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 March 31, 1998
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________to________________
Commission file number 1-10506
---------------------------------------------
Essex Bancorp, Inc.
(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
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 .
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<TABLE>
Essex Bancorp, Inc.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1998
Table of Contents
<CAPTION>
Page
----
<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets (unaudited)
as of March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998
and 1997 5
Consolidated Statement of Shareholders' Equity
(unaudited) for the three months ended
March 31, 1998 7
Consolidated Statements of Cash
Flows (unaudited) for the three months
ended March 31, 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 11
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 16
Part II OTHER INFORMATION
Item 1.Legal Proceedings 17
Item 2.Changes in Securities 17
Item 3.Defaults Upon Senior Securities 17
Item 4.Submission of Matters to a Vote
of Security Holders 17
Item 5.Other Information 17
Item 6.Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C>
ASSETS
Cash............................................................... $ 1,805,452 $ 2,023,197
Interest-bearing deposits.......................................... 2,733,658 6,261,686
Federal funds sold and securities purchased under
agreements to resell............................................. 1,677,476 2,748,000
------------- --------------
Cash and cash equivalents..................................... 6,216,586 11,032,883
Federal Home Loan Bank stock....................................... 1,431,000 1,431,000
Securities available for sale - cost approximates market........... 17,689 17,451
Securities held for investment - market value of
$2,232,000 in 1998 and $2,217,000 in 1997........................ 2,299,325 2,299,120
Mortgage-backed securities held for investment - market
value of $1,930,000 in 1998 and $1,886,000 in 1997............... 1,904,868 1,904,989
Loans, net of allowance for loan losses of $2,322,000
in 1998 and $2,382,000 in 1997................................... 167,866,101 167,440,733
Loans held for sale................................................ 3,959,513 2,165,074
Mortgage servicing rights.......................................... 1,063,114 1,169,766
Foreclosed properties, net......................................... 1,489,157 1,511,629
Accrued interest receivable........................................ 1,158,644 1,196,980
Excess of cost over net assets acquired............................ 144,238 159,754
Advances for taxes, insurance, and other........................... 690,284 633,053
Premises and equipment............................................. 2,212,605 1,926,729
Other assets....................................................... 2,594,360 2,198,598
------------- --------------
Total Assets.............................................. $ 193,047,484 $ 195,087,759
============= ==============
See notes to consolidated financial statements.
3
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
March 31, December 31,
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................................... $ 5,472,980 $ 5,055,545
Interest-bearing.............................................. 149,899,366 148,871,154
------------- -------------
Total deposits............................................ 155,372,346 153,926,699
Federal Home Loan Bank advances.................................... 20,260,833 23,546,667
Notes payable...................................................... - 72,102
Capitalized lease obligations...................................... 317,074 331,970
Other liabilities.................................................. 2,181,298 2,393,814
------------- -------------
Total Liabilities......................................... 178,131,551 180,271,252
SHAREHOLDERS' EQUITY
Series B preferred stock, $6.67 stated value:
Authorized shares - 2,250,000
Issued and outstanding shares - 2,125,000........................ 14,173,750 14,173,750
Series C preferred stock, $6.67 stated value:
Authorized shares - 125,000
Issued and outstanding shares - 125,000.......................... 833,750 833,750
Common stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 1,058,510 in 1998
and 1,058,136 in 1997......................................... 10,585 10,581
Capital in excess of par........................................... 8,683,285 8,681,739
Accumulated deficit................................................ (8,785,437) (8,883,313)
------------- -------------
Total Shareholders' Equity................................ 14,915,933 14,816,507
------------- -------------
Total Liabilities and Shareholders' Equity................ $ 193,047,484 $ 195,087,759
============= =============
See notes to consolidated financial statements.
