<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______________ to
_____________
Commission file number 0-12936
-------
Westport Bancorp, Inc.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1094350
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(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 offices)
(Zip Code)
(203) 222-6911
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(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes 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:
At April 30, 1996, there were 5,643,531 outstanding shares of Westport Bancorp,
Inc.'s common stock, par value $.01 per share.
1
<PAGE>
Part I -- Financial Information
Item 1 -- Financial Statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
March 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 20,040 $ 24,113
Federal funds sold 11,000 14,500
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 31,040 38,613
- -----------------------------------------------------------------------------------------------------------
Securities available for sale, at market value 86,744 85,338
- -----------------------------------------------------------------------------------------------------------
Loans 180,551 178,052
Allowance for loan losses (3,011) (2,854)
- -----------------------------------------------------------------------------------------------------------
Loans - net 177,540 175,198
- -----------------------------------------------------------------------------------------------------------
Premises and equipment - net 4,773 4,933
Accrued interest receivable 2,200 2,247
Other assets 5,531 6,588
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $307,828 $312,917
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 69,685 $ 78,421
Interest-bearing deposits 185,764 196,249
- -----------------------------------------------------------------------------------------------------------
Total deposits 255,449 274,670
- -----------------------------------------------------------------------------------------------------------
Short-term borrowings 25,084 7,733
Other liabilities 2,834 6,232
- -----------------------------------------------------------------------------------------------------------
Total liabilities 283,367 288,635
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000
shares; outstanding 40,100 shares at March 31, 1996, 1 1
41,850 at December 31, 1995
Common stock - $.01 par value; authorized 20,500,000 shares;
outstanding, 5,638,531 shares at March 31, 1996,
5,433,665 shares at December 31, 1995 56 54
Additional paid in capital 23,014 22,980
Retained earnings 1,927 1,285
Net unrealized depreciation on securities
available for sale, net of tax (537) (38)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,461 24,282
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $307,828 $312,917
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
1996 1995
- ------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 4,009 $ 4,142
Securities 1,309 963
Federal funds sold and other 26 9
- ------------------------------------------------------------------------------
Total interest income 5,344 5,114
- ------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 1,459 1,086
Short-term borrowings 178 322
- ------------------------------------------------------------------------------
Total interest expense 1,637 1,408
- ------------------------------------------------------------------------------
Net interest income 3,707 3,706
Provision for loan losses 300 375
- ------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,407 3,331
- ------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 456 404
Service charges on deposit accounts 329 342
Realized security gains (losses) - net --- (210)
Loan sale gains - net 85 17
Mortgage service fees 32 31
Other 178 136
- ------------------------------------------------------------------------------
Total other operating income 1,080 720
- ------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 1,509 1,414
Occupancy - net 397 359
Professional fees 274 203
Data processing 147 140
Furniture and equipment 78 76
Other insurance premiums 44 57
Other real estate owned - net --- 65
FDIC insurance premiums 1 176
Other 362 344
- ------------------------------------------------------------------------------
Total other operating expense 2,812 2,834
- ------------------------------------------------------------------------------
Income before income taxes 1,675 1,217
Income taxes (benefit) 695 (443)
- ------------------------------------------------------------------------------
NET INCOME $ 980 $ 1,660
==============================================================================
Earnings Per Share $ 0.09 $ 0.16
==============================================================================
Weighted average number of common shares
and common equivalent shares outstanding 10,567,618 10,276,231
==============================================================================
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
(unaudited)
Net
Unrealized
Depreciation
Preferred Stock Common Stock Additional Retained on Securities
Number of Number of Paid in Earnings Available for Sale,
Shares Amount Shares Amount Capital (Deficit) Net of Tax Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- 240 240
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 43,950 $ 1 3,292,752 $ 33 $21,526 $ (3,020) $(174) $18,366
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 41,850 $ 1 5,433,665 $ 54 $22,980 $ 1,285 $ (38) $24,282
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 980 --- 980
Issuance of Common Stock -
Conversion of Preferred Stock (1,750) --- 175,000 2 (2) --- --- ---
Warrants exercised --- --- 25,500 --- 19 --- --- 19
Dividend Reinvestment and
Stock Purchase Plan --- --- 1,116 --- 7 --- --- 7
Employee Options exercised --- --- 3,250 --- 10 --- --- 10
Dividends
Preferred Stock --- --- --- --- --- (140) --- (140)
Common Stock --- --- --- --- --- (198) --- (198)
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- (499) (499)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 40,100 $ 1 5,638,531 $ 56 $23,014 $ 1,927 $(537) $24,461
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
Three Months Ended
March 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 980 $ 1,660
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300 375
Deferred tax provision (benefit) 662 (468)
Depreciation, amortization and accretion 220 229
Provision for and losses on other real estate owned - net --- 60
Loan sale gains - net (85) (17)
Realized security losses - net --- 210
Decrease (increase) in accrued interest receivable 47 (290)
Decrease (increase) in other assets 727 (198)
Decrease in other liabilities (3,381) (238)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (530) 1,323
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale 16,995 ---
Held to maturity --- ---
Proceeds from sales of securities -
Available for sale --- 14,754
Principal collected on securities 943 900
Purchases of securities -
Available for sale (20,229) (10,005)
Held to maturity --- (4,999)
Increase in loans - net (7,414) (1,979)
Loans repurchased by the FDIC --- 351
Proceeds from sales of loans 4,857 2,961
Proceeds from sales of other real estate owned --- 1
Purchases of premises and equipment (23) (119)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (4,871) 1,865
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Decrease in noninterest-bearing deposits - net (8,736) (6,514)
Decrease in interest-bearing deposits - net (10,485) (10,515)
Increase in short-term borrowings - net 17,351 12,812
Proceeds from issuance of Common Stock - net 36 68
Dividends (338) ---
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,172) (4,149)
- -----------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (7,573) (961)
Cash and cash equivalents at beginning of year 38,613 17,924
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,040 $ 16,963
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<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 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 statements of condition and the reported amounts of
revenues and expenses for the 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,
1996. 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, 1995.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
Note 2 - Regulatory Matters
During January 1996, representatives of the State of Connecticut Bank
Commissioner completed a routine examination of the Bank as of October 30, 1995.
