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 Commission File Number 0-14018
September 30, 1996
BNH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
CONNECTICUT 06-1126899
(State of incorporation (I.R.S. Employer
or organization) Identification 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 13, 1996
Common Stock (no par value) 3,681,842
BNH BANCSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Page
Consolidated Statement of Financial Position as of
September 30, 1996 and December 31, 1995 3
Consolidated Statement of Operations for the three and nine
months ended September 30, 1996 and September 30, 1995 4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 1996 and September 30, 1995 5
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Items 1-5 Not Applicable 25
Items 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS Sept. 30, 1996 Dec. 31, 1995
(unaudited)
______________ _____________
Cash and due from banks $ 19,075,186 $ 19,818,406
Federal funds sold 0 5,800,000
Investment securities:
Held to Maturity, at amortized cost 21,836,973 23,830,868
Available for Sale, at market value 40,792,033 42,766,901
Loans less unearned discount 227,161,708 204,495,433
Less allowance for loan losses (4,695,682) (5,892,675)
___________ ___________
Loans - net 222,466,026 198,602,758
Property and equipment-net 3,990,895 3,891,749
Accrued interest receivable 2,305,017 2,052,832
Other real estate owned 955,780 614,272
Deferred tax asset 9,056,512 1,073,000
Other assets 528,750 460,294
___________ ___________
TOTAL $321,007,172 $298,911,080
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 53,398,624 $ 52,320,298
NOW accounts 38,774,127 44,018,506
Money market accounts 28,969,577 29,395,173
Savings deposits 34,281,726 32,508,789
Time deposits under $100,000 112,796,267 103,719,077
Time deposits $100,000 or more 14,726,892 14,802,638
___________ ____________
Total deposits 282,947,213 276,764,481
Federal funds purchased and
securities sold under
repurchase agreements 349,385 0
FHLB Advances 11,893,305 5,546,683
Accrued interest payable 397,062 404,262
Other liabilities 592,454 602,931
___________ ___________
Total liabilities 296,179,419 283,318,357
Shareholders' equity:
Common stock, $.01 stated value,
par value $1 issued 3,686,619 shares
Authorized 30,000,000 36,866 36,864
Capital surplus 47,641,491 47,634,086
Undivided profit/(loss) (21,944,478) (31,581,840)
Net unrealized losses on investment
securities available for sale (658,955) (249,216)
Treasury stock (4,777 shares) (247,171) (247,171)
_____________ _____________
Total shareholders' equity 24,827,753 15,592,723
_____________ _____________
TOTAL $321,007,172 $298,911,080
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Sept. 30, Nine Months Sept. 30,
1996 1995 1996 1995
INTEREST INCOME:
Loans $4,858,425 $4,548,824 $13,768,833 $13,835,204
Investment securities:
Held to maturity 311,939 480,734 964,847 1,475,633
Available for sale 608,370 513,846 1,808,080 1,455,000
Federal funds sold 22,849 68,077 111,436 199,284
__________ __________ __________ __________
Total interest income 5,801,583 5,611,481 16,653,196 16,965,121
INTEREST EXPENSE:
Time deposits 195,237 218,547 591,428 551,702
$100,000 or more
Time deposits 1,548,196 1,590,228 4,516,327 4,512,617
under $100,000
Other deposits 630,940 584,277 1,803,316 1,770,262
Other borrowings 113,876 126,954 327,805 462,590
_________ __________ __________ __________
Total interest expense 2,488,249 2,520,006 7,238,877 7,297,171
_________ __________ __________ __________
NET INTEREST INCOME 3,313,333 3,091,475 9,414,319 9,667,950
PROVISION FOR LOAN (500,000) (775,000) (1,602,000) (3,063,000)
LOSSES __________ ___________ __________ __________
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 2,813,333 2,316,475 7,812,319 6,604,950
OTHER INCOME:
Service charges 588,213 552,826 1,646,582 1,633,265
Other income 297,744 300,632 873,426 657,231
Net gain on investment
securities 0 0 7,242 5,710
_________ __________ __________ _________
Total other income 885,957 853,458 2,527,249 2,296,206
_________ __________ __________ _________
OPERATING EXPENSES:
