<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1995
Commission File Number 0-12936
WESTPORT BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1094350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
87 POST ROAD EAST, WESTPORT, CONNECTICUT 06880
(Address of principal executive office)
(203) 222-6911
(Registrant's telephone number, including area code)
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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares outstanding of Westport Bancorp, Inc.'s $.01 par value common
stock as of May 1, 1995 is 5,341,479 shares.
1
<PAGE> 2
WESTPORT BANCORP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
- ------------------------------------------------------------------------------------------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Condition -- March 31, 1995 (unaudited)
and December 31, 1994 3
Consolidated Statements of Income -- Three Months
Ended March 31, 1995 and 1994 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity -- Three
Months Ended March 31, 1995 and 1994 (unaudited) 5
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1995 and 1994 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 28
Item 2 -- Changes in Securities 28
Item 3 -- Defaults Upon Senior Securities 28
Item 4 -- Submission of Matters to a Vote of Security Holders 28
Item 5 -- Other Information 28
Item 6 -- Exhibits and Reports on Form 8-K 28
Signatures 33
Exhibit 11 Statement Regarding Computation of Per Share Earnings 34
</TABLE>
2
<PAGE> 3
PART I, ITEM 1 -- FINANCIAL INFORMATION.
===============================================================================
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
- --------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 16,963 $ 17,924
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents 16,963 17,924
- --------------------------------------------------------------------------------------------------
Securities available for sale, at market value 22,541 27,276
Securities held to maturity (market value: March 31, 1995,
$45,050; December 31, 1994, $39,678) 47,279 43,206
- --------------------------------------------------------------------------------------------------
Total securities 69,820 70,482
- --------------------------------------------------------------------------------------------------
Loans 184,741 186,648
Allowance for loan losses (3,125) (3,341)
- --------------------------------------------------------------------------------------------------
Loans - net 181,616 183,307
- --------------------------------------------------------------------------------------------------
Premises and equipment - net 5,069 5,137
Accrued interest receivable 2,048 1,758
Other real estate owned 291 352
Other assets 5,210 4,544
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $281,017 $283,504
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 66,458 $ 72,972
Interest-bearing deposits 170,471 180,986
- --------------------------------------------------------------------------------------------------
Total deposits 236,929 253,958
- --------------------------------------------------------------------------------------------------
Short term borrowings 23,296 10,484
Other liabilities 2,426 2,664
- --------------------------------------------------------------------------------------------------
Total liabilities 262,651 267,106
- --------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000
shares; outstanding 43,950 shares 1 1
Common stock - $.01 par value; authorized 20,500,000
shares; outstanding, 3,292,752 shares at March 31, 1995,
3,211,752 shares at December 31, 1994 33 32
Additional paid in capital 21,526 21,459
Accumulated deficit (3,020) (4,680)
Net unrealized depreciation
on securities available for sale (174) (414)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 18,366 16,398
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $281,017 $283,504
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans $ 4,142 $ 3,056
Securities 963 779
Federal funds sold and other 9 59
- --------------------------------------------------------------------------------------------
Total interest income 5,114 3,894
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 1,086 1,195
Short-term borrowings 322 27
- --------------------------------------------------------------------------------------------
Total interest expense 1,408 1,222
- --------------------------------------------------------------------------------------------
Net interest income 3,706 2,672
Provision for loan losses 375 450
- --------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,331 2,222
- --------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 404 391
Service charges on deposit accounts 342 321
Realized security gains (losses) - net (210) 3
Loan sale gains - net 17 85
Mortgage service fees 31 34
Other 136 123
- --------------------------------------------------------------------------------------------
Total other operating income 720 957
- --------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 1,414 1,344
Occupancy - net 359 387
Professional fees 203 208
FDIC insurance premiums 176 174
Data processing 140 190
Furniture and equipment 76 86
Other real estate owned - net 65 151
Other insurance premiums 57 80
Other 344 300
- --------------------------------------------------------------------------------------------
Total other operating expense 2,834 2,920
- --------------------------------------------------------------------------------------------
Income before income taxes 1,217 259
Income taxes (benefit) (443) 8
- --------------------------------------------------------------------------------------------
NET INCOME $ 1,660 $ 251
============================================================================================
NET INCOME PER COMMON SHARE $ 0.16 $ 0.03
============================================================================================
Weighted average number of common shares
and common equivalent shares outstanding 10,276,231 10,550,386
============================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
Net
Preferred Stock Common Stock Unrealized
------------------- ------------------- Additional Depreciation
Number of Number of Paid in Accumulated on Securities
Shares Amount Shares Amount Capital Deficit Available for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 44,950 $ 1 3,081,365 $ 31 $21,415 $ (9,042) --- $12,405
- -----------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- --- --- 251 --- 251
Issuance of Common Stock -
Warrants exercised --- --- 12,500 --- 9 --- --- 9
Employee Options exercised --- --- 2,500 --- 5 --- --- 5
Exercise of 1992 Rights --- --- 13 --- --- --- --- ---
Offering
Dividend Reinvestment and
Stock Purchase Plan --- --- 172 --- --- --- --- ---
Net change in unrealized
depreciation on securities
available for sale --- --- --- --- --- --- $ (56) (56)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 44,950 $ 1 3,096,550 $ 31 $21,429 $ (8,791) $ (56) $12,614
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 43,950 $ 1 3,211,752 $ 32 $21,459 $ (4,680) $ (414) $16,398
- -----------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- --- --- 1,660 --- 1,660
Issuance of Common Stock -
Warrants exercised --- --- 75,000 1 55 --- --- 56
Employee Options exercised --- --- 6,000 --- 12
--- --- 12
Net change in unrealized
depreciation
on securities available for sale --- --- --- --- --- --- 240 240
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 43,950 $ 1 3,292,752 $ 33 $21,526 $ (3,020) $ (174) $18,366
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,660 $ 251
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 375 450
Recognition of deferred tax asset (468) ---
Depreciation, amortization and accretion 229 310
Losses on other real estate owned 60 ---
Loan sale gains - net (17) (85)
Realized security (gains) losses - net 210 (3)
Decrease (increase) in accrued interest receivable (290) 778
Decrease (increase) in other assets (198) 769
Decrease in other liabilities (238) (99)
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,323 2,371
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale --- 37,889
Held to maturity --- 12,500
Proceeds from sales of securities -
Available for sale 14,754 2,519
Principal collected on securities 900 222
Purchases of securities -
Available for sale (10,005) (21,303)
Held to maturity (4,999) (12,951)
Increase in loans - net (1,979) (12,309)
Loans repurchased by the FDIC 351 72
Proceeds from sales of loans 2,961 7,356
Proceeds from sales of other real estate owned 1 485
Purchases of premises and equipment (119) (193)
- ---------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,865 14,287
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in noninterest-bearing deposits - net (6,514) 259
Decrease in interest-bearing deposits - net (10,515) (6,668)
Increase (decrease) in short-term borrowings - net 12,812 (1,720)
Proceeds from issuance of Common Stock - net 68 14
- ---------------------------------------------------------------------------------------------
Net cash used in financing activities (4,149) (8,115)
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (961) 8,543
Cash and cash equivalents at beginning of year 17,924 13,799
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,963 $ 22,342
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
WESTPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of Westport Bancorp, Inc. ("Bancorp") and its subsidiary, The Westport
Bank & Trust Company (the "Bank") (collectively, the "Company"). The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In preparing interim financial statements, management has made estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the consolidated balance sheets and the revenue and expenses for
the reported periods. Actual future results could differ significantly from
these estimates. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results are not necessarily indicative of the results
that may be expected for the year ended December 31, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
NOTE 2 - REGULATORY MATTERS
On December 20, 1994, the Federal Deposit Insurance Corporation (the "FDIC")
and the State of Connecticut Banking Commissioner (the "Commissioner") removed
the Order to Cease and Desist (the "Order") originally imposed on the Bank in
October 1991. This action was the result of a routine examination by the FDIC
completed in the fourth quarter of 1994. The Order had required, among other
things, the submission of written plans to the FDIC and the Commissioner
addressing capital plans, retention of qualified management and staff,
strategies for improving earnings and actions to lessen the Bank's risk on all
loans aggregating $50,000 or more which were adversely classified by the FDIC.