Other than minor suggestions for improvements, there were no significant
examination findings which are believed to have potentially negative
implications for the Bank.
The Federal Reserve Board and the Federal Deposit Insurance Corporation ("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).
6
<PAGE>
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, 1996.
<TABLE>
<CAPTION>
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Total Capital to Risk-Weighted Assets 14.41% 8.0%
Tier 1 Capital to Risk-Weighted Assets 13.16 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 8.45 3.0(1)
<FN>
(1) An additional 1% to 2% is required for all but the most highly rated
institutions.
</FN>
</TABLE>
The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), 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, 1996, the Company
was "well capitalized" under FDIA, as amended, based upon the above capital
ratios. 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, affecting the
ability of the Company to maintain the well capitalized classification, and
resulting in reductions in income and total capital.
Note 3 - Income Taxes
Effective January 1, 1996, the Company is providing income taxes at regular
federal and state tax rates, having fully recognized the financial statement
benefit of its net operating loss carryforwards in 1995. The Company's current
federal and state income tax provision for the first quarter of 1996, totaled
$700,000; cash payments for income taxes during the period totaled $43,000. The
Company's tax provision for the first quarter of 1995 included a current federal
and state tax provision totaling $25,000 and a $468,000 benefit resulting from
the reversal of a portion of the previously established deferred tax valuation
allowance. For the three month period ended March 31, 1995, the Company made
cash payments for income taxes totaling $4,000.
As of March 31, 1996, the Company has aggregate net operating loss carryforwards
of approximately $5.1 million for federal purposes and $5.7 million for state
purposes to offset future income for tax return purposes.
At March 31, 1996, the Company had a net deferred tax asset of $2.46 million
representing anticipated future utilization of its net operating loss
carryforwards as an offset against future taxable income and other temporary
differences.
The $.4 million tax effect relating to the unrealized loss on available for sale
securities during the first quarter of 1996 is excluded from the consolidated
statement of cash flows because no cash was involved.
7
<PAGE>
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, 1996 and 1995, the computation includes 5,569,634
and 3,249,474 weighted average shares outstanding and 937,434 and 2,631,757
weighted average common equivalent shares, respectively, under the treasury
stock method. The earnings per share computations also include 4,060,549 and
4,395,000 weighted average shares in 1996 and 1995, respectively, issuable upon
the assumed conversion of preferred stock. Adjusted earnings, in 1995, consist
of net income and the interest effect of the assumed reduction in short-term
borrowings, computed under the treasury stock method. There was no difference
between primary and fully diluted earnings per share in the first quarter of
1996 or 1995.
Note 5 - New Accounting Standards
On January 1, 1996, the Company adopted 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. The adoption of SFAS 121 did not have an impact on the Company's
consolidated financial statements.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The adoption of SFAS 123 did not have an impact on
the Company's consolidated financial statements.
8
<PAGE>
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 quarter of 1996 of $980,000, or
$0.09 per common share, compared to net income of $1,660,000 or $0.16 per common
share for the comparable 1995 period. There was no difference between primary
and fully diluted earnings per share in the first quarter of 1996 or 1995.
Excluding non-recurring gains and losses, the Company's pretax earnings from
core operations were $1.6 million for the three months ended March 31, 1996, an
increase of 13% from first quarter 1995 core earnings of $1.4 million. Effective
January 1, 1996, the Company is providing income taxes at regular federal and
state tax rates, having fully utilized the financial statement benefit of its
net operating loss carryforwards in 1995. The 1996 first quarter tax provision
of $0.7 million compares with a $0.5 million tax benefit recognized in 1995's
first quarter.
Contributing to the improved pre-tax results for the first quarter of 1996, as
compared to 1995, was a 52% decline in nonperforming assets, a reduction in the
provision for loan losses as a result of the overall improvement in the credit
quality of the loan portfolio, increases in average earning assets, the
elimination of realized security losses and the continued control of operating
expenses. In addition, stronger income from Trust fees and a reduction in FDIC
insurance premiums contributed to improved 1996 pre-tax earnings.
Earnings for the first quarter of 1996 were reduced by an increase in the cost
and volume of average interest-bearing liabilities, an increase in salaries and
benefits associated with the opening of a new branch facility during the third
quarter of 1995 and an increase in professional fees related to executive
compensation initiatives.
Bancorp's leverage ratio at March 31, 1996 was 8.45%, and its total capital to
risk-weighted asset ratio was 14.41%, well above current minimum requirements.
See Note 2 to the accompanying consolidated financial statements for further
discussion of regulatory matters.
The Company's results for 1996 continued to be impacted by the sluggish regional
economy and real estate market. However, during 1995 and the first quarter of
1996, management has seen some positive trends, including the increased
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. A deterioration of the economy and/or real estate values would
adversely affect results in 1996 and beyond, and could lead to increased levels
of loan charge-offs, the provision for loan losses and nonaccrual loans and
reductions in income and total capital.
9
<PAGE>
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 is affected by a number of variables. One such variable is the
interest rate spread, which represents the difference between the yield on total
average interest-earning assets and the cost of total average
noninterest-bearing and interest-bearing liabilities.
Net interest income was $3,707,000 in the first three months of 1996, compared
with $3,706,000 in the comparable 1995 period. Factors impacting interest income
and expense are discussed below.
