $ 15,105,702
Common stock issued under
Employee Stock Purchase
Plan......................... 43 -- -- 5,893 -- 5,936
Net loss....................... -- -- -- -- (83,433) (83,433)
----------- ----------- ----------- ------------- ------------- -------------
Balance, September 30, 1997.... $ 10,577 $ 21,250 $ 1,250 $ 23,665,226 $ (8,670,098) $ 15,028,205
----------- ----------- ----------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C>
1997 1996
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OPERATING ACTIVITIES
Net loss...................................... $ (83,433) $ (7,674,163)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Provisions for:
Losses on loans, foreclosed properties
and other............................... 247,445 1,375,596
Depreciation and amortization of premises
and equipment........................... 317,732 405,207
Amortization (accretion) of:
Premiums and discounts on:
Loans................................. 65,440 163,639
Mortgage-backed securities held to
maturity............................ 172 170
Mortgage-backed securities available
for sale............................ -- 7,009
Securities held to maturity........... 2,687 11,106
Mortgage servicing rights............... 355,330 409,712
Excess of costs over equity in net assets
acquired.............................. 46,546 6,467,328
Premium on deposits..................... -- (101,810)
Other................................... -- 7,411
Mortgage banking activities:
Net increase in loans originated for
resale.................................. 585,598 1,155,510
Realized gains from sale of loans......... (286,327) (432,618)
Realized (gains) and losses from sales of:
Securities available for sale............. -- (153,188)
Loans..................................... (14) 1,026,482
Premises and equipment.................... (75,005) (203,429)
Foreclosed properties..................... (69,724) (46,337)
Deposits.................................. -- (1,898,031)
Changes in operating assets and liabilities:
Accrued interest receivable............. (113,307) 920,187
Other assets............................ (643,330) (153,331)
Other liabilities....................... 173,373 186,542
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Net cash provided by operating activities..... 523,183 1,472,992
</TABLE>
See notes to consolidated financial statements.
8
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ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
<S> <C> <C>
1997 1996
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INVESTING ACTIVITIES
Purchase of certificates of deposit in other
financial institutions......................... (5,000,000) (17,000,000)
Proceeds from maturities of certificates of
deposit in other financial institutions........ 5,000,000 17,000,000
Purchase of Federal Home Loan Bank stock......... (95,800) --
Proceeds from sales of Federal Home Loan Bank
stock.......................................... 1,204,800 1,062,800
Purchase of securities held to maturity.......... (298,406) (1,020,625)
Proceeds from maturities of securities held to
maturity....................................... 1,000,000 3,000,000
Purchase of securities available for sale........ (2,508,049) (4,460,320)
Proceeds from sales of securities available
for sale....................................... 2,500,000 5,450,000
Principal remittances on mortgage-backed
securities available for sale.................. -- 990,065
Proceeds from sales of mortgage-backed
securities available for sale.................. -- 10,068,189
Proceeds from sales of loans..................... 201,565 118,090,724
Net (increase) decrease in net loans............. (16,202,570) 8,342,656
Proceeds from sales of foreclosed properties..... 1,659,756 4,243,968
Increase in foreclosed properties................ (309,625) (213,074)
Purchase of mortgage servicing rights............ (289,251) (73,230)
Purchase of premises and equipment............... (311,212) (122,902)
Proceeds from sales of premises and equipment.... 601,714 1,412,276
------------- --------------
Net cash provided by (used in) investing
activities..................................... (12,847,078) 146,770,527
FINANCING ACTIVITIES
Deposits sold in connection with branch sales:
NOW and savings deposits....................... -- (18,017,885)
Certificates of deposit........................ -- (140,351,280)
Net increase in NOW and savings deposits......... 11,759,901 4,918,011
Net increase in certificates of deposit.......... 8,170,844 3,193,841
Proceeds from Federal Home Loan Bank advances.... 18,500,000 --
Repayment of Federal Home Loan Bank advances..... (20,857,500) (5,357,500)
Payments on notes payable........................ -- (24,061)
Payments on capital lease obligations............ (39,044) (28,749)
Payments on mortgages payable on foreclosed
properties..................................... (10,391) (25,258)
Net proceeds from common stock issued under
Employee Stock Purchase Plan................... 5,936 5,855
------------- --------------
Net cash provided by (used in) financing
activities..................................... 17,529,746 (155,687,026)
------------- --------------
Increase (decrease) in cash and cash
equivalents.................................... 5,205,851 (7,443,507)
Cash and cash equivalents at beginning of
period......................................... 6,195,251 16,008,718
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Cash and cash equivalents at end of period....... $ 11,401,102 $ 8,565,211
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION> NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
<S> <C> <C>
1997 1996
------------ -------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans...... $ 1,278,955 $ 1,265,499
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest....................................... $ 6,806,249 $ 11,606,849
Net income taxes received...................... -- (109,244)
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Essex
Bancorp, Inc. and subsidiaries ("EBI") have been prepared in accordance with
generally accepted accounting principles for condensed interim financial
statements and, therefore, do not include all information required by
generally accepted accounting principles for complete financial statements.
