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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
0-12936
Commission file number
WESTPORT BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1094350
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
87 Post Road East
Westport, Connecticut 06880
(Address of principal executive office and zip code)
(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 $.01 par value
common stock as of October 31, 1995 is 5,381,475 shares.
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<PAGE>
WESTPORT BANCORP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Condition -- September 30, 1995
(unaudited)
and December 31, 1994 3
Consolidated Statements of Income -- Three Months and Nine
Months
Ended September 30, 1995 and 1994 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity --
Nine 5
Months Ended September 30, 1995 and 1994 (unaudited)
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1995 and 1994 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 31
Item 2 -- Changes in Securities 31
Item 3 -- Defaults Upon Senior 31
Securities
Item 4 -- Submission of Matters to a 31
Vote of Security Holders
Item 5 -- Other Information 31
Item 6 -- Exhibits and Reports on Form 31
8-K
Signatures 36
Exhibit 11 Statement Regarding Computation of Per Share Earnings 37
</TABLE>
<PAGE>
PART I, ITEM 1 -- FINANCIAL INFORMATION.
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
(unaudited)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 14,135 $ 17,924
Federal funds sold 9,000 ---
Cash and cash equivalents 23,135 17,924
Securities available for sale, at market value 42,062 27,276
Securities held to maturity (market value: September 30,
1995, $42,526; December 31, 1994, $39,678) 43,381 43,206
Total securities 85,443 70,482
Loans 178,051 186,648
Allowance for loan losses (3,277) (3,341)
Loans - net 174,774 183,307
Premises and equipment - net 5,085 5,137
Accrued interest receivable 2,012 1,758
Other real estate owned - net --- 352
Other assets 6,144 4,544
TOTAL ASSETS $296,593 $283,504
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 71,828 $ 72,972
Interest-bearing deposits 186,944 180,986
Total deposits 258,772 253,958
Short-term borrowings 10,735 10,484
Other liabilities 3,854 2,664
Total liabilities 273,361 267,106
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000
shares; outstanding 42,350 shares at September 30,
1995, 43,950 shares at December 31, 1994 1 1
Common stock - $.01 par value; authorized 20,500,000
shares; outstanding, 5,380,367 shares at September
30, 1995, 3,211,752 shares at December 31, 1994 54 32
Additional paid in capital 22,965 21,459
Retained earnings (deficit) 302 (4,680)
Net unrealized depreciation on securities available (90) (414)
for sale
Total stockholders' equity 23,232 16,398
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $296,593 $283,504
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 3,977 $ 3,686 $12,152 $ 9,921
Securities 1,132 904 3,079 2,548
Federal funds sold and other 48 16 120 115
Total interest income 5,157 4,606 15,351 12,584
INTEREST EXPENSE:
Deposits 1,349 1,084 3,597 3,407
Short-term borrowings 129 75 786 131
Total interest expense 1,478 1,159 4,383 3,538
Net interest income 3,679 3,447 10,968 9,046
Provision for loan losses 375 450 1,125 1,350
Net interest income after
provision for loan losses 3,304 2,997 9,843 7,696
OTHER OPERATING INCOME:
Trust fees 486 439 1,355 1,251
Service charges on deposit accounts 324 378 1,010 1,042
Realized security gains (losses) - net 4 --- (229) 3
Loan sale gains - net 7 24 45 109
Mortgage service fees 36 41 101 113
Other 134 133 417 383
Total other operating income 991 1,015 2,699 2,901
OTHER OPERATING EXPENSE:
Salaries and benefits 1,411 1,295 4,171 3,912
Occupancy - net 366 397 1,057 1,150
Professional fees 211 190 623 634
FDIC insurance premiums 17 180 370 517
Data processing 141 186 423 559
Furniture and equipment 73 85 211 258
Other insurance premiums 54 69 166 222
Other real estate owned - net 62 53 171 270
Other 420 351 1,126 990
Total other operating expense 2,755 2,806 8,318 8,512
Income before income taxes 1,540 1,206 4,224 2,085
Income tax benefit (585) (752) (1,143) (1,064)
NET INCOME $ 2,125 $ 1,958 $ 5,367 $ 3,149
NET INCOME PER COMMON SHARE $ 0.20 $ 0.19 $ 0.52 $ 0.31
Weighted average number of common
shares and common equivalent
shares outstanding 10,474,022 10,246,864 10,295,922 10,177,196
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
(unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
PREFERRED STOCK COMMON STOCK Additional Retained Depreciation
Number of Number of Paid in Earnings 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 --- --- --- --- --- 3,149 --- 3,149
Issuance of Common Stock -
Warrants exercised --- --- 12,500 --- 10 --- --- 10
Employee Options exercised --- --- 17,500 --- 35 --- --- 35
Exercise of 1992 Rights --- --- 13 --- --- --- --- ---
Offering
Dividend Reinvestment and
Stock Purchase Plan --- --- 374 --- 1 --- --- 1
Stock Conversion (1,000) --- 100,000 1 (1) --- --- ---
Net change in unrealized
depreciation on securities
available for sale --- --- --- --- --- --- (243) (243)
Balance September 30, 1994 43,950 $ 1 3,211,752 $ 32 $21,460 $ (5,893) $ (243) $15,357
Balance, January 1, 1995 43,950 $ 1 3,211,752 $ 32 $21,459 $ (4,680) $ (414) $16,398
Net income --- --- --- --- --- 5,367 --- 5,367
Issuance of Common Stock -
Warrants exercised --- --- 1,997,000 21 1,477 --- --- 1,498
Employee Options exercised --- --- 9,000 --- 18 --- 18
---
Stock Conversion (1,600) --- 160,000 1 (1) --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 2,615 --- 12 --- --- 12
Dividends Paid -
Preferred Stock --- --- --- --- --- (170) --- (170)
Common Stock --- --- --- --- --- (215) --- (215)
Net change in unrealized
depreciation on securities
available for sale --- --- --- --- --- --- 324 324
Balance, September 30, 1995 42,350 $ 1 5,380,367 $ 54 $22,965 $ 302 $ (90) $23,232
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
<S> <C> <C> <C>
1995 1994
OPERATING ACTIVITIES:
Net income $ 5,367 $ 3,149
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,125 1,350
Recognition of deferred tax asset (1,218) (1,100)
Depreciation, amortization and accretion 626 788
Losses on other real estate owned - net 162 172
Loan sale gains - net (45) (109)
Realized security (gains) losses - net 229 (3)
Decrease (increase) in accrued interest (254) 788
receivable
