SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996
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 February 28, 1996
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
March 31, 1996, December 31, 1995 3
Consolidated Statement of Operations for the three
months ended March 31, 1996 and March 31, 1995 4
Consolidated Statement of Changes in Shareholders'
Equity for the three months ended March 31, 1996
and March 31, 1995 5
Consolidated Statement of Cash Flows for the three
months ended March 31, 1996 and March 31, 1995 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 21
Items 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS March 31, 1996 Dec. 31, 1995
(unaudited)
_______________ ______________
Cash and due from banks $ 17,130,809 $ 19,818,406
Federal funds sold 9,475,000 5,800,000
Investment securities:
Held to Maturity, at amortized cost 23,832,914 23,830,868
Available for Sale, at fair value 39,187,625 42,766,901
Loans less unearned discount 203,551,912 204,495,433
Less allowance for loan losses (5,163,528) (5,892,675)
___________ ___________
Loans - net 198,388,384 198,602,758
Property and equipment-net 3,878,572 3,891,749
Accrued interest receivable 2,121,523 2,052,832
Other real estate owned 1,617,567 614,272
Other assets 1,832,628 1,533,294
___________ ___________
TOTAL $297,465,023 $298,911,080
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 46,266,465 $ 52,320,298
NOW accounts 41,892,385 44,018,506
Money market accounts 29,370,041 29,395,173
Savings deposits 32,591,069 32,508,789
Time deposits under $100,000 108,082,988 103,719,077
Time deposits $100,000 or more 14,494,501 14,802,638
___________ ___________
Total deposits 272,697,449 276,764,481
Federal funds purchased and
securities sold under
repurchase agreements 300,000 0
FHLB Advances 7,547,116 5,546,683
Accrued interest payable 439,155 404,262
Accrued income taxes
and other liabilities 509,947 602,931
___________ ___________
Total liabilities 281,493,667 283,318,357
Shareholders' equity:
Common stock, $.01, stated value;
issued 14,745,756,
authorized 30,000,000 147,458 147,458
Capital surplus 47,523,492 47,523,492
Undivided losses (30,848,032) (31,581,840)
Net unrealized losses on investment
securities available for sale (604,391) (249,216)
Treasury stock (19,106 shares) (247,171) (247,171)
_____________ _____________
Total shareholders' equity 15,971,356 15,593,723
_____________ _____________
TOTAL $297,465,023 $298,911,080
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1996 1995
INTEREST INCOME:
Loans $4,427,231 $4,592,305
Investment securities:
Held to maturity 329,353 503,388
Available for sale 582,123 467,028
Federal funds sold 49,734 7,900
__________ __________
Total interest income 5,388,441 5,570,621
INTEREST EXPENSE:
Time deposits $100,000 or more 198,456 139,488
Time deposits under $100,000 1,474,004 1,359,861
Other deposits 583,470 550,214
Other borrowings 105,951 187,340
_________ _________
Total interest expense 2,361,880 2,236,903
_________ _________
NET INTEREST INCOME 3,026,561 3,333,718
PROVISION FOR LOAN LOSSES (576,000) (1,394,000)
_________ __________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,450,561 1,939,718
OTHER INCOME:
Service charges 508,813 535,345
Other income 271,721 153,512
Net gain on sale of investments 7,242 0
_________ _________
Total other income 787,776 688,857
_________ _________
OPERATING EXPENSES:
Salaries and employee benefits 1,371,341 1,361,539
Occupancy 354,428 335,140
Advertising and promotion 85,624 113,519
Office stationery and supplies 75,658 53,433
Examination and
professional fees 201,421 148,229
Insurance 106,973 265,653
Other real estate owned 46,244 168,854
Other 488,339 445,784
_________ _________
Total operating expenses 2,730,028 2,892,151
NET INCOME(LOSS) BEFORE INCOME TAXES 508,308 (263,576)
PROVISION(BENEFIT) FOR INCOME TAXES (225,500) (485,500)
_________ __________
NET INCOME $733,808 $ 221,924
NET INCOME(LOSS) PER COMMON SHARE $0.05 $0.02
Weighted average number of common
