SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission File Number 0-14550
NEW ENGLAND COMMUNITY BANCORP, INC.
-----------------------------------
DELAWARE 06-1116165
OLD WINDSOR MALL
P.O. BOX 130
WINDSOR, CONNECTICUT 06095
Telephone: (860) 610-3600
Indicate by check mark whether 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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO[ ]
The number of shares of common stock of the registrant outstanding as of April
30, 1998 was 5,171,626.
The total number of pages in this report is 19.
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NEW ENGLAND COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets--March 31, 1998
(unaudited) and December 31, 1997 4
Consolidated Statements of Income--three
months ended March 31, 1998
and 1997 (unaudited) 5
Consolidated Statements of Cash Flows--
three months ended March 31, 1998
and 1997 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. OTHER INFORMATION 18
Item 6. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
SIGNATURES 19
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Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
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<TABLE>
<CAPTION>
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars; except share data)
March 31,
1998 December 31,
(Unaudited) 1997
===========================================================================================
<S> <C> <C>
Assets:
Cash and due from banks $ 34,796 $ 35,201
Federal funds sold 21,107 4,650
--------- ---------
Cash and cash equivalents 55,903 39,851
Securities held-to-maturity 9,925 11,336
Securities available-for-sale 106,137 120,448
Federal Home Loan Bank stock, at cost 2,977 2,977
Loans outstanding 399,653 408,535
Less: allowance for possible loan losses (7,210) (9,257)
--------- ---------
Net loans 392,443 399,278
Loans held-for-sale 8,000 2,966
Accrued interest receivable 3,950 4,395
Premises and equipment 10,978 11,064
Other real estate owned 2,466 2,870
Goodwill 5,140 5,238
Other assets 5,094 5,747
--------- ---------
Total Assets $ 603,013 $ 606,170
========= =========
Liabilities:
Deposits:
Noninterest bearing $ 98,214 $ 114,510
Interest bearing 411,378 408,134
--------- ---------
Total deposits 509,592 522,644
Short-term borrowings 14,466 14,036
Long-term debt 19,580 11,612
Other liabilities 4,127 4,055
--------- ---------
Total Liabilities 547,765 552,347
Shareholders' Equity:
Common stock, $.10 par value, authorized 10,000,000 shares:
March 31, 1998, 5,171,626 issued and outstanding;
December 31, 1997, 5,160,626 issued and outstanding 517 516
Additional paid-in capital 51,165 51,064
Retained earnings 2,531 1,107
Net unrealized gain on securities available-for-sale 1,035 1,136
--------- ---------
Total Shareholders' Equity 55,248 53,823
--------- ---------
Total Liabilities & Shareholders' Equity $ 603,013 $ 606,170
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Thousands of dollars; except per share data)
Three Months Ended
March 31,
1998 1997
==============================================================================
Interest income:
Loans, including fees $9,035 $7,594
Securities:
Taxable interest 1,812 1,818
Interest exempt from federal income taxes 37 36
Dividends 63 77
Federal funds sold and other interest 60 84
------ ------
Total interest income 11,007 9,609
Interest expense:
Deposits 3,865 3,121
Borrowed funds 362 166
------ ------
Total interest expense 4,227 3,287
Net interest income 6,780 6,322
Provision for possible loan losses 322 273
------ ------
Net interest income after provision for possible loan losses 6,458 6,049
Noninterest income:
Service charges, fees and commissions 714 622
Investment securities gains, net 1,229 (2)
Gain on the sales of loans, net 541 297
Other 44 37
------ ------
Total noninterest income 2,528 954
Noninterest expense:
Salaries and employee benefits 2,800 2,416
Occupancy 535 546
Furniture and equipment 354 302
Outside services 217 289
Postage and supplies 224 213
Insurance and assessments 87 45
Losses, writedowns, expenses - other real estate owned 68 31
Amortization of goodwill 98 79
Loss on sale of portfolio loans 718
Other 718 676
------ ------
Total noninterest expense 5,819 4,597
------ ------
Income before taxes 3,167 2,406
Income taxes 1,278 904
------ ------
Net Income $1,889 $1,502
====== ======
Net income per share--Basic $ 0.37 $ 0.30
Net income per share--Diluted $ 0.36 $ 0.30
Weighted average shares of Common Stock outstanding--Basic 5,161 5,006
Weighted average shares of Common Stock outstanding--Diluted 5,315 5,055
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
<CAPTION>
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of dollars)
Three Months Ended March 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,889 $ 1,502
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 275 308
Losses from sale or disposal and provisions to reduce the carrying value
of other real estate owned, net 209 47
Securities losses (gains), net (1,229) 2
Accretion of discounts and amortization of premiums on bonds, net (10) 3
Accretion, net of amortization, of purchase accounting adjustments (3) (53)
Amortization of goodwill 98 79