Increase in other assets (382) (417)
Increase (decrease) in other liabilities 1,190 (38)
Net cash provided by operating activities 6,800 4,580
INVESTING ACTIVITIES:
Proceeds from maturities or calls of securities -
Available for sale --- 37,890
Held to maturity 1,000 12,507
Proceeds from sales of securities -
Available for sale 28,859 4,253
Principal collected on securities 4,100 856
Purchases of securities -
Available for sale (43,904) (21,404)
Held to maturity (4,999) (14,454)
Increase in loans - net (6,390) (30,672)
Loans repurchased by the FDIC 1,988 1,432
Proceeds from sales of loans 12,763 12,691
Purchase of loans (997) (817)
Proceeds from sales of other real estate owned 279 1,363
Additions to other real estate owned --- (111)
Purchases of premises and equipment (496) (331)
Net cash (used in) provided by investing (7,797) 3,203
activities
FINANCING ACTIVITIES:
Increase (decrease) in noninterest-bearing deposits (1,144) 6,007
- net
Increase (decrease) in interest-bearing deposits - 5,958 (18,517)
net
Increase in short-term borrowings - net 251 13,266
Proceeds from issuance of Common Stock - net 1,528 45
Dividends (385) ---
Net cash used in financing activities 6,208 801
Increase in cash and cash equivalents 5,211 8,584
Cash and cash equivalents at beginning of year 17,924 13,799
Cash and cash equivalents at end of period $ 23,135 $ 22,383
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
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 the interim financial statements, management has
made estimates and assumptions that affect the reported amounts of assets
and liabilities 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 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.
On March 16, 1995, the Federal Reserve Bank of New York ("FRBNY") removed
all restrictions it had imposed on the Company in October 1991.
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 and the ratio of Tier 1 capital
to total quarterly average assets (leverage ratio).
<PAGE>
The following summarizes the minimum capital requirements and the Company's
capital position (there are no significant differences between the Bank's
and the Company's capital ratios) at September 30, 1995.
<TABLE>
<CAPTION>
Company's Minimum Capital
Capital Ratio Capital Position Requirements
<S> <C> <C>
Total Capital to Risk-Weighted Assets 13.91 % 8.0 %
Tier 1 Capital to Risk-Weighted Assets 12.65 4.0
Tier 1 Capital to Average Assets (Leverage 8.11 3.0 (1)
Ratio)
</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
September 30, 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
level at the well capitalized classification. 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 and nonaccrual loans, effecting the ability of the Company to
maintain the well capitalized classification, and resulting in reductions
in income and total capital.
NOTE 3 - INCOME TAXES
The 1995 nine month provision for income taxes is comprised of a $61,500
current federal provision, a $13,500 current state provision and the
$1,218,000 reversal of the previously established deferred tax valuation
allowance. The 1994 nine month provision for income taxes is comprised of
a $24,000 federal provision, a $12,000 state provision and a $1,100,000
reversal of a portion of the previously established deferred tax allowance.
As a result of the Company's net operating losses in prior years, the
Company had net operating loss carryforwards ("NOL's") of approximately
$7.9 million at September 30, 1995 for federal and state tax return
purposes, which is available to offset future tax return income. At
September 30, 1995 and 1994, the Company had recorded, for financial
statement purposes, net deferred tax assets (included in Other Assets) of
$2,868,000 and $1,450,000, respectively, for anticipated future utilization
of its net operating loss carryforwards ("NOL's") as an offset against
future taxable income. With the exception of the portion of its NOL
expected to be utilized as an offset to the Company's financial statement
income for the fourth quarter of 1995, at September 30, 1995, the Company
has recognized substantially all of the financial statement benefit of its
deferred tax assets.
<PAGE>
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 September 30, 1995, the recorded net deferred tax
asset, reflected in the accompanying statement of condition, included
$536,000 which is "ineligible" for regulatory capital purposes. At
September 30, 1994, no portion of the $1,450,000 deferred tax asset was
disqualified from capital for regulatory purposes.
For the nine month periods ended September 30, 1995 and September 30, 1994,
the Company made cash payments for income taxes of approximately $78,250
and $36,880, respectively.
NOTE 4 - EARNINGS PER SHARE
Earnings per share were computed by dividing earnings (adjusted earnings
for the 1994 periods) by the weighted average number of common shares and
common share equivalents outstanding. For the quarter ended September 30,
1995 and 1994, the computation includes 5,373,006 and 3,197,404 weighted
average shares outstanding and 866,016 and 2,654,460 weighted average
common equivalent shares, respectively, computed under the treasury stock
method. Common equivalent shares include 332,565 and 2,322,500 warrants
for the quarters ended September 30, 1995 and 1994, respectively. The
earnings per share computations also include 4,235,000 and 4,395,000
weighted average common shares for the three months ended September 30,
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 1994, computed
under the treasury stock method.
For the nine months ended September 30, 1995 and 1994, the computation
includes 4,469,681 and 3,127,736 weighted average common shares outstanding
and 1,522,669 and 2,654,460 weighted average common equivalent shares,
respectively, computed under the treasury stock method. The earnings per
share computations also include 4,303,571 and 4,395,000 weighted average
common shares in 1995 and 1994, respectively, issuable upon the adjusted
conversion of preferred stock. 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 these loans be
measured based on the present value of the related expected future cash
flows discounted at the loan's effective interest rate or the fair value of
the related 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 affect the Company's
financial statements or the amount of the allowance for loan losses.
