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 June 30, 1998
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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.)
The Koger Center
Building 9, Suite 200
Norfolk, Virginia 23502
----------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (757) 893-1300
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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 August 7, 1998: 1,059,203 shares of Common
Stock, par value $.01 per share.
<PAGE>
<TABLE>
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998
Table of Contents
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Page
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<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended
June 30, 1998 and 1997 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the six months ended
June 30, 1998 7
Consolidated Statements of Cash
Flows (unaudited) for the six months
ended June 30, 1998 and 1997 8
Notes to Consolidated Financial
Statements (unaudited) 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote
of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
June 30, December 31,
1998 1997
---- ----
ASSETS
Cash............................................................... $ 7,401,239 $ 2,023,197
Interest-bearing deposits.......................................... 5,187,211 6,261,686
Federal funds sold and securities purchased under
agreements to resell............................................. 1,179,815 2,748,000
------------ ------------
Cash and cash equivalents..................................... 13,768,265 11,032,883
Federal Home Loan Bank stock....................................... 1,548,800 1,431,000
Securities available for sale - cost approximates market........... 17,930 17,451
Securities held for investment - market value of
$2,241,000 in 1998 and $2,217,000 in 1997........................ 2,299,534 2,299,120
Mortgage-backed securities held for investment - market
value of $1,917,000 in 1998 and $1,886,000 in 1997............... 1,904,746 1,904,989
Loans, net of allowance for loan losses of $2,064,000
in 1998 and $2,382,000 in 1997................................... 180,468,283 167,440,733
Loans held for sale................................................ 3,959,130 2,165,074
Mortgage servicing rights.......................................... 933,346 1,169,766
Foreclosed properties, net......................................... 1,192,230 1,511,629
Accrued interest receivable........................................ 1,269,411 1,196,980
Excess of cost over net assets acquired............................ 128,723 159,754
Advances for taxes, insurance, and other........................... 1,078,059 633,053
Premises and equipment............................................. 2,495,570 1,926,729
Other assets....................................................... 3,326,547 2,198,598
------------ ------------
Total Assets.............................................. $214,390,574 $195,087,759
============ ============
See notes to consolidated financial statements.
3
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
June 30, December 31,
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................................... $ 12,765,531 $ 5,055,545
Interest-bearing.............................................. 153,053,854 148,871,154
------------ ------------
Total deposits............................................ 165,819,385 153,926,699
Federal Home Loan Bank advances.................................... 30,975,000 23,546,667
Notes payable...................................................... - 72,102
Capitalized lease obligations...................................... 301,489 331,970
Other liabilities.................................................. 2,239,356 2,393,814
------------ ------------
Total Liabilities......................................... 199,335,230 180,271,252
SHAREHOLDERS' EQUITY
Preferred stock, authorized - 10,000,000 shares:
Series B preferred stock, $6.67 stated value:
Issued and outstanding shares - 2,125,000..................... 14,173,750 14,173,750
Series C preferred stock, $6.67 stated value:
Issued and outstanding shares - 125,000....................... 833,750 833,750
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 1,059,203 in 1998
and 1,058,136 in 1997......................................... 10,592 10,581
Capital in excess of par........................................... 8,685,111 8,681,739
Accumulated deficit................................................ (8,647,859) (8,883,313)
------------ ------------
Total Shareholders' Equity................................ 15,055,344 14,816,507
------------ ------------
Total Liabilities and Shareholders' Equity................ $214,390,574 $195,087,759
============ ============
See notes to consolidated financial statements.