Provision for possible loan losses 322 273
Loss on sale of portfolio loans, net 440
(Increase) decrease in accrued interest income and other assets, net 1,014 (72)
Decrease (increase) in loans held-for-sale (5,034) (777)
(Decrease) increase in accrued interest payable and other liabilities, net 163 (1,126)
------- -------
Net cash provided by (used for) operating activities (1,866) 186
------- -------
Financing activities:
Net decrease in noninterest-bearing accounts (16,296) (6,274)
Net (decrease) increase in interest-bearing accounts 3,265 (9,667)
Net increase in short-term borrowings 430 3,797
Net increase in long-term borrowings 7,968 6,000
Proceeds from issuance of common stock 103 2
Cash dividends paid (465) (371)
------- -------
Net cash used for financing activities (4,995) (6,513)
------- -------
Investing activities:
Loans originated, net of principal collections (4,924) 1,815
Proceeds from sale of portfolio loans 10,156 3
Purchases of securities available-for-sale (3,287) (10,886)
Proceeds from sales of securities available-for-sale 8,823 4,559
Proceeds from maturities of securities available-for-sale 9,829 5,449
Purchases of securities held-to-maturity (25)
Proceeds from maturities of securities held-to-maturity 1,410 151
Proceeds from sales of other real estate owned 1,072 1,162
Purchases of premises and equipment, net (160) (348)
Capitalization of expenditures on other real estate owned (49) (20)
------- -------
Net cash provided by (used for) investing activities 22,913 1,860
------- -------
Increase (decrease) in cash and cash equivalents 16,052 (4,467)
Cash and cash equivalents, beginning of period 39,851 39,854
------- -------
Cash and cash equivalents, end of period $55,903 $35,387
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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NEW ENGLAND COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
- ------------------------------
The accompanying condensed interim financial statements are unaudited and
include the accounts of New England Community Bancorp, Inc. (the "Company" or
"NECB") and its subsidiaries, New England Bank and Trust Company ("New England
Bank"), The Equity Bank ("Equity Bank") and Community Bank ("Community Bank")
(together the "Subsidiaries"). The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles interim
financial information and with the instructions to SEC Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements reflect, in the opinion of
Management, all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and the
results of its operations and its cash flows for the periods presented. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1997 Annual Report on Form 10-K.
Note 2 - Mergers and Acquisitions
- ---------------------------------
On August 8, 1997, NECB acquired First Bank of West Hartford ("First Bank")
by issuing 995,355 shares of the Company's common stock for all of the
outstanding common shares of First Bank and all fully vested and exercisable
stock options. First Bank was also merged with and into New England Bank. The
acquisition of First Bank was accounted for as a pooling of interests and as
such all prior results have been restated as though the companies had been
combined as of the earliest period presented.
On December 31, 1997, NECB acquired Community Bank (formally known as
Community Savings Bank) by paying $4,832,000 in cash for all of the outstanding
common shares of Community Bank. The acquisition of Community Bank was accounted
for as a purchase. Accordingly, the consolidated financial statements of the
Company do not include prior operating results of Community Bank.
Note 3- Merger Agreements
- -------------------------
On February 10, 1998, Olde Port Bank & Trust Company ("Olde Port") of
Portsmouth, New Hampshire, entered into a Plan and Agreement of Merger (the
"Olde Port Merger Agreement") with the Company whereby NECB will acquire all of
the outstanding common stock of Olde Port in a tax-free exchange of stock. Under
the terms of the Olde Port Merger Agreement, for each share of outstanding Olde
Port common stock, holders will receive NECB common stock with a market value of
$200.00, subject to certain adjustments. The exact exchange ratio will be
computed based upon the average closing price of NECB shares for the ten (10)
days preceding the last regulatory approval. Based upon the closing price for
NECB shares on February 9, 1998 of $24.75, Olde Port shareholders would be
entitled to receive approximately 8.08 shares of NECB common stock for each
share of Olde Port common stock owned, with a resulting transaction value of
approximately $13.8 million. The transaction is subject to approval by Olde Port
shareholders and various regulatory agencies. NECB expects that the transaction
will close on or about June 30, 1998 and will be accounted for as a pooling of
interests. Olde Port will become NECB's fourth banking subsidiary.
Olde Port operates out of a single banking office and serves Portsmouth and
the surrounding communities. At March 31, 1998, Old Port had assets of
approximately $50 million, deposits of approximately $51 million, loans of
approximately $30 million, and shareholders' equity of approximately $5 million.