<PAGE>
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 September 30, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114 and 118 totaled
$5,569,000, of which $3,397,000 were nonaccrual loans. The Company has
elected to classify all restructured loans, including those restructured
prior to January 1, 1995, in accordance with SFAS 114 and 118. At
September 30, 1995, the valuation allowance related to all impaired loans,
totaled $1,470,000 and is included in the allowance for loan losses on the
statement of condition. For the three months ended September 30, 1995, the
average recorded investment in impaired loans was approximately $5,976,000.
Total interest in the amount of $42,000 was recognized on accruing impaired
loans during the quarter.
The following table sets forth the activity in the allowance for loan
losses for nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
($ in thousands)
<S> <C> <C>
Balance, January 1, $3,341 $3,024
Loans charged-off 1,453 1,638
Recoveries on amounts previously charged-off 175 467
Net loans charged-off 1,278 1,171
Provision charged to operating expenses 1,125 1,350
Other 89 ---
Balance, September 30, $3,277 $3,203
</TABLE>
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS 121 applies to financial
statements for fiscal years beginning after December 15, 1995. The Company is
currently in the process of evaluating the impact of this announcement on its
financial statements; however, it has not yet qualified such impact.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for
Mortgage Servicing Rights". SFAS 122 addresses the accounting for mortgage
servicing rights for purchased as well as originated mortgages by a
servicer. Additionally, SFAS 122 requires the capitalization of the
<PAGE>
fair value of mortgage servicing rights and amortization of these rights in
proportion to the net servicing income over the period during which
servicing income is expected. SFAS 122 applies to financial statements for
fiscal years beginning after December 15, 1995. The Company is currently
in the process of evaluating the impact of this pronouncement on its
financial statements; however, it has not yet quantified such impact.
NOTE 6 - SUBSEQUENT EVENTS
On October 19, 1995, the Company declared its third consecutive quarterly
dividend of $0.025 per common share and $2.50 per preferred share to
shareholders of record as of November 3, 1995, payable on November 20,
1995.
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.
The Company reported net income for the first nine months of 1995 of
$5,367,000, or $0.52 per common share, compared to net income of
$3,149,000, or $0.31 per common share for the comparable 1994 period, an
increase of 70.4%. Contributing to the improved results in 1995 was a
decline in nonperforming assets and related costs, increases in average
earning assets, an improved net interest margin and the continued reduction
of operating expenses. Results of operations for the first nine months of
1995 included the recognition of a net deferred tax asset of $1,218,000 and
a net loss on the sale of securities totaling $229,000. Earnings from core
operations (income before income taxes, excluding non-recurring gains and
losses) for the nine months ended September 30, 1995 have increased by more
than 123% over the same period last year. Excluding the recognition of
deferred tax assets, securities losses and loan sale gains, core earnings
for the nine months ended September 30, 1995 totaled $4,408,000. By
contrast, at September 30, 1994, excluding a net deferred tax asset of
$1,100,000, and gains on the sale of securities and loans, core earnings
totaled $1,973,000.
<PAGE>
During the third quarter of 1995, the Company reported net income of
$2,125,000, or $0.20 per common share, compared to net income of $1,958,000
or $0.19 per common share for the comparable 1994 period, an increase of
8.5%. Net income for the 1995 quarter included the recognition of deferred
tax assets of $600,000 and net gains on the sale of securities and loans of
$11,000, as compared to the recognition in the third quarter of 1994 of a
net deferred tax asset of $766,000 and $24,000 relating to loan sale gains.
Additionally, net income for the third quarter of 1995 included a rebate of
$112,000 from the Federal Deposit Insurance Corporation as a result of a
reduction in insurance premiums.
Negatively impacting results for both the three and nine months ended
September 30, 1995 was an increase in the Company's cost of funds and an
increase in salaries and benefits, in part, related to the implementation
of a bonus and incentive program. Further, the nine month period ending
September 30, 1995 includes an increase in other operating expenses related
to costs associated with the Bank's conversion to a new hardware and
software system in the fourth quarter of 1994 and includes the costs of
opening and operating a new branch bank facility in the third quarter of
1995.
The past decline in the regional economy, particularly in the local real
estate market, has impacted many of the Company's borrowers' ability to
repay their loans. Also, since 1989, real estate values in the Company's
market area have declined substantially. While the Company'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 that this decline abated
somewhat during 1994 and that the improvement has continued 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 $10,968,000 for the first nine months of 1995,
compared with $9,046,000 in the comparable 1994 period, an increase of
$1,922,000 or 21.2%. For the third quarter of 1995, net interest income
increased $232,000 to $3,679,000 or 6.7% over the 1994 third quarter figure
of $3,447,000. Contributing factors to the changes in interest income and
expense are discussed below.
Total interest income amounted to $15,351,000 for the first nine months of
1995, compared to $12,584,000 for the same period in 1994, an increase of
22.0%. For the third quarter of 1995, total interest income increased
$551,000, or 12.0% to $5,157,000 from $4,606,000 for the same period in
1994.
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 nine months of 1995, the yield on average
interest-earning assets increased to 8.0% from 6.9% in 1994, resulting in
an increase in interest income of $1,435,000. Additionally, average
interest-earning assets increased 5.4% during the first nine months of 1995
to $256,244,000 from $243,166,000 in the
<PAGE>
comparable 1994 period. This increase in volume during the 1995 period
resulted in an additional $1,332,000 of interest income. Accruing loans,
as a component of earning assets, experienced the most significant
increase, from $162,160,000 in 1994 to $179,020,000 in 1995, an increase of
10.4%. Positively impacting the third quarter of 1995, the yields on
average interest-earning assets increased to 8.0% from 7.4%, resulting in
$376,000 of additional interest income. In addition, average earning
assets increased 3.3% to $255,778,000, positively impacting interest income
by $175,000, while average non-accruing loans declined 30.6% from
$5,428,000 in the third quarter of 1994 to $3,766,000 in the third quarter
of 1995.