shares outstanding
during the period 14,726,650 14,726,650
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
March 31, 1996 March 31, 1995
______________ ______________
SHAREHOLDERS' EQUITY at beginning of period $15,592,723 $12,355,659
UNDIVIDED PROFITS:
Net Income 733,808 221,924
NET UNREALIZED LOSSES ON SECURITIES :
Unrealized accretion (depreciation) on investment
securities available for sale (355,175) 587,053
___________ ___________
SHAREHOLDERS' EQUITY at end of period $15,971,356 $13,164,636
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1996 1995
_____________________________
OPERATING ACTIVITIES
Net income $ 733,808 $ 221,924
Adjustments for items not affecting cash:
Provision for loan losses 576,000 1,394,000
Depreciation and amortization of property
and equipment 51,351 132,498
Accretion of bond premiums and discounts (62,006) (27,803)
Gain from the sale of available for sale
securities (7,242)
Loss/writedown on other real estate owned 20,684 144,844
(Increase)decrease in interest receivable (68,691) 11,636
Increase in interest payable 34,893 85,787
Other,net (392,318) (388,906)
_________ _________
Net cash provided by operating activities 886,479 1,573,980
_________ __________
FINANCING ACTIVITIES
Net decrease in demand, NOW, money market and
savings accounts (8,122,806) (16,735,989)
Net increase in time deposits 4,055,774 7,630,688
Net (decrease)increase in federal funds
purchased and securities sold under
repurchase agreements 300,000 (2,019,806)
Proceeds from FHLB advances 2,000,433 4,344,188
___________ __________
Net cash used by financing activities (1,766,599) (6,780,919)
___________ __________
INVESTING ACTIVITIES
Net increase in federal funds sold (3,675,000) (3,575,000)
Maturities of securities held to maturity 2,100,000
Maturities of securities available for
sale 11,202,977 2,031,401
Purchase of securities available for sale (7,922,067) (443,300)
Proceeds from the sale of available for
sale securities 10,392
Net decrease in loans (361,626) (1,900,919)
Proceeds from sale of other real estate
owned 46,746 296,473
Payments to acquire/improve other real
estate owned (1,070,725)
Purchase of property and equipment (38,174) (99,595)
___________ ___________
Net cash used by investing activities (1,807,477) (1,590,940)
Decrease in cash (2,687,597) (6,797,879)
Cash and due from banks at beginning of
year 19,818,406 22,011,625
___________ ___________
Cash and due from banks at end of period $17,130,809 $15,213,746
Cash paid for:
Interest expense $ 2,326,987 $ 2,151,116
Income taxes $ 5,500 $ 18,500
Non-cash transfers from loans receivable to other real estate owned were
$1,009,851 for the three months ending March 31, 1996. There were no
non-cash transfers from loans receivable to other real estate owned for
the three months ending March 31, 1995.
Non-cash transfers from other real estate owned to loans receivable were
$77,800 for the three months ending March 31, 1995. There were no non-
cash transfers from other real estate owned to loans receivable for the
three months ending March 31, 1996.
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 1995
Annual Report to Shareholders.
Net income (loss) per common share is computed based on the weighted
average number of common shares outstanding during each year. Per share
earnings and weighted average shares of common stock for all periods
presented reflect all stock dividends and splits. The exercise of stock
options would not result in material dilution of earnings per share.
2. Loan Portfolio
March 31, Dec. 31,
1996 1995
(dollars in thousands)
Commercial $ 54,774 $ 58,746
Real estate:
Construction 750 400
Commercial mortgage 54,373 54,518
Residential mortgage 47,720 45,399
Consumer 45,935 45,433
________ ________
Total loans 203,552 204,496
Allowance for loan losses (5,164) (5,893)
________ ________
Loans - net $198,388 $198,603
Below is an analysis of the allowance for loan losses for the three month
period ended March 31, 1996 and March 31, 1995.