The notes included herein should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this report, and the notes to EBI's financial
statements for the year ended December 31, 1996 included in the EBI 1996
Annual Report.
In the opinion of management, the accompanying unaudited financial
statements include all adjustments (including normal recurring entries)
necessary for a fair presentation of EBI's financial condition and interim
results of operations. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the
date of the financial statements and that affect the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2--EARNINGS PER SHARE
Earnings per share ("EPS") is computed based upon income adjusted for
preferred stock dividends, divided by the average number of common shares
outstanding. If dilutive for any period, warrants and options are treated as
outstanding using the modified treasury stock method. The weighted average
number of common and common equivalent shares outstanding used in the EPS
calculation was 1,055,118 and 1,050,704 for the nine months ended September
30, 1997 and 1996, respectively, and 1,057,198 and 1,051,799 for the three
months ended September 30, 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board (the "Board")
issued Statement of Financial Accounting Standards No. 128--Earnings Per
Share ("SFAS 128"). SFAS 128 specifies the computation, presentation, and
disclosure requirements for EPS for entities with publicly-held common stock
or potential common stock, such as EBI. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted; however, after the effective
date, all prior-period EPS data presented shall be restated to conform with
the provisions of SFAS 128. Under SFAS 128, basic EPS will replace primary
EPS and will be computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the
period. Therefore, to the extent that EBI's primary EPS calculations for
prior periods considered the dilutive impact of warrants and options for
common stock, EBI's SFAS 128 restatement will result in significantly higher
basic EPS. For the nine month and three month periods ended September 30,
1997 and 1996, however, EBI's basic EPS under SFAS 128 were the same as EBI's
primary EPS presented in the statements of operations due to the antidilutive
impact of common stock warrants and options during these periods.
11
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Also in February 1997, the Board issued Statement of Financial Accounting
Standards No. 129-- Disclosure of Information about Capital Structure ("SFAS
129"), which is effective contemporaneously with SFAS 128. However, because
EBI is currently subject to similar disclosure requirements of the Securities
and Exchange Commission, SFAS 129 will have no effect on EBI's disclosures
regarding its capital structure.
[intentionally blank]
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Total assets of EBI at September 30, 1997 were $191.9 million as compared
to $174.3 million at December 31, 1996, an increase of approximately $17.6
million or 10.1%. The increase in assets was primarily attributable to a
$14.5 million increase in loans held for investment and a $5.2 million
increase in cash and cash equivalents. These increases were partially offset
by a $1.1 million decrease in Federal Home Loan Bank ("FHLB") stock, a
$704,000 decrease in securities held to maturity and a $533,000 decrease in
premises and equipment. The increase in loans held for investment resulted
from (i) the purchase of adjustable-rate first mortgage loan portfolios and
(ii) mortgage loan originations by Essex First Mortgage Corporation ("Essex
First"). The increase in cash and cash equivalents resulted from excess
liquidity maintained at September 30, 1997 in order to fund the October
acquisition of an adjustable-rate first mortgage loan portfolio. The decrease
in FHLB stock resulted from the FHLB's policy regarding stock holdings in
excess of membership requirements, which limits any FHLB member's excess
stock to no more than $500,000. The decrease in securities held to maturity
resulted from the maturity of a U.S. Treasury Note during the first quarter
of 1997. The decrease in premises and equipment resulted from the second
quarter sale of Essex Savings Bank, F.S.B.'s (the "Bank") Portsmouth and
Newport News, Virginia former branch facilities, which had been vacant since
the sale of related deposits in September 1996.