Total interest expense for the nine months ended September 30, 1995, was
$4,383,000, an increase of 23.9% from $3,538,000 for the same period in
1994. This increase is, in part, the result of the average interest rate
on deposits and other interest-bearing liabilities increasing from 1.9%
during the first three quarters of 1994 to 2.3% during the first three
quarters of 1995, increasing interest expense by $438,000. For the third
quarter of 1995, interest expense increased $319,000 or 27.5% to
$1,478,000, from $1,159,000 for the same period in 1994. During the
quarter, the average interest rate on deposits and other interest-bearing
liabilities increased to 2.3% in 1995 from 1.8% in the comparable 1994
period, resulting in an increase in expense of $207,000. An increase in
the average balance of total interest bearing-liabilities, in both the
three and nine month periods of 1995, resulted in an increase in interest
expense of $112,000 and $407,000, respectively.
Total interest income for the comparable periods of 1995 and 1994 was
negatively impacted by the level of nonaccrual loans, which averaged $4.1
million and $5.7 million for the first nine months of 1995 and 1994,
respectively. Further improvement in net interest income is dependent, in
part, upon the continued resolution of nonperforming assets.
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related interest
income and expense during the three and nine month periods ended September
30, 1995 and 1994. Average balances are averages of daily closing balances,
except for nonaccrual loans in 1994, which are averages of monthly closing
balances.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
1995 1994
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Accruing loans $174,383 $ 3,977 9.1% $169,445 $3,686 8.7%
Non-accruing loans 3,766 --- --- 5,428 --- ---
Total loans 178,149 3,977 8.9 174,873 3,686 8.4
Investment securities 74,344 1,132 6.1 71,286 904 5.1
Federal funds sold
and other 3,285 48 5.7 1,537 16 4.1
Total interest-earning
assets $255,778 5,157 8.0 $247,696 4,606 7.4
Noninterest-bearing
demand deposits $ 68,599 $ 61,830
Interest-bearing
liabilities:
NOW & Money market 68,210 296 1.7 73,823 268 1.4
Savings 49,334 247 2.0 65,272 331 2.0
Certificates of 60,616 792 5.2 45,901 478 4.1
deposit
Other 9,754 143 5.8 7,619 82 4.3
Total interest-bearing
liabilities 187,914 1,478 3.1 192,615 1,159 2.4
Total noninterest-
bearing deposits and
interest-bearing
liabilities $256,513 1,478 2.3 $254,445 1,159 1.8
Net interest income(1) $3,679 $3,447
Net interest margin(2) 5.7% 5.5%
Interest rate spread(3) 5.7% 5.6%
</TABLE>
(1)INTEREST INCOME INCLUDES LOAN FEES OF $57,000 AND $96,000 FOR 1995 AND
1994, RESPECTIVELY.
(2)NET INTEREST MARGIN IS NET INTEREST INCOME DIVIDED BY TOTAL AVERAGE
EARNING ASSETS.
(3)INTEREST RATE SPREAD IS THE DIFFERENCE BETWEEN THE YIELD ON TOTAL
AVERAGE INTEREST-EARNING ASSETS AND THE COST OF TOTAL AVERAGE NONINTEREST-
BEARING DEPOSITS AND INTEREST-BEARING LIABILITIES.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Accruing loans $179,020 $12,152 9.1% $162,160 $9,921 8.2%
Non-accruing loans 4,141 --- --- 5,665 --- ---
Total loans 183,161 12,152 8.9 167,825 9,921 7.9
Investment securities 70,385 3,079 5.8 70,889 2,548 4.8
Federal funds sold
and other 2,698 120 5.9 4,452 115 3.4
Total interest-earning
assets $256,244 15,351 8.0 $243,166 12,584 6.9
Noninterest-bearing
demand deposits $ 66,668 $ 58,709
Interest-bearing
liabilities:
NOW & Money market 67,948 832 1.6 73,898 809 1.5
Savings 52,701 783 2.0 63,756 966 2.0
Certificates of 52,723 1,948 4.9 48,605 1,612 4.4
deposit
Other 18,669 820 5.9 5,568 151 3.6
Total interest-bearing
liabilities 192,041 4,383 3.1 191,827 3,538 2.5
Total noninterest-
bearing deposits and
interest-bearing
liabilities $258,709 4,383 2.3 $250,536 3,538 1.9
Net interest income(1) $10,968 $9,046
Net interest margin(2) 5.7% 5.0%
Interest rate spread(3) 5.7% 5.0%
</TABLE>
(1)INTEREST INCOME INCLUDES LOAN FEES OF $163,000 AND $215,000 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.
<PAGE>
The following table analyzes the changes attributable to the rate and
volume components of net interest income.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1995 vs 1994 1995 vs 1994
Increase/(decrease) Increase/(decrease)
due to change in(1): due to change in(1):
Total Total
Change Rate Volume Change Rate Volume
<S> <C> <C> <C> <C> <C> <C> <C>
Income on Earning Assets:
Loans $ 291 $ 179 $ 112 $ 2,231 $ 1,131 $ 1,100
Investment securities 228 188 40 531 549 (18)
Federal funds sold and other 32 9 23 5 (245) 250
Total interest income 551 376 175 2,767 1,435 1,332
Interest Expense:
Deposits and other interest-
bearing liabilities:
NOW & Money market 28 46 (18) 23 66 (43)
Savings (84) (17) (67) (183) (18) (165)
Certificate of deposit 314 142 172 336 193 143
Other 61 36 25 669 197 472
Total interest expense 319 207 112 845 438 407
Change in Net Interest Income $ 232 $ 169 $ 63 $ 1,922 $ 997 $ 925
</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.
<PAGE>
NONPERFORMING ASSETS
The following table sets forth the principal portion of loans contractually
past due 90 days or more, impaired loans (reflecting the adoption of SFAS
114 and 118) and other real estate owned at September 30, 1995, December
31, 1994 and September 30, 1994.