(dollars in thousands) March 31, 1996 March 31, 1995
Balance beginning of period $5,893 $6,827
Provision charged to income 576 1,394
Loans charged off:
Commercial 1,064 797
Real Estate:
Commercial Mtg. 15 3
Residential Mtg. 133 40
Consumer 117 89
______ ______
Total Loans Charged-off 1,329 929
Recoveries 24 112
______ ______
Net loans charged off 1,305 817
______ ______
Balance, end of period $5,164 $7,404
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 March 31, 1996, the
recorded investment in loans that are considered to be impaired under
SFAS 114 was $4,252,000. The related allowance for loan losses on
impaired loans was $1,638,000. The average aggregate balance of impaired
loans was $4,921,000 for the three month period ended March 31, 1996.
For those loans categorized as impaired as of March 31, 1996, the Company
recognized $41,000 of interest income for the three month period ended
March 31, 1996. 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 three months ended March 31, 1996
of $734,000 as compared to $222,000 for the same 1995 period. The
improvement in the Company's net income for the three month period ending
March 31, 1996 as compared to the same 1995 period, can be primarily
attributed to a decrease of $818,000 in provision for loan losses.
Also, the increase in net income for the three month period ended March
31, 1996, as compared to the same 1995 period, can be attributed to
increased income derived from fees collected for mortgage origination
activities, reduced operating expenses, reduced loan loss provisions, and
the recognition of deferred tax assets due to increased earnings over
time.
The return on average assets was 1% for the three months ended March 31,
1996 compared to 0.30% for the same 1995 period. Net income was $.05 per
share for the first quarter of 1996 as compared to $.02 per share for the
first quarter of 1995.
REGULATORY MATTERS
The Federal Deposit Insurance Corporation ("FDIC"), after completion of a
joint examination of the Bank with the Connecticut Banking Department as
of December 31, 1995, has recommended the removal of its Memorandum of
Understanding (the "Memorandum"), issued on May 16, 1995. The Memorandum
required, among other things, that the Bank achieve certain Tier 1
leverage and total risk based capital requirements. The Bank was
required to have a Tier 1 leverage capital ratio of at least 5% by June
30, 1996 and 6% by June 30, 1997. Also, the Bank was required to
maintain a total risk-based capital ratio of at least 8% throughout the
existence of the Memorandum. As of September 30, 1995, the Bank met the
first capital target identified in the Memorandum, as its Tier 1 leverage
capital and total risk-based capital ratios were 5.0% and 8.8%,
respectively. As of March 31, 1996, the Bank's Tier 1 leverage capital
and total risk-based capital ratios are 5.6% and 9.7%. The Company
anticipates that it will achieve the second Tier 1 leverage capital ratio
requirement, 6%, through future earnings. In removing the Memorandum,
the FDIC and the Company have agreed that the Company will continue
efforts towards meeting the capital goals outlined in the Memorandum,
notify the State regulators prior to paying dividends, and establish a
goal for the end of 1996 that classified assets will be equal to 40% of
total capital and eligible reserves; and, at the end of 1997, that this
ratio will be 30%.
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 $3,027,000 for the three month period ended March
31, 1996, a decrease of $307,000 from $3,334,000 for the same 1995
period. 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 compounded by a slight decrease in the rate earned on the
Company's overall earning assets. The result was that net interest
margins for the three month periods ended March 31, 1996 and 1995 were
4.49% and 4.88%, respectively; a decrease of 39 basis points.
Total interest income decreased $182,000 to $5,388,000 for the first
three months of 1996 as compared to $5,571,000 for the same period in
1995. This can be primarily attributed to a decrease in interest income
derived from the loan portfolio from $4,592,000 for the first three
months of 1995 to $4,427,000 for the same 1996 period, as well as from
the Bank's investment portfolio, from $970,000 to $911,000 for each of
the same periods, respectively. The reduction in interest income was due
to a decrease of $6,167,000 in total average interest earning assets and
a decrease of 15 basis points in rates on such assets.