4
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees.............................. $3,620,691 $3,403,649 $7,108,256 $6,552,787
Federal funds sold and securities purchased
under agreements to resell....................... 27,457 37,286 67,711 73,633
Investment securities, including
dividend income.................................. 54,753 89,108 108,886 207,245
Mortgage-backed securities......................... 31,487 31,155 62,975 61,519
Other.............................................. 59,923 92,363 134,334 129,613
---------- ---------- ---------- ----------
Total Interest Income..................... 3,794,311 3,653,561 7,482,162 7,024,797
INTEREST EXPENSE
Deposits .......................................... 2,052,737 1,885,754 4,052,669 3,644,004
Federal Home Loan Bank advances.................... 302,043 381,008 589,683 760,425
Notes payable...................................... - 2,303 792 4,580
Other.............................................. 14,214 17,081 29,119 36,553
---------- ---------- ---------- ----------
Total Interest Expense.................... 2,368,994 2,286,146 4,672,263 4,445,562
---------- ---------- ---------- ----------
Net Interest Income....................... 1,425,317 1,367,415 2,809,899 2,579,235
PROVISION FOR LOAN LOSSES.............................. - 107,160 - 84,707
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses................. 1,425,317 1,260,255 2,809,899 2,494,528
NONINTEREST INCOME
Loan servicing fees................................ 286,939 358,714 562,597 760,612
Mortgage banking income, including
gain on sale of loans............................ 166,810 95,739 325,697 183,958
Other service charges and fees..................... 104,314 102,508 191,997 213,470
Other.............................................. 61,310 249,406 91,393 250,955
---------- ---------- ---------- ----------
Total Noninterest Income.................. 619,373 806,367 1,171,684 1,408,995
See notes to consolidated financial statements.
5
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
NONINTEREST EXPENSE
Salaries and employee benefits..................... 782,249 689,135 1,583,966 1,460,764
Net occupancy and equipment........................ 249,947 246,571 479,238 538,766
Deposit insurance premiums......................... 122,709 118,349 243,804 230,694
Amortization of intangible assets.................. 145,284 141,142 267,451 266,568
Service bureau..................................... 117,888 114,892 224,014 241,643
Professional fees.................................. 77,714 74,854 153,200 144,515
Foreclosed properties, net......................... 33,942 58,668 80,313 53,770
Other.............................................. 377,379 233,145 714,143 559,202
---------- ---------- ---------- ----------
Total Noninterest Expense................. 1,907,112 1,676,756 3,746,129 3,495,922
---------- ---------- ---------- ----------
Income Before Income Taxes................ 137,578 389,866 235,454 407,601
PROVISION FOR INCOME TAXES............................. - - - -
---------- ---------- ---------- ----------
Net Income................................ $ 137,578 $ 389,866 $ 235,454 $ 407,601
=========== =========== =========== ===========
Loss available to common
shareholders (Note 2)............................ $ (303,711) $ (13,753) $ (638,796) $ (391,308)
=========== =========== =========== ===========
Basic and diluted loss per
common share (Note 2)............................ $ (.29) $ (.01) $ (.60) $ (.36)
=========== =========== =========== ===========
See notes to consolidated financial statements.
6
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the six months ended June 30, 1998
<CAPTION>
Series B Series C
Common Preferred Preferred Capital in
Stock, $.01 Stock, $6.67 Stock, $6.67 Excess Accumulated
Par Value Stated Value Stated Value of Par Deficit Total
--------- ------------ ------------ ------ ------- -----
Balance at January 1, 1998............... $10,581 $14,173,750 $833,750 $8,681,739 $(8,883,313) $14,816,507
Common stock issued under
Employee Stock Purchase
Plan.................................. 11 - - 3,372 - 3,383
Net income............................... - - - - 235,454 235,454
------- ----------- -------- ---------- ----------- -----------
Balance at June 30, 1998................. $10,592 $14,173,750 $833,750 $8,685,111 $(8,647,859) $15,055,344
======= =========== ======== ========== =========== ===========
See notes to consolidated financial statements.
7
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income........................................................... $ 235,454 $ 407,601
Adjustments to reconcile net loss to cash
provided by operating activities:
Provisions for:
Losses on loans, foreclosed properties and other.............. 63,339 143,020
Depreciation and amortization of premises
and equipment............................................. 191,888 213,528
Amortization (accretion) of:
Premiums and discounts on:
Loans................................................... 48,339 51,785
Mortgage-backed securities held to maturity............. 243 115
Securities held to maturity............................. (403) 2,882
Mortgage servicing rights................................. 236,420 235,536
Excess of costs over equity in net assets
acquired................................................ 31,031 31,031
Mortgage banking activities:
Net (increase) decrease in loans
originated for resale..................................... (1,509,467) 296,536
Realized gains from sale of loans............................. (284,589) (161,814)
Realized (gains) and losses from sales of:
Premises and equipment........................................ (525) (75,328)
Foreclosed properties......................................... (10,311) (55,264)
Changes in operating assets and liabilities:
Accrued interest receivable................................... (72,431) (20,649)
Other assets.................................................. (1,584,955) (386,636)
Other liabilities............................................. (154,458) (455,338)
----------- ------------
Net cash provided by (used in) operating activities.................. (2,810,425) 227,005
See notes to consolidated financial statements.