In addition, the Order required the Bank to achieve and maintain specified Tier
1 leverage capital ratios and obtain approval of the FDIC and the Commissioner
prior to paying or declaring any dividends. In connection with the release of
the Order, the Board of Directors of the Bank, by informal resolution, voted to
seek regulatory approval prior to declaring or paying a dividend.
On March 16, 1995, the Federal Reserve Bank of New York ("FRBNY") removed all
restrictions it had imposed on the Company in October 1991. Those restrictions
included, but were not limited to, limitations on cash expenditures by Bancorp,
the incurring of any debt by Bancorp or the payment of cash dividends by
Bancorp without prior written consent of the FRBNY and the Commissioner.
See Note 6 - Subsequent Event for information regarding the dividend declared
by the Company.
7
<PAGE> 8
The Federal Reserve Board and the FDIC require bank holding companies and
banks, respectively, to comply with guidelines based upon the ratio of capital
to total assets adjusted for risk.
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at March 31, 1995.
<TABLE>
<CAPTION>
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Capital to Risk-Weighted Assets 11.36% 8.0%
Tier 1 Capital to Risk-Weighted Assets 10.10 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 6.49 3.0(1)
</TABLE>
(1) An additional 1% to 2% is required for all but the most highly rated
institutions.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") of 1991
establishes five classifications for banks on the basis of their capital
levels; well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. At March 31,
1995, the Company was "well capitalized" under FDICIA, based upon the above
capital ratios. Management believes, in the current economic and operating
environment and due to the significant improvement in the Company's core
earnings, it will continue to maintain its capital ratios above these minimum
capital requirements. However, deterioration of economic conditions and real
estate values could adversely affect future results, leading to increased
levels of loan charge-offs, provision for loan losses, nonaccrual loans and the
ability of the Company to maintain the minimum Tier 1 leverage capital ratio,
as well as, reductions in income and total capital.
NOTE 3 - INCOME TAXES
The 1995 provision for income taxes is comprised of a $21,000 current federal
provision, a $4,000 current state provision and a $468,000 reversal of a
portion of the previously established deferred tax valuation allowance. The
1994 provision for income taxes is comprised of a $5,000 federal provision and
a $3,000 state provision.
At March 31, 1995 and 1994, the Company had recorded, for financial statement
purposes, net deferred tax assets (included in Other Assets) of $2,118,000 and
$350,000, respectively, for anticipated future utilization of net operating
loss carryforwards ("NOL's"). The FDIC and the FRBNY limit the amount of net
deferred tax assets that can be included in capital for regulatory purposes to
the lesser of the tax effect of the estimated subsequent twelve months pretax
earnings or 10% of stockholders' equity. On March 31, 1995, the recorded net
deferred tax asset
8
<PAGE> 9
included $298,000 determined to be "ineligible" for regulatory purposes. At
March 31, 1994, no portion of the $350,000 deferred tax asset was disqualified
from capital for regulatory purposes. Although management believes a
substantial portion of the gross deferred tax asset at March 31, 1995 will be
realized through future earnings, a valuation allowance has been established
for the amount in excess of $2,118,000.
As a result of the Company's net operating losses in prior years, the Company
had a net operating loss carryforward of approximately $12.1 million at
December 31, 1994 for federal purposes, which is available to offset future
taxable income.
For the three month periods ended March 31, 1995 and March 31, 1994, the
Company made cash payments for income taxes of approximately $4,000 and
$10,000, respectively.
NOTE 4 - EARNINGS PER SHARE
Earnings per share are computed by dividing adjusted earnings by the weighted
average number of common shares and common share equivalents outstanding. For
the periods ended March 31, 1995 and 1994, the computation includes 3,249,474
and 3,087,849 weighted average shares outstanding and 2,631,757 and 2,967,537
weighted average common equivalent shares, respectively, under the treasury
stock method. The earnings per share computations also include 4,395,000 and
4,495,000 weighted average shares in 1995 and 1994, respectively, issuable upon
the assumed conversion of preferred stock. Adjusted earnings consist of net
income and the interest effect of the assumed reduction in short-term
borrowings in 1995 and the assumed purchase of short-term debt securities in
1994, under the treasury stock method. There was no difference between primary
and fully diluted earnings per share for 1995 and 1994.
NOTE 5 - NEW ACCOUNTING STANDARDS
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of certain loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company
will be unable to collect the scheduled payments of principal and interest when
due according to the contractual terms of the loan agreement. The adoption of
SFAS 114 and 118 on January 1, 1995 did not materially effect the Company's
financial statement or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments on nonaccruing impaired loans are recorded as
reductions of loan principal.
At March 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $4,362,000, of
which $4,145,000 were nonaccrual loans. At March 31, 1995, the valuation
allowance, related to all impaired loans, totaled
9
<PAGE> 10
$600,000 and is included in the allowance for loan losses shown on the balance
sheet. For the three months ended March 31, 1995, the average recorded
investment in impaired loans was approximately $4.5 million. Total interest in
the amount of $4,800 was recognized, on accruing impaired loans during the
quarter.