Salaries and employee
benefits 1,512,123 1,380,083 4,323,469 4,090,750
Occupancy 352,555 335,379 1,025,201 975,752
Advertising and
promotion 208,349 89,265 434,781 360,538
Office stationery and
supplies 104,033 62,739 263,324 173,995
Examination and
professional fees 181,382 159,554 564,849 451,929
Insurance 50,092 138,223 265,368 668,016
Other real estate owned 20,840 139,373 87,266 441,661
Other 644,996 506,772 1,705,961 1,426,104
_________ __________ _________ _________
Total operating
expenses 3,074,370 2,811,388 8,670,219 8,588,745
NET INCOME BEFORE 624,920 358,545 1,669,350 312,411
INCOME TAXES
(BENEFIT)PROVISION
FOR INCOME TAXES (7,507,513) 5,000 (7,968,013)
(475,500)
_________ ___________ _________ _________
NET INCOME $8,132,433 $ 353,545 $9,637,363 $ 787,911
NET INCOME PER $2.21 $0.10 $2.62 $0.21
COMMON SHARE (1)
Weighted average number
of common shares
outstanding during the
period 3,681,842 3,681,663 3,682,234 3,681,663
(1) Adjusted to reflect 1 for 4 reverse stock split
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
Sept. 30, 1996 Sept. 30, 1995
______________ ______________
SHAREHOLDERS' EQUITY at beginning of period $15,592,723 $12,355,659
Net income 9,637,363 787,911
Change in unrealized appreciation(depreciation)
on investment securities available for sale (409,741) 1,222,650
Net proceeds from stock options exercised
2nd quarter 11,120
Fractional share payout from reverse stock
split (3,712)
___________ __________
SHAREHOLDERS' EQUITY at end of period $24,827,753 $14,366,220
See accompanying Notes to Consolidated Financial Statements.
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended Sept. 30,
1996 1995
_____________________________
OPERATING ACTIVITIES
Net income $ 9,637,363 $ 787,911
Adjustments for items not affecting cash:
Provision for loan losses 1,602,000 3,063,000
Depreciation and amortization of property
and equipment 378,348 556,348
Amortization of bond premiums and discounts (176,707) (110,428)
Gain from the sale of available for sale
securities (7,242) (5,709)
Loss/writedown on other real estate owned 17,359 364,452
(Increase)decrease in interest receivable (252,185) 52,896
Increase(decrease) in interest payable (7,200) 120,458
Other,net (8,062,446) (144,367)
_________ _________
Net cash provided by operating activities 3,129,290 4,684,561
_________ _________
FINANCING ACTIVITIES
Net decrease in demand, NOW, money market and
savings accounts (2,818,712) (12,869,745)
Net increase in time deposits 9,001,444 8,962,350
Net increase(decrease) in federal funds
purchased and securities sold under
repurchase agreements 349,385 (2,873,049)
Proceeds from FHLB advances 6,346,622 2,019,716
___________ __________
Net cash provided(used) by financing
activities 12,878,739 (4,760,728)
___________ __________
INVESTING ACTIVITIES
Net (increase)decrease in federal funds sold 5,800,000 (8,475,000)
Maturities of securities held to maturity 2,000,000 5,700,000
Maturities of securities available for sale 23,048,074 5,552,677
Purchase of securities available for sale (21,315,493) (16,115,030)
Purchase of securities held to maturity (500,000)
Proceeds from the sale of available for sale
securities 10,392 7,024,703
Net loans originated and matured (25,465,268) 1,917,657
Proceeds from sale of other real estate
owned 1,332,149 747,162
Payments to acquire/improve other real
estate owned (1,691,016) (322,681)
Purchase of property and equipment (477,494) (340,896)
___________ ___________
Net cash used by investing activities (16,758,656) (4,811,408)
SUPPLEMENTAL DATA
Cash received upon exercising of stock
options 11,120
Cash paid for retirement of fractional shares (3,713)
(Decrease)increase in cash (743,220) (4,887,575)
Cash and due from banks at beginning of year 19,818,406 22,011,625
___________ ___________
Cash and due from banks at end of period $19,075,186 $17,124,050
Cash paid for:
Interest expense $7,246,077 $7,176,713
Income taxes $15,500 $18,480
Non-cash transfers from loans receivable to other real estate owned were
$0 and $166,000, for the nine months ending September 30, 1996 and 1995,
respectively.