8
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
INVESTING ACTIVITIES
Purchase of certificates of deposit in other
financial institutions........................................... (4,000,000) (5,000,000)
Proceeds from maturities of certificates of deposit
in other financial institutions.................................. 4,000,000 5,000,000
Purchase of Federal Home Loan Bank stock............................. (117,800) (25,700)
Proceeds from sales of Federal Home Loan Bank stock.................. - 1,204,800
Purchase of securities held to maturity.............................. (11) (298,406)
Proceeds from maturities of securities held to maturity.............. - 1,000,000
Purchase of securities available for sale............................ (479) (2,507,814)
Proceeds from sales of securities available for sale................. - 2,500,000
Purchase of loans.................................................... (16,882,289) (5,118,780)
Net (increase) decrease in net loans................................. 3,446,663 (4,760,883)
Proceeds from sales of foreclosed properties......................... 697,271 1,187,991
Increase in foreclosed properties.................................... (59,163) (209,795)
Increase in mortgage servicing rights................................ - (289,251)
Purchase of premises and equipment................................... (760,729) (37,543)
Proceeds from sales of premises and equipment........................ 525 602,037
------------ ------------
Net cash used in investing activities................................ (13,676,012) (6,753,344)
FINANCING ACTIVITIES
Net increase in NOW, money market and savings deposits............... 10,368,149 7,668,739
Net increase in certificates of deposit.............................. 1,524,537 7,301,000
Proceeds from Federal Home Loan Bank advances........................ 34,500,000 14,500,000
Repayment of Federal Home Loan Bank advances......................... (27,071,667) (13,571,667)
Payments on capital lease obligations................................ (30,481) (25,436)
Payments on notes payable............................................ (72,102) -
Payments on mortgages payable on foreclosed
properties........................................................ - (10,391)
Net proceeds from common stock issued under
Employee Stock Purchase Plan...................................... 3,383 3,961
------------ ------------
Net cash provided by financing activities............................ 19,221,819 15,866,206
------------ ------------
Increase in cash and cash equivalents................................ 2,735,382 9,339,867
Cash and cash equivalents at beginning of period..................... 11,032,883 6,195,251
------------ ------------
Cash and cash equivalents at end of period........................... $ 13,768,265 $ 15,535,118
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties......................... $ 359,737 $ 964,609
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest......................................................... $ 4,724,898 $ 4,428,629
Income taxes..................................................... - -
</TABLE>
See notes to consolidated financial statements.
9
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<TABLE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1998
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, 1997 included in the EBI 1997 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
EBI calculates its basic and diluted earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128 - Earnings Per Share.
Accordingly, the components of EBI's EPS calculations are as follows:
<CAPTION>
<S> <C>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 137,578 $ 389,866 $ 235,454 $ 407,601
Preferred stock dividends (441,289) (403,619) (874,250) (798,909)
--------- --------- --------- ---------
Net loss available to
common shareholders $(303,711) $ (13,753) $(638,796) $(391,308)
========= ========= ========= =========
Weighted average common
shares outstanding 1,058,518 1,054,763 1,058,330 1,054,082
========= ========= ========= =========
Basic and diluted loss per
common share $(.29) $(.01) $(.60) $(.36)
===== ===== ===== =====
</TABLE>
EBI's common stock equivalents are antidilutive with respect to loss available
to common shareholders for all periods presented; therefore, basic and diluted
EPS are the same.
10
<PAGE>
NOTE 3 - ACCOUNTING FOR DERIVATIVES
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 - Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999 (January 1, 2000 for EBI). FAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. EBI's management anticipates that, due to its limited used
of derivative instruments, the adoption of FAS 133 will not have a significant
effect on EBI's results of operations or its financial position.