The following table sets forth the activity in the allowance for loan losses
for three months ended March 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
($ in thousands)
<S> <C> <C>
- ------------------------------------------------------------------------------------
Balance, January 1, $3,341 $3,024
- ------------------------------------------------------------------------------------
Loans charged-off: 631 801
- ------------------------------------------------------------------------------------
Recoveries on amounts previously charged-off: 40 180
- ------------------------------------------------------------------------------------
Net loans charged-off 591 621
Provision charged to operating expenses 375 450
- ------------------------------------------------------------------------------------
Balance, March 31, $3,125 $2,853
====================================================================================
</TABLE>
NOTE 6 - SUBSEQUENT EVENTS
On April 17, 1995, the Company, with the consent of the FDIC and the
Commissioner, declared a dividend of $0.02 per common share and $2.00 per
preferred share to shareholders of record as of May 5, 1995, payable on May 19,
1995.
During the period from April 20, 1995 to May 5, 1995, preferred stockholders
exercised 1,897,000 warrants, which resulted in the issuance of 1,897,000
shares of common stock. Total proceeds of $1,422,750 were received by the
Company in connection with the exercise of the warrants.
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
===============================================================================
RESULTS OF OPERATIONS
Overview
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations, including fees
generated by its Trust department. Net interest income is the difference
between interest earned on the loan and investment portfolios and interest paid
on deposits and other sources of funds. Noninterest income is primarily the
result of fees generated by the Trust department, charges related to
transaction activity from commercial and retail checking accounts and gains
from loan and securities sales.
10
<PAGE> 11
Bancorp reported net income for the first quarter of 1995 of $1,660,000, or
$0.16 per common share, compared to net income of $251,000 or $0.03 per common
share for the comparable 1994 period. Contributing to the improved results for
the first quarter of 1995, over 1994 results, was a 45% decline in
nonperforming assets, increases in average earning assets and fee income, and
the continued reduction of operating expenses. Net income for the 1995 period
also included the recognition of a deferred tax asset of $468,000 and a net
loss of $210,000 on the sale of securities included in the available for sale
portfolio. By contrast, net income for the 1994 period included a net gain of
$3,000 on the sale of securities and no recognition of a deferred tax asset.
The security losses, in the first quarter of 1995, were incurred in connection
with the repositioning of the available for sale portfolio into higher yielding
government agency securities.
Negatively impacting earnings for the first quarter of 1995 was an increase in
the cost of average interest-bearing liabilities, increased salaries and
benefits due to the implementation of a bonus and incentive program and
increased other operating expense due to forms costs associated with the Bank's
conversion to a new hardware and software platform in the fourth quarter of
1994.
Bancorp's leverage ratio at March 31, 1995 was 6.49%, and total capital to
risk-weighted asset ratio was 11.36%, well above current minimum requirements.
See Note 2 to the accompanying consolidated financial statements for further
discussion of regulatory matters.
The past decline in the regional economy, particularly in the local real estate
market, has affected many of the Bank's borrowers' ability to repay their
loans. Also, since 1989, real estate values in Bancorp's market area have
declined substantially. While the Bank's residential and construction mortgage
lending policies have specified a 75% or less loan-to-value ratio, the decline
in values has increased the possibility of loss in the event of default.
Management believes this decline abated somewhat during 1994 and the
improvement should continue during 1995.
Net Interest Income
Net interest income is the difference between interest earned on loans and
other investments and interest paid on deposits and other sources of funds.
Net interest income was $3,706,000 in the first three months of 1995, compared
with $2,672,000 in the comparable 1994 period, an increase of $1,034,000 or
38.7%. Contributing factors to the changes in interest income and expense are
discussed below.
Total interest income amounted to $5,114,000 for the first three months of
1995, compared to $3,894,000 for the same period in 1994, an increase of 31.3%.
A key factor relating to the higher level of total interest income for 1995,
compared to the prior year, was an increase in the yield on earning assets.
During the first quarter of 1995, the yield on average interest-earning assets
increased to 8.0% from 6.7% in 1994, resulting in an increase in interest
income of $691,000. Additionally, average earning assets increased 8.6% during
the first three months
11
<PAGE> 12
of 1995 to $257,199,000 from $236,837,000 in the comparable 1994 period. This
increase in volume during the 1995 period, resulted in an additional $529,000
of interest income. Loans, as a component of earning assets, experienced the
most significant increase, from $160,643,000 million in 1994 to $187,553,000
million in 1995, an increase of 16.8%.
Total interest expense, for the three months ended March 31, 1995, was
$1,408,000, an increase of 15.2% from $1,222,000 for the same period in 1994.
This increase is, in part, the result of a 3.1% increase in average
interest-bearing liabilities. For the first quarter of 1995, average
interest-bearing liabilities increased to $196,594,000 from $190,604,000 for
the comparable 1994 period, resulting in an increase in interest expense of
$187,000.
Total interest income for the comparable periods of 1995 and 1994 was
negatively impacted by the level of nonaccrual loans, averaging $4.2 million
and $5.5 million for the first quarter of 1995 and 1994, respectively. Further
improvement in net interest income is dependent, in part, upon the continued
resolution of nonperforming assets.
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related
interest-income and expense ended March 31, 1995 and 1994. Average balances are
averages of daily closing balances, except for nonaccrual loans in 1994, which
are averages of monthly closing balances.
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------
Average Income/ Average Income/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Accruing loans $183,313 $4,142 9.1% $155,106 $3,056 8.0%
Non-accruing loans 4,240 --- --- 5,537 --- ---
- -----------------------------------------------------------------------------------------------------------
Total loans 187,553 4,142 8.9 160,643 3,056 7.7
Investment securities 69,021 963 5.6 68,583 779 4.6
Federal funds sold
and other 625 9 6.0 7,611 59 3.1
- -----------------------------------------------------------------------------------------------------------
Total interest-earning
assets $257,199 5,114 8.0 $236,837 3,894 6.7
======== ----- ======== -----
Noninterest-bearing
demand deposits $ 65,235 $ 55,203
- -----------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
NOW & Money market 69,424 263 1.5 73,278 274 1.5
Savings 56,735 278 2.0 61,503 312 2.1
Certificates of deposit 47,300 536 4.6 50,992 603 4.8
Other 23,135 331 5.7 4,831 33 2.8
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 196,594 1,408 2.9 190,604 1,222 2.6
- -----------------------------------------------------------------------------------------------------------
Total noninterest-
bearing deposits and
interest-bearing
liabilities $261,829 1,408 2.2 $245,807 1,222 2.0
======== ----- ======== -----
Net interest income(1) $3,706 $2,672
===========================================================================================================
Net interest margin(2) 5.8% 4.6%
===========================================================================================================
Interest rate spread(3) 5.8% 4.7%
===========================================================================================================
</TABLE>
(1) Interest income includes fees on loans of $57,000 and $62,000 for 1995 and
1994, respectively.
(2) Net interest margin is net interest income divided by total average
earning assets.
(3) Interest rate spread is the difference between the yield on total average
interest-earning assets and the cost of total average noninterest-bearing
deposits and interest-bearing liabilities.
13
<PAGE> 14
The following table analyzes the changes attributable to the rate and volume
components of net interest income.