EBI's nonperforming assets, net of specific reserves for
collateral-dependent real estate loans ("CDRELs") and foreclosed properties,
decreased from $5.2 million, or 2.99% of total assets, at December 31, 1996
to $4.1 million, or 2.11% of total assets, at September 30, 1997, and are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Nonaccrual loans:
CDRELs, net....................................................................... $ 638 $ 609
Other............................................................................. 853 2,299
Accruing loans 90 days or more past due............................................. 365 30
Troubled debt restructured loans.................................................... 258 223
------ ------
Total nonperforming loans, net.................................................... 2,114 3,161
Foreclosed properties, net.......................................................... 1,938 2,054
------ ------
Total nonperforming assets,
net of specific reserves.......................................................... $ 4,052 $ 5,215
------ ------
------ ------
</TABLE>
Accruing loans in the 30-59 day and 60-89 day delinquency categories
decreased, as shown below (in thousands):
<TABLE>
<CAPTION>
DELINQUENCY SEPTEMBER 30, DECEMBER 31,
CATEGORY 1997 1996
---------------------- --------------- -------------
<S> <C> <C>
30-59 days past due $708 $1,156
60-89 days past due 213 335
---- -----
$921 $1,491
---- ------
---- ------
</TABLE>
The decrease in nonperforming assets occurred primarily in nonaccrual
loans, the number of which has declined by approximately 28% since December
31, 1996. This decrease was partially offset by an increase in accruing loans
90 days or more past due, which resulted from the continued delinquency of a
$288,000 loan secured by an apartment complex in Suffolk, Virginia. In
accordance with an interim bankruptcy plan, all payments made by the borrower
on this loan must be applied to interest, resulting in a delinquency in
principal collections. However, an
13
<PAGE>
agreement has been reached with the borrower to restructure this loan, which
will be completed upon receipt of the approval of the bankruptcy court. This
loan had been reported in the 30-59 day delinquency category at December 31,
1996.
Deposits, the primary source of EBI's funds, totaled $151.0 million at
September 30, 1997 as compared to $131.0 million at December 31, 1996, an
increase of $20.0 million or 15.2%. The increase in deposits was attributable
to increases in money market accounts and certificates of deposit. While
deposits grew at each of the Bank's branches, the most significant growth
occurred at the Suffolk and Richmond, Virginia branches, which experienced
deposit growth of 36.5% and 30.0%, respectively. In addition, because of the
improvement in the Bank's overall financial condition, Essex Home Mortgage
Servicing Corporation ("Essex Home") transferred a portion of its servicing
escrow accounts from a nonaffiliated financial institution to the Bank. This
transfer was reflected in the increase in noninterest-bearing deposits.
Total shareholders' equity at September 30, 1997 was $15.0 million. The
Series B and Series C preferred stock have a stated value and liquidation
preference of $15.0 million, exclusive of cumulative but undeclared dividends
and accrued interest thereon of $3.0 million at September 30, 1997. To the
extent that EBI's income is not sufficient to cover the cumulative dividends
and accrued interest on the Series B and C preferred stock, the equity of
EBI's common shareholders will continue to decline. Accordingly, EBI's board
of directors and the Strategic Evaluation Committee continue to evaluate
profitability enhancements and possibilities for corporate restructurings.
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1997 COMPARED TO FIRST NINE MONTHS OF 1996
EBI's net loss for the nine months ended September 30, 1997 totaled
$83,000, compared to a net loss of $7.7 million for the nine months ended
September 30, 1996. EBI's net loss for the first nine months of 1997 included
an aggregate gain of $97,000 on the sale of the Bank's Portsmouth and Newport
News, Virginia former branch facilities and termination fees approximating
$113,000 received by Essex Home in connection with a previously-disclosed
cancellation of a subservicing client's contract effective May 31, 1997.
During the first nine months of 1996, EBI's operating results were adversely
impacted by a $1.0 million loss on the sale of loans in connection with
funding the sale of nine of the Bank's retail bank branches (the "Branches")
and a $7.8 million write down in goodwill associated with the sale of the
Branches. However, EBI's operating results for the first nine months of 1996
benefited from a $3.8 million total premium on deposits sold and a $216,000
gain on sale of premises and equipment in connection with the sale of the
Branches. In addition, operating results during 1996 were favorably impacted
by a $153,000 gain on sale of mortgage-backed securities available for sale
related to the sale of the Branches. Excluding the impact of these
transactions in 1997 and 1996, EBI's net income for the first nine months of
1997 effectively improved $2.7 million over the first nine months of 1996.
This improvement reflected the impact of (i) an increase in the net yield on
interest-earning assets, (ii) a decrease in the provision for loan losses
resulting from a decline in nonperforming assets and (iii) a decrease in
noninterest expense resulting from the Bank's sale of the Branches during
1996. These favorable impacts were partially offset by the loss of net
interest income associated with assets sold in connection with the sale of
the Branches.