Non-cash transfers from other real estate owned to loans receivable were
$0 and $318,750, for the nine months ending September 30, 1996 and 1995,
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 1995
Annual Report to Shareholders.
All per share data disclosed has been adjusted to reflect a one for four
reverse stock split of the Company's common stock which shareholders
voted to approve at the Company's Annual Meeting on April 23, 1996.
2. Loan Portfolio
Sept. 30, Dec. 31,
1996 1995
(dollars in thousands)
Commercial $ 54,283 $ 58,746
Real estate:
Construction 850 400
Commercial mortgage 55,725 54,518
Residential mortgage 54,301 45,399
Consumer 62,003 45,433
________ ________
Total loans 227,162 204,496
Allowance for loan losses (4,696) (5,893)
________ ________
Loans - net $222,466 $198,603
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company earned net income for the nine months ended September 30,
1996 of $9,637,000 as compared to $788,000 for the same 1995 period. For
the three month period ended September 30, 1996, the Company had net
income of $8,132,000 as compared to $353,000 for the same 1995 period.
This substantial increase in net income reflects an income tax benefit
recognized during the three month period ended September 30, 1996 of
$7,508,000. This benefit was derived from the Company reducing its
valuation allowance on its deferred tax assets in accordance with SFAS
109. Income before tax benefit for the nine months ended September 30,
1996 was $1,670,000 as compared to $313,000 for the same 1995 period.
Income before tax benefit for the three month period ended September 30,
1996 was $625,000 as compared to $358,000 for the same 1995 period.
The primary reason for the improvement in pretax income for both the
three month and nine month periods ending September 30, 1996 was a
substantial decrease in both the Company's provision for loan loss and
Other Real Estate Owned ("OREO") expense, which declined 43% from
$914,000 in the third quarter of 1995 to $521,000 in the third quarter of
1996. The Company's provision for loan losses and OREO expense declined
52% from $3,504,000 in the first nine months of 1995 to $1,689,000 in the
first nine months of 1996. The reduction in both loan loss provisions
and OREO expenses can be attributed to an improvement in the Company's
overall asset quality.
The return on average assets was 3.2% for the nine months ended September
30, 1996 compared to 0.1% for the same 1995 period. Net income was $2.21
per share for the three months ended September 30, 1996 and $.10 per
share for the three months ended September 30, 1995. Net income was
$2.62 per share for the nine months ended September 30, 1996 compared to
$.21 for the same 1995 period.
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 removed 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 September 30,
1996, the Bank's Tier 1 leverage capital and total risk-based capital
ratios are 5.8% and 9.5%. 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 toward 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 $9,414,000 for the nine month period ended
September 30, 1996 and $9,668,000 for the same 1995 period a decrease of
$254,000 or 3%. The reasons for this were decreased earnings on the
Company's Investment Portfolio which resulted from a decline in the
Company's average investment portfolio balance and a decrease in the
overall yield earned on average assets. As of September 30, 1995, the
Company's average Investment Portfolio balance was $69,000,000 as
compared to $64,000,000 as of September 30, 1996. Net interest income was
$3,313,000 for the three months ended September 30, 1996 compared to
$3,091,000 for the same 1995 period, representing an increase of
$222,000, or 7%. The increase in net interest income for the comparative
three month periods can be attributed to increased levels of total
average earning assets and a decrease in the rates paid on average
interest bearing deposits and other borrowings.
Interest income decreased to $16,650,000 for the nine months ended
September 30, 1996 from $16,965,000 for the same 1995 period, a decrease
of $315,000, or 2.00%. Interest income increased to $5,802,000 for the
three months ended September 30, 1996 from $5,612,000 for the same 1995
period, an increase of $190,000, or 3%. The Company's average earning
assets decreased to $278,274,000 for the nine months ended September 30,
1996 from $279,948,000 for the same 1995 period, or 1%. The primary
reason for the nine month period decrease in interest income is a
decrease in the rates earned on average earning assets, from 8.10% for
the nine month period ended September 30, 1995 to 7.99% for the nine
month period ended September 30, 1996 or 11 basis points. For the
comparable three month period, average earning assets actually increased
primarily due to loan volume.