4
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees................................................ $3,487,565 $3,149,138
Federal funds sold and securities purchased
under agreements to resell......................................... 40,254 36,347
Investment securities, including dividend income..................... 54,133 118,137
Mortgage-backed securities........................................... 31,488 30,364
Other................................................................ 74,411 37,250
----------- -----------
Total Interest Income....................................... 3,687,851 3,371,236
----------- -----------
INTEREST EXPENSE
Deposits ............................................................ 1,999,932 1,758,250
Federal Home Loan Bank advances...................................... 287,640 379,417
Notes payable........................................................ 792 2,277
Other................................................................ 14,905 19,472
----------- -----------
Total Interest Expense...................................... 2,303,269 2,159,416
----------- -----------
Net Interest Income......................................... 1,384,582 1,211,820
PROVISION FOR LOAN LOSSES................................................ - (22,453)
----------- -----------
Net Interest Income After
Provision for Loan Losses................................... 1,384,582 1,234,273
NONINTEREST INCOME
Loan servicing fees.................................................. 275,658 401,898
Mortgage banking income, including
gain on sale of loans.............................................. 158,887 88,219
Other service charges and fees....................................... 87,683 110,962
Other................................................................ 30,083 1,549
----------- -----------
Total Noninterest Income.................................... 552,311 602,628
----------- -----------
See notes to consolidated financial statements.
5
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
NONINTEREST EXPENSE
Salaries and employee benefits....................................... 801,718 771,629
Net occupancy and equipment.......................................... 229,291 292,195
Deposit insurance premiums........................................... 121,095 112,345
Amortization of intangible assets.................................... 122,167 125,426
Service bureau....................................................... 106,126 126,751
Professional fees.................................................... 75,485 69,661
Foreclosed properties, net........................................... 46,371 (4,898)
Other................................................................ 336,764 326,057
----------- -----------
Total Noninterest Expense................................... 1,839,017 1,819,166
----------- -----------
Income Before Income Taxes.................................. 97,876 17,735
PROVISION FOR INCOME TAXES............................................... - -
----------- -----------
Net Income.................................................. $ 97,876 $ 17,735
============ ===========
Loss available to common shareholders (Note 2)....................... $ (335,085) $ (377,555)
============ ===========
Basic and diluted loss per common share (Note 2)..................... $ (.32) $ (.36)
============ ===========
See notes to consolidated financial statements.
6
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
For the three months ended March 31, 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............................ 4 - - 1,546 - 1,550
Net income......................... - - - - 97,876 97,876
---------- ----------- -------- ---------- ----------- -----------
Balance, March 31, 1998............ $ 10,585 $14,173,750 $833,750 $8,683,285 $(8,785,437) $14,915,933
========== =========== ======== ========== =========== ===========
See notes to consolidated financial statements.
7
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income........................................................... $ 97,876 $ 17,735
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provisions for:
Losses on loans, foreclosed properties and other.............. 35,665 14,148
Depreciation and amortization of premises
and equipment............................................. 100,459 108,786
Amortization (accretion) of:
Premiums and discounts on:
Loans................................................... 34,048 43,024
Mortgage-backed securities held to maturity............. 121 57
Securities held to maturity............................. (200) 3,074
Mortgage servicing rights................................. 106,652 109,910
Excess of costs over equity in net assets
acquired................................................ 15,516 15,516
Mortgage banking activities:
Net (increase) decrease in loans originated
for resale................................................ (1,652,222) 180,452
Realized gains from sale of loans............................. (142,217) (79,955)
Realized (gains) and losses from sales of:
Premises and equipment........................................ (225) 33,975
Foreclosed properties......................................... 1,155 (57,221)
Changes in operating assets and liabilities:
Accrued interest receivable................................... 38,336 (20,435)
Other assets.................................................. (458,993) (544,812)
Other liabilities............................................. (212,516) (27,438)
------------ ------------
Net cash used in operating activities................................ (2,036,545) (203,184)
See notes to consolidated financial statements.