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NET INTEREST INCOME. The table below presents weighted average balances
for interest-earning assets and interest-bearing liabilities, as well as
related average yields earned and rates paid for the nine months ended
September 30:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ----- ---------- ---------- ----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)......................................... $ 156,287 $ 10,028 8.56% $ 245,474 $ 14,724 8.00%
Investment securities........................... 7,315 297 5.45 11,743 494 5.62
Mortgage-backed
securities.................................... 1,905 93 6.51 7,713 466(2) 8.06
Federal funds sold and
securities purchased under
agreements to resell.......................... 2,759 112 5.43 7,100 279 5.24
Other........................................... 5,767 236 5.45 12,193 511 5.42
------- ------- ------ -----
Total interest-earning
assets...................................... $ 174,033 10,766 8.25 $ 284,223 16,474(2) 7.72
------- -------
------- -------
Interest-bearing liabilities:
Deposits........................................ $ 138,718 5,644 5.44 $ 245,867 10,173 5.52
FHLB advances................................... 25,317 1,130 5.97 27,687 1,249 6.02
Notes payable................................... 96 7 9.50 119 8 9.45
Subordinated capital notes...................... -- -- -- 532 53 13.15
Other........................................... 367 53 18.34 411 97 18.30
------- ------- ------- ------
Total interest-bearing
liabilities................................. $ 164,498 6,834 5.55 $ 274,616 11,580 5.60
------- ----- ------- ------
------- -------
Net interest earnings............................. $ 3,932 $ 4,894
----- ------
----- ------
Net interest spread (2)........................... 2.70% 2.12
---- ----
---- ----
Net yield on interest-earning
assets(2)....................................... 3.02% 2.31
---- ----
---- ----
</TABLE>
(1) Nonaccrual loans are included in the average balance of loans. Yield
calculations include the accretion of net deferred loan fees.
(2) Calculation is based on historical cost balances of mortgage-backed
securities available for sale and does not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
15
<PAGE>
The table below sets forth certain information regarding changes in EBI's
interest income and interest expense between the periods indicated.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM THE FIRST NINE MONTHS
OF 1996 TO THE FIRST NINE MONTHS OF 1997 DUE TO
-----------------------------------------------
VOLUME (1) RATE (1) NET
----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income on:
Loans (2).................................. $ (5,663) $ 967 $ (4,696)
Investment securities...................... (183) (14) (197)
Mortgage-backed securities................. (297) (76) (373)
Federal funds sold and
securities purchased under
agreements to resell..................... (177) 10 (167)
Other interest-earning assets.............. (277) 2 (275)
-------- --- ------
Total interest income (2)................ (6,597) 889 (5,708)
Interest expense on:
Deposits................................... (4,481) (48) (4,529)
FHLB advances.............................. (119) -- (119)
Notes payable.............................. (1) -- (1)
Subordinated capital notes................. (26) (27) (53)
Other interest-bearing liabilities......... (44) -- (44)
----- --- -----
Total interest expense................... (4,671) (75) (4,746)
----- --- -----
Net interest income...................... $ (1,926) $ 964 $ (962)
----- --- ---
----- --- ---
</TABLE>
(1) Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
(2) Interest income includes the amortization of premiums and the accretion of
net deferred loan fees.
Net interest income decreased from $4.9 million for the first nine months
of 1996 to $3.9 million for the first nine months of 1997, primarily as a
result of the loss of net interest income associated with assets sold in
connection with the sale of the Branches during 1996. However, the annualized
net yield on interest-earning assets increased 71 basis points from 2.31% for
the first nine months of 1996 to 3.02% for the first nine months of 1997 as a
result of an increase in the ratio of interest-earning assets to
interest-bearing liabilities along with an increase in the yield on loans,
which reflected the Bank's emphasis on investment in adjustable-rate
single-family residential loans.
PROVISION FOR LOAN LOSSES. Changes in the allowance for loan losses for
the nine months ended September 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of period....................... $ 2,556 $ 5,251
Provision for loan losses............................ 114 1,378
--------- ---------
2,670 6,629
Loans charged-off, net of recoveries................. (580) (3,568)
--------- ---------
Balance at end of period............................. $ 2,090 $ 3,061
--------- ---------
--------- ---------
</TABLE>
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. Accordingly,
management determined that a provision for loan losses was necessary during
the first nine months of 1997 in order to maintain the loan loss reserves at
adequate levels to absorb losses.
During the first nine months of 1996, management's assessment of the
uncertainty regarding the successful rehabilitation and ultimate sale of a
low-income apartment complex securing the Bank's most significant problem
credit (the "Richmond Apartments loan") resulted in
16
<PAGE>
the allocation of additional loss reserves to this CDREL, which further
resulted in a $1.4 million provision for loan losses in order to replenish
the general loan loss allowance to a level sufficient to absorb losses. This
$2.8 million CDREL was charged off in its entirety during 1996.
