SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995 Commission File Number 0-14018
BNH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
CONNECTICUT 06-1126899
(State of incorporation (I.R.S. Employer Identification
or organization) Number)
209 CHURCH STREET, NEW HAVEN, CONNECTICUT 06510
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 498-3500
Former name, former address and former fiscal year, if changed since
last report NONE
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS November 7, 1995
Common Stock (no par value) 14,726,650
BNH BANCSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Statement of Financial Position as of September
30, 1995, December 31, 1994 and September 30, 1994 3
Consolidated Statement of Operations for the three and nine
months ended September 30, 1995 and September 30, 1994 4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 1995 and September 30, 1994 5
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1995 and September 30, 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Items 1-5 Not Applicable 31
Items 6 Exhibits and Reports on Form 8-K 31
SIGNATURES 32
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
(Unaudited)
ASSETS Sept. 30, 1995 Dec. 31, 1994 Sept. 30, 1994
______________ _____________ ______________
Cash and due from banks $ 17,124,050 $ 22,011,625 $ 17,546,969
Federal funds sold 8,475,000 0 0
Investment securities:
Held to Maturity, at amortized cost 33,552,199 38,799,457 37,831,861
Available for Sale, at fair value 34,079,228 29,155,531 27,647,080
Loans less unearned discount 201,057,142 206,985,544 208,112,908
Less allowance for loan losses (5,879,629) (6,827,374) (6,694,847)
___________ ___________ ____________
Loans - net 195,177,513 200,158,170 201,418,061
Property and equipment-net 3,923,934 4,139,386 4,106,315
Accrued interest receivable 2,087,381 2,140,277 2,039,574
Other real estate owned 1,063,133 1,852,068 2,104,693
Other assets 1,057,812 918,672 690,495
___________ ___________ ___________
TOTAL $296,540,250 $299,175,186 $293,385,048
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 45,051,920 $ 59,232,645 $ 51,099,568
NOW accounts 41,605,778 39,869,769 41,289,675
Money market accounts 29,010,129 23,095,704 26,676,870
Savings deposits 29,830,085 36,169,539 36,391,631
Time deposits under $100,000 111,609,785 108,055,465 104,722,981
Time deposits $100,000 or more 16,701,070 11,293,040 10,314,024
___________ ____________ ____________
Total deposits 273,808,767 277,716,162 270,494,749
Federal funds purchased and
securities sold under
repurchase agreements 688,085 3,561,134 4,643,863
FHLB Advances 6,711,896 4,692,180 4,854,768
Accrued interest payable 425,273 304,815 283,088
Accrued income taxes
and other liabilities 540,009 545,236 607,203
___________ ___________ ____________
Total liabilities 282,174,030 286,819,527 280,883,671
Shareholders' equity:
Common stock, $.01, stated value;
issued 14,745,756, shares
Authorized 30,000,000 147,458 147,458 147,458
Capital surplus 47,523,492 47,523,492 47,523,492
Undivided losses (32,604,708) (33,392,619) (33,754,202)
Net unrealized losses on investment
securities available for sale (452,851) (1,675,501) (1,168,200)
Treasury stock (19,106, shares) (247,171) (247,171) (247,171)
_____________ _____________ _____________
Total shareholders' equity 14,366,220 12,355,659 12,501,377
_____________ _____________ _____________
TOTAL $296,540,250 $299,175,186 $293,385,048
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Sept. 30, Nine Months Sept. 30,
1995 1994 1995 1994
INTEREST INCOME:
Loans $4,548,824 $4,509,272 $13,835,204 $12,715,607
Investment securities:
Held to maturity 480,734 454,015 1,475,633 1,396,815
Available for sale 513,846 366,030 1,455,000 1,042,914
Federal funds sold 68,077 20,397 199,284 44,566
__________ __________ __________ __________
Total interest income 5,611,481 5,349,714 16,965,121 15,199,902
INTEREST EXPENSE:
Time deposits $100,000 or more 218,547 103,840 551,702 301,400
Time deposits under $100,000 1,590,228 1,175,819 4,512,617 3,383,060
Other deposits 584,277 566,263 1,770,262 1,664,045
Other borrowings 126,954 97,171 462,590 222,277
_________ __________ __________ __________
Total interest expense 2,520,006 1,943,093 7,297,171 5,570,782
_________ __________ __________ __________
NET INTEREST INCOME 3,091,475 3,406,621 9,667,950 9,629,120
PROVISION FOR LOAN LOSSES (775,000) (563,388) (3,063,000) (8,442,388)
__________ ___________ __________ __________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,316,475 2,843,233 6,604,950 1,186,732
OTHER INCOME:
Service charges 552,826 428,531 1,633,265 1,224,720
Other income 300,632 188,762 657,231 764,652
Net gain(loss) on investment
securities 0 0 5,710 (6,000)
_________ __________ __________ _________
Total other income 853,458 617,293 2,296,206 1,983,372
_________ __________ __________ _________
OPERATING EXPENSES:
Salaries and employee
benefits 1,380,083 1,390,081 4,090,750 4,126,233
Occupancy 335,379 307,250 975,752 969,380
Advertising and promotion 89,265 76,216 360,538 316,329
Office stationery and supplies 62,739 71,844 173,995 220,742
Examination and
professional fees 159,554 171,895 451,929 560,935
Insurance 138,223 250,456 668,016 777,999
Other real estate owned 139,373 427,024 441,661 1,167,324
Other 506,772 499,430 1,426,104 1,580,893
_________ __________ _________ _________
Total operating expenses 2,811,388 3,194,196 8,588,745 9,719,835
NET INCOME(LOSS) BEFORE INCOME
TAXES 358,545 266,330 312,411 (6,549,731)
(BENEFIT)PROVISION FOR INCOME
TAXES 5,000 0 (475,500) 0
_________ ___________ _________ _________
NET INCOME (LOSS) $353,545 $ 266,330 $ 787,911 ($6,549,731)
NET INCOME(LOSS) PER COMMON SHARE $0.02 $0.02 $0.05 ($0.44)
Weighted average number of common
shares outstanding
during the period 14,726,650 14,726,650 14,726,650 14,726,650
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Sept. 30, 1995 Sept. 30, 1994
______________ ______________
SHAREHOLDERS' EQUITY at beginning of
period $12,355,659 $20,206,348
UNDIVIDED LOSSES :
Net Income (loss) 787,911 (6,549,731)
Change in unrealized depreciation on
marketable equity securities 12,960
NET UNREALIZED LOSSES ON SECURITIES :
Unrealized accretion (depreciation) on
investment securities available for sale 1,222,650 (1,168,200)
___________ ___________
SHAREHOLDERS' EQUITY at end of period $14,366,220 $12,501,377
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended Sept. 30,
1995 1994
_____________________________
OPERATING ACTIVITIES
Net profit(loss) $ 787,911 $(6,549,731)
Adjustments for items not affecting cash:
Provision for loan losses 3,063,000 8,442,388
Depreciation and amortization of property and
equipment 556,348 415,138
(Accretion)Amortization of bond premiums and
discounts (110,428) 152,279
(Gain)Loss from the sale of available for sale
securities (5,709) 6,000
Loss/writedown on other real estate owned 364,452 791,275
(Increase)Decrease in interest receivable 52,896 108,290
Increase(Decrease) in interest payable 120,458 8,493
Other,net (incl. deferred tax asset) (144,367) 55,927