Total interest income amounted to $5,344,000 for the first three months of 1996,
compared to $5,114,000 for the same period in 1995, an increase of 4.5%. A key
factor relating to the higher level of total interest income for 1996, compared
to the prior year, was an increase in average earning assets of $13.1 million or
5.1%, to $270,334,000 from $257,199,000. This increase in volume during the 1996
period resulted in an additional $212,000 of interest income. Investment
securities, as a component of earning assets, experienced the most significant
increase from $69,021,000 in 1995 to $87,418,000 in 1996, an increase of 26.7%.
During the first quarter of 1996, the yield on average interest-earning assets
decreased slightly to 7.9% from 8.0% in 1995.
Total interest expense for the three months ended March 31, 1996 was $1,637,000,
an increase of 16.3% from $1,408,000 for the same period in 1995. This increase
is, in part, the result of a 1.1% increase in average interest-bearing
liabilities. For the first quarter of 1996, average interest-bearing liabilities
increased to $198,817,000 from $196,594,000 for the comparable 1995 period,
resulting in an increase in interest expense of $113,000. Additionally impacting
interest expense, average interest costs increased from 2.9% to 3.3% on
interest-bearing liabilities resulting in increased interest expense of
$116,000. Positively impacting results during the first quarter of 1996 was an
increase of 5.7% in the average balance of noninterest-bearing liabilities as
compared to the first quarter of 1995.
Net interest margin represents net interest income divided by average
interest-earning assets. For the first quarter of 1996, the net interest margin
declined to 5.5% from 5.8% in the comparable 1995 period. The net interest
margin was impacted by the increase in average interest-earning assets, the
increase in the cost and volume of interest-bearing liabilities, offset in part,
by the increase in noninterest-bearing liabilities.
Total interest income for the comparable periods of 1996 and 1995 was negatively
impacted by the level of nonaccrual loans, averaging $2.3 million and $4.2
million for the first quarter of 1996 and 1995, respectively. Further
improvement in net interest income is dependent, in part, upon the continued
resolution of nonperforming assets.
10
<PAGE>
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related
interest-income and expense for the three months ended March 31, 1996 and 1995.
Average balances are averages of daily closing balances.
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Accruing loans $178,648 $4,009 9.0% $183,313 $4,142 9.1%
Non-accruing loans 2,276 --- --- 4,240 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 180,924 4,009 8.9 187,553 4,142 8.9
Investment securities 87,418 1,309 5.9 69,021 963 5.6
Federal funds sold
and other 1,992 26 5.3 625 9 6.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $270,334 5,344 7.9 $257,199 5,114 8.0
======== ----- ======== -----
Noninterest-bearing
demand deposits $ 68,928 --- $ 65,235 ---
Interest-bearing
liabilities:
NOW and Money market 68,896 303 1.8 69,424 263 1.5
Savings 45,414 224 2.0 56,735 278 2.0
Certificates of deposit 70,233 923 5.3 47,300 536 4.6
Other 14,274 187 5.3 23,135 331 5.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 198,817 1,637 3.3 196,594 1,408 2.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-
bearing deposits and
interest-bearing
liabilities $267,745 1,637 2.4 $261,829 1,408 2.2
======== ----- ======== -----
Net interest income(1) $3,707 $3,706
==================================================================================================================================
Net interest margin(2) 5.5% 5.8%
==================================================================================================================================
Interest rate spread(3) 5.5% 5.8%
==================================================================================================================================
<FN>
(1) Interest income includes fees on loans of $72,000 and $57,000 for 1996 and
1995, respectively.
(2) Net interest margin is net interest income divided by total average
earning assets.
(3) Interest rate spread is the difference between the yield on total average
interest-earning assets and the cost of total average noninterest-bearing
deposits and interest-bearing liabilities.
</FN>
</TABLE>
11
<PAGE>
The following table analyzes the changes attributable to the rate and volume
components of net interest income.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
1996 vs 1995
Increase/(decrease)
due to change in(1):
Total
Rate Volume Change
- --------------------------------------------------------------------------------
($ in thousands)
Interest Income
Loans $ (56) $ (77) $ (133)
Investment securities 75 271 346
Federal funds sold and other (1) 18 17
- --------------------------------------------------------------------------------
Total interest income 18 212 230
- --------------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-
bearing liabilities:
NOW and Money market 42 (2) 40
Savings 2 (56) (54)
Certificates of deposit 99 288 387
Other (27) (117) (144)
- --------------------------------------------------------------------------------
Total interest expense 116 113 229
- --------------------------------------------------------------------------------
Change in Net Interest Income $ (98) $ 99 $ 1
================================================================================
(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 volume variances on the
basis of gross value.
12
<PAGE>
Nonperforming Assets
The following table sets forth the principal portion of loans with principal or
interest payments contractually past due 90 days or more, nonaccrual loans,
impaired loans and other real estate owned at March 31, 1996, December 31, 1995
and March 31, 1995.
<TABLE>
<CAPTION>
% Change % Change
March 31, March 31,
1996 vs 1996 vs
March 31, Dec. 31, March 31, Dec. 31, March 31,
1996 1995 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due, on accrual status:
Mortgage:
Secured by residential
property $ 265 $ 5 $ 4 N/M N/M
Commercial and other --- --- --- --- ---
Commercial --- --- 1 --- (100)%
Home equity --- 149 112 (100)% (100)
Consumer and other --- 4 12 (100) (100)
- --------------------------------------------------------------------------------------------------------------------------------
265 158 129 68 105
- --------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgage:
Secured by residential
property $ 677 $ 85 $ 2,547 N/M (73)
Commercial and other 995 1,098 1,098 (9) (9)
Commercial 782 813 500 (4) 56
Home equity 98 --- --- 100 100
- --------------------------------------------------------------------------------------------------------------------------------
2,552 1,996 4,145 28 (38)
Impaired accruing loans 502 447 2,374 12 (79)
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,319 2,601 6,648 28 (50)
Other real estate owned --- --- 291 --- (100)
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,319 $ 2,601 $ 6,939 28% (52)%
================================================================================================================================
<FN>
N/M = not measurable or not meaningful.