[intentionally blank]
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets of EBI at June 30, 1998 were $214.4 million as compared to
$195.1 million at December 31, 1997, an increase of approximately $19.3 million
or 9.9%. The increase in total assets resulted primarily from (i) the
acquisition of $15.8 million of residential mortgage loans and $1.1 million of
consumer loans, (ii) increased production of residential loans held for sale in
the secondary market and (iii) an increase in escrow deposits maintained by
Essex Home Mortgage Servicing Corporation ("Essex Home") at Essex Savings Bank,
F.S.B. (the "Bank").
Deposits, the primary source of EBI's funds, totaled $165.8 million at
June 30, 1998 as compared to $153.9 million at December 31, 1997, an increase of
$11.9 million or 7.7%. The increase in noninterest-bearing deposits reflected
the impact of the transfer of escrow accounts maintained by Essex Home from
nonaffiliated financial institutions. The increase in interest-bearing deposits
occurred primarily at EBI's Suffolk, Virginia retail banking branch, which was
relocated from a leased facility to a Bank-owned newly-constructed branch in
April 1998.
On May 28, 1998, EBI's shareholders approved an amendment of EBI's
Certificate of Incorporation whereby EBI's total authorized capitalization
increased to 30 million shares, consisting of 20 million shares of common stock
and 10 million shares of preferred stock. The increase in authorized
capitalization increases EBI's flexibility to issue additional shares of common
stock and preferred stock to enable EBI to engage in strategic transactions,
such as possible mergers or share exchanges with other entities. However, EBI
has no present plans to issue shares in connection with any particular
transaction.
Results of Operations
First Six Months of 1998 Compared to First Six Months of 1997
EBI's net income for the six months ended June 30, 1998 totaled
$235,000, compared to net income of $408,000 for the six months ended June 30,
1997. EBI's net income for the first six months of 1997 included an aggregate
gain of $97,000 on the sale of vacant branch facilities, termination fees
approximating $113,000 received by Essex Home in connection with the
cancellation of a subservicing client's contract and a $198,000 reduction in
stock option compensation attributable to changes in EBI's stock price.
Excluding the impact of these transactions in 1997, EBI's net income for the
first six months of 1998 effectively improved $235,000 over the first six months
of 1997. This improvement in 1998 resulted from (i) an increase in net interest
income, which reflected an increase in interest-earning assets, (ii) a decrease
in the provision for loan losses resulting from lower loan charge-offs and a
reduction in nonperforming assets and (iii) an increase in mortgage banking
income resulting from an increase in residential loan originations coupled with
sales in the secondary market. These increases were partially offset by a
decline in mortgage loan servicing fees resulting from the nonrenewal of a
significant subservicing contract effective May 1997.
12
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<TABLE>
Net Interest Income. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the six months ended June 30:
<CAPTION>
<S> <C>
1998 1997
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $172,185 $7,108 8.26% $153,491 $6,553 8.54%
Investment securities.......... 3,748 109 5.81 7,610 209 5.50
Mortgage-backed
securities................. 1,905 63 6.61 1,905 62 6.46
Federal funds sold and
securities purchased under
agreements to resell......... 2,487 68 5.44 2,752 74 5.35
Other.......................... 4,928 134 5.45 4,744 127 5.38
-------- ------ -------- ------
Total interest-earning
assets (1)................ $185,253 7,482 8.08 $170,502 7,025 8.24
======== ========
Interest-bearing liabilities:
Deposits....................... $150,607 4,052 5.43 $135,461 3,644 5.42
FHLB advances.................. 20,903 590 5.69 25,519 760 6.01
Notes payable.................. 17 1 9.32 96 5 9.61
Other.......................... 319 29 18.41 374 37 18.44
-------- ------ -------- ------
Total interest-bearing
liabilities............... $171,846 4,672 5.48 $161,450 4,446 5.50
======== ----- ======== -----
Net interest earnings............. $2,810 $2,579
====== ======
Net interest spread (1)........... 2.60% 2.74%
==== ====
Net yield on interest-earning
assets (1)..................... 3.03% 3.03%
==== ====
</TABLE>
(1) Nonaccrual loans are included in the average balance of loans.