Interest expense decreased to $7,240,000 for the nine months ended
September 30, 1996 from $7,297,000 for the same 1995 period, a decrease
of $57,000, or 1%. Interest expense decreased to $2,488,000 for the three
months ended September 30, 1996 from $2,520,000 for the same 1995 period,
a decrease of $32,000 or 1%. The nine month comparable period decrease
can be attributed to lower levels of other borrowings while the three
month comparable period decrease reflects lower rates paid on average
paying liabilities. Average paying liabilities decreased from
$233,677,000 for the nine months ended September 30, 1995 to $230,977,000
for the same period in 1996, a decrease of $2,700,000, or 1.%. The
reduction in average paying liabilities is primarily related to a
decrease in higher cost time deposits and other borrowings. Average total
time deposits decreased $3,500,000 and average other borrowings decreased
$2,300,000 for the nine month period ended September 30, 1996 compared to
the same 1995 period. Average interest bearing core deposits (NOW, money
market and savings accounts) as a percentage of total interest bearing
deposits and other borrowings increased from 42% as of September 30, 1995
to 43% as of September 30, 1996. The Company's average interest rate on
paying liabilities increased 1 basis point from 4.18% for the nine months
ended September 30, 1995 to 4.19% for the nine months ended September 30,
1996.
Three Months Ended September 30,
(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 $ 22,674 $ 312 5.47% | $ 35,640 $ 481 5.35%
|
Available for |
Sale(2) 40,888 608 5.92% | 34,323 513 5.94%
|
Federal funds |
sold 1,745 23 5.21% | 4,715 68 5.73%
|
Loans - net(1) 221,030 4,858 8.74% | 203,306 4,549 8.88%
________ ______ _____ | ________ ______ ______
|
Total average |
earning assets |
(1) $286,337 $5,801 8.06% | $277,984 $5,611 8.01%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW account $ 39,259 $ 149 1.51% | $ 38,553 $ 154 1.58%
|
Money markets 28,644 254 3.53% | 28,678 236 3.26%
|
Savings deposits 33,322 228 2.72% | 29,889 195 2.58%
|
Time deposits |
under $100,000 111,537 1,548 5.52% | 112,041 1,590 5.63%
|
Time deposits of |
$100,000 or more 14,331 195 5.42% | 15,686 217 5.48%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits $227,093 $2,374 4.16% | $224,846 $2,392 4.22%
|
Other borrowings 8,525 114 5.31% | 8,168 128 6.24%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits |
& other |
borrowings $235,618 $2,488 4.20% | $233,014 $2,520 4.29%
|
Net interest |
income $3,313 | $3,091
|
Interest rate |
spread (1) 3.86% | 3.72%
|
Net interest |
margin (1) 4.60% | 4.41%
(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)
1996 | 1995
|
Average Average | Average Average
ASSETS Balance Interest Yield | Balance Interest Yield
|
Investments: |
Held to |
Maturity, at |
amortized |
cost $ 23,447 $ 965 5.50% | $ 36,707 $1,476 5.37%
|
Available for |
Sale(2) 40,994 1,808 5.89% | 32,171 1,455 6.05%
|
Federal funds |
sold 2,833 111 5.25% | 4,603 199 5.79%
|
Loans - net(1) 211,010 13,769 8.72% | 206,467 13,835 8.96%
________ _______ _____ | ________ ______ _____
|
Total average |
earning assets |
(1) $278,284 $16,653 7.99% | $279,948 $16,965 8.10%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW accounts $ 39,767 $ 448 1.50% | $ 38,120 $ 483 1.69%
|
Money markets 28,884 737 3.41% | 27,304 641 3.14%
|
Savings deposits 31,667 619 2.61% | 31,782 646 2.72%
|
Time deposits |
under $100,000 108,315 4,516 5.57% | 112,433 4,513 5.37%
|
Time deposits over |
$100,000 or more 14,529 591 5.44% | 13,952 550 5.27%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits $223,162 $6,911 4.14% | $223,591 $6,832 4.09%
|
Other borrowings 7,815 328 5.60% | 10,086 464 6.15%
________ ______ _____ | ________ ______ _____
Total interest |
bearing deposits |
& other |
borrowings $230,977 $7,239 4.19% | $233,677 $7,297 4.18%
|
Net interest |
income $9,414 | $9,668
|
Interest rate |
spread (1) 3.80% | 3.92%
|
Net interest |
margin (1) 4.52% | 4.62%
(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 $231,000, or 10%, to $2,527,000 for the nine
months ended September 30, 1996 from $2,296,000 for the same 1995 period.