Interest expense increased to $2,362,000 for the three months ended March
31, 1996 from $2,237,000 for the same 1995 period, an increase of
$125,000 or 5.6%. Total average interest bearing liabilities decreased
from $229,646,000 to $225,740,000, or $3,906,000, from the quarter ended
March 31, 1995 to the quarter ended March 31, 1996. The Company's
average interest rate on paying liabilities increased 26 basis points
from 3.95% for the three months ended March 31, 1995 to 4.21% for the
three months ended March 31, 1996 due mainly to higher rates offered on
time deposit and money market accounts. Due to recent pressure on market
interest rates for deposits, the Company does not anticipate material
improvements in its net interest margin over the next few quarters.
Three Months Ended March 31,
(in thousands of dollars)
(Unaudited)
1996 | 1995
|
Average Average | Average Average
ASSETS Balance Interest Yield | Balance Interest Yield
|
Investments: |
Held to Maturity, |
at amortized cost $ 23,832 $ 329 5.56% | $ 37,791 $ 504 5.41%
|
Available for |
Sale(2) 40,041 582 5.85% | 30,712 467 6.18%
|
Federal funds sold 3,834 50 5.22% | 497 8 6.08%
|
Loans - net(1) 203,211 4,427 8.76% | 208,084 4,592 8.95%
________ ______ _____ | ________ ______ _____
|
Total average |
earning assets (1) $270,917 $5,388 8.00% | $277,084 $5,571 8.15%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW accounts $ 39,452 $ 148 1.51% | $ 38,043 $ 165 1.76%
|
Money markets 28,970 239 3.31% | 22,723 155 2.77%
|
Savings deposits 31,296 197 2.53% | 33,633 231 2.79%
|
Time deposits |
under $100,000 104,182 1,474 5.69% | 110,981 1,360 4.97%
|
Time deposits of |
$100,000 or more 14,626 198 5.46% | 11,727 139 4.81%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits $218,526 $2,256 4.15% | $217,107 $2,050 3.83%
|
Other borrowings 7,214 106 5.91% | 12,539 187 6.05%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits |
& other borrowings $225,740 $2,362 4.21% | $229,646 $2,237 3.95%
|
Net interest |
income $3,027 | $3,334
|
Interest rate |
spread (1) 3.79% | 4.20%
|
Net interest |
margin (1) 4.49% | 4.88%
(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.
OTHER INCOME
Other income increased $99,000, or 14%, to $787,000 for the three months
ended March 31, 1996 from $688,000 for the same 1995 period. Service fees
related to NOW and demand accounts, the major component of other income,
decreased $26,000 or 5%, to $509,000 for the three months ended March 31,
1996 from $535,000 for the same 1995 period. However, mortgage placement
fees, which are fees the Company earns for originating residential first
mortgage applications, increased $44,000, or 148% for the same comparable
period. Another component of other income which has increased
significantly is income derived from OREO. For the three months ended
March 31, 1996, OREO income increased $11,500 or 266% as compared to the
same period in 1995.
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 three
months of 1996 was $576,000 compared with $1,394,000 in the same 1995
period. Net loan charge offs for the three months ended March 31, 1996
and 1995 were $1,305,000 and $817,000, respectively.
In establishing the allowance for loan losses, management has considered
the possible deterioration of the collateral securing its past due loans.
As of March 31, 1996, the Company's allowance for loan losses was
$5,164,000, or 2.5% of total loans, as compared to $7,404,000, or 3.6%,
as of March 31, 1995. The allowance for loan losses was $5,893,000, or
2.9% of total loans as of December 31, 1995. The ratio of the allowance
for loan losses to nonaccrual and restructured loans and accruing loans
past due 90 days or more was 69.2% as of March 31, 1996 as compared to
66.1% and 76.8% as of March 31, 1995 and December 31, 1995, respectively.
As of March 31, 1996, nonaccrual loans were $5,273,000 as compared with
$5,964,000 as of December 31, 1995 and $8,101,000 as of March 31, 1995.