8
<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank certificates of
deposit.......................................................... (4,000,000) -
Redemption of Federal Home Loan Bank certificates of
deposit.......................................................... 4,000,000 -
Proceeds from redemption of Federal Home Loan
Bank stock....................................................... - 1,204,800
Purchase of securities held for investment........................... (5) (298,406)
Proceeds from maturities of securities held for investment........... - 1,000,000
Purchase of securities available for sale............................ (238) (2,507,588)
Proceeds from sales of securities available for sale................. - 2,500,000
Purchases of loans................................................... (5,404,807) (4,974,952)
Net (increase) decrease in net loans................................. 4,658,016 (2,703,082)
Proceeds from sales of foreclosed properties......................... 299,597 451,312
Increase in foreclosed properties.................................... (20,570) (57,383)
Increase in mortgage servicing rights................................ - (236,155)
Purchase of premises and equipment................................... (386,335) (21,313)
Proceeds from sales of premises and equipment........................ 225 3,790
------------- ------------
Net cash used in investing activities................................ (854,117) (5,638,977)
FINANCING ACTIVITIES
Net increase in NOW and savings deposits............................. 1,674,835 3,021,138
Net increase (decrease) in certificates of deposit................... (229,188) 2,948,049
Proceeds from Federal Home Loan Bank advances........................ 5,000,000 7,000,000
Repayment of Federal Home Loan Bank advances......................... (8,285,834) (7,285,833)
Repayment of note payable............................................ (72,102) -
Payments on capital lease obligations................................ (14,896) (12,430)
Common stock issued under Employee Stock
Purchase Plan..................................................... 1,550 1,875
------------- ------------
Net cash provided by (used in) financing activities.................. (1,925,635) 5,672,799
------------- ------------
Decrease in cash and cash equivalents................................ (4,816,297) (169,362)
Cash and cash equivalents at beginning of period..................... 11,032,883 6,195,251
------------- ------------
Cash and cash equivalents at end of period........................... $ 6,216,586 $ 6,025,889
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to foreclosed properties......................... $ 287,375 $ 619,823
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................................... $ 2,348,288 $ 2,148,231
See notes to consolidated financial statements.
9
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<PAGE>
ESSEX BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 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 for the three
months ended March 31 are as follows:
1998 1997
---- ----
Net income $ 97,876 $ 17,735
Preferred stock dividends (432,961) (395,290)
---------- ----------
Net loss available to common shareholders $ (335,085) $ (377,555)
========== ==========
Weighted average common shares outstanding 1,058,144 1,053,394
========== ==========
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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets of EBI at March 31, 1998 were $193.0 million as compared
to $195.1 million at December 31, 1997, a decrease of approximately $2.0 million
or 1.0%. The decline in total assets resulted from the utilization of funds
provided by loan prepayments and an increase in deposits to fund the origination
and acquisition of mortgage loans and to reduce the level of higher-costing
Federal Home Loan Bank advances.
Deposits, the primary source of EBI's funds, totaled $155.4 million at
March 31, 1998 as compared to $153.9 million at December 31, 1997, an increase
of $1.4 million or .9%. The increase in noninterest-bearing deposits reflected
the continuing transfer of escrow accounts maintained by Essex Home Mortgage
Servicing Corporation ("Essex Home") from nonaffiliated financial institutions.
The increase in interest-bearing deposits occurred primarily at EBI's branches
in Emporia and Suffolk, Virginia, where Essex Savings Bank, F.S.B. (the "Bank")
has a significant market presence.
Results of Operations
First Quarter of 1998 Compared to First Quarter of 1997
EBI's net income for the three months ended March 31, 1998 totaled
$98,000, compared to net income of $18,000 for the three months ended March 31,
1997. The improvement in 1998 resulted from (i) an increase in net interest
income, which reflected an increase in the net interest margin from 2.91% for
the first quarter of 1997 to 3.00% for the first quarter of 1998 and (ii) an
increase in mortgage banking income resulting from increased production of
residential loans held for sale in the secondary market. These increases were
partially offset by the anticipated decline in mortgage loan servicing fees
resulting from the nonrenewal of a significant subservicing contract effective
May 1997.
[intentionally blank]
11
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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 three months ended March
31:
<CAPTION>
1998 1997
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C>
Interest-earning assets:
Loans (1)...................... $170,411 $3,488 8.19% $150,756 $3,149 8.36%
Investment securities.......... 3,748 54 5.78 8,575 118 5.51
Mortgage-backed
securities................. 1,905 32 6.61 1,905 30 6.37
Federal funds sold and
securities purchased under
agreements to resell......... 2,949 40 5.46 2,789 37 5.21
Other.......................... 5,497 74 5.41 2,861 37 5.21
-------- ------ -------- ------
Total interest-earning
assets (1)................ $184,510 3,688 7.99 $166,886 3,371 8.08
======== ------ ======== ------
Interest-bearing liabilities:
Deposits....................... $148,908 2,000 5.45 $131,761 1,758 5.41
FHLB advances.................. 20,514 287 5.69 25,653 379 6.00
Notes payable.................. 34 1 9.32 96 2 9.61
Other.......................... 326 15 18.54 380 20 18.52
-------- ------ -------- ------
Total interest-bearing
liabilities............... $169,782 2,303 5.50 $157,890 2,159 5.54
======== ------ ======== ------
Net interest earnings............. $1,385 $1,212
====== ======
Net interest spread (1)........... 2.49% 2.54%
==== ====
Net interest margin (1)........... 3.00% 2.91%
==== ====
</TABLE>
(1) Nonaccrual loans are included in the average balance of loans. Yield
calculation includes the accretion of net deferred loan fees.