<TABLE>
<CAPTION>
% Change % Change
Sept. 30, Sept. 30,
1995 vs 1995 vs
Sept. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994 1994 1994
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans 90 days or more past
due, on accrual status:
Mortgages:
Secured by residential
property $ 105 $ 78 $ 352 35% (70)%
Commercial 59 6 --- N/M 100
Home equity --- 102 102 (100) (100)
Consumer and other 6 14 25 (57) (76)
170 200 479 (15) (65)
Impaired Nonaccruing Loans:
Mortgages:
Secured by residential
property $ 529 $ 2,659 $ 1,888 (80) (72)
Commercial and other 1,098 1,098 1,098 --- ---
Commercial 1,770 500 1,587 254 12
Home equity --- 59 308 (100) (100)
Consumer and other --- --- 24 --- (100)
3,397 4,316 4,905 (21) (31)
Impaired Accruing Loans 2,172 3,724 5,684 (42) (62)
Total nonperforming loans 5,739 8,240 11,068 (30) (48)
Other real estate owned --- 352 400 (100) (100)
Total nonperforming assets $ 5,739 $ 8,592 $ 11,468 (33)% (50)%
</TABLE>
N/M = NOT MEASURABLE OR NOT MEANINGFUL
<PAGE>
At September 30, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114 and 118 totaled
$5,569,000, of which $3,397,000 were nonaccrual loans. The Company has
elected to classify all restructured loans, including those restructured
prior to January 1, 1995 in accordance with SFAS 114 and 118. For the
three months ended September 30, 1995, the average recorded investment in
impaired loans was approximately $6.0 million. Total interest in the
amount of $42,000 was recognized on accruing impaired loans during the
quarter.
At September 30, 1995, impaired accruing loans included $1.8 million of
loans with interest rates below market, all of which were current and in
compliance with the terms and conditions of the modification agreements.
At September 30, 1995, the Company had no commitments to lend additional
funds to borrowers with loans that have been classified as impaired. 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 50% decline from
September 30, 1994 to September 30, 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 Company has had to
provide a high level of provision for loan losses and has 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.
Management's efforts to return nonperforming loans to performing status may
be hampered by market factors.
<PAGE>
The following table summarizes the activity on nonaccrual loans for the
periods ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
% Change
Sept. 30,
1995 vs
Sept. 30,
1995 1994 1994
<S> <C> <C> <C>
($ in thousands)
Balance, January 1, $ 4,316 $ 5,950 (27)%
Additions 2,089 2,845 (27)
Reductions:
Repayments 2,080 766 172
Charge-offs 405 1,526 (73)
Reinstate accruing 523 1,148 (54)
Transferred to OREO --- 450 (100)
Total resolved 3,008 3,890 (23)
Balance, September 30, $ 3,397 $ 4,905 (31)%
</TABLE>
In addition to the loans classified as nonperforming in the preceding
table, the Company's internal loan review function has identified
approximately $1.6 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 these 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 affect the Company's financial
statements 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.
<PAGE>
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 aggregate reserve based on estimated 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 $3,277,000 at September 30, 1995 is adequate to
absorb probable loan losses inherent in the loan portfolio. At September
30, 1995, the valuation allowance related to all impaired loans totaled
$1,470,000 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 $3,277,000 at September 30, 1995 reflects the reduction in
nonperforming and nonaccruing loans and $1,453,000 of loan charge-offs
during the period. 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 Company'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.
<PAGE>
The following table summarizes other selected loan and allowance for loan
losses information at September 30, 1995, December 31, 1994 and September
30, 1994.
<TABLE>
<CAPTION>
Sept. 30, December 31, Sept. 30,
1995 1994 1994
<S> <C> <C> <C>
Allowance for loan losses $ 3,277 $ 3,341 $ 3,203
Nonaccrual loans 3,397 4,316 4,905
Nonperforming loans (1) 5,739 8,240 11,068
Allowance for loan losses
as a % of nonaccrual loans 96% 77% 65%
Allowance for loan losses
as a % of nonperforming loans 57% 41% 29%
Allowance for loan losses
as a % of loans outstanding 1.84% 1.79% 1.83%
</TABLE>
(1) INCLUDES NONACCRUAL LOANS, IMPAIRED LOANS AND LOANS ACCRUING 90 DAYS OR
MORE PAST DUE.
As the volume of new loans increased and nonaccrual loans declined, the
overall credit quality of the total loan portfolio has improved which has
positively impacted management's estimate of the allowance for loan losses.
The allowance for loan losses ratio, as a percentage of outstanding loans
shown above, 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 by December 7, 1995) had not been included, the allowance-to-
loans outstanding ratio would have been 1.89% at September 30, 1995, 1.87%
at December 31, 1994 and 1.93% for September 30, 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 recent regulatory
examinations of the Company 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 economic conditions and real estate values could
adversely affect future results, leading to increased levels of loan
charge-offs, provision for loan losses and nonaccrual loans and reductions
in income and total capital.
<PAGE>
The following table sets forth the activity in the allowance for loan
losses for nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
($ in thousands)
<S> <C> <C>
Balance, January 1, $3,341 $3,024
Loans charged-off:
Mortgages (1):
Secured by residential property 227 173
Commercial and other 648 737
Commercial 420 558
Home equity 35 ---
Consumer and other 123 170
Total loans charged-off 1,453 1,638
Recoveries on amounts previously
charged-off:
Mortgages:
Secured by residential property 1 18
Commercial and other 51 7
Commercial 57 271
Home equity 16 16
Consumer and other 50 155
Total recoveries 175 467
Net loans charged-off 1,278 1,171
Provision charged to operating expenses 1,125 1,350
Other (2) 89 ---
Balance, September 30, $3,277 $3,203
</TABLE>
(1)INCLUDES WRITE-DOWNS OF LOANS TRANSFERRED TO OTHER REAL ESTATE OWNED OF
$94,000 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994. NO LOANS WERE
TRANSFERRED TO OREO DURING THE FIRST NINE MONTHS OF 1995.
(2)RECLASSIFICATION OF UNUTILIZED OREO RESERVE.
<PAGE>
OTHER REAL ESTATE OWNED
At September 30, 1995, the Company had no other real estate owned
properties ("OREO") in its possession as compared to September 30, 1994,
when OREO totaled $400,000. OREO properties are carried at the lower of
cost or estimated fair value. During the first nine months of 1995, the
Company recorded $171,000 of additional write-downs on real estate
properties and sold real estate properties with a carrying value of
$270,000, which resulted in a net gain of $9,000 during the 1995 period.