As of March 31, 1996, approximately $5,035,000 of the loans in the
nonaccrual portfolio were collateralized partially by commercial or
residential real estate or business assets. The Company believes that
its allowance for loan losses is adequate to absorb any potential
reduction of net carrying value in the nonaccrual portfolio. The ratio
of nonaccrual loans to total loans declined from 3.9% as of March 31,
1995 to 2.6% at March 31, 1996.
As of March 31, 1996, the Company's recorded investment in loans that are
considered to be impaired under SFAS 114 was $4,252,000 of which
$3,535,000 were on a nonaccrual status and $153,000 were classified as
troubled debt restructured loans. The remaining $564,000 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 $193,000 as of March 31, 1996. 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 March 31, 1996. 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 March 31, 1996, December 31, 1995 and March 31, 1995, the Company had
restructured loans of $1,650,000, $1,570,000 and $2,740,000,
respectively. Interest income recorded on these loans during the three
month periods ending March 31, 1996 and 1995 was $32,000 and $55,000,
respectively. The weighted average yield on restructured loans was 8.43%
and 6.96% during the three months ending March 31, 1996 and 1995,
respectively. If these loans had earned interest in accordance with their
original terms, interest income for the first three months of 1996 and
1995 would have been $10,000 and $9,000 higher, respectively.
Management, after careful consideration of the above factors, is of the
opinion that the allowance for loan losses as of March 31, 1996 is
adequate. However, because the economic recovery in Connecticut appears
to be progressing slower than in the nation 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 March 31, 1995 to March
31, 1996.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Quarter Ended
(dollars in thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1995 1995 1995 1995
Balance
beginning
of period $5,893 $5,880 $6,717 $7,404 $6,827
Provision
charged to
income 576 600 775 894 1,394
Loans
charged off:
Commercial 1,064 537 1,313 1,553 797
Real Estate:
Commercial
Mtg. 15 1 225 0 3
Residential
Mtg. 133 14 36 0 40
Consumer 117 93 86 99 89
______ ______ ______ ______ _______
Total Loans
Charged-off 1,329 645 1,660 1,652 929
Recoveries 24 58 48 71 112
______ ______ _______ ______ _______
Net loans
charged-off 1,305 587 1,612 1,581 817
______ ______ ______ ______ ______
Balance,
end of
period $5,164 $5,893 $5,880 $6,717 $7,404
Ratios:
Net loans
charged-off
to YTD avg.
loans 0.64% 0.29% 0.80% 0.76% 0.39%
Allowance
for loan
losses to
total loans 2.54% 2.88% 2.92% 3.24% 3.56%
NONACCRUAL LOANS, RESTRUCTURED LOANS
AND OTHER REAL ESTATE OWNED
(in thousands)
QUARTER ENDED March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1995 1995 1995 1995
Nonaccrual loans:
Commercial $ 1,375 $ 1,806 $ 2,422 $ 2,688 $ 3,368
Real Estate:
Commercial 3,140 3,628 3,044 3,509 4,032
Residential 520 292 773 420 556
Consumer 238 238 381 53 145
______ ______ ______ ______ ______
Total nonaccrual
loans 5,273 5,964 6,620 6,670 8,101
Other Real Estate
Owned-net 1,618 614 1,063 1,102 1,453
______ ______ ______ _______ _______
Total nonperforming
assets 6,890 6,578 7,683 7,772 9,554
______ ______ ______ ________ _______
Restructured loans 1,650 1,570 2,759 2,824 2,740
Total nonperforming
assets & restructured
loans $ 8,540 $ 8,148 $10,442 $10,596 $12,294
Accruing loans past
due 90 days or more:
Commercial 215 0 194 1 164
Real Estate:
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Residential 199 0 75 0 0
Consumer 126 139 110 185 196
______ ______ ______ ______ ______
Total accruing loans
past due 90 days or
more $ 540 $ 139 $ 379 $ 186 $ 360
Allowance for
loan losses $ 5,164 $ 5,893 $ 5,880 $ 6,717 $ 7,404
SFAS 114 impaired