_________ _________
Net cash provided by operating activities 4,684,561 3,430,059
_________ _________
FINANCING ACTIVITIES
Net increase(decrease) in demand, NOW, money
market and savings accounts (12,869,745) 5,174,606
Net increase in time deposits 8,962,350 713,823
Net (decrease)increase in federal funds
purchased and securities sold under
repurchase agreements (2,873,049) 4,554,929
Proceeds from FHLB advances 2,019,716 2,854,768
___________ __________
Net cash provided(used) by financing
activities (4,760,728) 13,298,126
___________ __________
INVESTING ACTIVITIES
Net (increase)decrease in federal funds
sold (8,475,000) 6,672,673
Maturities of securities held to maturity 5,700,000 7,005,000
Maturities of securities available for sale 5,552,677 554,849
Purchase of securities available for sale (16,115,030) (4,302,188)
Purchase of securities held to maturity (500,000) (5,902,109)
Proceeds from the sale of available for sale
securities 7,024,703 1,998,000
Net proceeds from sale of loans 11,509,206
Net loans originated and matured 1,917,657 (30,956,449)
Proceeds from sale of other real estate owned 747,162 2,119,600
Payments to acquire/improve other real estate
owned (322,681)
Purchase of property and equipment (340,896) (228,889)
___________ ___________
Net cash (used)provided by investing
activities (4,811,408) (11,530,307)
(Decrease)increase in cash (4,887,575) 5,197,878
Cash and due from banks at beginning of year 22,011,625 12,349,091
___________ ___________
Cash and due from banks at end of period $17,124,050 $17,546,969
Cash paid for:
Interest expense $ 7,176,713 $ 5,562,289
Income taxes $ 18,480 $ 18,480
Non-cash transfers from loans receivable to other real estate owned were
$166,000 and $207,147, for the nine months ending September 30, 1995 and
1994, respectively.
Non-cash transfers from other real estate owned to loans receivable were
$318,750 and $1,027,523, for the nine months ending September 30, 1995
and 1994, respectively.
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and
include the accounts of BNH Bancshares, Inc. (the "Company") and its
subsidiaries, The Bank of New Haven (the "Bank") and Northeastern Capital
Corporation. The financial statements reflect, in management's opinion,
all appropriate reclassifications, all adjustments consisting of normal
recurring adjustments and adjustments to the loan loss reserve necessary
for a fair presentation of the Company's financial position, the results
of its operations and the change in its cash flows for the periods
presented. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's 1994
Annual Report to Shareholders.
2. Loan Portfolio
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
(dollars in thousands)
Commercial $ 60,153 $ 67,418 $ 68,787
Real estate:
Commercial mortgage 55,160 57,097 59,616
Residential mortgage 42,550 36,605 34,019
Consumer 43,195 45,866 45,691
________ ________ ________
Total loans 201,058 206,986 208,113
Allowance for loan
losses (5,880) (6,827) (6,695)
________ ________ ________
Loans - net $195,178 $200,159 $201,418
Below is an analysis of the allowance for loan losses for the nine month
period ended September 30, 1995.
(dollars in thousands)
Balance beginning
of period $6,827
Provision charged to income 3,063
Loans charged off:
Commercial 2,827
Real Estate:
Commercial Mtg. 1,064
Residential Mtg. 76
Consumer 274
______
Total Loans Charged-off 4,241
Recoveries 231
______
Net loans charged off 4,010
______
Balance, end of period $5,880
The Company adopted Statement of Financial Accounting Standards No. 114
("SFAS 114"), "Accounting by Creditors for Impairment of a Loan",
effective January 1, 1995. The new accounting standard requires that
impaired loans, which are defined as loans where it is probable that a
creditor will not be able to fully collect both the contractual interest
and principal payments, be measured at the present value of expected
future cash flows discounted at the loan's effective interest rate or, as
a practical expedient, at the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent, when
assessing the need for a loss accrual. As of September 30, 1995, the
recorded investment in loans that are considered to be impaired under
SFAS 114 was $7,914,000. The related allowance for loan losses on
impaired loans was $2,078,000. The average aggregate balance of impaired
loans was $8,718,000 for the nine month period ended September 30, 1995.
For those loans categorized as impaired as of September 30, 1995, the
Company recognized $301,000 of interest income for the nine month period
ended September 30, 1995. All impaired nonaccrual loans recognize cash
payments as a reduction to principal.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company earned net income for the nine months ended September 30,
1995 of $788,000 as compared to a net loss of $6,550,000 for the same
1994 period. For the three month period ended September 30, 1995, the
Company had net income of $354,000 as compared to $266,000 for the same
1994 period. The Company's substantial net loss for the nine month
period ending September 30, 1994 can be primarily attributed to loan
chargeoffs, other real estate owned ("OREO") writedowns and expenses, and
a special loan loss provision related to a bulk loan sale of $18 million
of problem loans completed in the third quarter of 1994. The most
significant difference when comparing the nine month financial results of
1995 and 1994 is the Company's provision for loan losses. Provisions for
loan losses were $3,063,000 for the nine month period ended September 30,
1995 compared to $8,442,000 for the same 1994 period. During the first
nine months of 1995, the Company also experienced lower OREO expenses as
compared to the same 1994 period. Losses on sales of OREO properties and
writedowns of real estate values of OREO properties were $364,000 for the
nine month period ended September 30, 1995, as compared to $791,000 for
the same 1994 period. Operating expenses associated with OREO also
declined substantially and were $77,000 for the nine months ended
September 30, 1995 as compared to $376,000 for the same 1994 period. In
addition, as a result of the Company's improving profitability and its
available net operating loss carryforwards, the Company recognized
noncurrent deferred tax benefits of $504,000 during the first quarter of
1995. However, no additional deferred tax benefits relating to future
periods were recognized during subsequent quarters.
The increase in net income for the three month period ended September 30,
1995, as compared to the same 1994 period, can be attributed to lower
operating expenses, increased service charges and other income, offset by
a decline in net interest income and higher loan loss provisions.
The return on average assets was 0.35% for the nine months ended
September 30, 1995 compared to (3.03%) for the same 1994 period. Net
income was $.02 per share for both the three months ended September 30,
1995 and 1994. Net income was $.05 per share for the nine months ended
September 30, 1995 compared with a net loss of $.44 for the same 1994
period.