[intentionally blank]
13
<PAGE>
<TABLE>
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
<CAPTION>
<S> <C>
Increase (Decrease) From the First Six Months
of 1997 to the First Six Months of 1998 Due to
----------------------------------------------
Volume (1) Rate (1) Net
------ ---- -----
(in thousands)
Interest income on:
Loans (2)................................ $ 777 $(222) $ 555
Investment securities.................... (113) 13 (100)
Mortgage-backed securities............... - 1 1
Federal funds sold and
securities purchased under
agreements to resell.................. (7) 1 (6)
Other interest-earning assets............ 5 2 7
------ ------ ------
Total interest income (2)............. 662 (205) 457
Interest expense on:
Deposits................................. 379 29 408
FHLB advances............................ (136) (34) (170)
Notes payable............................ (4) - (4)
Other interest-bearing liabilities....... (8) - (8)
------ ------ ------
Total interest expense................ 231 (5) 226
------ ------ ------
Net interest income................... $ 431 $(200) $ 231
===== ===== =====
(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 increased from $2.6 million for the first six
months of 1997 to $2.8 million for the first six months of 1998, which reflected
the favorable impact of the increase in the ratio of average interest-earning
assets to average interest-bearing liabilities. However, there was a decline in
the net interest spread resulting from the impact of the lower interest rate
environment in 1998 on the volume of refinancings to lower fixed rate loans.
Typically, declining interest rates favorably impact EBI's earnings due to the
repricing of deposits with shorter maturities as compared to interest-earning
assets, predominantly loans, which have either fixed interest rates or interest
rates that adjust over longer periods. However, in an extended period of lower
interest rates, EBI can expect an increase in the volume of refinancings to
lower fixed-rate loans. While EBI continues to emphasize investment in
adjustable-rate loan portfolios, customer demand for such loans is lessening as
borrowers' demand for lower fixed-rate loans is increasing. Within the spectrum
of loan products offered by the Bank, the percentage of balloon payment and
adjustable-rate loans with longer initial adjustment terms has increased.
Provision for Loan Losses. Changes in the allowance for loan losses for
the six months ended June 30 are as follows (in thousands):
<CAPTION>
1998 1997
---- ----
Balance at beginning of period................... $2,382 $2,556
Provision for loan losses........................ - 85
------ ------
2,382 2,641
Loans charged-off, net of recoveries............. (318) (513)
------ -----
Balance at end of period......................... $2,064 $2,128
====== ======
</TABLE>
Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At June 30,
1998, nonperforming assets as a percentage of total assets was 1.26% as compared
to 1.69% at December 31, 1997. In addition, nonperforming assets totaled $2.7
14
<PAGE>
<TABLE>
million at June 30, 1998 as compared to $3.3 million at December 31, 1997. Based
on these favorable trends in nonperforming assets and the level of the general
loan loss reserves, management considered the loan loss allowance sufficient to
absorb losses and did not provide for additional losses during the first six
months of 1998.
Noninterest Income. Noninterest income for the first six months of 1998
totaled $1.2 million as compared to $1.4 million for the first six months of
1997. However, noninterest income during the first six months of 1997 included
(i) an aggregate gain of $97,000 on the sale of vacant branch facilities and
(ii) termination fees approximating $113,000 received by Essex Home in
connection with the cancellation of a subservicing client's contract effective
May 31, 1997. Excluding the impact of these transactions in 1997, noninterest
income effectively decreased slightly as a result of lower loan servicing fees
and other service charges and fees resulting from the nonrenewal of a
significant subservicing contract. However, Essex Home has been successful in
negotiating new subservicing contracts and has more than doubled its mortgage
loan subservicing portfolio since December 31, 1997. These contracts provide for
servicing a substantial number of loans, which will generate servicing and
ancillary fee income in future periods to significantly mitigate the impact of
the lost servicing volume in 1997.
Mortgage banking income increased from $184,000 for the first six
months of 1997 to $326,000 for the first six months of 1998, which was an
increase of 77.1%. This increase resulted from the impact of the lower interest
rate environment in 1998 on Essex First Mortgage Corporation's production of
residential loans sold in the secondary market.