NONINTEREST INCOME. The significant components of noninterest income for
the nine months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
------------ ------------ -------------
<S> <C> <C> <C>
Loan servicing fees.................................................... $ 1,038,957 $ 1,252,841 $ (213,884)
Mortgage banking income................................................ 317,124 456,761 (139,637)
Other service charges and fees......................................... 286,644 389,482 (102,838)
Net gain (loss) on sales of:
Securities........................................................... -- 153,188 (153,188)
Loans................................................................ 14 (1,026,482) 1,026,496
Deposits............................................................. -- 1,898,031 (1,898,031)
Other.................................................................. 287,671 398,304 (110,633)
------------ ------------ -------------
$ 1,930,410 $ 3,522,125 $ (1,591,715)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Noninterest income for the first nine months of 1997 totaled $1.9 million
as compared to $3.5 million for the first nine months of 1996. However,
noninterest income during the first nine months of 1997 included (i) an
aggregate gain of $97,000 on the sale of the Bank's Newport News and
Portsmouth, Virginia former branch facilities, which had been vacant since
the sale of related deposits in September 1996 and (ii) termination fees
approximating $113,000 received by Essex Home in connection with a
previously-disclosed cancellation of a subservicing client's contract
effective May 31, 1997. Noninterest income in 1996 included the gains on
sales of securities, deposits, and premises and equipment, which totaled $2.3
million, associated with the sale of the Branches, which were partially
offset by a $1.0 million loss on loans sold to partially fund the sale of the
Branches. Exclusive of the impacts of these transactions during 1997 and
1996, the effective decline in noninterest income for the first nine months
of 1997 was $561,000. This decline was primarily attributable to (i) lower
loan servicing fees resulting from fluctuations in loan servicing volume
including the impact of the subservicing contract cancellation effective May
31, 1997, (ii) lower mortgage banking income resulting from fewer loans
originated for sale in the secondary market as Essex First focused on
expanding its construction lending programs and (iii) lower service charges
and fees resulting primarily from the Bank's sale of the Branches during 1996.
Loan servicing fee and ancillary servicing fee income in future periods
will be negatively impacted by the transfer of Essex Home's largest
subservicing client to another servicer effective May 31, 1997. Because no
assurances can be made that this significant servicing volume can be replaced
in its entirety in the near term, Essex Home implemented a plan for operating
expense reductions. Notwithstanding the impact of the cancellation of this
subservicing contract, Essex Home increased its mortgage loan servicing
portfolio since December 31, 1996 by approximately 1,300 loans with an
aggregate principal balance of $170.4 million as of September 30, 1997.
17
<PAGE>
NONINTEREST EXPENSE. The significant components of noninterest expense
for the nine months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
------------ ------------- -------------
<S> <C> <C> <C>
Salaries and employee benefits........................................ $ 2,751,430 $ 3,796,847 $ (1,045,417)
Net occupancy and equipment........................................... 800,394 1,145,880 (345,486)
Deposit insurance premiums............................................ 350,598 584,906 (234,308)
Amortization of intangible assets..................................... 401,878 6,877,041 (6,475,163)
Service bureau........................................................ 349,785 470,386 (120,601)
Professional fees..................................................... 231,504 402,716 (171,212)
Foreclosed properties, net............................................ 142,672 100,231 42,441
Other................................................................. 803,524 1,334,620 (531,096)
------------ ------------- -------------
$ 5,831,785 $ 14,712,627 $ (8,880,842)
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Noninterest expense decreased from $14.7 million in the first nine months
of 1996 to $5.8 million in the first nine months of 1997. The sale of the
Branches during 1996 had a pervasive impact on the decrease in noninterest
expense. In addition to the $5.9 million write down in the net asset value of
certain of the sold branches, total noninterest expense associated with the
sold branches, including amortization of goodwill, approximated $1.7 million
during the first nine months of 1996. The decline in noninterest expense
during 1997 also reflected (i) the impact of a corporate downsizing strategy,
which resulted in a decrease of 30 personnel positions, excluding positions
eliminated in connection with the sale of the Branches, from January 1, 1996
to September 30, 1997, (ii) the relocation of EBI's corporate headquarters to
a smaller, more economical facility and (iii) a decrease in professional fees
resulting from the cancellation of a consulting contract.
The significant components of other noninterest expense for the nine
months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
---------- ------------ -----------
<S> <C> <C> <C>
Loan expense............................................................... $ 99,901 $ 205,483 $ (105,582)
Telephone.................................................................. 132,277 176,966 (44,689)
Postage and courier........................................................ 121,844 158,391 (36,547)
Stationery and supplies.................................................... 77,461 100,064 (22,603)
Advertising and marketing.................................................. 119,255 156,781 (37,526)
Corporate insurance........................................................ 87,646 141,112 (53,466)
Travel..................................................................... 30,774 58,231 (27,457)
Provision for servicing losses............................................. 18,000 19,000 (1,000)
Other...................................................................... 116,366 318,592 (202,226)
---------- ------------ -----------
$ 803,524 $ 1,334,620 $ (531,096)
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
INCOME TAXES. There was no income tax provision recognized for financial
reporting purposes during the first nine months of 1997 or 1996, because EBI
had significant net operating loss carryforwards, which approximated $21.1
million at December 31, 1996. Also, until consistent profitability is
demonstrated, deferred income tax assets related to EBI's net operating loss
carryforwards and temporary differences will not be recognized.