REGULATORY MATTERS
The FDIC, after completion of a joint examination of the Bank with the
Connecticut Banking Department as of February 6, 1995, has removed its
Cease and Desist Order ("Order") issued in 1991. The Order required the
Bank to take a series of actions designed to improve its financial
condition and operating results and augment its capital position. At the
conclusion of its regulatory examination, the FDIC, based on the Bank's
improved overall financial condition, issued on May 16,1995 a less
stringent Memorandum of Understanding (the "Memorandum"), which the Bank
voluntarily agreed to enter into. The Memorandum requires, among other
things, that the Bank achieve certain Tier 1 leverage and total risk
based capital requirements. The Bank must improve its Tier 1 leverage
capital ratio to 5% by June 30, 1996 and to 6% by June 30, 1997. If these
thresholds are not achieved, the Bank will be required to submit a
written capital plan to increase its Tier 1 leverage capital to the
required level. Also, the Bank must maintain a total risk-based capital
ratio of at least 8% throughout the existence of the Memorandum. As of
September 30, 1995, the Bank has met the first capital hurdle identified
in the Memorandum, as its Tier 1 leverage capital and total risk-based
capital ratios were 5.0% and 8.8%, respectively. The Company anticipates
that it will achieve the second Tier 1 leverage capital ratio
requirement, 6%, through future earnings. See "Capital Adequacy" for
further discussion. The Memorandum also required the Bank to charge-off
certain loans and develop and implement a written problem loan reduction
program to continue to reduce its level of problem loans. In addition,
the Memorandum prohibits the payment of dividends without prior FDIC
consent and requires the Bank to review, monitor and update certain loan
and liquidity policies.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on
loans and investments and the interest paid on deposits and other
borrowings.
Net interest income was $9,668,000 for the nine month period ended
September 30, 1995, relatively unchanged from $9,629,000 for the same
1994 period. Net interest income was $3,091,000 for the three months
ended September 30, 1995 compared to $3,407,000 for the same 1994 period,
representing a decrease of $316,000, or 9%. The decrease in net interest
income for the comparative three month periods is primarily attributed to
a significant increase in the rates paid on the Company's total interest
bearing deposits and other borrowings without a corresponding increase in
the rate earned on the Company's overall earning assets. The Company's
level of nonperforming assets continues to impact negatively overall net
interest income, although to a lesser degree than in prior periods.
The net interest margins for the nine month periods ended September 30,
1995 and 1994 were 4.62% and 4.76%, respectively, a decrease of 14 basis
points. The net interest margins for the three months ended September
30, 1995 and 1994 were 4.41% and 4.94%, respectively, a decrease of 53
basis points.
Interest income increased to $16,965,000 for the nine months ended
September 30, 1995 from $15,200,000 for the same 1994 period, an increase
of $1,765,000, or 11.61%. Interest income increased to $5,612,000 for the
three months ended September 30, 1995 from $5,349,000 for the same 1994
period, an increase of $263,000, or 5%. The Company's average earning
assets increased from $270,358,000 for the nine months ended September
30, 1994 to $279,969,000 for the same 1995 period, or 3.55%. The growth
in interest income can be attributed to both the loan and investment
portfolios.
Average total investments increased from $61,419,000 for the nine months
ended September 30, 1994 to $68,876,000 for the same period in 1995. The
average yield on the Company's held to maturity investment portfolio
increased 17 basis points when comparing the first nine months of 1994 to
the same 1995 period, while the average yield on the Company's available
for sale portfolio increased 57 basis points during the same comparable
period. Average loans decreased slightly from $207,483,000 for the nine
months ended September 30, 1994 to $206,467,000 for the same 1995 period.
The rates earned on average loans increased 77 basis points from 8.19%
for the nine months ended September 30, 1994 to 8.96% for the same 1995
period. The Wall Street Prime rate of interest charged on loans ranged
between 6.00% and 7.75% for the first nine months of 1994. For the first
nine months of 1995 the Wall Street Prime rate of interest ranged from a
low of 8.5% to a high of 9.00%, although ending the quarter at 8.75%.
Most of the Company's commercial loans are either directly tied to the
Wall Street Prime rate of interest or an internal Company index whose
movement closely follows movements in Wall Street Prime. Interest income
was negatively impacted by the level of nonperforming assets (nonaccrual
loans and OREO) of $7,683,000, $ 8,895,000 and $9,669,000 as of September
30, 1995, December 31, 1994 and September 30, 1994, respectively. If
nonperforming assets had earned interest in accordance with their
original terms, the Company would have earned additional interest of
approximately $670,000 and $196,000 for the first nine months and third
quarter, respectively of 1995 as compared to $1,000,000 and $300,000 for
the same 1994 periods, respectively.
Interest expense increased to $7,297,000 for the nine months ended
September 30, 1995 from $5,571,000 for the same 1994 period, an increase
of $1,726,000, or 31%. Interest expense increased to $2,520,000 for the
three months ended September 30, 1995 from $1,943,000 for the same 1994
period, an increase of $577,000, or 30%. This increase primarily reflects
a significant rise in rates paid on average paying liabilities and, to a
lesser extent an increase in the average level of paying liabilities from
September 30, 1994 to September 30, 1995. Average paying liabilities
increased from $225,446,000 for the nine months ended September 30, 1994
to $233,677,000 for the same period in 1995, an increase of $8,231,000,
or 4.%. The growth in average paying liabilities is primarily related to
an increase in higher cost time deposits and other borrowings. Average
total time deposits increased $11,153,000 and average other borrowings
increased $3,725,000 for the nine months period ended September 30, 1995
compared to the same 1994 period. Average interest bearing core deposits
(NOW, money market and savings accounts) as a percentage of total average
deposits and other borrowings declined from 38% as of September 30, 1994
to 35% as of September 30, 1995. The Company's average interest rate on
paying liabilities increased 88 basis points from 3.30% for the nine
months ended September 30, 1994 to 4.18% for the nine months ended
September 30, 1995. Due to the pressure on market interest rates for
deposits since the beginning of 1995, the Company does not anticipate
material improvements in its net interest margin, in the next several
quarters.
Three Months Ended September 30,
(in thousands of dollars)
(Unaudited)
1995 | 1994
|
Average Average | Average Average
ASSETS Balance Interest Yield | Balance Interest Yield
|
Investments: |
Held to Maturity, |
at amortized cost $ 35,641 $ 481 5.35% | $ 34,572 $ 454 5.21%
|
Available for |
Sale(2) 34,323 513 5.93% | 25,729 367 5.66%
|
Federal funds sold 4,715 68 5.72% | 1,706 19 4.42%
|
Loans - net(1) 203,306 4,549 8.88% | 211,289 4,509 8.47%
________ ______ _____ | ________ ______ _____
|
Total average |
earning assets (1) $277,985 $5,611 8.01% | $273,296 $5,349 7.77%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW accounts $ 38,553 $ 154 1.58% | $ 40,842 $ 183 1.78%
|
Money markets 28,678 236 3.26% | 28,335 161 2.25%
|
Savings deposits 29,889 195 2.59% | 34,951 224 2.54%
|
Time deposits |
under $100,000 112,041 1,590 5.63% | 107,608 1,175 4.33%
|
Time deposits of |
$100,000 or more 15,686 217 5.49% | 10,447 104 3.95%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits $224,847 $2,392 4.22% | $222,183 $1,847 3.30%
|
Other borrowings 8,168 128 6.22% | 7,443 96 5.12%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits |
& other borrowings $233,015 $2,520 4.29% | $229,626 $1,943 3.36%
|
Net interest |
income $3,091 | $3,406
|
Interest rate |
spread (1) 3.72% | 4.41%
|
Net interest |
margin (1) 4.41% | 4.94%
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities (which do not include non-interest bearing
demand accounts), and net interest margin represents net interest income
as a percentage of average interest-earning assets, including the average
daily amount of non-performing loans.