On March 19, 1998, Bank of South Windsor ("BSW"), of South Windsor,
Connecticut, and NECB entered into a Plan and Agreement of Merger (the "BSW
Merger Agreement") whereby BSW will be acquired by NECB and merged with and into
New England Bank. Under the terms of the BSW Merger Agreement, NECB will acquire
BSW on a stock-for-stock basis in a tax-free exchange fixed at 1.3204 shares of
NECB common stock for each share of BSW common stock. Using NECB's closing price
on March 18, 1998 of $25.50 per share, the transaction would have a value of
$33.67 per
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share to BSW shareholders and an aggregate transaction value of approximately
$32.8 million. In the event that the average closing price of NECB stock, for
the twenty days ending on the date of final regulatory approval, is less than
$23.48, the exchange ratio will (subject to certain qualifications) be adjusted
to result in the receipt by BSW shareholders of NECB shares having a value of
$31.00 per share of BSW common stock.
At March 31, 1998, BSW had assets of approximately $153 million, deposits of
approximately $129 million, loans of approximately $96 million, and
shareholders' equity of approximately $11 million. BSW is a
Connecticut-chartered commercial bank and has banking offices in South Windsor,
Vernon and East Hartford, Connecticut.
Note 4- Disclosure for Statements of Cash Flows
- -----------------------------------------------
Schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
(Thousands of dollars)
Three Months Ended March 31, 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Loans charged off, net of recoveries $2,369 $ 216
Real estate acquired through foreclosure 828 247
Loans originated to facilitate sales of other real estate owned 653
Income tax paid 1,132 444
Interest paid 4,174 3,393
</TABLE>
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Part I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations--with net interest
income providing the vast majority of the Company's revenues. 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
revenue is primarily derived from service charges, fees and commissions related
to deposit accounts and the Company's service loan portfolio. As noted in Note 2
above, the acquisition of First Bank was accounted for as a pooling of
interests. As such, all prior results have been restated as though the companies
had been combined as of the earliest period presented.
NECB reported record net income for the first quarter of 1998 of
$1,889,000, or $0.36 per diluted share, compared to net income of $1,502,000, or
$0.30 per diluted share, reported in 1997. This represents an increase of
$387,000 or 26% over net income reported in the previous year. On an earnings
per share basis, 1998 net income increased 20% over recorded in the first
quarter of 1997. Returns on assets ("ROA") and equity ("ROE") also improved from
1997 and were 1.30% and 13.99%, respectively, for 1998 compared to 1.21% and
12.13%, respectively, for the comparative period.
Net interest income on a fully taxable-equivalent ("FTE") basis totaled
$6,838,000 for 1998 compared to $6,362,000 in 1997. The net interest margin
declined from a historical high of 5.52% in the first quarter of 1997 to 5.13%
in first quarter of 1998. The decrease in the margin is largely due to increased
competition among area lenders coupled with increased funding costs.
The provisions for possible loan losses were $322,000 compared to $273,000
in the comparable period in 1997. The $49,000 increase is largely due to the
increased size of the loan.
Noninterest income increased $1,574,000 and totaled $2,582,000 in 1998
compared to $954,000 in 1997. Compared to the first quarter of 1997, gains from
the sale of securities increased $1,231,000 (with $898,000 being realized by the
parent company) and gains from the sale of mortgage loans increased $244,000.
Additionally, service charges, fees and commissions rose $92,000, or 15%, and
totaled $714,000 compared to the $622,000 recorded in the quarter ended March
31, 1997.
Noninterest expense totaled $5,819,000 in the first quarter of 1998
compared to $4,597,000 in 1997. The increase primarily resulted from the
$718,000 in expense to facilitate a bulk sale of workout loans (see "Financial
Condition--Non-performing Assets" for management's discussion concerning this
transaction) and increased compensation costs associated with NECB's acquisition
of Community Bank. NECB's efficiency ratio, which measures how much a dollar or
revenue costs to produce, equaled 58.7% for the first quarter of 1998 compared
to 62.0% for the same period in 1997.
Total loans at March 31, 1998 amounted to $399,653,000 compared to
$408,535,000 at December 31, 1997. Absent the effect of the bulk loan sale,
loans would have increased slightly during the quarter. Total deposits amounted
to $509,592,000 at March 31, 1998 compared to $522,644,000 at December 31, 1997.
A decline in NECB's deposit base during the first quarter of the year is a
recurring phenomenon observed by management. To partially offset this outflow,
NECB increased its use of alternative funding sources by increasing its
long-term debt outstanding during the quarter to $19,580,000 at March 31, 1998
compared to $11,612,000 at year-end 1997.
Shareholders' equity increased $1,425,000 from $53,823,000 at December 31,
1997 to $55,248,000 at quarter-end. At March 31, 1998, the ratio of equity to
total assets equaled 9.17%. When goodwill resulting from the Equity Bank BANK,
MSB and Community Bank acquisitions is excluded, tangible equity capital is
reduced to $50,108,000,or 8.31% of total assets. The resulting tangible book
value per share amounted to $9.69 at March 31, 1998 compared to $8.92 at
December 31, 1997.