loans $ 4,252 $ 5,590 $ 7,914 $ 9,535 $ 8,705
Ratio of nonperforming
assets to total assets 2.3% 2.2% 2.6% 2.6% 3.3%
Ratio of nonperforming
assets, restructured
loans & accruing loans
past due 90 days or
more to total assets 3.1% 2.8% 3.6% 3.6% 4.3%
Ratio of nonperforming
assets to total loans
and OREO 3.4% 3.2% 3.8% 3.7% 4.6%
Ratio of nonperforming
assets, restructured
loans, and accruing
loans past due 90 days
or more to total loans
and OREO 4.5% 4.0% 5.4% 5.2% 6.0%
Ratio of allowance for
loan losses to
nonaccrual loans,
restructured loans and
accruing loans past
due 90 days or more 69.2% 76.8% 60.2% 69.4% 66.1%
Ratio of nonaccrual
loans, restructured
loans and accruing
loans past due 90 days
or more to share-
holders' equity and
allowance for loan
losses 35.3% 35.7% 48.2% 46.8% 54.5%
OTHER REAL ESTATE OWNED
Other Real Estate Owned (OREO) expense was $46,000 for the three month
period ended March 31, 1996 as compared to $169,000 for the three months
ended March 31, 1995. 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
$25,000 and $24,000 for the three month periods ended March 31, 1996 and
1995, respectively.
The OREO balance as of March 31, 1996 is $1,618,000 and is comprised of
23 properties and has increased, as anticipated, $1,004,000 from December
31, 1995. The OREO portfolio consists of 12 residential properties,
representing 52% of the total OREO portfolio, and 7 commercial properties
which constitutes 30% of the total OREO portfolio. In addition, the
Company has 4 parcels of land comprising the remaining 18% 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 the 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 03/31/96 12/31/95 09/30/95 06/30/95 03/31/95
_____________________________________________________________________________
_
Beginning book value $ 614 $1,063 $1,102 $1,453 $1,852
Properties added 1,071 487 100 180 42
Proceeds from OREO sold (47) (892) (53) (398) (296)
Gains(losses) on
properties sold (8) (44) 7 (103) 14
Property writedowns (13) (93) (30) (159)
_______ _______ _______ _______ _______
Ending book value $1,617 $ 614 $1,063 $1,102 $1,453
OPERATING EXPENSES
Operating expenses decreased $162,000, or 6%, from $2,892,000 for the
three months ending March 31, 1995 to $2,730,000 for the same 1996
period. OREO expense, insurance and other operating expenses were
primarily responsible for the decrease in operating expenses during the
first three months of 1996 as compared to the same 1995 period.
OREO expense comprised of losses on sales and writedowns on OREO
properties and associated direct holding costs declined $123,000, or 73%,
from $169,000 for the three months ended March 31, 1995 to $46,000 for
the same 1996 period. Examination and professional fees increased
$53,000, or 36%, from $148,000 for the three months ended March 31, 1995
to $201,000 for the same 1996 period. The primary reason for increased
Examination & Professional fees is a $68,000 increase in consulting cost
from the first three month period of 1996 versus 1995 due largely to the
outsourcing of the Bank's loan review function and internal audit
departments. Insurance expense decreased $159,000, or 60%, from $266,000
for the three months ended March 31, 1995 to $107,000 for the same 1996
period, which primarily resulted from a rebate from the FDIC for
previously assessed charges. Effective in the first quarter of 1996, the
FDIC announced that it is lowering its deposit insurance premiums for
banks. As a result of the new deposit insurance premium structure, the
Company anticipates that its insurance premiums should be reduced by
approximately $107,000 on an annual basis. Salaries and employee
benefits increased slightly from $1,362,000 for the first three months of
1995 as compared to $1,371,000 for the same 1996 period. The Company's
full-time equivalent positions as of March 31, 1996 is 140, unchanged
from the same 1995 period.