(2) The average balance and related weighted average yield calculations
are based on average historical amortized cost for the period presented.
For the Year to Date period ended September 30,
(in thousands of dollars)
(Unaudited)
1995 | 1994
|
Average Average | Average Average
ASSETS Balance Interest Yield | Balance Interest Yield
|
Investments: |
Held to Maturity, |
at amortized cost $ 36,706 $1,476 5.38% | $ 35,840 $1,397 5.21%
|
Available for |
Sale(2) 32,170 1,455 6.05% | 25,579 1,045 5.47%
|
Federal funds sold 4,626 199 5.75% | 1,456 42 3.86%
|
Loans - net(1) 206,467 13,835 8.96% | 207,483 12,716 8.19%
________ _______ _____ | ________ ______ _____
|
Total average |
earning assets (1) $279,969 $16,965 8.10% | $270,358 $15,200 7.52%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW accounts $ 38,120 $ 483 1.69% | $ 41,764 $ 554 1.77%
|
Money markets 27,304 641 3.14% | 28,434 478 2.25%
|
Savings deposits 31,782 645 2.71% | 33,665 632 2.51%
|
Time deposits |
under $100,000 112,433 4,513 5.37% | 104,854 3,383 4.31%
|
Time deposits over |
$100,000 or more 13,952 550 5.27% | 10,378 301 3.88%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits $223,591 $6,832 4.09% | $219,085 $5,348 3.26%
|
Other borrowings 10,086 465 6.16% | 6,361 223 4.69%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits |
& other borrowings $233,677 $7,297 4.18% | $225,446 $5,571 3.30%
|
Net interest |
income $9,668 | $9,629
|
Interest rate |
spread (1) 3.93% | 4.21%
|
Net interest |
margin (1) 4.62% | 4.76%
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities (which do not include non-interest bearing
demand accounts), and net interest margin represents net interest income
as a percentage of average interest-earning assets, including the average
daily amount of non-performing loans.
(2) The average balance and related weighted average yield calculations
are based on average historical amortized cost for the period presented.
FOR THE YEAR TO DATE PERIOD
SUMMARY OF AVERAGE INTEREST BEARING
LIABILITIES AND DEMAND DEPOSITS
(dollars in thousands) Sept. 30, 1995 December 31, 1994 Sept. 30, 1994
Amount % Amount % Amount %
______________________________________________________
Demand deposits $ 47,996 17.0% $ 46,290 17.0% $ 44,603 16.5%
NOW accounts 38,120 13.5% 41,048 15.1% 41,764 15.5%
Money market accounts 27,304 9.7% 27,955 10.3% 28,434 10.5%
Savings deposits 31,782 11.3% 34,512 12.6% 33,655 12.5%
Time deposits
under $100,000 112,433 39.9% 105,067 38.5% 104,854 38.8%
Time deposits $100,000
or more 13,952 5.0% 10,444 3.8% 10,378 3.8%
_______ ______ _______ ______ _______ ______
Total deposits 271,587 96.4% 265,316 97.3% 263,688 97.6%
Other borrowings 10,086 3.6% 7,362 2.7% 6,361 2.4%
________ ______ ________ ______ ________ ______
Average deposits and
other borrowings $281,673 100.0% $272,678 100.0% $270,049 100.0%
OTHER INCOME
Other income increased $313,000, or 16%, to $2,296,000 for the nine
months ended September 30, 1995 from $1,983,000 for the same 1994 period.
In addition, other income increased $236,000, or 38%, to $853,000 for the
three months ended September 30, 1995 from $617,000 for the same 1994
period. The major component of other income is service fees related to
NOW and demand accounts which increased $408,000, or 33%, from $1,225,000
for the nine months ended September 30, 1994 to $1,633,000 for the same
1995 period and increased $124,000, or 29%, for the third quarter
comparable periods. This increase is primarily due to the additional fees
collected relating to checking account overdraft charges.
Mortgage placement fees, which are fees the Company earns for originating
residential first mortgage applications, declined $43,000 for the nine
months ending September 30, 1995 as compared to the same 1994 period due
to a slowdown in residential mortgage business in the first half of 1995.
However, during the third quarter of 1995, the residential mortgage
applications increased and subsequently placement fees increased $47,000
for the three months ending September 30, 1995 as compared to the same
1994 period.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operations reflects management's
analysis of the loan portfolio and determination of an adequate allowance
for loan losses to provide for probable losses in the loan portfolio.
The potential for loss in the portfolio reflects the risks and
uncertainties inherent in the extension of credit.
The determination of the adequacy of the allowance for loan loss is based
upon management's assessment of risk elements in the portfolio, factors
affecting loan quality and assumptions about the economic environment in
which the Company operates. The Company utilizes a loan grading system,
based upon FDIC parameters, and utilizes that assessment of the overall
quality of the loan portfolio in the process of determining an adequate
allowance for loan loss level. This system involves an ongoing review of
the commercial and real estate loan portfolios, with added emphasis on
the Company's larger commercial credits and nonperforming loans. Various
factors are involved in determining the loan grade, including the cash
flow and financial status of the borrower, the existence and nature of
collateral, and general economic conditions and their impact on the
borrower's industry. These reviews are dependent upon estimates,
appraisals and judgments, which can change quickly due to economic
conditions and the Company's perceptions as to how these conditions
affect the collateral securing its current and past due loans as well as
the borrower's economic prospects. During the third quarter of 1995, the
Company retained an independent management consultant to review the
Company's overall loan grading process and to perform individual loan
reviews. The results of the evaluation generally agreed with
management's assessments of the quality of its loan portfolio. In each
reporting period, the allowance for loan losses is reviewed based on the
most recent loan grading data and is adjusted to the amount deemed
necessary, in the Company's judgment, to maintain adequate allowance for
loan loss levels.
The provision for loan losses charged against earnings in the first nine
months of 1995 was $3,063,000 compared with $8,442,000 in the same 1994
period. Net loan charge-offs for the nine months ended September 30,
1995 and 1994 were $4,011,000 and $11,245,000, respectively. The
provision for loan losses charged against earnings in the third quarter
of 1995 was $775,000 compared with $563,000 in the same 1994 period. Net
loan charge-offs for the three months ended September 30, 1995 and
September 30, 1994 were $1,612,000 and $1,024,000, respectively.