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RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- -----------------------------------------------------------------
For the three months ended March 31, 1998, the Company reported net income
of $1,889,000, or $0.36 per diluted share, compared to $1,502,000, or $0.30 per
diluted share, for the same period of 1997. The largest factor in the
improvement was an increase of $1,574,000, or 165%, in noninterest income. Also
showing improvement was net interest income, which increased $458,000, or 7.2%,
from the same period in 1997. Also increasing was noninterest expense, which
rose $1,222,000, or 27%, to $5,819,000 in the first quarter of 1998 compared to
1997.
Net Interest Income
- -------------------
The principal earning asset of the Company is its loan portfolio--which is
comprised of loans to finance operations of businesses located primarily within
its market area, mortgage loans to finance the purchase or improvement of
properties used by businesses and mortgage and personal loans to individuals.
Representing approximately a quarter of the Company's earning assets, NECB's
investment portfolio also plays an important part in the management of the
Company's balance sheet. While providing a source of revenue, these funds are
used to provide reserves and meet the liquidity needs of the Company. Excess
reserves are available to meet the borrowing needs of the communities NECB
serves. For the following discussion, interest income is presented on a fully
taxable-equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and securities as if such interest were taxed at the
statutory Federal income tax rate of 34% for all periods presented.
(Amounts in thousands)
Three Months Ended March 31, 1998 1997 % Change
- ---------------------------------------------------------------------------
Interest income (financial statements) $11,007 $ 9,609 14.5%
Tax equivalent adjustment 58 40 45.0%
------- -------
Total interest income (on an FTE basis) 11,065 9,649 14.7%
Interest expense (4,227) (3,287) 28.6%
------- -------
Net interest income (on an FTE basis) $ 6,838 $ 6,362 7.5%
======= =======
For the first quarter of 1998, net interest income on an FTE basis was
$6,838,000, a 7.5% increase over the $6,362,000 in the comparable period in
1997. A key factor in the $476,000 increase in 1998 was the increase in average
loans outstanding. Internal growth and the acquisition of Community Bank (which
provided an additional $55,000,000 in loans outstanding) served to increase
interest income by $1,749,000 during the first quarter of 1998 compared to the
same period a year earlier.
The net interest margin measures the difference in yield on, and the mix
of, interest-earning assets and interest-bearing liabilities. As shown in the
table below, the margin for the quarter ended March 31, 1998 decreased to 5.13%
from 5.52% in 1997. The yield on earning assets was reduced by 8 basis points
and equaled 8.30% to 8.38% while the yield on interest-bearing liabilities
increased 44 basis points and equaled 3.95% for the quarter ended March 31, 1998
compared to 3.51% a year earlier. Helping to lessen the effect of increased
competition from area lenders (which served to reduce the yield on NECB's loan
portfolio to 8.85% in 1998 from 9.27% in 1997) was an improved mix of
interest-earning assets. For the first quarter of 1998, average loans
outstanding and average investment securities (including held-to-maturity and
available-for-sale) represented 76% and 22% of earning assets, respectively,
compared to 71% and 27%, respectively, for the same period last year.
Additionally, a 200 basis point increase in the percentage of earning assets
funded by interest-earning assets (from 15% during the first quarter of 1997 to
17% in 1998) served to help reduce the Company's funding costs.
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<CAPTION>
Consolidated Average Balances/Interest Earned or Paid/Rates
- -----------------------------------------------------------
Three Months Ended March 31, 1998 March 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Amounts in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 4,605 $ 60 5.28% $ 7,289 $ 84 4.67%
Securities held-to-maturity 10,442 182 7.08% 13,257 225 6.88%
Securities available-for-sale 110,940 1,788 6.53% 114,214 1,746 6.20%
Mortgages held for sale 3,949 70 7.19% 1,243 23 7.50%
Loans (A) 410,778 8,965 8.85% 331,213 7,571 9.27%
-------- ------ -------- ------
Total interest-earning assets 540,714 11,065 8.30% 467,216 9,649 8.38%
Allowance for loan losses (7,209) (6,744)
Cash and due from banks 26,417 20,058
Other assets 29,729 23,520
-------- --------
Total Assets $589,651 $504,050
======== ========
Liabilities:
Regular savings deposits $111,224 $ 552 2.01% $104,157 $ 357 1.39%
NOW account deposits 68,250 310 1.84% 73,260 292 1.62%
Money market deposits 3,062 16 2.12% 4,254 20 1.91%
-------- ------ -------- ------
Total savings deposits 182,536 878 1.95% 181,671 669 1.49%
Time deposits 224,349 2,987 5.40% 186,512 2,452 5.33%
Short-term borrowings 12,639 146 4.68% 4,744 58 4.96%
Long-term borrowings 14,565 216 6.01% 6,609 108 6.63%
-------- ------ -------- ------
Total interest bearing liabilities 434,089 4,227 3.95% 379,536 3,287 3.51%
Demand deposits 96,238 71,488
Other liabilities 4,564 2,816
-------- --------
Total Liabilities 534,891 453,840
Equity 54,760 50,210
Total Liabilities & Equity $589,651 $504,050
======== ========
Net interest income--FTE basis $6,838 $6,362
====== ======
Net interest margin 5.13% 5.52%
Net interest spread 4.35% 4.86%
</TABLE>
(A) AVERAGE LOANS INCLUDE NONACCRUING LOANS.