</FN>
</TABLE>
The increase in nonperforming loans at March 31, 1996 as compared to December
31, 1995 is primarily attributable to the addition of five loans totaling $.8
million which are secured by residential property. Management believes these
loans are well secured and is aggressively pursuing the collection of these
loans.
13
<PAGE>
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 has not materially affected 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 received on nonaccruing impaired loans are recorded as
reductions of loan principal.
At March 31, 1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $3,054,000, of which
$2,552,000 were nonaccrual loans. At March 31, 1996, the valuation allowance
related to all impaired loans totaled $650,000 and is included in the allowance
for loan losses. For the three months ended March 31, 1996, the average recorded
investment in impaired loans was approximately $2.8 million. Total interest in
the amount of $11,900 was recognized on accruing impaired loans during the
quarter.
At March 31, 1996, 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 52% decline from March 31, 1995 to March 31,
1996.
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 caused primarily by 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 1995 and continuing into 1996, management
has seen some positive trends including the increased 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.
14
<PAGE>
The characteristics of the real estate market since 1989 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 1989 have been in commercial mortgage
loans, residential 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.
The following table summarizes the activity on nonaccrual loans for the periods
ended March 31, 1996 and 1995.
% Change
March 31,
1996 vs
March 31,
1996 1995 1995
- --------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 1,996 $ 4,316 (54)%
- --------------------------------------------------------------------------
Additions 1,180 --- N/M
- --------------------------------------------------------------------------
Less:
Repayments 291 27 N/M
Charge-offs 171 60 185
Reinstate accruing 162 84 93
- --------------------------------------------------------------------------
Total resolved 624 171 265
- --------------------------------------------------------------------------
Balance, March 31, $ 2,552 $ 4,145 (38)%
==========================================================================
N/M = not measurable or not meaningful
Included in the additions for the first quarter of 1996 are four loans totaling
$.6 million which are secured by residential properties. Management believes
these loans are well secured and is aggressively pursuing the collection of
these loans.
In addition to the loans classified as nonperforming in the preceding table, the
Bank's internal loan review function has identified approximately $1.7 million
of loans with more than normal credit risk. Management believes the payment
history of these loans indicates the borrowers may have difficulty in the future
in meeting all of the terms of the contractual agreements. These loans, as well
as nonperforming loans, have been considered in the analysis of the adequacy of
the allowance for loan losses.
15
<PAGE>
Allowance for Loan Losses
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 $3,011,000 at March 31, 1996 is
adequate to absorb probable loan losses inherent in the loan portfolio. 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 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 increase in the allowance for loan losses from $2,854,000 at December 31,
1995 to $3,011,000 at March 31, 1996 reflects $257,000 of loan charge-offs
during the period, a provision for loan losses of $300,000 and recoveries of
$114,000. The charge-offs in 1996 primarily relate to loans on which a specific
reserve had been allocated at December 31, 1995 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.
The following table summarizes other selected loan and allowance for loan losses
information at March 31, 1996, December 31, 1995 and March 31, 1995.
March 31, December 31, March 31,
1996 1995 1995
- -------------------------------------------------------------------------------
Allowance for loan losses $ 3,011 $ 2,854 $ 3,125
Nonaccrual loans 2,552 1,996 4,145
Nonperforming loans (1) 3,319 2,601 6,648
Allowance for loan losses
as a % of nonaccrual loans 118% 143% 75%
Allowance for loan losses
as a % of nonperforming loans 91% 110% 47%
Allowance for loan losses
as a % of loans outstanding 1.67% 1.60% 1.69%
(1) Includes nonaccrual loans, impaired loans and loans accruing 90 days or
more past due
16
<PAGE>
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 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 would 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.
The following table sets forth the activity in the allowance for loan losses for
three months ended March 31, 1996 and 1995.
1996 1995
- -------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $2,854 $3,341
- -------------------------------------------------------------------------------
Loans charged-off:
Mortgage:
Secured by residential property 5 27
Commercial and other 161 422
Commercial 68 32
Home equity --- 35
Consumer and other 23 115
- -------------------------------------------------------------------------------
Total loans charged-off 257 631
Recoveries on amounts previously charged-off:
Mortgage:
Secured by residential property 3 ---
Commercial and other --- ---
Commercial 28 15
Home equity 10 4
Consumer and other 73 21
- -------------------------------------------------------------------------------
Total recoveries 114 40
Net loans charged-off 143 591
Provision charged to operating expenses 300 375
- -------------------------------------------------------------------------------
Balance, March 31, $3,011 $3,125
===============================================================================
17
<PAGE>
Other Real Estate Owned
At March 31, 1996, the Company had no other real estate owned properties
("OREO") in its possession. At March 31, 1995 OREO totaled $291,000. OREO
properties are carried at the lower of cost or estimated fair value. During the
first quarter of 1995, the Bank recorded $60,000 of additional write-downs on
real estate properties. No other significant activity occurred during this
period. No properties were acquired, through foreclosure or acquisition, during
the first three months of 1996 and 1995, respectively.
Further material declines in the real estate market could cause increases in the
level of OREO, further losses or writedowns.
The following table summarizes the changes in OREO for three months ended March
31, 1996 and 1995.
1996 1995
- -------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ --- $ 352
- -------------------------------------------------------------------------
Write-downs --- (60)
Other --- (1)
- -------------------------------------------------------------------------
Balance, March 31, $ --- $ 291
=========================================================================
Other Operating Income
The following table sets forth other operating income for the three month
periods ended March 31, 1996 and 1995 and the percentage change from period to
period.