12
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<TABLE>
The table below sets forth certain information regarding changes in
EBI's interest income and interest expense between the periods indicated.
Increase (Decrease) From First Quarter of 1997
to First Quarter of 1998 Due to
<CAPTION>
Volume (1) Rate (1) Net
------ ---- -----
(in thousands)
<S> <C>
Interest income on:
Loans (2)................................ $403 $(64) $339
Investment securities.................... (69) 5 (64)
Mortgage-backed securities............... - 2 2
Federal funds sold and
securities purchased under
agreements to resell.................. 2 1 3
Other interest-earning assets............ 36 1 37
---- ---- ----
Total interest income (2)............. 372 (55) 317
Interest expense on:
Deposits................................. 230 12 242
FHLB advances............................ (73) (19) (92)
Notes payable............................ (1) - (1)
Other interest-bearing liabilities....... (5) - (5)
---- ---- ----
Total interest expense................ 151 (7) 144
---- ---- ----
Net interest income................... $221 $(48) $173
==== ==== ====
</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 increased from $1.2 million for the first quarter
of 1997 to $1.4 million for the first quarter 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.
Further, in order to provide higher-yielding asset growth, the Bank has
committed to purchasing in May 1998 a portfolio of second mortgage and unsecured
loans aggregating approximately $3.2 million.
Provision for Loan Losses. Changes in the allowance for loan losses for
the three months ended March 31 are as follows (in thousands):
1998 1997
---- ----
Balance at beginning of period................... $2,382 $2,556
Provision for loan losses........................ - (22)
------ ------
2,382 2,534
Loans charged-off, net of recoveries............. (60) (172)
------ ------
Balance at end of period......................... $2,322 $2,362
====== ======
13
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Management reviews the adequacy of the allowance for loan losses on a
continual basis to ensure that amounts provided are reasonable. At March 31,
1998, the unallocated portion of the general loan loss allowance approximated
$238,000. Management considered the loan loss allowance adequate to absorb
losses and did not provide for additional losses during the first quarter of
1998.
Noninterest Income. The significant components of noninterest income
for the three months ended March 31 are presented below:
<TABLE>
<CAPTION>
<S> <C>
Increase
1998 1997 (Decrease)
---- ---- ----------
Loan servicing fees..................... $275,658 $401,898 $(126,240)
Mortgage banking income................. 158,887 88,219 70,668
Other service charges and fees.......... 87,683 110,962 (23,279)
Other................................... 29,536 1,549 27,987
-------- -------- ---------
$551,764 $602,628 $ (50,864)
======== ======== =========
Noninterest income declined from $603,000 for the first quarter of 1997
to $552,000 for the first quarter of 1998. This decline was primarily
attributable to lower loan servicing fees and other service charges and fees
resulting from the nonrenewal of a significant subservicing contract effective
May 1997. However, during the first quarter of 1998, Essex Home was successful
in negotiating subservicing contracts with three new clients. 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 $88,000 for the first quarter of
1997 to $159,000 for the first quarter of 1998, which was an increase of 80.1%.
This increase resulted from the impact of the lower interest rate environment in
1998 on Essex First Mortgage Corporation's production of residential loans held
for sale in the secondary market.