During the first nine months of 1994, the Company sold properties with a
carrying value of $1,476,000 incurring losses of $101,000, a portion of
which had been previously accrued. In addition, in the first quarter of
1994, the Company transferred a commercial office building, carried at $1.3
million, from OREO to banking premises after determining the building could
be utilized for future use in operations after the expiration of existing
leases. During the third quarter of 1994, the Bank acquired two residential
properties through foreclosure, carried at $561,000. No properties were
acquired through foreclosure or acquisition during the first nine months of
1995. Further material declines in the real estate market could cause
increases in the level of OREO, further losses or write-downs.
The following table summarizes the changes in OREO for the nine months
ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
($ in thousands)
<S> <C> <C>
Balance, January 1, $ 352 $ 2,723
Additions --- 561
Sales (270) (1,476)
Write-downs (171) ---
Transfers to banking premises --- (1,349)
Valuation allowance 89 (59)
Balance, September 30, $ --- $ 400
</TABLE>
<PAGE>
OTHER OPERATING INCOME AND EXPENSE
The following table sets forth other operating income and other operating
expense for the three month and nine month periods ended September 30, 1995
and 1994, and the percentage change from period to period.
<TABLE>
<CAPTION>
Three Months Ended % Change Nine Months Ended % Change
September 30, 1995 vs September 30, 1995 vs
1995 1994 1994 1995 1994 1994
($ in thousands) ($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Operating Income:
Trust fees $ 486 $ 439 10.7% $ 1,355 $ 1,251 8.3%
Service charges on deposit 324 378 (14.3) 1,010 1,042 (3.1)
accounts
Realized security gains (losses) - 4 --- 100 (229) 3 N/M
net
Loan sale gains 7 24 (70.8) 45 109 (58.7)
Mortgage servicing fees 36 41 (12.2) 101 113 (10.6)
Other 134 133 .8 417 383 8.9
Total other operating income $ 991 $ 1,015 (2.4)% $ 2,699 $ 2,901 (7.0)%
Other Operating Expense:
Salaries and benefits $ 1,411 $ 1,295 9.0% $ 4,171 $ 3,912 6.6%
Occupancy - net 366 397 (7.8) 1,057 1,150 (8.1)
Professional fees 211 190 11.1 623 634 (1.7)
FDIC insurance premiums 17 180 (90.6) 370 517 (28.4)
Data processing 141 186 (24.2) 423 559 (24.3)
Furniture and equipment 73 85 (14.1) 211 258 (18.2)
Other insurance premiums 54 69 (21.7) 166 222 (25.2)
Other real estate owned - net 62 53 17.0 171 270 (36.7)
Other 420 351 19.7 1,126 990 13.7
Total other operating expense $ 2,755 $ 2,806 (1.8)% $ 8,318 $ 8,512 (2.3)%
</TABLE>
N/M = NOT MEASURABLE OR NOT MEANINGFUL
For the first nine months of 1995, total other operating income declined 7.0%
to $2,699,000 from $2,901,000 in 1994, primarily due to a net loss of $229,000
realized on the sale of securities in the available for sale portfolio. The
security losses were incurred in connection with the repositioning of the
available for sale portfolio in higher yielding government agency securities.
Excluding these losses, total other operating income would have increased 0.9%
in 1995 over the comparable 1994 period. For the third quarter of 1995, total
other operating income decreased 2.4% to $991,000 from $1,015,000 for the same
period in 1994. Contributing factors are discussed below.
<PAGE>
Negatively impacting the first nine months of 1995 was a decline in gains
related to the sale of residential mortgage loans and a decline in mortgage
servicing fees. In the first nine months of 1994, the Company sold $12.6
million in residential mortgage loans at a premium, realizing a net gain of
$109,000 which also included origination fees that had been collected and
deferred in accordance with Financial Accounting Standards No. 91. In
contrast, net gains declined 58.7% during the first nine months of 1995, as
the Company sold $12.7 million in residential mortgage loans at a discount,
realizing a net gain of $45,000, which includes deferred origination fees.
Loan sale gains, in 1995, were impacted by changes in market rates. The
Company engages in the origination of residential mortgage loans and the
sale of such loans based upon liquidity needs and to manage interest rate
risk. Additionally, the average balance of residential mortgage loans
serviced for investors declined 8.0% to $43.8 million in 1995 as compared
to $47.6 million in 1994, resulting in a decrease of 10.6% in mortgage
servicing income for the first nine months of 1995 as compared to the same
period of 1994.
Service charges on deposit accounts have decreased 3.1% to $1.0 million for
the first nine months of 1995 as compared to 1994, in part, due to a lower
volume of insufficient funds charges.
Positively impacting other income, trust fees increased 10.7% to $486,000
in the third quarter of 1995 and 8.3% to $1,355,000 for the first nine
months of 1995 over the comparable 1994 periods. This increase can
primarily be attributed to new wealth management and investment services
offered in 1995 and an increase in estate fees.
The other income category increased 0.8% to $134,000 and 8.9% to $417,000
for the three and nine month periods of 1995, respectively, over the
comparable 1994 periods. Contributing to this improvement was an increase
in fees related to equity lines of credit and wire transfer services.
For the nine months ended September 30, 1995, total other operating expense
decreased $194,000, or 2.3% to $8,318,000 from $8,512,000 in 1994. Total
other operating expense during the third quarter of 1995 decreased $51,000
or 1.8% from $2,806,000 in 1994 to $2,755,000 in 1995. These declines were
realized despite the Company's expansion by opening an additional branch
facility during the third quarter. Contributing factors are discussed
below.
FDIC insurance premiums declined 90.6% and 28.4%, respectively in the three
and nine month periods of 1995. The decrease is, in part, attributable to
a rebate of insurance premiums the Company received from the Federal
Deposit Insurance Corporation during the third quarter. This action was
required due to statutory limits imposed on the Bank Insurance Fund by the
Federal Deposit Insurance Corporation Improvement Act of 1991. Commencing
October 1, 1995, the Company's FDIC insurance premiums will decrease by
approximately 80% on an annualized basis due to FDIC premium reductions.