Three Months Ended % Change
March 31, 1996 vs
1996 1995 1995
- --------------------------------------------------------------------------------
($ in thousands)
Trust fees $ 456 $ 404 12.9%
Service charges on deposit accounts 329 342 (3.8)
Realized security gains (losses) - net --- (210) N/M
Loan sale gains - net 85 17 N/M
Mortgage servicing fees 32 31 3.2
Other 178 136 30.9
- --------------------------------------------------------------------------------
Total other operating income $ 1,080 $ 720 50.0%
================================================================================
N/M = not measurable or not meaningful
18
<PAGE>
Total other operating income for the first quarter of 1996 increased 50% from
the comparable period in 1995. This increase was due, in part, to a net loss of
$210,000 realized on the sale of securities in the available for sale portfolio
during 1995. The security losses were incurred in connection with the
repositioning of the available for sale portfolio into higher yielding
government agency securities. Excluding the securities loss in 1995, total other
operating income for the first three months of 1996 increased 16.1% over the
1995 period. Contributing factors are discussed below.
Trust fees increased $52,000, or 12.9%, to $456,000 in the first three months of
1996, primarily attributable to new wealth management and investment services
offered in the second quarter of 1995.
The other income category also increased $42,000 or 30.9% in 1996, as compared
to the same period in 1995, primarily due to the increase in letter of credit
fees and commissions collected from checkbook orders.
Loan sale gains in 1996 were positively impacted by the adoption of Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights" in the fourth quarter of 1995. SFAS 122 requires the
capitalization of the fair value of originated mortgage servicing rights in
connection with the sale of loans in the secondary market. During 1996, the
Company sold $3.1 million in residential mortgage loans while retaining the
rights to service these loans. Net gains of $66,000 were realized from the sale
of these loans which included the recognition of a servicing asset (originated
mortgage servicing rights) and origination fees that had been previously
collected and deferred in accordance with Statement of Financial Accounting
Standards No. 91. Additionally, residential mortgage loans totaling $1.7 million
were sold in the first quarter of 1996, servicing released, resulting in
realized net gains of $19,000. During the first quarter of 1995, $2.9 million in
residential mortgage loans were sold for a net gain of $17,000. The Company
utilizes loan sales as part of its asset/liability management program.
Negatively impacting total other operating income was a decline of 3.8% in the
first three months of 1996 in service charges on deposit accounts as compared to
the first three months of 1995. This decline is due, primarily, to a reduction
in fees related to commercial checking accounts.
19
<PAGE>
Other Operating Expense
The following table sets forth other operating expense for the three month
periods ended March 31, 1996 and 1995, and the percentage change from period to
period.
Three Months Ended % Change
March 31, 1996 vs
1996 1995 1995
- -------------------------------------------------------------------------------
($ in thousands)
Salaries and benefits $ 1,509 $ 1,414 6.7%
Occupancy - net 397 359 10.6
Professional fees 274 203 35.0
Data processing 147 140 5.0
Furniture and equipment 78 76 2.6
Other insurance premiums 44 57 (22.8)
Other real estate owned - net --- 65 (100.0)
FDIC insurance premiums 1 176 (99.4)
Other 362 344 5.2
- -------------------------------------------------------------------------------
Total other operating expense $ 2,812 $ 2,834 (0.8)%
===============================================================================
N/M = not measurable or not meaningful
Total other operating expense decreased $22,000 or .8% from $2,834,000 in the
first quarter of 1995 to $2,812,000 in the first quarter of 1996. This decline
was realized despite the Company's expansion by opening an additional branch
facility during the third quarter of 1995. Contributing factors are discussed
below.
FDIC insurance premiums declined to minimum levels in 1996 based on the current
rate structure imposed by the FDIC and the Bank's classification as well
capitalized. The FDIA, as amended, establishes classifications for banks on the
basis of their capital levels. This classification, along with statutory limits
on the Bank Insurance Fund imposed by FDICIA, impact the amount of insurance
premiums the Company must pay.
During the first quarter of 1996, the Company did not incur any expense related
to other real estate owned as compared to $65,000 in the first quarter of 1995.
This decline was caused by the elimination of foreclosed properties during the
third quarter of 1995.
Other insurance premiums declined 22.8% to $44,000 in 1996 due to lower premium
costs as a result of the Company's improved financial condition and the
continued decline in commercial insurance rates.
Offsetting these decreases was an increase in salaries and benefits of 6.7% in
the first quarter of 1996, as compared to 1995, primarily as a result of
additional staffing added in the third quarter of 1995 for the new branch
facility, along with an increase in employee benefit costs.
Professional fees increased 35% to $274,000 in the first three months of 1996 as
compared to 1995 primarily as a result of costs associated with executive
compensation initiatives.
20
<PAGE>
Occupancy expense increased 10.6% or $38,000 in the first quarter of 1996, over
1995, primarily due to expenses associated with the new branch facility which
opened during the third quarter of 1995. Data processing expense increased 5%
for the same period primarily due to outsourcing certain tax functions for the
Trust division.
In addition, the other expense category increased 5.2% in 1996 over the
comparable 1995 period primarily as a result of the reinstatement, during the
second quarter of 1995, of fees paid for directors services.
Income Taxes
Effective January 1, 1996, the Company is providing income taxes at regular
federal and state tax rates, having fully utilized the financial statement
benefit of its net operating loss carryforwards during 1995. See Note 3 to the
accompanying unaudited consolidated financial statements for further discussion.