In addition, other income increased $33,000 or 4%, to $886,000 for the
three months ended September 30, 1996 from $853,000 for the same 1995
period. This increase is primarily due to increased revenue from
mortgage placement fees and installment loan origination fees which
result from the Company's active participation in loan placement programs
where both mortgage and installment loans are brokered or sold to third
party financial institutions. Mortgage placement fees, which are fees
the Company earns for originating residential first mortgage applications
increased $39,000 or 27% for the nine months ended September 30, 1996 to
$185,000 from $146,000 for the nine month period ended September 30,
1995. Mortgage placement fees declined 49% during the three month period
ended September 30, 1996 or $38,000 from the same 1995 period. The
Company anticipates that this reduced level of mortgage placement fees
will continue until the end of 1996 due to current interest rate levels
and loan demand. Installment loan placement fees, which are fees the
Company earns for originating installment loan applications, increased
$143,000 or 586% for the nine months ended September 30, 1996 to $180,000
from $37,000 for the same 1995 period and increased $55,000 for the three
month period ended September 30, 1996 to $77,000 from $22,000 for the
same 1995 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. 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 1996 was $1,602,000 compared with $3,063,000 in the same 1995
period. Net loan charge-offs for the nine months ended September 30,
1996 and 1995 were $2,799,000 and $4,011,000, respectively. The
provision for loan losses charged against earnings in the third quarter
of 1996 was $500,000 compared with $775,000 in the same 1995 period. Net
loan charge-offs for the three months ended September 30, 1996 and
September 30, 1995 were $527,000 and $1,612,000, respectively.
In establishing the allowance for loan losses, Management has considered
the possible deterioration of the collateral securing its past due loans.
As of September 30, 1996, the Company's allowance for loan losses was
$4,695,000, or 2.1% of total loans, as compared to $5,880,000, or 2.9% of
total loans, as of September 30, 1995. The allowance for loan losses was
$5,893,000, or 2.9% 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 76.5% as of September 30, 1996 as compared
to 76.8% and 60.2% as of December 31, 1995 and September 30, 1995,
respectively.
As of September 30, 1996, nonaccrual loans were $3,894,000 as compared
with $5,964,000 as of December 31, 1995, and $6,620,000 as of September
30, 1995. As of September 30, 1996, approximately $2,990,000 of the
loans in the nonaccrual portfolio were collateralized partially by
commercial or residential real estate or business assets and
approximately $580,000 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
3.3% at September 30, 1995 to 1.7% at September 30, 1996.