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ------------------------------------------------------------------------------------------
1995 vs 1994
Increase/(decrease)
due to change in(1):
Total
Change Rate Volume
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income on Earning Assets:
Loans $1,086 $ 479 $ 607
Investment securities 184 179 5
Federal funds sold and other (50) 33 (83)
- ------------------------------------------------------------------------------------------
Total interest income 1,220 691 529
- ------------------------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-bearing
liabilities:
Now & Money market (11) 4 (15)
Savings (34) (18) (16)
Certificates of deposit (67) (29) (38)
Other 298 42 256
- ------------------------------------------------------------------------------------------
Total interest expense 186 (1) 187
- ------------------------------------------------------------------------------------------
Change in Net Interest Income $1,034 $ 692 $ 342
==========================================================================================
</TABLE>
(1) Variances were computed as follows:
Variance due to rate = change in rate multiplied by old volume.
Variance due to volume = change in volume multiplied by old rate.
Variance due to rate/volume prorated to rate and variance volumes on the
basis of gross value.
14
<PAGE> 15
NONPERFORMING ASSETS
The following table sets forth the principal portion of loans contractually
past due 90 days or more, nonaccrual loans, restructured loans and other real
estate owned at March 31, 1995, December 31, 1994 and March 31, 1994.
<TABLE>
<CAPTION>
% Change % Change
March 31, March 31,
1995 vs 1995 vs
March 31, Dec. 31, March 31, Dec. 31, March 31,
1995 1994 1994 1994 1994
- -------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past
due, on accrual status:
Mortgages:
Secured by residential
property $ 4 $ 78 $ 716 (95)% (99)%
Commercial and other --- --- --- N/M N/M
Commercial 1 6 529 (83) (100)
Home equity 112 102 200 10 (44)
Consumer and other 12 14 --- (14) N/M
- -------------------------------------------------------------------------------------------------------------
129 200 1,445 (36) (91)
- -------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgages:
Secured by residential
property $ 2,547 $ 2,659 $ 517 (4) N/M
Commercial and other 1,098 1,098 2,019 --- (46)
Commercial 500 500 1,737 --- (71)
Home equity --- 59 258 (100) (100)
Consumer and other --- --- 217 --- (100)
- -------------------------------------------------------------------------------------------------------------
4,145 4,316 4,748 (4) (13)
- -------------------------------------------------------------------------------------------------------------
Restructured loans 2,374 3,724 5,515 (36) (57)
- -------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,648 8,240 11,708 (19) (43)
Other real estate owned 291 352 889 (17) (67)
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,939 $ 8,592 $ 12,597 (19)% (45)%
=============================================================================================================
</TABLE>
N/M = not measurable or not meaningful.
15
<PAGE> 16
At March 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $4,362,000, of
which $4,145,000 were nonaccrual loans. For the three months ended March 31,
1995, the average recorded investment in impaired loans was approximately $4.5
million. Total interest in the amount of $4,800 was recognized, on accruing
impaired loans during the quarter.
At March 31, 1995, nonperforming assets included restructured loans, with
interest rates below market, totaling $4.2 million, of which $2.4 million were
current and in compliance with the terms and conditions of the modification
agreements. Two restructured loans totaling $1.8 million, which are not
performing under the terms of the restructured agreement, are included in the
nonaccrual loan category. At March 31, 1995, the Company had no commitments to
lend additional funds to borrowers with loans whose terms have been modified in
debt restructurings. The level of nonperforming assets has had a significant
negative impact on the Company's capital and earnings over the last five years.
Although management recognizes the level of nonperforming assets is still high,
it is encouraged by the downward trend since 1990 and the 45% decline from
March 31, 1994 to March 31, 1995.
It is the Company's policy to discontinue the accrual of interest on loans,
including impaired loans, when, in the opinion of management, a reasonable
doubt exists as to the timely collection of the amounts due. Additionally,
regulatory requirements generally prohibit the accrual of interest on certain
loans when principal or interest is due and remains unpaid for 90 days or more,
unless the loan is both well secured and in the process of collection.
Operating results since 1989 have been adversely impacted by the level of
nonperforming assets caused by the deterioration of borrowers' ability to make
scheduled interest and principal payments, the decline in real estate values, a
severe slowdown in business activity and a high rate of unemployment. In
addition to foregone revenue, the Bank had to provide a high level of provision
for loan losses and incurred significant collection costs and costs associated
with the management and disposition of foreclosed properties. However, during
1994 and continuing into 1995, management has seen some positive trends; e.g.,
stabilization of the local economy, reduction in vacancy rates, and renewed
activity in the real estate market, which have had a positive effect on
earnings.
The characteristics of the real estate market since 1988 include a substantial
decline in real estate property values and a significant increase in the amount
of time that properties remain on the market prior to sale. Factors
contributing to the depressed market conditions are an over supply of
properties on the market and a continued sluggish local economy. As a result,
the most significant increases in nonperforming loans since 1988 have been in
commercial mortgage loans and real estate related commercial loans. Management
has seen some recent improvement in the real estate market and the local
economy, which has had a positive effect on its efforts to resolve
nonperforming loans. Management is aggressively pursuing the collection of all
nonperforming loans and during the first quarter of 1995 collected $27,000,
charged-off $60,000, and returned $84,000 to accruing status. Management's
efforts to return nonperforming loans to performing status may be hampered by
market factors.
16
<PAGE> 17
The following table summarizes the activity on nonaccrual loans for the periods
ended March 31, 1995 and 1994.
<TABLE>
<CAPTION>
% Change
March 31,
1995 vs
March 31,
1995 1994 1994
- -----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Balance, January 1, $ 4,316 $ 5,950 (27)%
- -----------------------------------------------------------------------------
Additions --- 434 (100)
Reductions:
Repayments 27 581 (95)
Transfer to OREO --- --- ---
Charge-offs 60 741 (92)
Reinstate accruing 84 314 (73)
- -----------------------------------------------------------------------------
Total resolved 171 1,636 (90)
- -----------------------------------------------------------------------------
Balance, March 31, $ 4,145 $ 4,748 (13)%
=============================================================================
</TABLE>
In addition to the loans classified as nonperforming in the preceding table,
the Bank's internal loan review function has identified approximately $1.3
million of loans with more than normal credit risk. These loans, as well as
nonperforming loans, have been considered in the analysis of the adequacy of
the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of certain loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company
will be unable to collect the scheduled payments of principal and interest when
due according to the contractual terms of the loan agreement. The adoption of
SFAS 114 and 118 on January 1, 1995 did not materially effect the Company's
financial statement or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments on nonaccruing impaired loans are recorded as
reductions of loan principal.