Financial Condition
Total assets at March 31, 1996 aggregated $307,828,000 compared with
$312,917,000 at December 31, 1995. Total loans were $180,551,000 at March 31,
1996, versus $178,052,000 at December 31, 1995. Noninterest-bearing deposits
decreased to $69,685,000 at March 31, 1996, compared with $78,421,000 at
December 31, 1995. Interest-bearing deposits totaled $185,764,000 at March 31,
1996 versus $196,249,000 at December 31, 1995. The balance of short-term
borrowings was $25,084,000 at March 31, 1996 and $7,733,000 at December 31,
1995. For municipalities and selected commercial and retail customers, the Bank
also offers secured borrowings through repurchase agreements which are included
in short-term borrowings. Securities sold under repurchase agreements were
$10,775,000 at March 31, 1996 and $1,050,000 at December 31, 1995. The decline
at March 31, 1996 in noninterest and interest-bearing deposits, as compared to
December 31, 1995, can primarily be attributed to the seasonal increase in
deposits at year end, and the cyclical decline during the first quarter. As a
result of the decline in deposits at March 31, 1996, short-term borrowings
increased to $25,084,000 from $7,733,000 at December 31, 1995 to meet the
Company's funding requirements.
At March 31, 1996, the Company's available for sale securities portfolio totaled
$86,744,000 as compared to $85,338,000 at December 31, 1995. Securities
available for sale are carried at fair value, with any unrealized gains or
losses included as a separate component of stockholder's equity. The portfolio
at March 31, 1996 was comprised primarily of fixed rate U.S. Government Agency
debt and mortgage-backed securities.
Beginning December 31, 1992, banks 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 14.41% at March 31, 1996, as compared to 14.02% at
December 31, 1995.
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, banks are expected to
meet a minimum Tier 1 leverage ratio of 3.00%. The Company's leverage ratio at
March 31, 1996 was 8.45%, exceeding the minimum requirements.
21
<PAGE>
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
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 $31,040,000 or
10.1% of total assets at March 31, 1996, as compared with $38,613,000 or 12.3%
of total assets at December 31, 1995. Securities available for sale were
$86,744,000 at March 31, 1996 compared with $85,338,000 at December 31, 1995.
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,
1996.
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 March 31, 1996, these
available lines amounted to $17.6 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 had $12.0 million in
short-term borrowings from the FHLBB at March 31, 1996.
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 outstanding balance of securities sold
under repurchase agreements at March 31, 1996 was $10,775,000. The discount
window, if needed, would allow the Company to cover any short-term liquidity
needs without reducing earning assets. At March 31, 1996, the Company did not
have any borrowings from the Federal Reserve Bank's discount window.
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1996 and in the foreseeable future. Bancorp has
minimal operations and therefore does not generate or utilize 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 or 1996). Proceeds from the
exercise of warrants and options may from time to time result in a loan to the
Bank by Bancorp. At March 31, 1996, Bancorp had loaned a total of $89,000 to the
Bank under such arrangement.
22
<PAGE>
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the State of Connecticut
Banking Commissioner, exceed the total of its net profits for that year combined
with its retained net profits from the preceding two years. These dividend
limitations can affect the amount of dividends payable to Bancorp as the sole
stockholder of the Bank, and therefore affect Bancorp's payment of dividends to
its stockholders.
The following table provides a summary of outstanding loan commitments and
standby letters of credit at March 31, 1996.
($ in thousands)
Loan commitments:
Residential mortgage $ 2,196
Commercial mortgage 1,032
Residential construction 1,857
- -------------------------------------------------------------------------
Total 5,085
- -------------------------------------------------------------------------
Lines of credit commitments:
Commercial 14,999
Home equity 16,814
Personal 2,351
- -------------------------------------------------------------------------
Total 34,164
- -------------------------------------------------------------------------
Commercial letters of credit 107
Standby letters of credit 3,080
- -------------------------------------------------------------------------
Total commitments and letters of credit $ 42,436
=========================================================================
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 maturing or repricing within a specified time period and the amount of
liabilities maturing or 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, 1996, the cumulative one year GAP as a percentage of total
assets was 14.98%. As a result of the increase in interest rates during the
first quarter of 1996, certain callable investment securities have shifted since
December 31, 1995, from repricing in one year or less to maturing during the one
to five year period, causing the cumulative one year GAP to exceed 10% of total
assets. Although $7.6 million in investment securities mature, reprice or are
subject to call in one year or less, the total investment securities portfolio
of $86.7 million is classified
23
<PAGE>
as "available for sale". Therefore, management has the ability to reposition the
portfolio at any time to manage the impact of interest rate shifts. The Bank
concentrates on originating adjustable rate loans to hold in its loan portfolio
in order to reduce interest rate risk. Deregulation of deposit instruments has
allowed the Bank to generate deposit liabilities whose repricing more closely
matches that of its loans.
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at March 31, 1996:
<TABLE>
<CAPTION>
Maturity/Repricing Intervals
- ----------------------------------------------------------------------------------------------------------------------------
Over
3 Months
3 Months through 1 - 5 Over 5
or Less 1 Year Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans(1) $ 84,536 $ 47,320 $ 34,055 $ 12,088 $177,999
Investment securities 3,923 3,686 66,254 12,881 86,744
Federal funds sold and other 11,246 --- --- --- 11,246
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 99,705 51,006 100,309 24,969 275,989
- ----------------------------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
NOW and Money market deposits 71,752 --- --- --- 71,752
Certificates of deposit and other 37,299 16,498 14,018 --- 67,815
Savings deposits 46,197 --- --- --- 46,197
Short-term borrowings 25,084 --- --- --- 25,084
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 180,332 16,498 14,018 --- 210,848
============================================================================================================================
GAP $(80,627) $ 34,508 $ 86,291 $ 24,969 $ 65,141
============================================================================================================================
Cumulative GAP $(80,627) $(46,119) $ 40,172 $ 65,141
============================================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 55% 77% 119% 131%
============================================================================================================================
<FN>
(1) Excludes nonaccrual loans of $2,552,000, and is net of deferred loan fees
of $305,000.