Noninterest Expense. Noninterest expense increased from $3.5 million in
the first six months of 1997 to $3.7 million in the first six months of 1998.
However, noninterest expense during 1997 included a reduction of $198,000 in
compensation expense associated with EBI's stock options. Excluding the impact
of this reduction in 1997, noninterest expense effectively increased $52,000 as
a result of the increase in other noninterest expenses associated with the
increase in EBI's loan origination and servicing volumes. The significant
components of other noninterest expense for the six months ended June 30 are
presented below:
<CAPTION>
<S> <C>
Increase
1998 1997 (Decrease)
---- ---- ----------
Loan expense............................ $ 73,390 $ 72,057 $ 1,333
Telephone............................... 93,685 88,304 5,381
Postage and courier..................... 87,379 88,155 (776)
Stationery and supplies................. 58,053 51,228 6,825
Advertising and marketing............... 102,740 87,404 15,336
Corporate insurance..................... 49,208 59,536 (10,328)
Travel.................................. 34,449 22,232 12,217
Franchise and other taxes............... 39,793 33,604 6,189
Bank charges............................ 49,750 12,528 37,222
Year 2000 compliance.................... 20,016 - 20,016
Other................................... 105,680 44,154 61,526
------- -------- --------
$714,143 $559,202 $154,941
======== ======== ========
</TABLE>
The increase in other noninterest expense was partially offset by
decreases in (i) salaries and employee benefits (excluding the $198,000
reduction described above) resulting from downsizing in middle management
positions in 1997 and (ii) occupancy and equipment expense resulting from the
1998 reversal of a significant portion of a lease termination penalty previously
recognized in connection with the relocation of the Bank's Suffolk, Virginia
branch and a decrease in equipment rent.
15
<PAGE>
<TABLE>
Income Taxes. There was no income tax provision recognized for
financial reporting purposes during the six months ended June 30, 1998 or 1997,
because EBI had significant net operating loss carryforwards, which approximated
$19.9 million at December 31, 1997. 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.
Second Quarter of 1998 Compared to Second Quarter of 1997
EBI's net income for the three months ended June 30, 1998 totaled
$138,000, compared to net income of $390,000 for the three months ended June 30,
1997. However, net income for the second quarter of 1997 included an aggregate
gain of $97,000 from the sale of vacant branch facilities, termination fees
approximating $113,000 in connection with the cancellation of a subservicing
client's contract and a $94,000 reduction in stock option compensation
attributable to changes in EBI's stock price during the second quarter of 1997.
Excluding the impact of these transactions in 1997, EBI's net income effectively
improved $51,000 during the second quarter of 1998. Factors contributing to the
second quarter improvement in 1998 parallel the factors described in the
six-month comparison.
Net Interest Income. The table below presents average balances for
interest-earning assets and interest-bearing liabilities, as well as related
weighted average yields earned and rates paid for the three months ended June
30:
<CAPTION>
<S> <C>
1998 1997
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Interest-earning assets:
Loans (1)...................... $173,938 $3,621 8.33% $156,195 $3,403 8.72%
Investment securities.......... 3,748 55 5.84 6,655 89 5.36
Mortgage-backed
securities................. 1,905 31 6.61 1,905 31 6.54
Federal funds sold and
securities purchased under
agreements to resell......... 2,031 27 5.41 2,716 37 5.49
Other.......................... 4,366 60 5.49 6,606 93 5.47
-------- ------ -------- ------
Total interest-earning
assets (1)................ $185,988 3,794 8.16 $174,077 3,653 8.39
======== ========
Interest-bearing liabilities:
Deposits....................... $152,287 2,053 5.41 $139,120 1,886 5.44
FHLB advances.................. 21,288 302 5.69 25,388 381 6.02
Notes payable.................. - - - 96 2 9.61
Other.......................... 312 14 18.28 367 17 18.35
-------- ------ -------- ------
Total interest-bearing
liabilities............... $173,887 2,369 5.46 $164,971 2,286 5.56
======== ----- ======== -----
Net interest earnings............. $1,425 $1,367
====== ======
Net interest spread (1)........... 2.70% 2.83%
==== ====
Net yield on interest-earning
assets (1)..................... 3.07% 3.13%
==== ====
(1) Nonaccrual loans are included in the average balance of loans.