Rate/Volume Analysis
- --------------------
Changes in net interest income are divided into two components--the changes
resulting from the changes in average balances of earning assets and
interest-bearing liabilities (or "volume") and the changes in the rates earned
or paid on those balances. The changes in interest income and interest expense
attributable to changes in both volume and rate, which cannot be segregated,
have been allocated proportionately to the absolute values of the changes due to
volume and rate. The following table is presented on a FTE basis.
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Change due to
Total Change in:
Increase -------------------
(Amounts in thousands) (Decrease) Rate Volume
- -------------------------------------------------------------------
Interest earned on:
Federal funds sold $ (24) $ 10 $ (34)
Securities held-to-maturity (43) 6 (49)
Securities available-for-sale 42 93 (51)
Mortgages held for sale 47 (1) 48
Loans 1,394 (355) 1,749
------- ------- -------
Total interest-earning assets 1,416 (247) 1,663
------- ------- -------
Interest paid on:
Regular savings deposits $ 195 $ 169 $ 26
NOW account deposits 18 39 (21)
Money market deposits (4) 2 (6)
------- ------- -------
Total savings deposits 209 210 (1)
Time deposits 535 32 503
Short-term borrowings 88 (3) 91
Long-term borrowings 108 (11) 119
------- ------- -------
Total interest-bearing liabilities 940 228 712
------- ------- -------
Net interest income change $ 476 $ (475) $ 951
======= ======= =======
Noninterest Income
- ------------------
For the quarter ended March 31, 1998, noninterest income increased sharply
and totaled $2,528,000, compared to $954,000 reported for the first quarter in
1997. NECB realized gains from the sale of securities during the first quarter
of 1998 of $1,229,000. In addition to gains recorded by the Subsidiaries, the
parent company recorded a gain of $898,000 from the sale of its own investment
securities. Gains from the sale of mortgage loans also increased markedly from
1997. With moderate interest rates (the bellwether 30-year bond remained under
6% for the quarter), demand for home purchase financing remained strong and
enabled NECB to originate a record $49,000,000 in loans during the 1998 first
quarter. In turn, gains from the sale of these loans increased $406,000, or
300%, compared to the same quarter in 1997.
Service charges, fees and commissions also increased substantially, totaling
$714,000 in the first quarter of 1998. This represents a $92,000, or 15%,
increase compared to the $622,000 recorded in first quarter of 1997. This
increase resulted from several factors. The inclusion of Community Bank (which,
as noted earlier, was accounted for as a purchase), selected price increases and
increased volume of services provided to our growing base of customers all
contributed to this increase.
Noninterest Expense
- -------------------
Noninterest expenses amounted to $5,819,000 during the first quarter of
1998. This is a $1,222,000 increase, or 27%, over $4,597,000 reported during the
same period in 1997. The increase included a $718,000 charged related to the
bulk sale of loans. The inclusion of Community Bank increased expenses by
$426,000. Other expenses increased by $78,000 during the first quarter of 1998
compared to the same quarter last year. This modest increase is the result of
economies achieved following the August, 1997 acquisition of First Bank
partially offset by increases related to expanding activities such as mortgage
production and specialized lending.
FINANCIAL CONDITION
Total assets at March 31, 1998 were $603,013,000, a decrease of $3,157,000
from $606,170,000 at December 31, 1997. During the first quarter of 1998 loan
production remained strong, especially residential mortgage loans.
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These loans are typically sold in the secondary market upon closing. The Company
experienced a modest rise in prepayments, which has been noted throughout the
industry. When the effect of the bulk loan sale is excluded, outstanding loan
rose slightly by $1,274,000. Loans consisted of the following:
(Amounts in thousands)
March 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------
Commercial and financial $ 105,826 $ 102,105
Real estate:
Construction 17,292 19,620
Residential 104,248 111,32
Commercial 132,972 133,803
Consumer 39,653 41,686
--------- ---------
Loans outstanding $ 399,653 $ 408,535
========= =========
Securities available-for-sale and held-to-maturity decreased from December
31, 1997 and ended the first quarter of 1998 at $106,137,000 and $9,925,000,
respectively, compared to $120,448,000 and $11,336,000, respectively, at
year-end. Reflecting the receipt of proceeds from the loan sale, federal funds
increased substantially and totaled $21,107,000 at quarter-end compared to
$4,650,000 at December 31, 1997. Federal funds--which are overnight loans to
other banks--represent excess reserves that are the Company's most liquid assets
and as such are available to meet short-term cash flow needs of the Company and
its customers.