Management, after careful consideration of the above factors, is of the
opinion that the allowance for loan losses as of September 30, 1996 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 during
1996, Management believes that the level of its nonaccrual loans will
continue to 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, 1995 to
September 30, 1996.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Quarter Ended
(dollars in thousands)
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1996 1996 1996 1995 1995
Balance
beginning
of period $4,723 $5,164 $5,893 $5,880 $6,717
Provision
charged to
income 500 526 576 600 775
Loans charged off:
Commercial 413 696 1,064 537 1,313
Real Estate:
Commercial Mtg. 33 182 15 1 225
Residential Mtg. 48 108 133 14 36
Consumer 108 109 117 93 86
______ ______ ______ ______ _______
Total Loans
Charged-off 602 1,095 1,329 645 1,660
Recoveries 75 128 24 58 48
______ ______ _______ ______ _______
Net loans
charged-off 527 967 1,305 587 1,612
______ ______ ______ ______ ______
Balance, end
of period $4,696 $4,723 $5,164 $5,893 $5,880
Ratios:
Net loans charged-
off to avg. loans 0.24% 0.46% 0.64% 0.29% 0.80%
Allowance for
loan losses to
total loans 2.07% 2.22% 2.54% 2.88% 2.92%
NONACCRUAL LOANS, RESTRUCTURED LOANS
AND OTHER REAL ESTATE OWNED
(in thousands)
QUARTER ENDED Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1996 1996 1996 1995 1995
Nonaccrual loans:
Commercial $ 1,213 $ 1,665 $ 1,375 $ 1,806 $ 2,422
Real Estate:
Commercial 2,316 2,336 3,140 3,628 3,044
Residential 99 185 520 292 773
Consumer 266 266 238 238 381
______ ______ ______ ______ ______
Total nonaccrual
loans 3,894 4,452 5,273 5,964 6,620
Other Real Estate
Owned-net 956 1,673 1,618 614 1,063
______ ______ ______ _______ _______
Total
nonperforming
assets 4,850 6,124 6,890 6,578 7,683
Restructured
loans 1,592 1,622 1,650 1,570 2,759
_______ _______ _______ _______ _______
Total
nonperforming
assets &
restructured
loans $ 6,442 $ 7,746 $ 8,540 $ 8,148 $10,442
Accruing loans
past due 90 days
or more:
Commercial 514 5 215 0 194
Real Estate:
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Residential 0 0 199 0 75
Consumer 142 151 126 139 110
______ ______ ______ ______ ______
Total accruing
loans past due
90 days or more $ 656 $ 156 $ 540 $ 139 $ 379
Allowance for
loan losses $ 4,696 $ 4,723 $ 5,164 $ 5,893 $ 5,880
SFAS 114
impaired loans $ 2,723 $ 2,997 $ 4,252 $ 5,590 $ 7,914
Ratio of
nonperforming
assets to total
assets 1.5% 2.0% 2.3% 2.2% 2.6%
Ratio of
nonperforming
assets,
restructured
loans & accruing
loans past due
90 days or more
to total assets 2.2% 2.5% 3.1% 2.8% 3.6%
Ratio of
nonperforming
assets to total
loans and OREO 2.1% 2.9% 3.4% 3.2% 3.8%
Ratio of
nonperforming
assets,
restructured loans,
and accruing loans
past due 90 days
or more to total
loans and OREO 3.1% 3.7% 4.5% 4.0% 5.4%
Ratio of
allowance for
loan losses to
nonaccrual loans,
restructured
loans and accruing
loans past due 90
days or more 76.5% 75.8% 69.2% 76.8% 60.2%
Ratio of non-
accrual loans,
restructured
loans and
accruing loans
past due 90 days
or more to
shareholders'
equity and
allowance for
loan losses 20.8% 29.3% 35.3% 35.7% 48.2%
OTHER REAL ESTATE OWNED
Other Real Estate Owned (OREO) expense was $87,000 for the nine month
period ended September 30, 1996 as compared to $442,000 for the nine
months ended September 30, 1995. OREO expense was $21,000 for the three
month period ended September 30, 1996 as compared to $139,000 for the
three months ended September 30, 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 $70,000 and $77,000 for the nine month periods ended September
30, 1996 and 1995, respectively. For the three month period ended
September 30, 1996 holding costs were $26,000 as compared to $53,000 for
the same 1995 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, 1996 is $956,000 and is comprised of
13 properties. The OREO portfolio consists of 5 residential properties,
representing 38% of the total OREO portfolio, and 4 commercial properties
which constitutes 31% of the total OREO portfolio. In addition, the
Company has 4 parcels of land comprising the remaining 31% of the
portfolio.
The following table reflects OREO activity for the last five quarterly
periods.