17
<PAGE> 18
Management evaluates the adequacy of the allowance for loan losses on a regular
basis by considering various factors, including past loan loss experience,
delinquent and nonperforming loans and the quality and level of collateral
securing these loans, inherent risks in the loan portfolio, and current
economic and real estate market conditions. Management has performed a
loan-by-loan risk assessment of each classified loan and of a substantial
portion of the performing commercial and commercial mortgage portfolios
resulting in a specific reserve based on loss exposure. An additional
general reserve is also allocated to each of these portfolios as well as to the
residential mortgage and other loan portfolios on an overall basis, based upon
the risk category and loss experience of the given portfolio. Based upon this
review, management believes that, in the aggregate, the allowance of $3,125,000
at March 31, 1995 is adequate to absorb probable loan losses inherent in the
loan portfolio. At March 31, 1995, the valuation allowance, related to
all impaired loans totaled $600,000 and is included in the allowance for loan
losses shown on the balance sheet. The adverse real estate market in Fairfield
County, the Company's past reliance upon commercial real estate lending, the
level of charge-offs during the past five years and the continuing high level
of nonperforming loans are factors which are considered when the adequacy of
the allowance for loan losses is reviewed. There is no assurance that the
Company will not be required to make increases to the allowance in the future
in response to changing economic conditions or regulatory examinations.
The decrease in the allowance for loan losses from $3,341,000 at December 31,
1994 to $3,125,000 at March 31, 1995 reflects $631,000 of loan charge-offs
during the period, a provision for loan losses of $375,000 and recoveries of
$40,000. The charge-offs in 1995 primarily relate to loans on which a specific
reserve had been allocated at December 31, 1994, based on anticipated loss
exposure.
It is the Bank's policy to charge-off loans against the allowance for loan
losses when losses are certain. Such decisions are based upon an analysis of
the loan, a judgment as to the borrower's ability to repay and the adequacy of
collateral.
18
<PAGE> 19
The following table summarizes other selected loan and allowance for loan
losses information at March 31, 1995, December 31, 1994 and March 31, 1994.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses $ 3,125 $ 3,341 $ 2,853
Nonaccrual loans 4,145 4,316 4,748
Nonperforming loans (1) 6,648 8,240 11,708
Allowance for loan losses
as a % of nonaccrual loans 75% 77% 60%
Allowance for loan losses
as a % of nonperforming loans 47% 41% 24%
Allowance for loan losses
as a % of loans outstanding 1.69% 1.79% 1.75%
</TABLE>
(1) Includes nonaccrual loans, impaired loans in 1995, loans accruing 90 days
or more past due and restructured loans.
As the volume of new loans increased and nonaccrual loans declined, the overall
credit quality of the total loan portfolio has improved. This has positively
impacted management's estimate of the allowance for loan losses and has caused
a reduction in the allowance for loan losses ratio as a percentage of
outstanding loans.
The allowance for loan losses ratio, as a percentage of outstanding loans shown
on the preceding page, is impacted by the loans purchased from the FDIC in late
1992. If these loans (which must be repurchased by the FDIC if they become
nonperforming within three years of the purchase date) had not been included,
the allowance-to-loans outstanding ratio would have been 1.76% at March 31,
1995, 1.87% at December 31, 1994 and 1.88% for March 31, 1994.
Management is aware of its responsibility for maintaining an adequate allowance
for loan losses and an adequate system to identify credit risk and account for
it appropriately. The various regulatory examinations of the Bank have not
identified significant problem loans not already identified by management.
Management will continue to review the findings of regulatory examinations and
comply with regulatory recommendations.
A deterioration of the regional economy and weak real estate market would
adversely affect results in 1995 and lead to increased levels of loan
charge-offs, provisions for loan losses, nonaccrual loans and reductions in
total capital.
19
<PAGE> 20
The following table sets forth the activity in the allowance for loan losses
for three months ended March 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
Balance, January 1, $3,341 $3,024
- ----------------------------------------------------------------------------
Loans charged-off:
Mortgages:
Secured by residential property 27 107
Commercial and other 422 346
Commercial 32 314
Home Equity 35 ---
Consumer and other 115 34
- ----------------------------------------------------------------------------
Total loans charged-off 631 801
Recoveries on amounts previously charged-off:
Mortgages:
Secured by residential property --- 4
Commercial and other --- ---
Commercial 15 114
Home equity 4 4
Consumer and other 21 58
- ----------------------------------------------------------------------------
Total recoveries 40 180
Net loans charged-off 591 621
Provision charged to operating expenses 375 450
- ----------------------------------------------------------------------------
Balance, March 31, $3,125 $2,853
============================================================================
</TABLE>
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") totaled $291,000 and $889,000 at March 31,
1995 and 1994, respectively. During the first quarter of 1995, the Bank
recorded $60,000 of additional write-downs on real estate properties. No other
significant activity occurred during this period. During the first three
months of 1994, the Bank sold properties with a carrying value of $485,000
incurring losses of $113,000, a portion of which had been previously accrued.
In addition, in the first quarter of 1994, the Bank transferred a commercial
office building, carried at $1.3 million, from OREO to banking premises after
determining the building will be utilized for future use in operations after
the expiration of existing leases. No properties were acquired, through
foreclosure or acquisition, during the first three months of 1995 and 1994,
respectively.
20
<PAGE> 21
The following table summarizes the changes in OREO for three months ended March
31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
Balance, January 1, $ 352 $ 2,723
- -----------------------------------------------------------------------------
Sales --- (485)
Write-downs (60) ---
Other (1) (1,349)
- -----------------------------------------------------------------------------
Balance, March 31, $ 291 $ 889
=============================================================================
</TABLE>
At March 31, 1995, OREO consists primarily of single family building lots
located in the Bank's market areas of Fairfield County, Connecticut. These
properties are carried at the lower of cost or estimated fair value. The
Bank's efforts to reduce its holdings have been impacted by local market
conditions. However, the Bank is aggressively pursuing the sale of such
properties. Further material declines in the real estate market could cause
increases in the level of OREO, further losses or write-downs.
OTHER OPERATING INCOME
The following table sets forth other operating income for the three month
periods ended March 31, 1995 and 1994, and the percentage change from period to
period.
<TABLE>
<CAPTION>
Three Months Ended % Change
March 31, 1995 vs
1995 1994 1994
- ------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Trust fees $ 404 $ 391 3.3%
Service charges on deposit accounts 342 321 6.5
Realized security gains (losses) - net (210) 3 N/M
Loan sale gains 17 85 (80.0)
Mortgage servicing fees 31 34 (8.8)
Other 136 123 9.6
- ------------------------------------------------------------------------------------------------
Total other operating income $ 720 $ 957 (24.8)%
================================================================================================
</TABLE>
N/M = not measurable or not meaningful
Total other operating income for the first quarter of 1995, declined 24.8% from
1994 levels. This decline was due, primarily, to a net loss of $210,000,
realized on the sale of securities in the available for sale portfolio during
1995 as a compared to a net gain of $3,000 in the comparable 1994 period. The
security losses were incurred in connection with the repositioning of the
available for sale portfolio into higher yielding government agency securities.