Noninterest Expense. The significant components of noninterest expense
for the three months ended March 31 are presented below:
<CAPTION>
Increase
1998 1997 (Decrease)
---- ---- ----------
Salaries and employee benefits.......... $ 801,718 $ 771,629 $ 30,089
Net occupancy and equipment............. 229,291 292,195 (62,904)
Deposit insurance premiums.............. 121,095 112,345 8,750
Amortization of intangible assets....... 122,167 125,426 (3,259)
Service bureau.......................... 106,126 126,751 (20,625)
Professional fees....................... 75,485 69,661 5,824
Foreclosed properties, net.............. 46,371 (4,898) 51,269
Other................................... 336,764 326,057 10,707
---------- ---------- --------
$1,839,017 $1,819,166 $ 19,851
========== ========== ========
</TABLE>
Noninterest expense increased slightly from the first quarter of 1997
to the first quarter of 1998. The increase was primarily attributable to
increases in (i) salaries and employee benefits resulting from an adjustment to
stock option compensation in the first quarter of 1997 reflecting the decline in
EBI's common stock price, (ii) foreclosed properties expense resulting from
gains recognized during the first quarter of 1997 on the sales of foreclosed
properties and (iii) other noninterest expense, the primary components of which
are detailed below. These increases were partially offset by decreases in (i)
occupancy and equipment expense resulting from the first quarter 1998 reversal
of a significant portion of a lease termination penalty recognized in December
14
<PAGE>
1997 in connection with the relocation of the Bank's Suffolk, Virginia branch
and a decline in equipment rent and (ii) service bureau expense resulting from
Essex Home's lower servicing volume during the first quarter of 1998.
The significant components of other noninterest expense for the three
months ended March 31 are presented below:
<TABLE>
<CAPTION>
<S> <C>
Increase
1998 1997 (Decrease)
---- ---- ----------
Loan expense............................ $ 36,056 $ 58,504 $(22,448)
Telephone............................... 44,426 40,864 3,562
Postage and courier..................... 41,691 48,245 (6,554)
Stationery and supplies................. 24,921 27,647 (2,726)
Advertising and marketing............... 43,199 43,443 (244)
Corporate insurance..................... 23,968 31,246 (7,278)
Travel.................................. 12,713 11,196 1,517
Licensing fees.......................... 11,706 12,825 (1,119)
Franchise and other taxes............... 19,749 42,207 (22,458)
Other................................... 78,335 9,880 68,455
-------- --------- ------
$ 336,764 $ 326,057 $10,707
========= ========= ========
</TABLE>
Income Taxes. There was no income tax provision recognized for
financial reporting purposes during the three months ended March 31, 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.
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
March 31, 1998, had a liquidity ratio of 9.85%. A portion of the excess
liquidity will be used to fund the purchase of a loan portfolio in May 1998.
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 March 31, 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 March 31, 1998, the Bank was
"well capitalized" for PCA purposes.
15
<PAGE>
<TABLE>
The Bank's capital amounts and ratios as of March 31, 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) $16,875 14.44% $9,349 8.0% $11,686 =>10.0%
Tier I capital (to
risk-weighted assets) 15,414 13.19% 4,675 4.0% 7,012 =>6.0%
Tier I capital (to
total assets) 15,414 8.00% 7,707 4.0% 9,634 =>5.0%
Tangible capital (to
total assets) 15,414 8.00% 2,890 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.
[intentionally blank]
16
<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
----------- -----------
10.1 Essex Bancorp, Inc. Management Recognition Plan
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
17
<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.
May 8, 1998 By: /s/ Gene D. Ross
----------- -------------------------
(Date) Gene D. Ross
Chairman, President,
and Chief Executive
Officer
May 8, 1998 By: /s/ Mary-Jo Rawson
----------- -------------------------
(Date) Mary-Jo Rawson
Chief Accounting Officer
18
EXHIBIT 10.1
ESSEX BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
<PAGE>
1. Establishment of Plan
Essex Bancorp, Inc. (the "Company") hereby establishes the
Essex Bancorp, Inc. Management Recognition Plan (the "Plan"), effective May 1,
1998, contingent upon ratification of the Plan by the Company's shareholders. In
the event the Company's shareholders fail to ratify the Plan, the Plan shall be
null and void ab initio.
2. Purpose of Plan
The purpose of the Plan is to attract and retain personnel of
experience and ability in key positions by providing those key employees with a
proprietary interest in the Company and its Subsidiaries as compensation for
their contributions to the Company and any Subsidiaries and as an incentive to
make such contributions in the future.