During the second quarter of 1994, the Company classified a pool of loans
as held for sale which were recorded at their approximate fair value on
June 30, 1994. The loans held for sale represented gross loans of
$17,860,000 which were carried net of $6,282,000 of charge-offs made
during the second quarter of 1994, which approximated the fair value less
selling costs. The loan sale was completed during the third quarter of
1994 and ultimately resulted in total charge-offs of approximately
$6,500,000. Management believes that this loan sale was necessary in
order to improve the quality of its loan portfolio.
The Company's adoption of SFAS 114 as of January 1, 1995, required that
impaired loans, which are defined as loans where it is probable that a
creditor will not be able to collect both the contractual interest and
principal payments, be measured at the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent, when
assessing the need for a loss accrual. The adoption of SFAS 114 resulted
in an additional provision for loan losses of approximately $500,000
during the first quarter of 1995. The Company believes that the level of
net charge-offs in the next several quarters should not be as great, on
average, as the level experienced throughout the three quarterly periods
in 1995. In addition, the Company anticipates that quarterly provisions
for loan losses for the remaining quarterly period of 1995 and the
quarterly periods of 1996 should not exceed the levels experienced by the
Company during the first several quarters of 1995.
In establishing the allowance for loan losses, management has considered
the possible deterioration of the collateral securing its past due loans.
As of September 30, 1995, the Company's allowance for loan losses was
$5,880,000, or 2.9% of total loans, as compared to $6,695,000, or 3.2% of
total loans, as of September 30, 1994. The allowance for loan losses was
$6,827,000, or 3.30% as of December 31, 1994. The ratio of the allowance
for loan losses to nonaccrual and restructured loans and accruing loans
past due 90 days or more was 60.2% as of September 30, 1995 as compared
to 69.3% and 51.4% as of December 31, 1994 and September 30, 1994,
respectively.
As of September 30, 1995, nonaccrual loans were $6,620,000 as compared
with $7,043,000 as of December 31, 1994, and $7,564,000 as of September
30, 1994. As of September 30, 1995, approximately $5,403,000 of the
loans in the nonaccrual portfolio were collateralized partially by
commercial or residential real estate or business assets and
approximately $1,154,000 of nonaccrual loans were unsecured. The Company
believes that its allowance for loan losses is adequate to absorb any
potential reduction of the net carrying value in the nonaccrual
portfolio. The ratio of nonaccrual loans to total loans declined from
3.6% at September 30, 1994 to 3.3% at September 30, 1995.
Accruing loans past due 90 days or more were $379,000 as of September 30,
1995, $357,000 as of December 31, 1994 and $664,000 as of September 30,
1994. The Company's nonaccrual policy states that any commercial or
mortgage loan attaining a 90-day past due status is placed on nonaccrual
unless such loan is well secured and in the process of collection.
Exceptions to placement on nonaccrual status that extend beyond 120 days
must be approved by the Board of Directors' Loan Committee. Any
installment or consumer loan that attains a 180-day past due status will
be placed on nonaccrual regardless of collateral value or collection
proceedings. At September 30, 1995, loans totaling $84,000 were accruing
past due 120-180 days.
As of September 30, 1995, the Company's recorded investment in loans that
are considered to be impaired under SFAS 114 was $7,914,000 of which
$4,716,000 were on a nonaccrual status and $809,000 were classified as
troubled debt restructured loans. The remaining $2,389,000 of loans
classified as impaired, which are also classified as potential problem
loans, have either experienced slight delinquency problems or collateral
deterioration but continue to meet the contractual terms of the loan. The
Company has also identified seven additional problem loans in the amount
of $290,000 as of September 30, 1995. Potential problem loans are
defined as loans where known information about possible credit problems
of borrowers causes management to have serious doubts as to the ability
of such borrowers to comply with the present loan repayment terms. These
accruing commercial loans have experienced frequent delinquency problems,
2 or more delinquencies between 60-89 days during the last seven
quarterly periods. However, they continue to be less than 90 days
delinquent as of September 30, 1995. If these credits continue to have
financial difficulties, they could be classified as nonaccrual loans and
become potential loan charge-offs in future quarterly periods.
At September 30, 1995, December 31, 1994 and September 30, 1994, the
Company had restructured loans of $2,759,000, $2,448,000 and $4,806,000,
respectively. Interest income recorded on these loans during the nine
month periods ending September 30, 1995 and 1994 was $163,000 and
$241,000, respectively. The weighted average yield on restructured loans
was 7.86% and 6.55% during the nine months ending September 30, 1995 and
1994, respectively. If these loans had earned interest in accordance
with their original terms, interest income for the first nine months of
1995 and 1994 would have been $69,000 and $133,000 higher, respectively.
Management, after careful consideration of the above factors, is of the
opinion that the allowance for loan losses as of September 30, 1995 is
adequate. However, because the economic recovery in Connecticut appears
to be progressing slower than in the nation, as a whole, it is difficult
to predict how the future economy may impact the Company's loan
customers. If economic conditions continue to slowly improve, management
believes that the level of its nonaccrual loans could gradually decline
during the next several quarterly periods. However, the level of the
Company's nonperforming assets will continue to negatively impact the
Company's profitability in future quarterly periods. The nature of the
Connecticut economy will continue to influence the levels of loan charge-
offs, nonaccrual loans and the allowance for loan losses, and management
will appropriately adjust the allowance as considered necessary to
reflect future changes in risk.