OTHER REAL ESTATE OWNED
QUARTERLY ANALYSIS
(dollars in thousands)
QUARTER ENDED
DESCRIPTION 09/30/96 06/30/96 03/31/96 12/31/95 09/30/95
__________________________________________________________________________
Beginning book value $1,673 $1,617 $ 614 $1,063 $1,102
Properties added 1 620 1,071 487 100
Proceeds from OREO sold (722) (563) (47) (892) (53)
Gains(losses) on
properties sold 4 84 (8) (44) 7
Other activity
Property writedowns (85) (13) (93)
_______ _______ _______ _______ _______
Ending book value $ 956 $1,673 $1,617 $ 614 $1,063
OPERATING EXPENSES
Operating expenses increased $81,000, or 1%, from $8,589,000 for the nine
months ending September 30, 1995 to $8,670,000 for the same 1996 period.
Salary and employee benefit expense, advertising and promotion expense,
examination and professional fees, and other operating expenses offset in
part by lower insurance and OREO expense were primarily responsible for
the increase in operating expenses during the first nine 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 $355,000, or 80%,
from $442,000 for the nine months ended September 30, 1995 to $87,000 for
the same 1996 period due to a reduced OREO portfolio balance and gains
recognized on OREO property sales. Advertising and promotion fees
increased $74,000 or 21% from $361,000 during the nine month period ended
September 30, 1995 to $435,000 for the nine month period ended September
30, 1996. This increase was primarily due to increased marketing dollars
committed to product, promotion campaigns and branch openings.
Examination and professional fees increased $113,000, or 25%, from
$452,000 for the nine months ended September 30, 1995 to $565,000 for the
same 1996 period. This increase is primarily related to increased
professional fees incurred by the Company as a result of outsourcing
previous internal department functions such as credit review and internal
audit. Insurance expense decreased $403,000, or 60%, from $668,000 for
the nine months ended September 30, 1995 to $265,000 for the same 1996
period. This decrease is due primarily to reduced insurance assessments
by the FDIC. Salaries and employee benefits increased from $4,091,000
for the first nine months of 1995 as compared to $4,323,000 for the same
1996 period. The Company's full-time equivalent positions as of
September 30, 1996 is 144 as compared to 138 as of September 30, 1995.
During the second and third quarters of 1996, the Company opened and
staffed two additional retail branch facilities.
Operating expenses increased $263,000, or 9%, from $2,811,000 for the
three months ending September 30, 1995 to $3,074,000 for the same 1996
period. Similar to the nine month operating expense comparisons, salary
and employee benefit expense, advertising and promotion expense,
examination and professional fees, and other operating expenses were
primarily responsible for the increase in operating expenses during the
third quarter of 1996 as compared to the same 1995 period.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded an income tax benefit of $7,968,000 for the nine
months ended September 30, 1996 consisting of a deferred income tax
benefit of $7,983,000 offset by a $15,500 provision for minimum federal
and state taxes currently payable. The deferred income tax benefit
resulted from a reduction in the Company's valuation allowance in its
deferred tax asset in accordance with SFAS 109, as the company recognized
substantially all of its remaining available Federal income tax benefits
(expiring 2010) along with a portion of its remaining State Income tax
benefits (expiring 2000) which the Company expects to utilize.
The reduction in the deferred tax valuation reflects the Company's
improved operating performance, reductions in non-performing assets and a
positive outlook for future earnings. These factors make it more likely
than not that these deferred tax items will be utilized in the future.
Due to the utilization of net operating loss carryforwards, only minimum
Federal and State income taxes are currently payable.
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, 1996, December 31, 1995
and September 30, 1995, the Company's total risk-based capital ratio was
9.6%, 9.4%, 8.8%, 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, 1996, December
31, 1995 and September 30, 1995, the Company's Tier 1 risk-based ratio
was 8.4%, 8.1%, and 7.6%, 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 5.8%, 5.3%, and
5.0% as of September 30, 1996, December 31, 1995 and September 30, 1995,
respectively. As of September 30, 1996, based on the above criteria, the
Company falls within the adequately capitalized category. The Bank also
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 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. While the FDIC has published proposed regulations for
the purpose of amending its risk-based capital standards, the Company
cannot predict what may be required under any final regulations that may
be adopted. Such regulations could, however, further increase the
regulatory capital requirements which are applicable to the Company and
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 1996, the average balance of federal funds sold was $2,833,000.