The $404,000 reduction in other real estate owned brought this account down
to $2,466,000, or 0.41% of total assets, at March 31, 1998. During the first
three months of the year the Company acquired properties with a value of
$828,000 through foreclosure and disposed of properties with a market value of
$1,241,000.
Total deposits, which constitute the principal funding source of the
Company's assets, decreased $13,052,000 from December 31, 1997 and amounted to
$509,592,000 at March 31, 1998. This is consistent with past years and reflects
seasonal cash flows of NECB's deposit customers--especially noninterest
deposits. During the quarter, management increased long-term debt (from the
Federal Home Loan Bank of Boston) with two amortizing notes:
-------------------------------------------------------------------
Term Rate Maturity Date Amount
-------------------------------------------------------------------
5-Year 5.95% February 18, 2003 $4,000,000
10-Year 5.93% February 19, 2008 $4,000,000
-------------------------------------------------------------------
Total shareholders' equity was $55,248,000 at March 31, 1998, an increase of
$1,425,000 over December 31, 1997.
Securities held-to-maturity
- ---------------------------
Securities held-to-maturity are shown in the Company's balance sheets on an
amortized cost basis. Amortized cost is the original cost adjusted for the
effect of accumulated amortization of premiums and accretion of discounts. As
summarized in the table below, investments in securities held-to-maturity
decreased from $11,336,000 at December 31, 1997 to $9,925,000 at March 31, 1998.
Page -13-
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------
Amortized Amortized
Cost Fair Cost Fair
(Amounts in thousands) Basis Value Basis Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $ 5,399 $ 5,422 $ 6,398 $ 6,430
Debt securities issued by states and
political subdivisions of the states 2,839 2,934 2,841 2,944
Mortgage-backed securities 1,472 1,478 1,882 1,885
Other debt securities 215 221 215 219
------- ------- ------- -------
$ 9,925 $10,055 $11,336 $11,478
======= ======= ======= =======
</TABLE>
Securities available-for-sale
- -----------------------------
Securities available-for-sale are shown in the Company's balance sheets at
fair value. The unrealized gain or loss resulting from such valuation, reduced
by the effect of income taxes, is reflected as a separately disclosed component
of shareholders' equity. At March 31, 1998, the net unrealized gain on
securities available-for-sale was $1,736,000 while at December 31, 1997 the net
unrealized gain was $1,923,000, representing a decrease in net unrealized gains
of $187,000. As shown in the table below, investments in securities
available-for-sale totaled $106,137,000 at March 31, 1998 versus $120,448,000 at
December 31, 1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------
Amortized Amortized
Cost Fair Cost Fair
(Amounts in thousands) Basis Value Basis Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable equity securities $ 15,969 $ 16,981 $ 19,072 $ 20,190
Debt securities issued by the U.S. Treasury
and other U.S. government agencies 68,092 68,573 76,373 76,948
Corporation debt securities 8,991 9,080 9,968 10,053
Asset-based securities 517 518 527 527
Mortgage-backed securities 10,832 10,985 12,585 12,730
-------- -------- -------- --------
$104,401 $106,137 $118,525 $120,448
======== ======== ======== ========
</TABLE>
Nonperforming Assets
- --------------------
Nonperforming assets ("NPAs") are assets on which income recognition in the
form of principal and/or interest has either ceased or is limited, thereby
reducing the Company's earnings. Maintaining a low level of NPAs is important to
the ongoing success of NECB. The Company's comprehensive credit review and
approval process is critical to the ability to minimize NPAs on a long-term
basis. In addition to the negative impact on net interest income and credit
losses, NPAs also increase operating expenses due to the costs associated with
collection efforts.
NPAs include nonaccrual loans and other real estate owned ("OREO").
Generally, loans are placed in nonaccrual status when they are past due greater
than ninety days or the repayment of interest or principal is considered to be
in doubt. OREO consists of properties acquired through foreclosure proceedings.
These properties are recorded at the lower of the carrying value of the related
loans or the estimated fair market value less estimated selling costs. Charges
to the allowance for loan losses are made to reduce the carrying amount of loans
to the fair market value of the properties less estimated selling expenses upon
reclassification as OREO. Subsequent reductions, if needed, are charged to
operating income. In addition to NPAs, the asset quality of the Company can be
measured by the amount of the provision, charge-offs and several credit quality
ratios presented in the discussion concerning "Provision and Allowance for Loan
Losses."
Page -14-
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands)
March 31, 1998 December 31,1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 3,934 $ 9,075
OREO 2,466 2,870
------- -------
Total nonperforming assets $ 6,400 $11,945
======= =======
Loans past due in excess of ninety days and accruing interest $ 641 $ 951
</TABLE>
NPAs decreased $5,545,000 or 46% to $6,400,000 at March 31, 1998 from
$11,945,000 at December 31, 1997. At March 31, 1998 nonaccrual loans as a
percentage of total loans and nonperforming assets as a percentage of total
assets were 0.98% and 1.17%, respectively, compared to 2.20% and 1.97%, at
December 31, 1997. The decrease in total NPAs in the quarter ended March 31,
1998 primarily resulted from a bulk sale of loans completed at quarter-end.