The following tables set forth quarterly information on nonperforming
assets, restructured loans, accruing loans past due 90 days or more and
loans charged-off for the quarterly periods from September 30, 1994 to
September 30, 1995.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Quarter Ended
(dollars in thousands)
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1995 1995 1995 1994 1994
Balance beginning
of period $6,717 $7,404 $6,827 $6,695 $7,155
Provision charged to
income 775 894 1,394 757 564
Loans charged off:
Commercial 1,090 1,071 666 529 1,131
Real Estate:
Commercial Mtg. 448 482 134 173 189
Residential Mtg. 36 0 40 0 0
Consumer 86 99 89 58 41
______ ______ ______ ______ _______
Total Loans
Charged-off 1,660 1,652 929 760 1,361
Recoveries 48 71 112 135 337
______ ______ _______ ______ _______
Net loans
charged-off 1,612 1,581 817 625 1,024
______ ______ ______ ______ ______
Balance, end of period $5,880 $6,717 $7,404 $6,827 $6,695
Ratios:
Net loans charged-off
to avg. loans 0.80% 0.76% 0.39% 0.30% 0.49%
Allowance for loan
losses to total loans 2.92% 3.24% 3.56% 3.30% 3.22%
NONACCRUAL LOANS, RESTRUCTURED LOANS
AND OTHER REAL ESTATE OWNED
(in thousands)
QUARTER ENDED Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1995 1995 1995 1994 1994
Nonaccrual loans:
Commercial $ 2,422 $ 2,688 $ 3,368 $ 3,712 $ 3,595
Real Estate:
Commercial 3,044 3,509 4,032 3,129 3,748
Residential 773 420 556 190 161
Consumer 381 53 145 12 60
______ ______ ______ ______ ______
Total nonaccrual loans 6,620 6,670 8,101 7,043 7,564
Other Real Estate Owned-net 1,063 1,102 1,453 1,852 2,105
______ ______ ______ _______ _______
Total nonperforming assets 7,683 7,772 9,554 8,895 9,669
Restructured loans 2,759 2,824 2,740 2,448 4,806
_______ _______ _______ _______ _______
Total nonperforming assets
& restructured loans $10,442 $10,596 $12,294 $11,343 $14,475
Accruing loans past due
90 days or more:
Commercial 194 1 164 88 240
Real Estate:
Construction 0 0 0 0 0
Commercial 0 0 0 0 132
Residential 75 0 0 0 0
Consumer 110 185 196 269 292
______ ______ ______ ______ ______
Total accruing loans past
due 90 days or more $ 379 $ 186 $ 360 $ 357 $ 664
Allowance for loan losses $ 5,880 $ 6,717 $ 7,404 $ 6,827 $ 6,695
SFAS 114 impaired loans $ 7,914 $ 9,535 $ 8,705
Ratio of nonperforming
assets to total assets 2.6% 2.6% 3.3% 3.0% 3.3%
Ratio of nonperforming
assets, restructured loans
& accruing loans past due
90 days or more to total
assets 3.6% 3.6% 4.3% 3.9% 5.2%
Ratio of nonperforming
assets to total loans
and OREO 3.8% 3.7% 4.6% 4.3% 4.6%
Ratio of nonperforming
assets, restructured loans,
and accruing loans past due
90 days or more to total
loans and OREO 5.4% 5.2% 6.0% 5.6% 7.2%
Ratio of allowance for loan
losses to nonaccrual loans,
restructured loans and
accruing loans past due
90 days or more 60.2% 69.4% 66.1% 69.3% 51.4%
Ratio of nonaccrual loans,
restructured loans and
accruing loans past due
90 days or more to
shareholders' equity and
allowance for loan losses 48.2% 46.8% 54.5% 51.3% 67.9%
OTHER REAL ESTATE OWNED
Other Real Estate Owned (OREO) expense was $442,000 for the nine month
period ended September 30, 1995 as compared to $1,167,000 for the nine
months ended September 30, 1994. OREO expense was $139,000 for the three
month period ended September 30, 1995 as compared to $427,000 for the
three months ended September 30, 1994. These expenses reflect losses on
sales and writedowns on OREO properties and associated direct holding
costs, such as property taxes, insurance and utilities. OREO holding
costs were $77,000 and $376,000 for the nine month periods ended
September 30, 1995 and 1994, respectively. For the three month period
ended September 30, 1995 holding costs were $53,000 as compared to
$97,000 for the same 1994 period. The total decline in OREO expense for
both the three month and year to date periods is attributed to a decrease
in OREO properties held.
The OREO balance as of September 30, 1995 is $1,063,000 and is comprised
of 13 properties. The OREO portfolio consists of 6 residential
properties, representing 32% of the total OREO portfolio, and 3
commercial properties which constitutes 61% of the total OREO portfolio.
In addition, the Company has 4 parcels of land comprising the remaining
7% of the portfolio.
OREO properties are carried at the lower of carrying value of the related
loan or fair value of the foreclosed property at date acquired through
foreclosure less the cost to dispose. Fair value of OREO properties is
determined using the Company's most recent appraisal or a more recent
broker's valuation. In order to facilitate the sale and ultimate
disposition of OREO, the Bank may finance the sale of a property at
market rates to qualified, credit-worthy borrowers. The Company values
its OREO properties based on an asset by asset review and on the
assumption that an active market exists for those properties. The
Company's primary valuation technique is to derive values from available
comparable sales data and not from other evaluation criteria such as
discounted cash flows. In making the assumption that an active market
exists for OREO properties, the Company has made the determination that
the properties are salable within approximately one year, and has valued
each property at an amount which the Company anticipates will permit the
sale of such property within approximately one year. Although the
Company actively markets all OREO properties for sale, no assurance can
be given that properties will actually sell in approximately one year,
such sales being dependent upon relevant market conditions which will
vary from property to property, and include such factors as the number of
comparable properties available for purchase at the time, the
availability of financing and the stability or trends of real estate
values in the area. The following table reflects OREO activity for the
last five quarterly periods.
OTHER REAL ESTATE OWNED
QUARTERLY ANALYSIS
(dollars in thousands)
QUARTER ENDED
DESCRIPTION 09/30/95 06/30/95 03/31/95 12/31/94 09/30/94
_____________________________________________________________________________
Beginning book value $1,102 $1,453 $1,852 $2,105 $3,169
Properties added 100 180 42 101 23
Proceeds from OREO sold (53) (398) (296) (186) (590)
Gains(losses) on
properties sold 7 (103) 14 (35) (24)
Other activity (8) (157)
Property writedowns (93) (30) (159) (125) (316)
_______ _______ _______ _______ _______
Ending book value $1,063 $1,102 $1,453 $1,852 $2,105
OPERATING EXPENSES
Operating expenses decreased $1,131,000, or 12%, from $9,720,000 for the
nine months ending September 30, 1994 to $8,589,000 for the same 1995
period. OREO expense, examination and professional fees, insurance and
other operating expenses were primarily responsible for the decrease in
operating expenses during the first nine months of 1995 as compared to
the same 1994 period.
OREO expense comprised of losses on sales and writedowns on OREO
properties and associated direct holding costs declined $725,000, or 62%,
from $1,167,000 for the nine months ended September 30, 1994 to $442,000
for the same 1995 period. Examination and professional fees decreased
$109,000, or 19%, from $561,000 for the nine months ended September 30,
1994 to $452,000 for the same 1995 period which resulted from lower legal
expenses related to problem assets. Insurance expense decreased
$110,000, or 14%, from $778,000 for the nine months ended September 30,
1994 to $668,000 for the same 1995 period which primarily resulted from a
rebate from the FDIC for previously assessed charges. Effective in the
third quarter of 1995, the FDIC announced that it is lowering its deposit
insurance premiums for banks. As a result of the new deposit premium
structure, the Company anticipates that its insurance premiums should be
reduced by approximately $360,000 on an annual basis. Salaries and
employee benefits declined slightly from $4,126,000 for the first nine
months of 1994 as compared to $4,091,000 for the same 1995 period. The
Company's full-time equivalent positions as of September 30, 1995 is 138
as compared to 142 as of September 30, 1994. The reduction in other
operating expenses of $155,000 from $1,581,000 for the nine month period
ended September 30, 1994 to $1,426,000 for the same 1995 period primarily
consisted of approximately $80,000 in fraudulent check losses experienced
in 1994.
Operating expenses decreased $383,000, or 12%, from $3,194,000 for the
three months ending September 30, 1994 to $2,811,000 for the same 1995
period. Similar to the nine month operating expense comparisons, OREO
expense, examination and professional fees, insurance and other operating
expenses were primarily responsible for the decrease in operating
expenses during the third quarter of 1995 as compared to the same 1994
period.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes for the third quarter of 1995 was $5,000,
representing an effective tax rate of 1.3%. The effective tax rate
reflects the utilization of net operating loss carryforwards and state
and alternative minimum federal taxes.