In addition, the Company's premium was reduced due to improved capital
levels.
Data processing expense declined 24.2% and 24.3% in the three and nine
month periods of 1995 to $141,000 and $423,000, respectively. This
reduction is due primarily to the purchase of a new bank-wide hardware and
software system during the fourth quarter of 1994, substantially reducing
maintenance and equipment costs.
Insurance expense declined 21.7% to $54,000 in the third quarter of 1995
and 25.2% for the nine month period in 1995 due to lower premium costs for
the Company's insurance coverage.
<PAGE>
Furniture and equipment expense decreased 14.1% during the third quarter of
1995 and 18.2% for the nine month period as a result of assets becoming
fully depreciated, with minimal purchases of new furniture or equipment.
Occupancy expense also declined in 1995 to $366,000 and $1,057,000 for
the three and nine month periods, respectively, primarily due to the
consolidation of previously leased office space. This decline was realized,
in both furniture and equipment expense and occupancy, despite additional
costs related to the new branch opening.
Other real estate owned expense declined 36.7% to $171,000 for the first
nine months of 1995, as compared to the 1994 period due to a significant
reduction in the levels of foreclosed properties. The increase in expense
in the third quarter of 1995 as compared to the same period in 1994 is
related to gains realized on the sale of property in the third quarter of
1994.
Offsetting these decreases, was an increase in salaries and benefits of
9.0% in the third quarter and 6.6% for the first nine months of 1995
primarily as a result of a new bonus and incentive program implemented
during 1995, along with an increase in the Company's matching contribution
to the employee 401(k) Plan. The addition of staff for the new branch
facility also impacted third quarter 1995 expenses.
In addition, the other expense category increased 19.7% in the third
quarter and 13.7% for the nine month period in 1995, primarily as a result
of an increase in advertising costs associated with the promotion of new
Trust services. Also impacting the respective periods was an increase in
forms and supplies related to the installation of the new hardware and
software system as well as other costs related to the opening of a new
branch facility.
Professional fees increased 11.1% to $211,000 in the third quarter of 1995,
primarily due to an increase in consulting and actuary fees. For the first
nine months of 1995, however, professional fees declined 1.7% as compared
to 1994, primarily due to lower collection and legal fees associated with
lower levels of nonperforming assets.
INCOME TAXES
The Company pays minimum income taxes as a result of utilizing its net
operating loss carryforwards. During the nine months ended September 30,
1995 and 1994, the Company recorded a deferred tax benefit of $1,218,000
and $1,100,000, respectively. See Note 3 to the accompanying unaudited
consolidated financial statements for further discussion.
FINANCIAL POSITION
Total assets at September 30, 1995 aggregated $296,593,000 compared with
$283,504,000 at December 31, 1994. Total loans were $178,051,000 at
September 30, 1995, versus $186,648,000 at December 31, 1994. The decline
in loans is primarily attributable to the payoff of four large loans and
the sale of residential mortgage loans in excess of residential mortgage
originations. Noninterest-bearing deposits decreased, totaling $71,828,000
at September 30, 1995, compared with $72,972,000 at December 31, 1994.
Interest-bearing deposits totaled $186,944,000 at September 30, 1995 versus
$180,986,000 at December 31, 1994. The balance of short-term borrowings was
$10,735,000 at September 30, 1995 and $10,484,000 at December 31, 1994.
Secured borrowings and securities sold under repurchase agreements are
included in short-term borrowings.
<PAGE>
Beginning December 31, 1992, banks and bank holding companies were required
to have a minimum risk-based capital ratio of 8.00%. The Company's total
capital as a percentage of risk-weighted assets was 13.91% at September 30,
1995, as compared to 10.45% at December 31, 1994.
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 to the accompanying unaudited consolidated financial statements, the
most highly rated banks and bank holding companies are expected to meet a
minimum Tier 1 leverage ratio of 3.00% with other institutions meeting a
leverage ratio of 4.00% to 5.00%. The Company's leverage ratio at September
30, 1995 was 8.11%, exceeding the minimum requirements.
The Company's capital resources are discussed further in Note 2 to the
September 30, 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 Company's more liquid assets are
Federal funds sold and securities available for sale. On a daily basis,
the Company lends its excess funds to other commercial institutions in need
of Federal funds. Such cash and cash equivalents totaled $23,135,000 or
7.8% of total assets at September 30, 1995, as compared with $17,924,000 or
6.3% of total assets at December 31, 1994. Securities available for sale
were $42,062,000 at September 30, 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
Company'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
September 30, 1995.
During the second quarter of 1995, the Bank became a member of the Federal
Home Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include
an unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At September 30, 1995
these available lines amounted to $17.1 million. The FHLBB also offers
cash management services, investment services, as well as lower cost
advances for affordable housing or community investment programs. The Bank
did not have any borrowings with the FHLBB as of September 30, 1995.
<PAGE>
Additional sources of liquidity are available to the Company 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 Company to cover any short-term liquidity needs
without reducing earning assets.
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1995 and in the foreseeable future. The Company
has minimal operations and therefore does not generate a significant amount
of funds. Dividends paid by the Company are funded utilizing proceeds from
the exercise of warrants and options and dividends received from the Bank
(although no dividends were paid by the Bank in 1995). Excess proceeds
from the exercise of warrants and options may from time to time, result in
a loan to the Bank by Bancorp. At September 30, 1995, Bancorp had loaned a
total of $907,000 to the Bank under such arrangement.
The following table provides a summary of outstanding loan and lines of
credit commitments and standby letters of credit at September 30, 1995.
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
Loan commitments:
Residential mortgage $ 916
Residential construction 439
Total 1,355
Lines of Credit commitments:
Commercial 11,044
Home equity 16,857
Personal 2,318
Total 30,219
Commercial letters of credit 5
Standby letters of credit 1,824
Total 1,829
Total commitments and letters of credit $ 33,403
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company'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
Company'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".