21
<PAGE> 22
In addition, during the first three months of 1995, the Bank recorded a net
gain of $17,000 on the sale of $2.9 million in residential mortgage loans.
During the comparable 1994 period, the Bank sold $7.3 million in residential
mortgage loans and realized a gain of $85,000 primarily related to the
origination fees that had been collected and deferred in accordance with
Financial Accounting Standards No. 91. The reduction in residential loan sales
in the first quarter of 1995 was due, in part, to a decline in the origination
of fixed rate mortgage loans. The Bank also originates variable rate
residential mortgage loans which are generally retained for portfolio as part
of the Bank's asset/liability management program. The Bank engages in the
origination of residential mortgage loans and the sale of such loans based upon
liquidity needs and to manage interest rate risk.
Offsetting these decreases, was a $13,000 increase in Trust fees, primarily as
a result of higher estate fee income and a $21,000 increase in service charges
on deposit accounts over the 1994 period, due to the increase in the Bank's fee
schedule that occurred during the second quarter of 1994. The other income
category also increased 9.6% in 1995 due to the increased volume of wire
transfer activity and related charges and an increase in letter of credit
income.
OTHER OPERATING EXPENSE
The following table sets forth other operating expense for the three month
periods ended March 31, 1995 and 1994, and the percentage change from period to
period.
<TABLE>
<CAPTION>
Three Months Ended % Change
March 31, 1995 vs
1995 1994 1994
- ----------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Salaries and benefits $ 1,414 $ 1,344 5.2%
Occupancy - net 359 387 (7.2)
Professional fees 203 208 (2.4)
FDIC insurance premiums 176 174 1.2
Data processing 140 190 (26.3)
Furniture and equipment 76 86 (11.6)
Other real estate owned - net 65 151 (57.0)
Other insurance premiums 57 80 (28.8)
Other 344 300 14.7
- ----------------------------------------------------------------------------------------
Total other operating expense $ 2,834 $ 2,920 (3.0)%
========================================================================================
</TABLE>
N/M = not measurable or not meaningful
Total other operating expense decreased $86,000 or 3.0% from $2,920,000 in 1994
to $2,834,000 in 1995. Contributing factors are discussed below.
Other real estate owned expense declined 57.0% to $65,000 in the first quarter
of 1995 from $151,000 in 1994 primarily due to the reduced levels of foreclosed
properties.
22
<PAGE> 23
Data processing expense declined 26.2% in the first three months of 1995 to
$140,000, from $190,000 in 1994. This reduction is due primarily, to the
purchase of a new bank-wide hardware and software platform during the fourth
quarter of 1994, substantially reducing maintenance and equipment costs.
Insurance expense declined 28.8% to $57,000 in 1995 due to lower premium costs
for the Bank's insurance coverage.
Furniture and equipment expense decreased 11.6% during the first quarter of
1995, as a result of assets becoming fully depreciated, with minimal purchases
of new furniture or equipment. Occupancy costs have also declined in 1995 to
$359,000 from $387,000 in 1994 primarily due to the consolidation of previously
leased office space.
Offsetting these decreases, was an increase in salaries and benefits of 5.2% in
the first quarter of 1995 primarily as a result of a new bonus and incentive
program implemented during 1995, along with an increase in the Bank's matching
contribution to the employee 401(k) Plan.
In addition, the other expense category increased 14.7% in 1995 primarily as a
result of an increase in forms and supplies related to the installation of the
new hardware and software platform.
INCOME TAXES
The Company pays minimum income taxes as a result of utilizing its net
operating loss carryforwards. The Company recorded a deferred tax benefit of
$468,000 in the first quarter of 1995. See Note 3 to the accompanying
unaudited consolidated financial statements for further discussion.
FINANCIAL POSITION
Total assets at March 31, 1995 aggregated $281,017,000 compared with
$283,504,000 at December 31, 1994. Total loans were $184,741,000 at March 31,
1995, versus $186,648,000 at December 31, 1994. Noninterest-bearing deposits
decreased, totaling $66,458,000 at March 31, 1995, compared with $72,972,000 at
December 31, 1994. Interest-bearing deposits totaled $170,471,000 at March 31,
1995 versus $180,986,000 at December 31, 1994. The balance of short-term
borrowings was $23,296,000 at March 31, 1995 and $10,484,000 at December 31,
1994. Secured borrowings and securities sold under repurchase agreements are
included in short-term borrowings.
Beginning December 31, 1992, banks were required to have a minimum risk-based
capital ratio of 8.00%. Bancorp's total capital as a percentage of
risk-weighted assets was 11.36% at March 31, 1995, as compared to 10.45% at
December 31, 1994.
23
<PAGE> 24
An additional capital requirement is a minimum leverage ratio of Tier 1 capital
to total quarterly average assets (leverage ratio), which is intended to
supplement the risk-based capital guidelines. As discussed in Note 2 and Note
6 to the accompanying unaudited consolidated financial statements, banks are
expected to meet a minimum Tier 1 leverage ratio of 3.00%. Bancorp's leverage
ratio at March 31, 1995 was 6.49%, exceeding the minimum requirements.
The Company's capital resources are discussed further in Note 2 and Note 6
to the March 31, 1995 unaudited consolidated financial statements and in the
Capital Resources section included elsewhere herein.
LIQUIDITY
Liquidity management involves the ability to meet the cash flow requirements of
depositors who want to withdraw funds or borrowers who need assurance that
sufficient funds will be available to meet their credit needs. The objective of
asset liquidity management is to determine and maintain an appropriate level of
liquid interest-earning assets. Aside from cash on hand and due from banks,
the Bank's more liquid assets are Federal funds sold and securities available
for sale. On a daily basis, the Bank lends its excess funds to other
commercial institutions in need of Federal funds. Such cash and cash
equivalents totaled $16,963,000 or 6.0% of total assets at March 31, 1995, as
compared with $17,924,000 or 6.3% of total assets at December 31, 1994.
Securities available for sale were $22,541,000 at March 31, 1995 compared with
$27,276,000 at December 31, 1994.
Demand deposits, regular savings, money market accounts and NOW deposits from
consumer and commercial customers are a relatively stable, low cost source of
funds which comprise a substantial portion of funding of the Bank's
interest-earning assets. Other sources of asset liquidity include loan and
mortgage-backed security principal and interest payments, maturing securities
and loans, and earnings on investments.
In addition, the Bank has two unsecured lines of credit with correspondent
banks totaling $5,000,000. There were no borrowings under these lines at March
31, 1995.
Additional sources of liquidity are available to the Bank through the Federal
Reserve Bank's discount window and the sale of certain investment securities to
securities firms and correspondent banks under repurchase agreements. Such
agreements are generally short- term. The discount window, if needed, would
allow the Bank to cover any short-term liquidity needs without reducing earning
assets.
Management believes the above sources of liquidity are adequate to meet the
Bank's funding needs in 1995 and the foreseeable future. Bancorp has minimal
operations and therefore neither generates nor uses a significant amount of
funds.