THIRD QUARTER OF 1997 COMPARED TO THIRD QUARTER OF 1996
EBI's net loss for the three months ended September 30, 1997 totaled
$491,000, compared to a net loss of $754,000 for the three months ended
September 30, 1996. EBI's net loss for the third quarter of 1997 included a
charge of $566,000 associated with EBI's fully-vested stock options with tandem
stock appreciation rights ("SARs") resulting from unusual
18
<PAGE>
trading activity in EBI's common stock during the third quarter of 1997,
which propelled EBI's stock to a 52-week high of $10.25 before closing at
$4.75 on September 30, 1997. During the third quarter of 1996, EBI's
operating results were adversely affected by a $962,000 loss on the sale of
loans in connection with funding the sale of the Branches and a $1.9 million
write down of the remaining goodwill associated with the sale of the
Branches. However, EBI's operating results for the third quarter of 1996
benefited from a $2.8 million premium on deposits sold and a $152,000 gain on
sale of premises and equipment in connection with the sale of the Branches.
Excluding the impacts of these transactions in 1997 and 1996, EBI's net
income for the third quarter of 1997 effectively improved $852,000 over the
third quarter of 1996. This improvement reflected the impact of (i) an
increase in the net yield on interest-earning assets, (ii) a decrease in the
loan loss provision and (iii) a decrease in noninterest expense resulting
from the sale of the Branches during 1996. These favorable impacts were
partially offset by the loss of net interest income associated with assets
sold in connection with the sale of the Branches.
NET INTEREST INCOME. The table below presents weighted average balances
for interest-earning assets and interest-bearing liabilities, as well as
related average yields earned and rates paid for the three months ended
September 30:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ----- ---------- --------- -----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1).............................................. $ 161,791 $ 3,475 8.59% $ 207,054 $ 4,149 8.01%
Investment securities.................................. 6,735 90 5.34 11,029 151 5.49
Mortgage-backed
securities........................................... 1,905 32 6.62 4,697 106(2) 9.00
Federal funds sold and
securities purchased under
agreements to resell................................. 2,771 39 5.59 8,232 108 5.25
Other.................................................. 7,779 106 5.55 13,577 186 5.48
---------- --------- ---------- ---------
Total interest-earning
assets............................................. $ 180,981 3,742 8.28 $ 244,589 4,700(2) 7.68
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits............................................... $ 145,126 2,000 5.47 $ 205,907 2,782 5.40
FHLB advances.......................................... 24,917 370 5.89 25,902 393 6.07
Notes payable.......................................... 96 2 9.50 116 3 9.39
Subordinated capital notes............................. -- -- -- 336 16 18.55
Other.................................................. 355 17 18.13 401 30 18.30
---------- --------- ---------- ---------
Total interest-bearing
liabilities........................................ $ 170,494 2,389 5.62 $ 232,662 3,224 5.52
---------- --------- ---------- ---------
---------- ----------
Net interest earnings.................................. $ 1,353 $ 1,476
---------- ---------
---------- ---------
Net interest spread (2)................................ 2.66% 2.16%
----- ----
----- ----
Net yield on interest-earning
assets (2)........................................... 3.00% 2.43%
---- ----
---- ----
</TABLE>
(1) Nonaccrual loans are included in the average balance of loans. Yield
calculations include the accretion of net deferred loan fees.
(2) Calculation is based on historical cost balances of mortgage-backed
securities available for sale and does not give effect to changes in fair
value that are reflected as a component of shareholders' equity.
19
<PAGE>
The table below sets forth certain information regarding changes in EBI's
interest income and interest expense between the periods indicated.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM THE THIRD QUARTER OF
1996 TO THE THIRD QUARTER OF 1997 DUE TO
-----------------------------------------
VOLUME (1) RATE (1) NET
----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income on:
Loans (2)................................ $ (957) $ 283 $ (674)
Investment securities.................... (57) (4) (61)
Mortgage-backed securities............... (51) (23) (74)
Federal funds sold and
securities purchased under
agreements to resell................... (75) 6 (69)
Other interest-earning assets............ (82) 2 (80)
----------- ----- ---------
Total interest income (2).............. (1,222) 264 (958)
Interest expense on:
Deposits................................. (818) 36 (782)
FHLB advances............................ (13) (10) (23)
Notes payable............................ (1) -- (1)
Subordinated capital notes............... (8) (8) (16)
Other interest-bearing liabilities....... (12) (1) (13)
----------- ----- ---------
Total interest expense................. (852) 17 (835)
----------- ----- ---------
Net interest income.................... $ (370) $ 247 $ (123)
----------- ----- ---------
----------- ----- ---------
</TABLE>
(1) Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
(2) Interest income includes the amortization of premiums and the accretion of
net deferred loan fees.