3. Definitions
In this document, unless the context clearly indicates
otherwise, words in the masculine gender shall be deemed to refer to females as
well as males, any term used in the singular also shall refer to the plural, and
the following capitalized terms shall have the following meanings:
3.1 "Agreement" means a written agreement between the Company
and an Employee implementing and evidencing the grant of Plan Shares.
3.2 "Board of Directors" or "Board" means the board of
directors of the Company.
3.3 "Change in Control" means the acquisition by any "person"
or "group" (as defined in Sections 13(d) and 14(d) of the Exchange Act),
directly or indirectly, as "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of securities of the Company representing twenty percent (20%)
or more of the combined voting power of the then outstanding securities of the
Company; provided, however, that no Change in Control shall be deemed to occur
as a result of: (a) any transaction prior to May 1, 1998; (b) any purchase,
transfer, or other disposition of the Series B and Series C preferred shares of
the Company; or (c) any exercise or conversion of warrants or options of the
Company which were issued prior to 1996 (and any exercise, or conversion of such
warrants or options shall be disregarded in determining whether a Change of
Control has occurred).
3.4 "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
3.5 "Committee" means the Executive Compensation Committee of
the Board consisting of not less than two non-employee directors of the Company.
3.6 "Company" means Essex Bancorp, Inc.
3.7 "Employee" means any person who is currently employed by
the Company or any Subsidiary, including officers of the Company or any
Subsidiary.
3.8 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
3.9 "Permanent Disability" means disabled within the meaning
of Code Section 72(m)(7).
3.10 "Plan" means the Essex Bancorp, Inc. Management
Recognition Plan, as set forth herein and as amended from time to time.
3.11 "Plan Shares" means Shares granted to a Recipient
pursuant to the Plan.
3.12 "Restriction Period" means the period of time any Plan
Shares are nontransferable and subject to a forfeiture, as set forth in the
applicable Agreement.
3.13 "Recipient" means an Employee who receives Plan Shares
under the Plan.
3.14 "Shares" means shares of the common stock of the Company.
3.15 "Subsidiary" means any subsidiary corporation of the
Company within the meaning of Section 424(f) of the Code (or a successor
provision of similar import).
4. Administration
4.1 The Plan shall be administered by the Committee. Except as
expressly provided herein, the Committee shall have the exclusive power to
determine in its discretion the Employees to whom the Company shall issue Plan
Shares, the number of Plan Shares to be granted, and the terms and conditions of
each award of Plan Shares, including the applicable Restriction Period and
vesting schedule. Without limiting the generality of the foregoing, the
Committee may provide in its discretion in an Agreement pertaining to an award
of Plan Shares: (a) for an agreement by the Recipient to render services to the
Company or a Subsidiary upon the terms and conditions specified in the Agreement
during the Restriction Period; and (b) for an agreement by the Recipient to
resell the Plan Shares to the Company under specified conditions. In no event,
however, shall any Agreement permit vesting of Plan Shares prior to the first to
occur of the Participant's death, Permanent Disability, completion of three (3)
years of employment with the Company from the date of grant or a Change in
Control.
4.2 In addition to any other powers provided herein, the
Committee shall have the following powers: (a) to construe and interpret the
Agreements and the Plan; (b) to require, whether or not provided for in the
pertinent Agreement, of any person receiving Shares, the making of any
representations or agreements which the Committee may deem necessary or
advisable in order to comply with the securities laws of the United States or of
any state, including Section 16(b) of the Exchange Act; (c) to provide for
satisfaction of a Recipient's tax liabilities arising in connection with the
Plan; and (d) to make all other determinations and take all other actions
necessary or advisable for the administration of the Plan. In no case, however,
may the Committee or Company grant any Plan Shares until the Plan has been
approved by the Company's shareholders.
4.3 Any determinations or actions made or taken by the
Committee pursuant to this Article shall be binding and final.
4.4 In addition to any other indemnification rights they may
have as members of the Board, the members of the Committee shall be indemnified
by the Company against the reasonable expenses, including attorneys' fees,
actually incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any award of Plan Shares made hereunder, and against
all amounts reasonably paid by them in settlement thereof or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, if the
members acted in good faith and in a manner which they believed to be in, and
not opposed to, the best interests of the Company.