24
<PAGE> 25
The following table provides a summary of outstanding loan commitments and
standby letters of credit at March 31, 1995.
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
Loan commitments:
Residential mortgage $ 1,417
Residential construction 796
- ---------------------------------------------------------------------
Total 2,213
- ---------------------------------------------------------------------
Lines of Credit commitments:
Commercial 13,189
Home equity 16,308
Personal 2,440
- ---------------------------------------------------------------------
Total 31,937
- ---------------------------------------------------------------------
Commercial letters of credit 761
Standby letters of credit 2,410
- ---------------------------------------------------------------------
Total commitments and letters of credit $ 36,496
=====================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability management program focuses on maximizing net
interest income while minimizing balance sheet risk by maintaining what
management considers to be an appropriate balance between the volume of assets
and liabilities maturing or subject to repricing within the same interval.
Asset/liability management also focuses on maintaining adequate liquidity and
capital. Interest rate sensitivity has a major impact on the Bank's earnings.
Proper asset/liability management involves the matching of short-term interest
sensitive assets and liabilities to reduce interest rate risk. Interest rate
sensitivity is measured by comparing the dollar difference between the amount
of assets repricing within a specified time period and the amount of
liabilities repricing within the same time period. This dollar difference is
referred to as the rate sensitivity or maturity "GAP".
Management's goal is to maintain a cumulative one year GAP of under 10% of
total assets. At March 31, 1995 the cumulative one year GAP as a percentage of
total assets was 3.48%. The Bank concentrates on originating adjustable rate
loans to hold in its loan portfolio in order to reduce interest rate risk.
Deregulation of deposit instruments has allowed the Bank to generate deposit
liabilities whose repricing more closely matches that of its loans.
25
<PAGE> 26
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at March 31, 1995:
<TABLE>
<CAPTION>
Maturity/Repricing Intervals
- ----------------------------------------------------------------------------------------------------------
Over
3 Mos
3 Months through 1 - 5 Over 5
or Less 1 Year Years Years Total
- ----------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans(1) $ 85,167 $ 58,701 $ 29,683 $ 7,045 $180,596
Investment securities (2) 22,541 --- 31,874 15,405 69,820
Federal funds sold and other 653 --- --- --- 653
- ----------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 108,361 58,701 61,557 22,450 251,069
- ----------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
NOW & Money market deposits 66,833 --- --- --- 66,833
Certificates of deposit and other 16,240 16,225 16,926 --- 49,391
Savings deposits 54,247 --- --- --- 54,247
Short-term borrowings 23,296 --- --- --- 23,296
- ----------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 160,616 16,225 16,926 --- 193,767
==========================================================================================================
GAP $ (52,255) $ 42,476 $ 44,631 $ 22,450 $ 57,302
==========================================================================================================
Cumulative GAP $ (52,255) $ (9,779) $ 34,852 $ 57,302
==========================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 67% 94% 118% 130%
==========================================================================================================
</TABLE>
(1) Excludes nonaccrual loans of $4,145,000.
(2) Securities available for sale are included in the "3 Month or Less"
category.
The table above shows repricing intervals of the Company's rate-sensitive
assets and rate-sensitive liabilities as of March 31, 1995. The time periods
indicated in the table represent the shorter of the remaining time before the
asset or liability matures or can be repriced. The principal amount of each
asset and liability is included in the period in which it matures or reprices.
26
<PAGE> 27
Nonaccrual loans have been excluded from the rate-sensitive assets. Regular
savings accounts, money market accounts and NOW deposits have been included in
the "3 Months or Less" category. However, these deposits have historically
remained stable and are an integral part of the Bank's funding and
asset/liability management strategy.
Noninterest-bearing demand deposits of $66,458,000 have been excluded from the
table. These deposits, which also have historically been stable, are used to
fund net interest rate sensitive assets beyond three months.
One measure of interest rate sensitivity is the excess or deficiency of assets
that mature or reprice in one year or less. As shown in the preceding table,
rate-sensitive assets that mature or reprice in one year total $167,062,000 and
rate-sensitive liabilities that mature or reprice in one year total
$176,841,000. The resulting negative one year rate-sensitive GAP is
$9,779,000. During periods of rising interest rates, a negative GAP position
can be a disadvantage if more rate-sensitive liabilities than rate- sensitive
assets reprice at higher rates, creating an adverse impact on net interest
income. This impact may be mitigated somewhat if the level of nonaccrual loans
and other real estate owned declines, resulting in an increase in
rate-sensitive assets. During a falling rate environment, a negative rate GAP
can be an advantage. However, the impact of rising and falling interest rates
on net interest income may not directly correlate to the Company's GAP position
since interest rate changes and the timing of such changes can be impacted by
management's actions as well as by competitive and market factors. As interest
rates change, rates earned on assets do not necessarily move in parallel with
rates paid on liabilities.
CAPITAL RESOURCES
Stockholders' equity increased to $18,366,000 at March 31, 1995 from
$16,398,000 at December 31, 1994, primarily due to earnings of $1,660,000 and a
reduction in the net unrealized depreciation of the securities available for
sale portfolio during the first quarter of 1995.
At March 31, 1995, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 6.49% and its total capital to risk- weighted asset ratio was
11.36%, exceeding minimum requirements.
In February 1992, the Company completed a private placement of 46,700
investment units, resulting in total proceeds of $4,670,000 and net proceeds,
after expenses, of $4,320,000. Each unit consists of one share of Series A
Noncumulative Convertible Preferred Stock and fifty warrants. These warrants
became exercisable on January 1, 1994 at an exercise price of $.75 per share.
As of March 31, 1995, 87,500 warrants had been exercised. If the remaining
warrants outstanding at March 31, 1995 are exercised, this would result in
additional capital for the Company of $1,686,000. All warrants expire on
December 31, 1996. See Note 6 to the accompanying unaudited consolidated
financial statements at March 31, 1995 for additional information on warrants
exercised subsequent to March 31, 1995.
27
<PAGE> 28
PART II - OTHER INFORMATION
===============================================================================
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On January 12, 1995, Bancorp filed a Form 8-K to report the termination of the
Order to Cease and Desist by the FDIC and the Commissioner.
The exhibits that are filed with this Form 10-Q, or that are incorporated by
reference, are set forth in the following exhibit index.