In the event the Company needs to borrow cash to manage its overnight
position or short-term position, the Company can borrow approximately
$6,000,000, as of September 30, 1996, on an overnight basis from the
Federal Home Loan Bank of Boston and has access to a $1 million federal
funds line of credit with a commercial correspondent bank. The Company
can also borrow funds from the Federal Home Loan Bank of Boston on a
short- and long-term advance basis. As of September 30, 1996, the
Company had $4,260,000 in overnight borrowings outstanding from the
Federal Home Loan Bank of Boston and has borrowed $7.4 million, on
average, during the first nine 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 a brokerage firm. The Company's
investment portfolio also provides a secondary source of liquidity.
At September 30, 1996, the Company's liquidity ratio as defined by FDIC
criteria was 24.4% compared to 24.4% and 29.1% as of December 31, 1995
and September 30, 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 September 30, 1996.
The Company generated a negative aggregate cash flow of $743,000 for the
nine months ended September 30, 1996, as compared to a negative aggregate
cash flow of $4,888,000 for the same 1995 period. Cash flows provided by
operating activities were $3,129,000 and $4,685,000 for the nine months
ending September 30, 1996 and September 30, 1995, respectively, which was
due in part to significant non-cash charges for the provision for loan
losses and writedowns on OREO. Net cash provided by financing activities
was $12,879,000 for the nine months ending September 30, 1996 as opposed
to net cash used by financing activities of $4,761,000 for the same 1995
period. For the nine months ended September 30, 1996, net cash provided
by financing activities was primarily attributed to time deposits and
proceeds from FHLB advances. Net cash used by investing activities was
$16,759,000 and $4,811,000 for the nine months ending September 30, 1996
and September 30, 1995. The cash used by investing activities for the
nine months ended September 30, 1996 was primarily for net loans
originated and matured and net purchases of investment securities
available for sale partially offset by the sale of investment securities
held as available for sale. For the nine months ended September 30,
1995, cash used by investing activities was due to loans originated
offset by a decrease in federal funds sold and investment securities
maturities.
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, 1996, the Company's rate
sensitive assets repricing or maturing approximately equalled its rate
sensitive liabilities during the first nine months. This results from
having approximately 31% 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" between the periods of seven to twelve months and
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, 1996, the
amount of the Company's cumulative gap with respect to assets and
liabilities maturing or repricing within one year was $40,069,000 more
liabilities than assets repricing (a negative gap position), representing
a negative 14% 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 immediately increase 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, 1996. 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)
September 30,
1996 Month 1 Month 2 Month 3 Months Months Over Total
4-6 7-12 1 Year
_____________________________________________________________________________
Rate Sensitive
Assets:
Loans 1 $71,184 $4,298 $4,210 $12,208 $25,264 $103,644 $220,808
Investments 6,669 6,480 4,754 2,350 3,508 39,526 63,287
_______ ______ ______ ______ _______ _______ ________
Total Rate
Sensitive
Assets 77,853 10,778 8,964 14,558 28,772 143,170 284,095
Rate Sensitive
Liabilities:
Time deposits 6,380 8,557 6,992 33,149 35,158 37,157 127,393
Other
deposits 84,1472 70 2,071 4,215 255 77,5303 168,288
_______ ______ ______ ______ ______ _______ _______
Total Rate
Sensitive
Liabilities 90,527 8,627 9,063 37,364 35,413 114,687 295,681
Net Gap (12,674) 2,151 (99) (22,806) (6,641) 28,483 (11,586)
______ ______ _____ ______ ______ _______ ______
Cumulative
Gap (12,674) (10,523) (10,622) (33,428) (40,069) (11,586) (11,586)
Net Gap as %
of total rate
sensitive assets -4% 1% -0% -8% -2% 10% -4%
Cumulative Gap
as % of total
rate sensitive
assets -4% -4% -4% -12% -14% -4% -4%
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.
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, 1996 /s/ F. Patrick McFadden, Jr.
________________________________________
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: November 13, 1996 /s/ John F. Trentacosta
________________________________________
John F. Trentacosta
Executive Vice President/Chief Financial
Officer
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, 1996 ______________________________________
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: November 13, 1996 ______________________________________
John F. Trentacosta
Executive Vice President/Chief Financial
Officer