5. Number of Shares Subject to The Plan
5.1 As of any date, the maximum number of Plan Shares which
may be issued under this Plan is limited to the excess of: (a) five percent (5%)
of the total issued and outstanding Shares of the Company (computed without
regard to Shares issued under this Plan or any Shares issued upon the exercise
of any warrants for Shares outstanding as of the effective date of this Plan);
over (b) any Plan Shares previously issued and not yet forfeited.
5.2 If Plan Shares previously issued are forfeited, in whole
or in part, the Shares shall become available for reissuance as new Plan Shares
within the aggregate maximum number of Shares stated in Section 5.1 above.
6. Eligibility and Grants
6.1 Only those officers and other Employees designated by the
Committee as key management Employees of the Company or any Subsidiary are
eligible to receive Plan Shares. An Employee may receive more than one award of
Plan Shares.
6.2 The Committee shall determine from time to time which of
the Employees referenced in Section 6.1 above will be issued Plan Shares and the
number of Plan Shares which the Company shall issue, provided that the total
number of Shares issued pursuant to this Plan may not exceed the number of
Shares set forth in Section 5.1. In selecting those Employees to whom Plan
Shares will be granted and the number of Plan Shares to be issued, the Committee
may consider the position and responsibilities of the eligible Employees, the
value of their services to the Company and its Subsidiaries, and any other
factors the Committee may deem relevant.
6.3 As promptly as practicable after a determination is made
pursuant to Section 6.2 that Plan Shares are to be granted, the Committee shall
notify the Recipient and Company in writing of the grant of the Shares, the
number of Shares covered by the grant, the Restriction Period and the terms and
conditions upon which the Plan Shares subject to the grant will become vested
and transferable. The Committee shall cause the Company to tender to the
Recipient an Agreement evidencing the grant, which Agreement must be executed by
the Chairman of the Committee (or his delegee) on behalf of the Company and by
the Recipient for the grant to be consummated. The date of the Agreement shall
be considered the date of grant of the plan Shares.
6.4 The Company shall issue the applicable number of Plan
Shares to the Recipient as soon as possible after the date of the Plan Shares
are awarded by the Committee. Unless otherwise provided in the applicable
Agreement, a Recipient will not be required to pay any amount for his Plan
Shares and such Shares shall be issued fully paid and non-assessable. No Plan
Shares shall be issued, however, until all applicable requirements of law and
regulatory restrictions are satisfied.
6.5 The Company may withhold from any transfer, payment or
distribution made under this Plan sufficient amounts of cash or Shares to cover
any applicable withholding and employment taxes, and if the amount of the
payment is insufficient, the Company may require the Recipient to pay to the
Company the amount required to be withheld as a condition of delivering the Plan
Shares; provided, however, that the withholding of Shares on behalf of any
Recipient who is an officer or director of the Company within the meaning of
Section 16 of the Exchange Act shall be effective only as permitted under Rule
16b-3 under the Exchange Act and Securities and Exchange Commission staff
interpretations thereunder.
6.6 If the Recipient timely and properly elects pursuant to
Code Section 83(b) to include in gross income for federal income tax purposes
the amount in respect of Plan Shares that is determined under Code Section
83(b), the Recipient shall furnish to the Company a copy of his completed and
signed election form, and shall pay (or make arrangements satisfactory to the
Company to pay) to the Company any federal, state or local taxes required to be
withheld with respect to the Shares. If the Recipient fails to make those
payments, the Company shall, to the extent permitted by law, have the right to
deduct from any payment of any kind otherwise due to the Recipient any federal,
state or local taxes of any kind required by law to be withheld with respect to
the Shares.
7. Restrictions on Transfer; Forfeiture Upon Termination of
Employment
7.1 Plan Shares issued to a Recipient shall be nontransferable
and subject to forfeiture by the Recipient during the Restriction Period in
accordance with the terms and conditions (including vesting schedule) set forth
in the applicable Agreement evidencing the award of the Plan Shares. In no event
shall the Restriction Period end, or the corresponding Plan Shares vest, prior
to the first to occur of the Participant's death or Permanent Disability, the
Participant's completion of three years of employment with the Company from the
date of grant of the Plan Shares or a Change in Control.