PROVISION (BENEFIT) FOR INCOME TAXES
Income tax benefits for the three months ended March 31, 1996 were
$225,500. Tax benefits of $236,000, less $10,500 for state alternative
minimum taxes, were recorded in the first quarter of 1996 for recognition
of deferred tax amounts relating to the realization of net operating loss
carryforwards on expected 1996 earnings.
The tax expense related to alternative minimum state taxes realized in
the first quarter, $10,500, represents an effective tax rate of 2%.
Gross deferred tax assets were approximately $13 million as of March 31,
1996. A valuation allowance of $11.7 million was established for a
significant portion of the deferred tax assets. The net deferred tax
assets after valuation allowance were $1.3 million as of March 31, 1996
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 net operating loss carryforwards of approximately $21.6
million (expiring in 2010) and $30.6 million (expiring in 2000),
respectively, as of December 31, 1995. 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.
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%
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. 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 March 31, 1996, December 31, 1995 and March 31, 1995, the Company's
total risk-based capital ratio was 9.76%, 9.37%, 8.3%, 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 March 31, 1996, December 31, 1995 and March 31, 1995, the
Company's Tier 1 risk-based ratio was 8.49%, 8.10%, and 7.0%,
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 5.68%, 5.29%, and 4.8% as of March 31, 1996, December
31, 1995 and March 31, 1995, respectively. As of March 31, 1996, based on
the above criteria, the Company and the Bank falls within the adequately
capitalized category.
At the conclusion of its regulatory examination, the FDIC, based on the
Bank's improved overall financial condition, has removed the Memorandum
of Understanding. See "Regulatory Matters" for further discussion. The
Company's principal subsidiary, The Bank of New Haven, voluntarily agreed
to enter into the Memorandum effective May 16, 1995. The Memorandum
required, among other things, the Bank to achieve certain Tier 1 leverage
and total risk-based capital requirements.
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 to
appropriately 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 three months of 1996, the average balance of federal funds sold was
$3,800,000. 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 March 31, 1996, 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 March 31, 1996, the Company had no overnight borrowings outstanding
from the Federal Home Loan Bank of Boston and has borrowed $7 million, on
average, during the first three months of 1996 in term advances. In
addition, the Company has access to $2,000,000 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 March 31, 1996, the Company's liquidity ratio as defined by FDIC
criteria was 28.26% compared to 29.3% and 25.2% as of December 31, 1995
and March 31, 1995. 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 March 31, 1996.
The Company generated a negative aggregate cash flow of $2,688,000 for
the three months ended March 31, 1996, as compared to a negative
aggregate cash flow of $6,798,000 for the same 1995 period. Cash flows
provided by operating activities were $886,000 and $1,574,000 for the
three months ending March 31, 1996 and March 31, 1995, respectively.
This was due in part to significant non-cash charges for the provision
for loan losses, depreciation and amortization of fixed assets, and
writedowns on OREO, particularly during the first three months of 1995.
During the first three months of 1996, there was net cash of $1,767,000
used by financing activities as compared to $6,781,000 for the same 1995
period. The primary reason for the lower number in 1996 is a reduction
in the decrease of NOW, money market, and savings accounts. During the
first three months of 1996, these accounts were down $8,123,000 as
compared to $16,736,000 for the same 1995 period. Although the Bank's
retail network aggressively sought to retain and generate existing and
new business, stiff competition, both in the areas of rate and product
were evident in the marketplace. During the second quarter of 1996, the
Bank will kick off a new advertising campaign coupled with an improved
incentive program for account generation. Management believes that these
efforts may curb any additional reduction of these account types. It
should also be noted that the Company's asset base increased slightly
from $293 million to $297.5 million from March 31, 1995 to March 31,
1996. 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 increased slightly from $1,591,000
for the first three months of 1995 to $1,807,000 for the same 1996
period. Cash used by the net origination and maturity of loans was $1.9
million for the first three months of 1995 as compared to $362,000 for
the same 1996 period, a decrease of $1.5 million. The Company, however,
utilized $1 million dollars to acquire and/or improve other real estate
owned. Proceeds from the sale of other real estate owned were down
$250,000 when comparing the first three months of 1995 to the first three
months of 1996. The Company also realized approximately $400,000 more
cash provided by investing activities related to its investment portfolio
during the first three months of 1995 as compared to the same 1996
period.