Income tax benefits for the nine months ended September 30, 1995 were
$475,500. Tax benefits of $504,000, less $18,500 of state and alternative
minimum federal taxes, were recorded in the first quarter of 1995 for
recognition of deferred tax amounts relating to the realization of net
operating loss carryforwards on 1996 earnings. No additional deferred
tax assets relating to 1996 or other future periods were recognized in
the second or third quarters of 1995.
Gross deferred tax assets and liabilities were approximately $14.5
million and $.7 million, respectively, as of September 30, 1995. A
valuation allowance of $13.3 million was established for a significant
portion of the deferred tax assets. The net deferred tax assets after
valuation allowance were $500,000 as of September 30, 1995 and were
included in other assets in the financial statements. The level of the
valuation allowance is management's best judgment regarding the amount
and timing of future taxable income and estimated reversal patterns of
temporary differences.
As a result of the Company's net operating losses in prior years, it has
Federal and state tax net operating loss carryforwards of approximately
$20.8 million and $31.1 million, respectively, as of December 31, 1994.
Such net operating loss carryforwards can be used to offset future
taxable income based on management's estimate of the amount of taxable
income to be generated in future periods. The federal tax net operating
loss carryforwards expire in the years from 1997 to 2009 while the state
net operating loss carryforwards expire from 1995 to 1999.
CAPITAL ADEQUACY
The Company and the Bank are subject to the capital adequacy rules of
several regulators. Effective December 19, 1992, each federal banking
agency issued final rules to carry out the "prompt corrective action"
provisions of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "Improvement Act"). The regulations adopted, among other
things, defined capital measures and the capital thresholds for each of
the five capital categories established in the statute and established a
uniform schedule for filing of capital restoration plans by
undercapitalized institutions. The following table identifies generally
the capital measures and thresholds defined under the FDIC and Federal
Reserve Board rules.
Total Tier 1 Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
Well Capitalized 10% or above & 6% or above & 5% or above
Adequately Capitalized 8% or above & 4% or above & 4% or above
Undercapitalized Under 8% or Under 4% or Under 4%
Significantly Undercapitalized Under 6% or Under 3% or Under 3%
Critically Undercapitalized A ratio of
tangible
equity to
total
assets
equal to or
under 2%
To fall within the well capitalized or adequately capitalized capital
category, the financial institution must meet the requirements of all
three capital measurements. Undercapitalized and significantly
undercapitalized institutions will be categorized as such if the
institution falls within any of those three capital measurements. The
risk-based capital guidelines establish a measurement of capital adequacy
by relating a banking organization's capital to its financial risks, both
on- and off-balance sheet. As of September 30, 1995, December 31, 1994
and September 30, 1994, the Company's total risk-based capital ratio was
8.8%, 7.8%, 8.4%, respectively. The second capital measure is the Tier 1
risk-based ratio, which includes only core capital as it measures the
relationship to risk-weighted assets. As of September 30, 1995, December
31, 1994 and September 30, 1994, the Company's Tier 1 risk-based ratio
was 7.6%, 6.8%, and 9.7%, respectively. The third capital adequacy
measure is the Tier 1 (or core) leverage capital (using the same
definition of capital as used in the risk-based guidelines) to average
total assets. The Company's Tier 1 leverage ratio was 5.0%, 4.7%, and
4.8% as of September 30, 1995, December 31, 1994 and September 30, 1994,
respectively. As of September 30, 1995, based on the above criteria, the
Company falls within the adequately capitalized category. The Bank also
falls within the adequately capitalized category.
The reporting of debt and equity securities (not held for trading
activities or to maturity) for the purposes of calculating Tier 1 capital
for the Company and the Bank differs from reporting under SFAS 115.
Under final FDIC regulations, net unrealized losses for equity securities
that are available for sale are included in the calculation of Tier 1
capital. All other net unrealized gains or losses on available for sale
securities are excluded from the definition of Tier 1 capital. As of
September 30, 1995, Tier 1 capital was reduced $212,000 to reflect the
unrealized depreciation on the Company's equity securities held as
available for sale.
At the conclusion of its regulatory examination, the FDIC, based on the
Bank's improved overall financial condition, has removed the Order and
has issued a less stringent Memorandum of Understanding. See "Regulatory
Matters" for further discussion. The Company's principal subsidiary, The
Bank of New Haven, voluntarily agreed to enter into of the Memorandum
effective May 16, 1995. The Memorandum requires, among other things, the
Bank to achieve certain Tier 1 leverage and total risk-based capital
requirements.
The Improvement Act also requires each federal banking agency to revise
its risk-based capital standards for insured institutions to ensure that
those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities and
reflect the actual performance and expected risk of loss on multi-family
residential loans. The FDIC and the Federal Reserve Board have adopted
final regulations for the purpose of amending their risk-based capital
standards. The Company does not believe that the final regulations will
have a material adverse impact on the operations of the Company or the
Bank.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The liquidity process is monitored by the Company's Asset Liability
Committee ("ALCO"), which meets regularly to implement its
asset/liability and funds management policy. ALCO's role is to evaluate
liquidity and interest rate risk and their impact on earnings. The
Committee developed a reporting system that integrates the current
interest rate environment of the national and local economy with the
maturities and the repricing schedules of both the assets and liabilities
of the Company. The objective of ALCO is to manage the Company's assets
and liabilities to provide an optimum and stable net interest margin and
to facilitate a constant level of net interest income.
The primary focus of the Company's liquidity management is appropriately
to match cash inflows and outflows with funds provided by the Company's
market for deposits and loans. The Company's objective is to maintain
adequate cash which is invested in federal funds. During the first nine
months of 1995, the average balance of federal funds sold was $4,626,000.
In the event the Company needs to borrow cash to manage its overnight
position or short-term position, the Company can borrow approximately $6
million, as of September 30, 1995, on an overnight basis from the Federal
Home Loan Bank of Boston ("FHLBB"). The Company can also borrow funds
from the FHLBB on a short- and long-term advance basis. As of September
30, 1995, the Company had no overnight borrowings outstanding from the
Federal Home Loan Bank of Boston and has borrowed $7.2 million, on
average, during the first nine months of 1995 in term advances. In
addition, the Company has access to $7,000,000 in short-term funds via
reverse repurchase agreements with two brokerage firms. The Company's
investment portfolio also provides a secondary source of liquidity.
At September 30, 1995, the Company's liquidity ratio as defined by FDIC
criteria was 29.1% compared to 25.9% and 25.0% as of December 31, 1994
and September 30, 1994. The liquidity ratio is defined as the total of
net cash, short-term investments and other marketable assets, divided by
total net deposits and short-term liabilities. Management believes that
its liquidity position is adequate as of September 30, 1995.