</FN>
</TABLE>
The principal amount of each asset and liability is included in the above table
in the earliest period in which it matures, reprices or is subject to call.
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.
24
<PAGE>
Noninterest-bearing demand deposits of $69,685,000 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 $150,711,000 and
rate-sensitive liabilities that mature or reprice in one year total
$196,830,000. The resulting negative one year rate-sensitive GAP is $46,119,000.
During periods of declining interest rates, a negative GAP position can be
favorable if more rate-sensitive liabilities than rate-sensitive assets reprice
at lower rates, creating a favorable impact on net interest income. This impact
may be mitigated somewhat if the level of nonaccrual loans and other real estate
owned increases, resulting in a decrease in rate-sensitive assets. During a
rising rate environment, a negative rate GAP can be a disadvantage. 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 $24,461,000 at March 31, 1996 from $24,282,000
at December 31, 1995, primarily due to earnings of $980,000 offset, in part, by
a $338,000 dividend payment to stockholders and a net change of $499,000 in the
unrealized depreciation of the securities available for sale portfolio.
At March 31, 1996, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 8.45% and its total capital to risk-weighted asset ratio was 14.41%,
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, 1996, 2,035,000 warrants had been exercised, resulting in total
proceeds of $1,526,250 to the Company. At March 31, 1996, there were 300,000
warrants outstanding. There is no assurance as to the number of warrants, if
any, that will be exercised in the future. All warrants expire on December 31,
1996.
25
<PAGE>
Part II - Other Information
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to their business, to which Bancorp or
the Bank is a party or to which any of their property is subject.
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.
No matter was submitted to a vote of Bancorp's security holders
during the first quarter of 1996.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits that are filed with this Form 10-Q, or that are incorporated
herein by reference, are set forth below:
26
<PAGE>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-12936 ("1991 Form
10-K"), and incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible
Preferred Stock of Bancorp. (Filed as Exhibit 3(b) to 1991
Form 10-K, and incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c)
to Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-12936 ("1995 Form 10-K"), and
incorporated herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-12936 ("1992 Form 10-K"), and incorporated
herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to
1991 Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to
Registration Statement on Form S-1, File No. 2- 93773, and
incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and
Weston Shopping Center Associates, as amended by
Modification dated July 1, 1993. (Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 0-12936, and as Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and
incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the
Bank and John Sherwood, Trustee. (Filed as Exhibit 10(e) to
1992 Form 10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank
and William L. Gault, Trustee. (Filed as Exhibit 10(f) to
1992 Form 10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991
between the Bank and One Research Drive Associates Limited
Partnership. (Filed as Exhibit 10(h) to 1991 Form 10-K, and
incorporated herein by reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the
Bank and C.A.T.F. Limited Partnership. (Filed as Exhibit
10(f) to 1995 Form 10-K, and incorporated herein by
reference.)
27
<PAGE>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
10(g) Employment Agreement among Michael H. Flynn, Bancorp and
the Bank dated August 31, 1989, as amended December 17,
1991, and November 13, 1995. (Filed as Exhibit 10(i)(1) to
1992 Form 10-K and Exhibit 10(g) to 1995 Form 10-K, and
incorporated herein by reference.)
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and
the Bank dated June 16, 1992, and as amended November 13,
1995. (Filed as Exhibit 10(i)(1) to 1992 Form 10-K and as
Exhibit 10(h) to 1995 Form 10-K, and incorporated herein by
reference.)
10(i) Employment Agreement among Richard T. Cummings, Jr.,
Bancorp and the Bank dated January 12, 1990, as amended
December 17, 1991, and November 13, 1995. (Filed as Exhibit
10(i)(1) to 1992 Form 10-K and as Exhibit 10(i) to 1995
Form 10- K, and incorporated herein by reference.)
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp
and the Bank dated February 23, 1995, and as amended
November 13, 1995. (Filed as Exhibit 10(g)(6) to 1994 Form
10-K and as Exhibit 10(j) to 1995 Form 10-K, and
incorporated herein by reference.)
10(k) Employment Agreement among Richard L. Card, Bancorp and the
Bank dated November 15, 1993, and as amended November 13,
1995. (Filed as Exhibit 10(i)(4) to 1993 Form 10-K and as
Exhibit 10(k) to 1995 Form 10-K, and incorporated herein by
reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989 and as amended December 17, 1991. (Filed
as Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated
herein by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3)
to 1992 Form 10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5)
to 1993 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp
dated November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993
Form 10-K, and incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B.
Laudano, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(r) to 1995 Form 10-K, and incorporated
herein by reference.)
28
<PAGE>
Exhibit Description
- --------------------------------------------------------------------------------
10(s) Split Dollar Insurance Agreement between Richard T.
Cummings, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(s) to 1995 Form 10-K, and incorporated
herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card
and the Bank dated as of December 1, 1995. (Filed as
Exhibit 10(t) to 1995 Form 10-K, and incorporated herein by
reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated
November 13, 1995, as amended November 29, 1995 and January
18, 1996. (Filed as Exhibit 10(u) to 1995 Form 10-K, and
incorporated herein by reference.)
10(v) Trust under Supplemental Executive Retirement Plan between
the Bank and People's Bank, Trustee. (Filed as Exhibit
10(v) to 1995 Form 10-K, and incorporated herein by
reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit
10(m) to 1992 Form 10-K, and incorporated herein by
reference.)
10(x) 1985 Incentive Stock Option Plan of Bancorp, as restated.
(Filed as Exhibit 10(n) to 1992 Form 10-K, and incorporated
herein by reference.)
10(y) 1995 Incentive Stock Option Plan of Bancorp. (Filed as
Exhibit 10(y) to 1995 Form 10-K, and incorporated herein by
reference.)