The table below compares rate sensitive assets and rate sensitive
liabilities according to when they will mature and/or reprice after March
31, 1996. The comparison is expressed as a rate sensitivity gap (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities)
and an interest rate sensitivity gap ratio (i.e., the rate sensitivity
gap as a percentage of rate sensitive assets). These measures are shown
both for individual periods and cumulatively. In an increasing rate
environment, asset sensitivity (i.e., a positive gap) enhances earnings
potential, whereas liability sensitivity (i.e., a negative gap)
negatively impacts earnings. The opposite results occur in a declining
rate environment. It should be noted that the table does not necessarily
indicate the impact of general interest rate movements on net interest
margin since the Company's repricing of different assets and liabilities
is also influenced by competitive pressures and the needs of the
Company's customers.
As of March 31, 1996, the Company has an approximately neutral cumulative
gap through a 90 day horizon. This results from having approximately
half of the Company's loan portfolio available to reprice within thirty
days. However, the Company becomes liability sensitive in the third
month and remains so beyond one year, primarily due to its demand and
savings accounts, which are considered relatively stable and not easily
influenced by changes in interest rates. Cumulatively through one year,
the Company has a negative gap position of $11,663,000, representing a
negative 4% cumulative gap ratio.
ALCO manages the gap position on an ongoing basis according to its
assessment of the interest rate outlook and other factors in order to
assure that interest rate risk does not exceed a 3% change in net
interest income for a one year period. As the Company increases its
total assets, the overall business plan provides for matching assets and
liabilities to minimize interest rate and liquidity risk. If interest
rates were to increase immediately by 200 basis points, the negative
impact on the Company would be within ALCO's tolerance level.
Interest - Rate Sensitivity
Table
(dollars in thousands)
March 31, Month 1 Month 2 Month 3 Months Months Over Total
1996 4-6 7-12 1 Year
_____________________________________________________________________________
Rate Sensitive
Assets:
Loans (1) $75,122 $2,743 $4,153 $11,203 $22,600 $82,459 $198,280
Investments 16,431 9,477 6,251 6,352 9,00 25,032 72,548
_______ ______ ______ ______ ______ _______ ________
Total Rate
Sensitive
Assets 91,553 12,220 10,404 17,555 31,605 107,491 270,828
Rate Sensitive
Liabilities:
Time
deposits 7,966 10,323 15,348 20,725 36,879 31,336 122,577
Other
deposits 78,259(2) 1,500 0 0 4,000 73,938(3) 157,697
_______ ______ ______ ______ ______ _______ _______
Total Rate
Sensitive
Liabilities 86,225 11,823 15,348 20,725 40,879 105,274 280,274
Net Gap 5,328 397 (4,944) (3,170) (9,274) 2,217 (9,446)
______ ______ ______ ______ ______ _______ _______
Cumulative
Gap 5,328 5,725 781 (2,389)(11,663) (9,446) (9,446)
Net Gap as
% of total
rate sensitive
assets 2% 0% -2% -1% -3% -1% -3%
Cumulative Gap
as % of total
rate sensitive
assets 2% 2% 0% -1% -4% -3% -3%
(1) Excludes nonaccrual loans
(2) The Company has assumed that 100% of money market and NOW accounts
will reprice within 30 days.
(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
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 not applicable.
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: May 14, 1996 /s/ F. Patrick McFadden, Jr.
_____________________________________
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: May 14, 1996 /s/ John F. Trentacosta
_____________________________________
John F. Trentacosta
Executive Vice President
Chief Financial Officer