<PAGE>
Management's goal is to maintain a cumulative one year GAP of under 10% of
total assets. At September 30, 1995 the cumulative one year GAP as a
percentage of total assets was 2.18%. The Company 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 Company to generate deposit liabilities whose repricing more closely
matches that of its loans.
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at September 30, 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) $ 77,191 $ 47,550 $ 32,883 $ 17,030 $174,654
Investment securities (2) 42,486 1,194 34,996 6,767 85,443
Federal funds sold and other 9,239 --- --- --- 9,239
Total rate-sensitive assets 128,916 48,744 67,879 23,797 269,336
Rate-Sensitive Liabilities:
NOW & Money market deposits 67,186 --- --- --- 67,186
Certificates of deposit and 24,622 36,248 13,557 --- 74,427
other
Savings deposits 45,331 --- --- --- 45,331
Short-term borrowings 10,735 --- --- --- 10,735
Total rate-sensitive liabilities 147,874 36,248 13,557 --- 197,679
GAP $ (18,958) $ 12,496 $ 54,322 $ 23,797 $ 71,657
Cumulative GAP $ (18,958) $ (6,462) $ 47,860 $ 71,657
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 87% 97% 124% 136%
</TABLE>
(1) EXCLUDES NONACCRUAL LOANS OF $3,397,000.
(2) SECURITIES AVAILABLE FOR SALE ARE INCLUDED IN THE "3 MONTH OR
LESS" CATEGORY.
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.
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 Company's
funding and asset/liability management strategy.
<PAGE>
Noninterest-bearing demand deposits of $71,828,000 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 $177,660,000 and rate-sensitive liabilities that mature or reprice in
one year total $184,122,000. The resulting negative one year rate-
sensitive GAP is $6,462,000. 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 $23,232,000 at September 30, 1995 from
$16,398,000 at December 31, 1994, primarily due to earnings of $5,367,000
and the exercise of 1,997,000 warrants by preferred stockholders, which
resulted in additional capital of $1,498,000. Additionally, a $324,000 net
change in unrealized appreciation of the securities available for sale
portfolio at September 30, 1995 positively impacted stockholders' equity as
compared to December 31, 1994. Stockholder's equity was further reduced by
the payment of dividends, which the Company resumed in 1995.
At September 30, 1995, the Company's Tier 1 capital to average assets ratio
(leverage ratio) was 8.11% and its total capital to risk-weighted asset
ratio was 13.91%, exceeding minimum requirements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(i) The exhibits that are filed with this Form 10-Q, or that
are incorporated by reference, are set forth in the following exhibit index.
(ii) No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
<PAGE>
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>
<PAGE>
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>
<PAGE>
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 Agreement with Exhibit 10(i)(4) to
Richard L. Card Annual Report
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>
<PAGE>
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>
<PAGE>
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 NOVEMBER 9, 1995 BY /S/MICHAEL H. FLYNN
Michael H. Flynn
President
Chief Executive Officer
DATE NOVEMBER 9, 1995 BY /S/WILLIAM B. LAUDANO, JR.
William B. Laudano, Jr.
Senior Vice President
Chief Financial Officer
Chief Accounting Officer
<PAGE>
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended September 30,
<S> <C> <C>
1995 1994
INCOME BEFORE ADJUSTMENT $ 2,125,000 $ 1,958,000
INTEREST ADJUSTMENT (1) --- 22,000
NET INCOME $ 2,125,000 $ 1,980,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,373,006 3,197,404
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK EQUIVALENTS:
Net shares assumed to be issued for
dilutive stock options and warrants 866,0162,654,460
Shares assumed to be issued on
conversion of preferred stock 4,235,000 4,395,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,474,022 10,246,864
EARNINGS PER COMMON SHARE $ 0.20 $ 0.19
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
<S> <C> <C>
1995 1994
INCOME BEFORE ADJUSTMENT $ 5,367,000 $ 3,149,000
INTEREST ADJUSTMENT (1) --- 55,000
NET INCOME $ 5,367,000 $ 3,204,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,469,681 3,127,736
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK EQUIVALENTS:
Net shares assumed to be issued for
dilutive stock options and warrants 1,522,6692,654,460
Shares assumed to be issued on
conversion of preferred stock 4,303,571 4,395,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,295,922 10,177,196
EARNINGS PER COMMON SHARE $ 0.52 $ 0.31
</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 1994.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
BANK HOLDING COMPANIES AND SAVINGS AND LOAN HOLDING COMPANIES
ARTICLE 9 OF REGULATION S-X
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 23135
<INT-BEARING-DEPOSITS> 186944
<FED-FUNDS-SOLD> 9000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42062
<INVESTMENTS-CARRYING> 43381
<INVESTMENTS-MARKET> 42526
<LOANS> 178051
<ALLOWANCE> 3277
<TOTAL-ASSETS> 296593
<DEPOSITS> 258772
<SHORT-TERM> 10735
<LIABILITIES-OTHER> 3854
<LONG-TERM> 0
<COMMON> 54
0
1
<OTHER-SE> 23177
<TOTAL-LIABILITIES-AND-EQUITY> 296593
<INTEREST-LOAN> 12152
<INTEREST-INVEST> 3079
<INTEREST-OTHER> 120
<INTEREST-TOTAL> 15351
<INTEREST-DEPOSIT> 3597
<INTEREST-EXPENSE> 4383
<INTEREST-INCOME-NET> 10968
<LOAN-LOSSES> 1125
<SECURITIES-GAINS> (229)
<EXPENSE-OTHER> 8318
<INCOME-PRETAX> 4224
<INCOME-PRE-EXTRAORDINARY> 4224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5367
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 8.0
<LOANS-NON> 3397
<LOANS-PAST> 170
<LOANS-TROUBLED> 2172
<LOANS-PROBLEM> 1586
<ALLOWANCE-OPEN> 3341
<CHARGE-OFFS> 1453
<RECOVERIES> 175
<ALLOWANCE-CLOSE> 3277
<ALLOWANCE-DOMESTIC> 3277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