Taking advantage of a favorable secondary market for such loans, NECB sold
$11,988,000 of problem assets to an investor that specializes in workout loans.
The majority of the assets sold had been obtained in several recent acquisitions
(e.g., the Community Bank acquisition brought with it approximately $4,209,000
in NPAs). Management expects the sale to have two positive effects upon its
ongoing performance (i) net interest income will be helped by the reemployment
of the sale proceeds and (ii) certain costs related to the effort to work-out
and/or collect these loans will be avoided.
OREO consists of properties acquired through foreclosure proceedings. These
properties are recorded at the lower of the carrying value of the related loans
or the estimated fair market value less estimated selling costs. Charges to the
allowance for loan losses are made to reduce the carrying amount of loans to the
fair market value of the properties less estimated selling expenses upon
reclassification as OREO. Subsequent reductions when necessary are charged to
operating income.
Activity in Nonperforming Assets
(Amounts in thousands)
Three Months ending March 31, 1998 1997
- --------------------------------------------------------------------------------
December 31, 1997 and 1996 $11,945 $8,757
Additions 2,622 1,001
Reductions:
Payments (301) (446)
Charge-offs and writedowns (2,556) (354)
Sales, net (5,310) (1,128)
-------- -------
Ending Balance, March 31, 1998 and 1997 $ 6,400 $ 7,830
======== =======
As noted above, the decrease in nonperforming assets is primarily due to the
bulk sale.
Provision and Allowance for Loan Losses
- ---------------------------------------
NECB's allowance for loan losses represents amounts available for future
credit losses. Management continually assesses the adequacy of the allowance for
loan losses in response to current and anticipated economic conditions, specific
problem loans, historical net charge-offs and the overall risk profile of the
loan portfolio. Management allocates specific allowances to individual problem
loans based upon its analysis of the potential for loss perceived to exist
related to such loans. In addition to the specific allowances for individual
loans, a portion of the allowance is maintained as a general allowance. The
amount of the general allowance is determined through management's analysis of
the potential for loss inherent in those loans not considered problem loans.
Among the factors considered by management in this analysis are the number and
type of loans, nature and amount of collateral pledged to secure such loans and
current economic conditions. The allowance for loan losses is not a precise
amount but is derived from judgments based on the above factors.
The following table summarizes the activity in the allowance for possible
loan losses for the quarters ended March 31, 1998 and 1997. The allowance is
maintained at a level consistent with identified loss potential and the
perceived risk in the portfolio.
Page -15-
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended March 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance beginning of period $ 9,257 $ 6,660
Provisions charged to operations 322 273
Recoveries on loans previously charged-off 125 73
Charge-offs taken in conjunction with bulk loan sale (i.e., specific allocated reserves) (1,392) 0
Loans charged-off (1,102) (279)
------- -------
Balance end of period $ 7,210 $ 6,727
======= =======
</TABLE>
Provisions for possible loan losses charged to operations for the first
three months of 1998 were $322,000, an increase of $49,000 from the $273,000
recorded in the same period in 1997. During the three-month period, charge-offs
increased by $2,167,000 largely due to the loan sale.
Capital
- -------
The Company endeavors to maintain an optimal amount of capital upon which an
attractive return to shareholders will be realized over the short and long run
while meeting all regulatory requirements for minimum levels of capital.
As of March 31, 1998, the Company exceeded all regulatory capital ratios and
the subsidiaries were categorized as "well capitalized." The various capital
ratios of the Company for March 31, 1998 and 1997 were:
Minimum Level 1998 1997
------------- ---- ----
Total Risk-Based............................ 8% 12.9% 14.5%
Tier 1 Risk-Based........................... 4% 11.7% 13.2%
Leverage.................................... 4% 8.3% 9.1%
Liquidity
- ---------
It is management's objective to ensure the continuous ability to meet cash
needs as they arise. Such needs may occur from time to time as a result of
seasonal declines in deposit levels, response to changes in interest rates paid
on deposits and interest rates charged for loans and fluctuations in the demand
for the Banks' various loan products. Accordingly, the Company maintains
liquidity that provides the flexibility to meet its cash needs. The liquidity
objective is achieved through the maintenance of readily marketable assets as
well as a balanced flow of asset maturities and prudent pricing on loan and
deposit agreements. The Company has alternative sources of liquidity, including
repurchase agreements and lines of credits provided by the FHLBB to the
Subsidiaries, which together provide the Company with flexibility in managing
its liquidity position. The maturities of investment securities and cash flows
from the repayments of outstanding loans are expected to provide the Company
with adequate liquidity over the coming months.