</TABLE>
16
<PAGE>
<TABLE>
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
<CAPTION>
<S> <C>
Increase (Decrease) From the Second Quarter of
1997 to the Second Quarter of 1998 Due to
-----------------------------------------
Volume (1) Rate (1) Net
------ ---- -----
(in thousands)
Interest income on:
Loans (2)................................ $375 $(157) $218
Investment securities.................... (41) 7 (34)
Mortgage-backed securities............... - - -
Federal funds sold and
securities purchased under
agreements to resell.................. (10) - (10)
Other interest-earning assets............ (33) - (33)
---- ----- ----
Total interest income (2) 291 (150) 141
Interest expense on:
Deposits................................. 173 (6) 167
FHLB advances............................ (60) (19) (79)
Notes payable............................ (1) (1) (2)
Other interest-bearing liabilities....... (3) - (3)
---- ----- ----
Total interest expense................ 109 (26) 83
---- ----- ----
Net interest income................... $182 $(124) $ 58
==== ===== =====
(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 increased from $1.37 million for the second quarter
of 1997 to $1.43 million for the second quarter of 1998, primarily as a result
of the increase in the ratio of average interest-earning assets to average
interest-bearing liabilities. However, there was a decline in the net interest
spread resulting from a 39 basis decrease in yield on loans. This decline
reflected the impact of the lower interest rate environment in 1998 on the
volume of refinancings to lower fixed rate loans.
Provision for Loan Losses. Changes in the allowance for loan losses for
the three months ended June 30 are as follows (in thousands):
<CAPTION>
1998 1997
---- ----
Balance at beginning of period................... $2,322 $2,362
Provision for loan losses........................ - 107
------ ------
2,322 2,469
Loans charged-off, net of recoveries............. (258) (341)
------ ------
Balance at end of period......................... $2,064 $2,128
====== ======
</TABLE>
As previously described, based on the improving trends in nonperforming
assets and the level of general loss reserves, management determined that a
provision for loan losses was not necessary during the second quarter of 1998 in
order to maintain the loan loss reserves at adequate levels to absorb losses.
17
<PAGE>
<TABLE>
Noninterest Income. Noninterest income for the second quarter of 1998
totaled $619,000 as compared to $806,000 for the second quarter of 1997.
Noninterest income for the second quarter of 1997, however, included a $97,000
aggregate gain on the sale of vacant branch facilities and $113,000 in
termination fees in connection with the cancellation of a subservicing client's
contact. Excluding the impact of these transactions in 1997, noninterest income
effectively increased slightly as a result of the increase in mortgage banking
income resulting from an increase in residential loan originations coupled with
sales in the secondary market.
Noninterest Expense. Noninterest expense increased from $1.7 million in
the second quarter of 1997 to $1.9 million in the second quarter of 1998.
Noninterest expense during 1997 included a $94,000 reduction of compensation
expense associated with EBI's stock options. Excluding the impact of this
reduction in 1997, noninterest expense effectively increased $136,000 as a
result of the increase in other noninterest expense, the most significant
components of which for the three months ended June 30 are presented below.