11 Statement Regarding Computation of Per Share Earnings
(Filed herewith).
27 Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K
-------------------
No Form 8-K was filed by Bancorp during the first quarter of 1996.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTPORT BANCORP, INC.
----------------------
(Registrant)
DATE May 14, 1996 BY /s/Michael H. Flynn
------------- ---------------------
Michael H. Flynn
President and
Chief Executive Officer
(principal executive officer)
DATE May 14, 1996 BY /s/William B. Laudano, Jr.
------------- ----------------------------
William B. Laudano, Jr.
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
30
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-12936 ("1991 Form
10-K"), and incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible
Preferred Stock of Bancorp. (Filed as Exhibit 3(b) to 1991
Form 10-K, and incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c)
to Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-12936 ("1995 Form 10-K") and
incorporated herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-12936 ("1992 Form 10-K"), and incorporated
herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to
1991 Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to
Registration Statement on Form S-1, File No. 2- 93773, and
incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and
Weston Shopping Center Associates, as amended by
Modification dated July 1, 1993. (Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 0-12936, and as Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and
incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the
Bank and John Sherwood, Trustee. (Filed as Exhibit 10(e) to
1992 Form 10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank
and William L. Gault, Trustee. (Filed as Exhibit 10(f) to
1992 Form 10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991
between the Bank and One Research Drive Associates Limited
Partnership. (Filed as Exhibit 10(h) to 1991 Form 10-K, and
incorporated herein by reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the
Bank and C.A.T.F. Limited Partnership. (Filed as Exhibit
10(f) to 1995 Form 10-K, and incorporated herein by
reference.)
31
<PAGE>
Exhibit No. Exhibit Description
- -------------------------------------------------------------------------------
10(g) Employment Agreement among Michael H. Flynn, Bancorp and
the Bank dated August 31, 1989, as amended December 17,
1991, and November 13, 1995. (Filed as Exhibit 10(i)(1) to
1992 Form 10-K and Exhibit 10(g) to 1995 Form 10-K, and
incorporated herein by reference.)
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and
the Bank dated June 16, 1992, and as amended November 13,
1995. (Filed as Exhibit 10(i)(1) to 1992 Form 10-K and as
Exhibit 10(h) to 1995 Form 10-K, and incorporated herein by
reference.)
10(i) Employment Agreement among Richard T. Cummings, Jr.,
Bancorp and the Bank dated January 12, 1990, as amended
December 17, 1991, and November 13, 1995. (Filed as Exhibit
10(i)(1) to 1992 Form 10-K and as Exhibit 10(i) to 1995
Form 10- K, and incorporated herein by reference.)
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp
and the Bank dated February 23, 1995, and as amended
November 13, 1995. (Filed as Exhibit 10(g)(6) to 1994 Form
10-K and as Exhibit 10(j) to 1995 Form 10-K, and
incorporated herein by reference.)
10(k) Employment Agreement among Richard L. Card, Bancorp and the
Bank dated November 15, 1993, and as amended November 13,
1995. (Filed as Exhibit 10(i)(4) to 1993 Form 10-K and as
Exhibit 10(k) to 1995 Form 10-K, and incorporated herein by
reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989 and as amended December 17, 1991. (Filed
as Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated
herein by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3)
to 1992 Form 10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5)
to 1993 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp
dated November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993
Form 10-K, and incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B.
Laudano, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(r) to 1995 Form 10-K, and incorporated
herein by reference.)
32
<PAGE>
Exhibit Description
- --------------------------------------------------------------------------------
10(s) Split Dollar Insurance Agreement between Richard T.
Cummings, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(s) to 1995 Form 10-K, and incorporated
herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card
and the Bank dated as of December 1, 1995. (Filed as
Exhibit 10(t) to 1995 Form 10-K, and incorporated herein by
reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated
November 13, 1995, as amended November 29, 1995 and January
18, 1996. (Filed as Exhibit 10(u) to 1995 Form 10-K, and
incorporated herein by reference.)
10(v) Trust under Supplemental Executive Retirement Plan between
the Bank and People's Bank, Trustee. (Filed as Exhibit
10(v) to 1995 Form 10-K, and incorporated herein by
reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit
10(m) to 1992 Form 10-K, and incorporated herein by
reference.)
10(x) 1985 Incentive Stock Option Plan of Bancorp, as restated.
(Filed as Exhibit 10(n) to 1992 Form 10-K, and incorporated
herein by reference.)
10(y) 1995 Incentive Stock Option Plan of Bancorp. (Filed as
Exhibit 10(y) to 1995 Form 10-K, and incorporated herein by
reference.)
11 Statement Regarding Computation of Per Share Earnings
(Filed herewith).
27 Financial Data Schedule (Filed herewith).
33
<PAGE>
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
Three Months Ended March 31,
1996 1995
- --------------------------------------------------------------------------------
INCOME BEFORE ADJUSTMENT $ 980,000 $ 1,660,000
INTEREST ADJUSTMENT (1) --- 19,000
- --------------------------------------------------------------------------------
NET INCOME $ 980,000 $ 1,679,000
================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,569,634 3,249,474
WEIGHTED AVERAGE NUMBER OF
COMMON SHARE EQUIVALENTS:
Net shares assumed to be
issued for dilutive stock
options and warrants: 937,434 2,631,757
Shares assumed to be
issued on conversion of
preferred stock: 4,060,549 4,395,000
- --------------------------------------------------------------------------------
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,567,618 10,276,231
================================================================================
EARNINGS PER COMMON SHARE (2) $ 0.09 $ 0.16
================================================================================
(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.
(2) There was no difference between primary and fully diluted earnings per
share in the first quarter of 1996 and 1995.
34
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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<INT-BEARING-DEPOSITS> 185764
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0
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<INCOME-PRETAX> 1675
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<LOANS-NON> 2552
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