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Reference
- -------------------------------------------------------------------------------
<S> <C> <C>
3(a) Restated Certificate Exhibit 3(a) to
of Incorporation Annual Report
filed May 16, 1990 on Form 10-K
for the year ended
December 31, 1991
3(b) Certificate of Exhibit 3(b) to
Designation filed Annual Report
February 21, 1992 on Form 10-K
for the year ended
December 31, 1991
3(c) By-Laws, as amended Exhibit 3(b) to
effective Annual Report
October 25, 1990 on Form 10-K
for the year ended
December 31, 1990
3(d) By-Laws, as amended Exhibit 3(d) to
effective Annual Report
April 29, 1993 on Form 10-K
for the year ended
December 31, 1992
4(a) Specimen Common Stock Exhibit 4 to
Certificate Registration
Statement
No. 2-93773
4(b) Specimen Series A Exhibit 4(b) to
Convertible Annual Report
Preferred Stock on Form 10-K
Certificate for the year ended
December 31, 1991
4(c) Specimen Warrant Exhibit 4(c) to
Certificate Annual Report
on Form 10-K
for the year ended
December 31, 1991
10(a) Weston Lease dated Exhibit 10(c) to
June 5, 1979 Registration
Statement
No. 2-93773
</TABLE>
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Reference
- -------------------------------------------------------------------------------
<S> <C> <C>
10(b) Weston lease dated Exhibit 10(e) to
August 23, 1979 Annual Report
on Form 10-K
for the year ended
December 31, 1989
10(c) Weston lease modification Exhibit 10(c) to
dated July 1, 1993 Annual Report
on Form 10-K
for the year ended
December 31, 1993
10(d) Trust Department lease Exhibit 10(e) to
dated November 7, 1986 Annual Report
on Form 10-K
for the year ended
December 31, 1992
10(e) Gault Building lease Exhibit 10(f) to
dated April 1, 1987 Annual Report
on Form 10-K
for the year ended
December 31, 1992
10(f) Shelton Operations Exhibit 10(h) to
Center lease dated Annual Report
March 22, 1991 on Form 10-K for
the year ended
December 31, 1991
10(g)(1) Agreements with Exhibit 10(i)(1) to
Certain Executives: Annual Report
Employment & Option on Form 10-K for
Agreements for: the year ended
A) Michael H. Flynn December 31, 1992
B) Thomas P. Bilbao
C) Richard T. Cummings, Jr.
Executive Agreement for:
A) Arnold Levine
</TABLE>
30
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Reference
- -------------------------------------------------------------------------------
<S> <C> <C>
10(g)(2) Agreements of Waiver of Exhibit 10(i)(2) to
certain provisions of Annual Report
agreements with on Form 10-K
executives identified for the year ended
as Exhibit 10(g)(1) December 31, 1992
above:
Employment & Option
Agreements for:
A) Michael H. Flynn
B) Richard T. Cummings, Jr.
Executive Agreement for:
A) Arnold Levine
10(g)(3) Stock Option Exhibit 10(i)(3) to
Agreements with Annual Report
Executives: on Form 10-K
A) Michael H. Flynn for the year ended
B) Thomas P. Bilbao December 31, 1992
C) Richard T. Cummings, Jr.
10(g)(4) Employment Agreements with Exhibit 10(i)(4) to
Certain Executives: Annual Report
A) Richard L. Card on Form 10-K
for the year ended
December 31, 1993
10(g)(5) Stock Option Agreements with Exhibit 10(i)(5) to
Certain Executives: Annual Report
A) William B. Laudano, Jr. on Form 10-K
B) Richard L. Card for the year ended
December 31, 1993
10(g)(6) Employment Agreement with Exhibit 10(g)(6) to
William B. Laudano, Jr. Annual Report
on form 10-K
for the year ended
December 31, 1994
10(h) Supplemental Executive Exhibit 10(j) to
Retirement Plan dated Annual Report
July, 1987 on Form 10-K
for the year ended
December 31, 1992
</TABLE>
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Reference
- -------------------------------------------------------------------------------
<S> <C> <C>
10(i) Directors Retirement Exhibit 10(m) to
Plan Annual Report
on Form 10-K
for the year ended
December 31, 1992
10(j) 1985 Incentive Stock Exhibit 10(n) to
Option Plan restated Annual Report
January 1, 1990 on Form 10-K
for the year ended
December 31, 1992
11 Statement Regarding Filed herewith
Computation of Per
Share Earnings
27 Financial Data Schedule Filed herewith
</TABLE>
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Bancorp
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WESTPORT BANCORP, INC.
DATE May 12, 1995 BY /s/Michael H. Flynn
---------------------------
Michael H. Flynn
President
Chief Executive Officer
DATE May 12, 1995 BY /s/William B. Laudano, Jr.
---------------------------
William B. Laudano, Jr.
Senior Vice President
Chief Financial Officer
Chief Accounting Officer
33
<PAGE> 34
EXHIBIT INDEX
--------------
Exhibit No. Description
----------- -----------
11 Statement Regarding Computation of Per
Share Earnings
27 Financial Data Schedule
<PAGE> 1
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
INCOME BEFORE ADJUSTMENT $ 1,660,000 $ 251,000
INTEREST ADJUSTMENT (1) 19,000 20,000
- --------------------------------------------------------------------------
NET INCOME $ 1,679,000 $ 271,000
==========================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,249,474 3,087,849
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK EQUIVALENTS:
Net shares assumed to be
issued for dilutive stock
options and warrants 2,631,757 2,967,537
Shares assumed to be
issued on conversion of
preferred stock 4,395,000 4,495,000
- --------------------------------------------------------------------------
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,276,231 10,550,386
==========================================================================
EARNINGS PER COMMON SHARE $ 0.16 $ 0.03
==========================================================================
</TABLE>
(1) Pursuant to the "treasury stock method" - represents an adjustment to
interest from the assumed use of a portion of the proceeds from the exercise
of options and warrants to retire a portion of short-term borrowings in 1995
and to invest in short-term debt securities in 1994.
34
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 16,963
<INT-BEARING-DEPOSITS> 170,471
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,541
<INVESTMENTS-CARRYING> 47,279
<INVESTMENTS-MARKET> 45,050
<LOANS> 184,741
<ALLOWANCE> 3,125
<TOTAL-ASSETS> 281,017
<DEPOSITS> 236,929
<SHORT-TERM> 23,296
<LIABILITIES-OTHER> 2,426
<LONG-TERM> 0
<COMMON> 33
0
1
<OTHER-SE> 18,332
<TOTAL-LIABILITIES-AND-EQUITY> 281,017
<INTEREST-LOAN> 4,142
<INTEREST-INVEST> 963
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 5,114
<INTEREST-DEPOSIT> 1,086
<INTEREST-EXPENSE> 322
<INTEREST-INCOME-NET> 3,706
<LOAN-LOSSES> 375
<SECURITIES-GAINS> (210)
<EXPENSE-OTHER> 2,834
<INCOME-PRETAX> 1,217
<INCOME-PRE-EXTRAORDINARY> 1,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,660
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 8.0
<LOANS-NON> 4,145
<LOANS-PAST> 129
<LOANS-TROUBLED> 2,374
<LOANS-PROBLEM> 1,300
<ALLOWANCE-OPEN> 3,341
<CHARGE-OFFS> 631
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 3,125
<ALLOWANCE-DOMESTIC> 3,125
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