Effective January 1, 1994, the Company adopted the provisions of the
Statement of Financial Accounting Standard No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS 115, debt securities classified as held to maturity are
reported at amortized cost. Debt and equity securities (not held for
trading activities or to maturity) are reported at fair value with
unrealized gains or losses excluded from income and reported as a
separate component of shareholders' equity. In order to classify
securities as held to maturity, management must have the positive intent
and ability to hold the securities to maturity.
The Company generated a negative aggregate cash flow of $4,888,000 for
the nine months ended September 30, 1995, as compared to a positive
aggregate cash flow of $5,198,000 for the same 1994 period. Cash flows
provided by operating activities were $4,685,000 and $3,430,000 for the
nine months ending September 30, 1995 and September 30, 1994,
respectively. This was due in part to significant non-cash charges for
the provision for loan losses and the depreciation and amortization of
fixed assets in both periods and writedowns on OREO, particularly during
the first nine months of 1994.
During the first nine months of 1995, there was net cash of $4,761,000
used by financing activities as compared to net cash of $13,298,000
provided by financing activities during the first nine months of 1994.
The primary difference between the two periods is that during the first
nine months of 1994, the Company had increased its level of deposits and
borrowings in order to support a growing asset base which increased from
$287 million as of December 31, 1993 to $293 million as of September 30,
1994. In contrast, during the first nine months of 1995, the Company's
asset base had declined slightly from $299.2 million as of December 31,
1994 to $296.5 million as of September 30, 1995, and hence financing was
not needed. This was due in part to the Company's efforts to control its
overall growth in order to improve its capital ratios.
Net cash used by investing activities were $4,811,000 and $11,530,000 for
the nine months ending September 30, 1995 and September 30, 1994. The
net cash used by investing activities for the first nine months of 1995
was due to an increase in federal funds sold offset partially by a
decline in net loans originated for the period. During the first nine
months of 1994, net cash used by financing activities was primarily due
to a significant amount of loans originated during the period net of
loans sold and offset partially by proceeds from the sale of OREO and
funds provided by a decrease in federal funds sold. Net funds
used/provided by transactions effecting the Company's investment
portfolio was comparable for both periods.
The Company concentrates its efforts on evaluating interest rate risk and
appropriately adjusts for changes in rates and maturities of its assets
and liabilities. The Company's objective is to provide stable net
interest income. The table below illustrates the ratio of rate sensitive
assets to rate sensitive liabilities as they mature and/or reprice within
the indicated periods. As of September 30, 1995, the Company's rate
sensitive assets repricing or maturing approximately equalled its rate
sensitive liabilities during the first ninety days. This results from
having approximately half of the Company's loan portfolio available to
reprice within thirty days. In an increasing rate environment, asset
sensitivity enhances earnings potential, whereas liability sensitivity
would negatively impact earnings. In contrast, in a declining rate
environment, asset sensitivity would negatively impact earnings, whereas
liability sensitivity enhances earnings potential. The Company is
"liability sensitive" in the third month and remains liability sensitive
beyond one year which is primarily due to its demand and savings
accounts, which are considered relatively stable and not easily
influenced by changes in interest rates. At September 30, 1995, the
amount of the Company's cumulative gap with respect to assets and
liabilities maturing or repricing within one year was $13,296,000 more
liabilities than assets repricing (a negative gap position), representing
a negative 5% cumulative gap to total rate sensitive assets. ALCO manages
the gap position on an ongoing basis to assure an interest rate risk not
to exceed more than a 3% change in net interest income for a one year
period. If interest rates were to increase immediately by 200 basis
points, the negative impact on the Company would be within ALCO's
tolerance level.
The following table sets forth the distribution of the repricing of the
Company's earning assets and interest bearing liabilities at a single
point in time, as of September 30, 1995. The table shows the interest
rate sensitivity gap (i.e., interest rate sensitive assets less interest
rate sensitive liabilities), the cumulative interest rate sensitivity
gap, the interest rate sensitivity gap ratio (i.e., interest rate
sensitive assets divided by interest rate sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio. The table also sets
forth the time periods in which interest earning assets and interest
bearing liabilities will mature or may reprice in accordance with their
contractual terms. However, the table does not necessarily indicate the
impact of general interest rate movements on the net interest margin
since the Company's repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the
Company's customers. The Company's interest rate sensitivity position is
adjusted as ALCO's assessment of the interest rate outlook and other
factors are modified. As the Company increases its total assets, the
overall business plan provides for matching its assets and liabilities to
reduce interest rate risk and liquidity risk.
Interest - Rate Sensitivity
Table
(dollars in thousands)
Sept. 30, 1995 Month 1 Month 2 Month 3 Months Months Over Total
4-6 7-12 1 Year
_____________________________________________________________________________
Rate Sensitive Assets:
Loans (1) $97,422 $2,927 $4,507 $ 7,356 $16,998 $71,339 $200,549
Investments 3,994 2,500 0 5,207 8,001 45,777 65,479
_______ ______ ______ ______ _______ _______ ________
Total Rate
Sensitive Assets 101,416 5,427 4,507 12,563 24,999 117,116 266,028
Rate Sensitive
Liabilities:
Time deposits 13,678 8,902 9,422 23,649 22,613 36,773 115,037
Other deposits 80,944(2) 0 2,000 1,000 0 81,013(3) 164,957
_______ ______ ______ ______ ______ _______ _______
Total Rate
Sensitive
Liabilities 94,622 8,902 11,422 24,649 22,613 117,786 279,994
Net Gap 6,794 (3,475) (6,915)(12,086) 2,386 (670) (13,966)
______ ______ _____ ______ ______ _______ ______
Cumulative Gap 6,794 3,319 (3,596)(15,682)(13,296) (13,966) (13,966)
Net Gap as % of total
rate sensitive assets 3% -1% -3% -5% 1% -0% -5%
Cumulative Gap as %
of total rate sensitive
assets 3% 1% -1% -6% -5% -5% -5%
(1) Excludes nonaccrual loans
(2) The Company has assumed that 100% of money market and NOW accounts
will reprice within 30 days based on local market conditions.
(3) The Company has assumed that 90% of demand and savings deposits will
not be withdrawn in less than one year based on its analysis of Bank and
industry experiences for the rate of runoff of such deposits.
PART II - OTHER INFORMATION
ITEMS 1-5 Not applicable.
ITEM 6 Exhibits and Reports on Form 8-K:
(a) Exhibits- Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K: On October 25, 1995, the Company filed a Current
Report on Form 8-K reporting that the Audit Committee of the Board of
Directors of the Company recommended and the Board of Directors of the
Company approved (1) the dismissal of Price Waterhouse LLP, effective
October 19, 1995, as the independent accountants engaged to perform the
audit examination of the Company's financial statements for the year
ending December 31, 1995 and (2) the engagement of Coopers & Lybrand
L.L.P., effective October 19, 1995, to perform the audit examination of
the Company's financial statements for the year ending December 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1995 /s/ F. Patrick McFadden, Jr.
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: November 13, 1995 /s/ John F. Trentacosta
John F. Trentacosta
Executive Vice President/
Chief Financial Officer