The Year 2000 Problem
- ---------------------
NECB, like all institutions that utilize computer technology, is facing
challenges associated with the inability of many existing computer systems to
process time-sensitive data accurately beyond the year 1999 (referred to as the
"Year 2000 Problem"). The Year 2000 Problem is the result of computer programs
using two digits rather than four in date fields that define the year. Any
computer programs used by NECB that have time-sensitive software may recognize a
date field using "00" as the year 1900 rather than the year 2000. If not
modified or replaced, these programs could cause system failures or
miscalculations, which could adversely affect NECB's ability to process customer
transactions or provide customer service.
NECB has conducted a comprehensive review of its computer systems to
identify all systems that could be affected by the Year 2000 Problem and
developed a comprehensive project management process to modify or replace all
affected systems and test them for Year 2000 compliance. NECB relies upon
third-party providers for its computer software.
Page -16-
<PAGE>
NECB is monitoring the activities of its providers to ensure that appropriate
development and implementation plans to address the Year 2000 Problem are in
place. NECB has taken steps to identify alternative vendors in the event that
one or more of these providers fail to become Year 2000 compliant. While NECB
expects its Year 2000 plan to be completed on a timely basis (to allow for
adequate testing in late 1998 and 1999), there can be no assurance that the
systems of other companies on which NECB's systems may rely also will be
completed in a timely fashion. In addition, NECB exchanges data with a number of
other entities, such as credit bureaus and governmental entities. The failure of
these entities to adequately address the Year 2000 Problem could adversely
affect NECB's ability to conduct its business.
Costs associated with modifying existing system applications have been and
will continue to be expensed as incurred. NECB does not expect incremental costs
associated with any modifications for Year 2000 compliance to be material.
Forward Looking Statements
- --------------------------
Certain statements contained in this Quarterly Report on Form 10-Q,
including those contained in this Item 1, are forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. Such forward looking statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially from
future results express or implied by such statements. Such factors include, but
are not limited to: changes in interest rates, regulation, competition and the
local and regional economy.
Page -17-
<PAGE>
Part II: Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit Number Exhibit
27 Financial Data Schedule
(b) Form 8-K; Current Reports. The following reports were filed with the
Securities and Exchange Commission during the quarter ended March 31, 1998:
(i) Acquisition of Community Bank
In an initial Item 2 report filed on January 5, 1998 (and amended on March 13,
1998) it was reported that NECB had completed its acquisition of Community Bank.
In the amended filing, NECB disclosed that its acquisition of the stock of
Community Bank did not constitute an acquisition of a significant amount of
assets for which a report under Item 2 was required. Consequently, NECB amended
its original Item 2 disclosure on Form 8-K and transferred it to Item 5 the
information included under Item 2 in the original report.
(ii) Acquisition of Olde Port
On February 26, 1998 it was reported, under Item 5, that at separate
meetings on February 10, 1998 the Boards of Directors of NECB and Olde Port
approved a definitive agreement whereby Olde Port will be acquired by NECB. Olde
Port will become NECB's fourth banking subsidiary.
(iii) Acquisition of BSW
On march 24, 1998 it was reported, under Item 5, that at separate meetings
on March 19, 1998 the Boards of Directors of NECB and BSW approved a definitive
agreement whereby BSW will be acquired by NECB. BSW will merged with and into
NECB's New England Bank subsidiary.
Page -18-
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC.
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.
NEW ENGLAND COMMUNITY BANCORP, INC.
Date: May 13, 1998 By: /s/ ANSON C. HALL
--------------------------------
Anson C. Hall
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000752324
<NAME> NEW ENGLAND COMMUNITY BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 34,796
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 21,107
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 114,326
<INVESTMENTS-MARKET> 116,192
<LOANS> 349,344
<ALLOWANCE> 7,210
<TOTAL-ASSETS> 603,013
<DEPOSITS> 509,592
<SHORT-TERM> 14,466
<LIABILITIES-OTHER> 4,127
<LONG-TERM> 19,580
0
0
<COMMON> 517
<OTHER-SE> 54,731
<TOTAL-LIABILITIES-AND-EQUITY> 603,013
<INTEREST-LOAN> 9,035
<INTEREST-INVEST> 1,912
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 11,007
<INTEREST-DEPOSIT> 3,865
<INTEREST-EXPENSE> 4,227
<INTEREST-INCOME-NET> 6,780
<LOAN-LOSSES> 322
<SECURITIES-GAINS> 1,229
<EXPENSE-OTHER> 5,819
<INCOME-PRETAX> 3,167
<INCOME-PRE-EXTRAORDINARY> 3,167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,889
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 5.13
<LOANS-NON> 5,064
<LOANS-PAST> 641
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 20,361
<ALLOWANCE-OPEN> 9,257
<CHARGE-OFFS> 2,494
<RECOVERIES> 125
<ALLOWANCE-CLOSE> 7,210
<ALLOWANCE-DOMESTIC> 7,210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