<CAPTION>
<S> <C>
Increase
1998 1997 (Decrease)
---- ---- ----------
Loan expense............................ $ 37,334 $ 13,553 $23,781
Telephone............................... 49,259 47,440 1,819
Postage and courier..................... 45,688 39,910 5,778
Stationery and supplies................. 33,132 23,581 9,551
Advertising and marketing............... 59,541 43,961 15,580
Corporate insurance..................... 25,240 28,290 (3,050)
Travel.................................. 21,736 11,036 10,700
Franchise and other taxes............... 20,044 (8,603) 28,647
Bank charges............................ 30,468 6,960 23,508
Year 2000 compliance.................... 11,850 - 11,850
Other................................... 43,087 27,017 16,070
-------- -------- --------
$377,379 $233,145 $144,234
======== ======== ========
</TABLE>
Year 2000 Readiness
As previously described in its 1997 Annual Report, EBI has established
a company-wide task force to assess and remediate business risks associated with
the Year 2000. EBI has completed its assessment of all mission-critical internal
systems and operations, as well as strategic relationships with others. EBI has
relied upon both internal and external resources to complete the assessment
phase. EBI is now proceeding with the remediation phase and it is anticipated
that all reprogramming and replacement efforts will be substantially complete by
December 31, 1998. The total cost of the project (including the capitalized cost
of new hardware and software) is estimated to be $350,000 and is being funded
through operating cash flows. During the six months ended June 30, 1998, EBI
recognized $20,000 of expense associated with this project. Management believes
EBI can incur Year 2000 project costs without adversely affecting future
operating results. However, because of the complexity of the issue and possible
unidentified risks, actual costs may vary from the estimate.
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 4%. The
Bank has consistently exceeded such regulatory liquidity requirement and, at
June 30, 1998, had a liquidity ratio of 10.09%.
18
<PAGE>
<TABLE>
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 June 30, 1998,
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 four separate requirements of specified capital as
a percent of the appropriate asset base. As of June 30, 1998, the Bank was "well
capitalized" for PCA purposes.
The Bank's capital amounts and ratios as of June 30, 1998 are presented
below (in thousands):
<CAPTION>
<S> <C>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes PCA Provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to
risk-weighted assets) $16,989 13.39% $10,154 8.0% $12,692 =>10.0%
Tier I capital (to
risk-weighted assets) 15,591 12.28% 5,077 4.0% 7,615 =>6.0%
Tier I capital (to
total assets) 15,591 7.28% 8,561 4.0% 10,702 =>5.0%
Tangible capital (to
total assets) 15,591 7.28% 3,210 1.5% - -
</TABLE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk exposures that
affect the quantitative or qualitative disclosures presented as of the preceding
year end in the EBI 1997 Annual Report.
19
<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
On May 28, 1998, an annual meeting of stockholders of EBI was held for
the purpose of considering and voting upon (i) an amendment to EBI's Certificate
of Incorporation to authorize additional shares of common and preferred stock
and (ii) the ratification of the Essex Bancorp, Inc. Management Recognition
Plan. At the meeting, (i) the amendment to EBI's Certificate of Incorporation
was approved by a vote of 427,909 EBI common shares voting in favor, 94,800
shares voting against and 496,684 shares abstaining and (ii) the Essex Bancorp,
Inc. Management Recognition Plan was ratified by a vote of 920,049 shares voting
in favor, 72,656 voting against and 26,688 shares abstaining. No other business
was conducted at the meeting.
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 -- None
20
<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.
August 7, 1998 By: /s/Gene D. Ross
-------------- ---------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
August 7, 1998 By: /s/Mary-Jo Rawson
-------------- -----------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7401
<INT-BEARING-DEPOSITS> 5187
<FED-FUNDS-SOLD> 1180
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18
<INVESTMENTS-CARRYING> 5753
<INVESTMENTS-MARKET> 5707
<LOANS> 186491
<ALLOWANCE> 2064
<TOTAL-ASSETS> 214391
<DEPOSITS> 165819
<SHORT-TERM> 25145
<LIABILITIES-OTHER> 2240
<LONG-TERM> 6131
0
15008
<COMMON> 11
<OTHER-SE> 37
<TOTAL-LIABILITIES-AND-EQUITY> 214391
<INTEREST-LOAN> 7108
<INTEREST-INVEST> 172
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 7482
<INTEREST-DEPOSIT> 4052
<INTEREST-EXPENSE> 4672
<INTEREST-INCOME-NET> 2810
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3746
<INCOME-PRETAX> 235
<INCOME-PRE-EXTRAORDINARY> 235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
<YIELD-ACTUAL> 3.03
<LOANS-NON> 1327
<LOANS-PAST> 0
<LOANS-TROUBLED> 174
<LOANS-PROBLEM> 1591
<ALLOWANCE-OPEN> 2382
<CHARGE-OFFS> 327
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 2064
<ALLOWANCE-DOMESTIC> 2064
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 87
</TABLE>