Net interest income decreased from $1.5 million for the third quarter of
1996 to $1.4 million for the third quarter of 1997, primarily as a result of
the loss of net interest income associated with assets sold in connection
with the sale of the Branches during 1996. However, the annualized net yield
on interest-earning assets increased 57 basis points from 2.43% for the third
quarter of 1996 to 3.00% for the third quarter of 1997 as a result of an
increase in the ratio of interest-earning assets to interest-bearing
liabilities along with an increase in the yield on loans.
PROVISION FOR LOAN LOSSES. Changes in the allowance for loan losses for
the three months ended September 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of period..................... $ 2,128 $ 5,533
Provision for loan losses.......................... 30 575
----- -----
2,158 6,108
Loans charged-off, net of recoveries............... (68) (3,047)
----- -----
Balance at end of period........................... $ 2,090 $ 3,061
----- -----
----- -----
</TABLE>
Management determined that a provision for loan losses was necessary
during the third quarter of 1997 in order to maintain the loan loss reserves
at adequate levels to absorb losses. During the third quarter of 1996, a
$575,000 provision was deemed necessary by management to ensure the adequacy
of the general loan loss allowance after allocating additional loss reserves
to the Richmond Apartments loan. This credit totaling $2.8 million was
charged off in its entirety during the third quarter of 1996.
20
<PAGE>
NONINTEREST INCOME. The significant components of noninterest income for
the three months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
---------- ----------- -----------
<S> <C> <C> <C>
Loan servicing fees........................................................ $ 278,345 $ 417,726 $ (139,381)
Mortgage banking income.................................................... 133,166 185,640 (52,474)
Other service charges and fees............................................. 73,174 111,957 (38,783)
Net gain (loss) on sale of:
Loans.................................................................... 14 (1,027,070) 1,027,084
Deposits................................................................. -- 833,376 (833,376)
Other...................................................................... 36,716 311,088 (274,372)
--------- --------- ---------
$ 521,415 $ 832,717 $ (311,302)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Noninterest income for the third quarter of 1997 totaled $521,000, a
decrease of 37.4% compared to $833,000 for the third quarter of 1996.
Noninterest income for the third quarter of 1996 included the net impact of
the sale of the Branches totaling $23,000. Excluding the impact of these
transactions in 1996, noninterest income effectively declined $288,000 during
the third quarter of 1997. This decline resulted from (i) lower loan
servicing fees resulting from fluctuations in loan servicing volume including
the impact of the subservicing contract cancellation effective May 31, 1997,
(ii) lower mortgage banking income resulting from fewer loans originated for
sale in the secondary market as Essex First focused on expanding its
construction lending programs and (iii) lower service charges and fees
resulting primarily from the sale of the Branches during 1996.
NONINTEREST EXPENSE. The significant components of noninterest expense
for the three months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
------------ ------------ -----------
<S> <C> <C> <C>
Salaries and employee benefits........................................... $ 1,290,666 $ 1,120,978 $ 169,688
Net occupancy and equipment.............................................. 261,628 364,553 (102,925)
Deposit insurance premiums............................................... 119,904 146,980 (27,076)
Amortization of intangible assets........................................ 135,310 143,798 (8,488)
Service bureau........................................................... 108,142 148,818 (40,676)
Professional fees........................................................ 86,989 118,836 (31,847)
Foreclosed properties, net............................................... 88,902 14,124 74,778
Other.................................................................... 244,322 429,725 (185,403)
--------- --------- ---------
$ 2,335,863 $ 2,487,812 $ (151,949)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Noninterest expense decreased from $2.5 million in the third quarter of
1996 to $2.3 million in the third quarter of 1997. The decline in noninterest
expense during 1997 reflected (i) the impact of a corporate downsizing
strategy, which resulted in a decrease of 30 personnel positions, excluding
positions eliminated in connection with the sale of the Branches, from
January 1, 1996 to September 30, 1997, (ii) the relocation of EBI's corporate
headquarters to a smaller, more economical facility and (iii) a decrease in
professional fees resulting from the cancellation of a consulting contract.
Partially offsetting these decreases, salaries and employee benefits
increased during 1997 because of a charge of $566,000 associated with EBI's
fully-vested stock options with tandem SARs resulting from unusual trading
activity in EBI's common stock during the third quarter of 1997. In addition,
expenses associated with foreclosed properties increased during 1997 because
of additional loss provisions on several devalued foreclosed properties.