7.2 Except as provided in Subject 7.4 below, if the employment
of a Recipient terminates for any reason other than Permanent Disability or
death before he has satisfied the three (3) year or greater vesting requirement
applicable to any Plan Shares, as specified in the applicable Agreement, the
Recipient shall forfeit the Shares that have not theretofore become vested.
7.3 In determining the number of Plan Shares that are vested,
fractional shares shall be rounded down to the nearest whole number provided
that such fractional shares shall be aggregated and deemed earned on the first
date that all Plan Shares subject to an award have been vested.
7.4 Notwithstanding the general rule set forth in Section 7.2
above, all Plan Shares shall automatically vest upon the occurrence of a Change
in Control, if not previously forfeited.
7.5 Plan Shares may not be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of during the Restriction Period
described in the underlying Agreement. Share certificates representing the
Shares shall not be issued until the Shares become vested at the close of the
Restriction Period.
8. Voting of Plan Shares and Distributions
8.1 Except as provided in the applicable Agreement, a
Recipient may exercise all voting rights with respect to the Plan Shares
(whether or not vested) issued to him.
8.2 Except as provided in the applicable Agreement, any cash
dividends, stock dividends or other distributions payable in respect of Plan
Shares (whether or not vested) will be paid to the Recipient.
9. Miscellaneous
9.1 The aggregate number of Plan Shares available for issuance
pursuant to the Plan and the number of Shares to which the Plan Share award
relates shall be proportionately adjusted for any increase or decrease in the
total number of Shares outstanding subsequent to the effective date of the Plan
resulting from any split, subdivision or consolidation of Shares or other
capital adjustment, or other increase or decrease in such Shares effected by the
Company without receipt or payment of consideration. All such adjustments shall
be in such amounts as the Committee in its sole discretion determines.
9.2 The Board shall have the power to terminate the Plan and
amend it in any respect, provided that the Board may not, without the approval
of the shareholders of the Company, amend the Plan so as to increase the
aggregate number of Shares that may be awarded under the Plan or increase
materially the benefits accruing to participants under the Plan. No termination
or amendment of the Plan shall adversely affect the rights or obligations of any
Recipient as to his then outstanding Plan Shares without his consent. All such
adjustments shall be in such amounts as the Committee in its sole discretion
determines.
9.3 The grant of Plan Shares shall not give the Recipient any
right to similar grants in future years or any right to be retained in the
employ of the Company or any Subsidiary.
9.4 The Plan and Agreements shall be governed and their
provisions construed, enforced and administered in accordance with the laws of
Virginia, except to the extent that such laws may be superseded by any federal
law.
9.5 The shareholders of the Company shall be considered to
have ratified the Plan (or any amendment to the Plan) if the Plan (or amendment)
is approved by a majority of the votes, cast by the shareholders of the Company
at any duly called shareholder meeting at which a quorum is present.
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Agreement to be executed effective as of the ___ day of
__________, 1998.
ESSEX BANCORP, INC.
By:______________________________
Its:____________________
Date:____________________________
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1805
<INT-BEARING-DEPOSITS> 2734
<FED-FUNDS-SOLD> 1678
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18
<INVESTMENTS-CARRYING> 5635
<INVESTMENTS-MARKET> 5593
<LOANS> 174147
<ALLOWANCE> 2322
<TOTAL-ASSETS> 193047
<DEPOSITS> 155372
<SHORT-TERM> 18778
<LIABILITIES-OTHER> 2181
<LONG-TERM> 1799
0
15008
<COMMON> 11
<OTHER-SE> (102)
<TOTAL-LIABILITIES-AND-EQUITY> 193047
<INTEREST-LOAN> 3488
<INTEREST-INVEST> 86
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 3688
<INTEREST-DEPOSIT> 1200
<INTEREST-EXPENSE> 2303
<INTEREST-INCOME-NET> 1385
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1839
<INCOME-PRETAX> 98
<INCOME-PRE-EXTRAORDINARY> 98
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
<YIELD-ACTUAL> 3.00
<LOANS-NON> 1537
<LOANS-PAST> 0
<LOANS-TROUBLED> 233
<LOANS-PROBLEM> 1685
<ALLOWANCE-OPEN> 2382
<CHARGE-OFFS> 67
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2322
<ALLOWANCE-DOMESTIC> 2322
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 238
</TABLE>