21
<PAGE>
The significant components of other noninterest expense for the three
months ended September 30 are presented below:
<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
---------- ---------- -----------
<S> <C> <C> <C>
Loan expense................................................................ $ 27,844 $ 72,106 $ (44,262)
Telephone................................................................... 43,973 54,709 (10,736)
Postage and courier......................................................... 33,689 43,546 (9,857)
Stationery and supplies..................................................... 26,233 28,830 (2,597)
Advertising and marketing................................................... 31,851 50,886 (19,035)
Corporate insurance......................................................... 28,110 43,809 (15,699)
Travel...................................................................... 8,542 17,486 (8,944)
Provision for servicing losses.............................................. 6,000 7,000 (1,000)
Other....................................................................... 38,080 111,353 (73,273)
--------- --------- ---------
$ 244,322 $ 429,725 $ (185,403)
--------- --------- ---------
--------- --------- ---------
</TABLE>
LIQUIDITY
The Office of Thrift Supervision ("OTS") has established minimum
liquidity requirements for savings associations. These regulations provide,
in part, that members of the FHLB system maintain daily average balances of
liquid assets equal to a certain percentage of net withdrawable deposits plus
current borrowings. Current regulations require a liquidity level of at least
5%. The Bank's liquidity ratio at September 30, 1997 was 9.52%. This ratio
reflected excess liquidity maintained at September 30, 1997 in order to fund
the October acquisition of an adjustable-rate first mortgage loan portfolio.
REGULATORY MATTERS
REGULATORY CAPITAL. The Bank is required pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and OTS
regulations promulgated thereunder to satisfy three separate requirements of
specified capital as a percent of the appropriate asset base. At September
30, 1997, the Bank was in compliance with the capital requirements
established by FIRREA.
Section 38 of the Federal Deposit Insurance Act, as added by the FDIC
Improvement Act ("FDICIA"), requires each appropriate agency and the Federal
Deposit Insurance Corporation to, among other things, take prompt corrective
action ("PCA") to resolve the problems of insured depository institutions
that fall below certain capital ratios. Federal regulations under FDICIA
classify savings institutions based on three separate requirements of
specified capital as a percent of the appropriate asset base. As of September
30, 1997, the Bank was "well capitalized" for PCA purposes.
22
<PAGE>
The Bank's capital amounts and ratios as of September 30, 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
REQUIRED
REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES PCA PROVISIONS
-------------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- ------- -----
Total capital (to
risk-weighted assets)........................... $ 16,834 14.47% $ 9,304 8.0% $ 11,630 >=10.0%
Tier I capital (to
risk-weighted assets)........................... 15,453 13.29% N/A N/ A 11,493 >=6.0%
Tier I capital (to
total assets)................................... 15,453 8.07% 5,747 4.0% 9,578 >=5.0%
Tangible capital (to
total assets)................................... 15,453 8.07% 2,873 1.5% N/A N/A
</TABLE>
REGULATORY COMPLIANCE. During the third quarter of 1997, the OTS
completed its safety and soundness examination of EBI and the Bank and
concluded that no adjustments to loss allowances were required. Moreover, the
Bank is no longer considered an institution requiring more-than-normal
supervision and EBI and the Bank are no longer operating under any
supervisory agreements.
[intentionally blank]
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--Not Applicable
Item 2. Changes in Securities--Not Applicable
Item 3. Defaults Upon Senior Securities--Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders--Not Applicable
Item 5. Other Information--Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--The following exhibits are filed as part of this Part II:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K--Not Applicable
24
<PAGE>
SIGNATURE
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.
ESSEX BANCORP, INC.
November 6, 1997 By: /s/ Gene D. Ross
---------------- ------------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
November 6, 1997 By: /s/ Mary-Jo Rawson
---------------- ------------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Form 10-Q for the quarter ended September 30, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,048
<INT-BEARING-DEPOSITS> 7,001
<FED-FUNDS-SOLD> 2,352
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17
<INVESTMENTS-CARRYING> 7,204
<INVESTMENTS-MARKET> 7,117
<LOANS> 162,256
<ALLOWANCE> 2,090
<TOTAL-ASSETS> 191,887
<DEPOSITS> 150,964
<SHORT-TERM> 18,712
<LIABILITIES-OTHER> 2,119
<LONG-TERM> 5,061
0
15,000
<COMMON> 11
<OTHER-SE> 17
<TOTAL-LIABILITIES-AND-EQUITY> 191,887
<INTEREST-LOAN> 10,028
<INTEREST-INVEST> 502
<INTEREST-OTHER> 236
<INTEREST-TOTAL> 10,766
<INTEREST-DEPOSIT> 5,644
<INTEREST-EXPENSE> 6,834
<INTEREST-INCOME-NET> 3,932
<LOAN-LOSSES> 114
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,832
<INCOME-PRETAX> (83)
<INCOME-PRE-EXTRAORDINARY> (83)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
<YIELD-ACTUAL> 3.02
<LOANS-NON> 1,491
<LOANS-PAST> 365
<LOANS-TROUBLED> 258
<LOANS-PROBLEM> 1,695
<ALLOWANCE-OPEN> 2,556
<CHARGE-OFFS> 607
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 2,090
<ALLOWANCE-DOMESTIC> 1,953
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 137
</TABLE>
