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, 1999 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, 1999 was 7,031,180.
The total number of pages in this report is 18.
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets--March 31, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Income--three months ended
March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows--three months ended
March 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Part II. OTHER INFORMATION 16
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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<PAGE>
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars; except share data)
<TABLE>
<CAPTION>
March 31, December 31
1999 1998
(Unaudited)
===========================================================================================
<S> <C> <C>
ASSETS:
Cash and due from banks $ 39,256 $ 39,279
Short-term investments 7,120 12,080
Federal funds sold 1,898 1,485
--------- ---------
Cash and cash equivalents 48,274 52,844
Interest bearing deposits with banks 595 694
Securities held-to-maturity 5,210 5,675
Securities available-for-sale 186,293 191,867
Federal Home Loan Bank stock, at cost 4,881 4,881
Loans outstanding 512,905 515,980
Less: allowance for possible loan losses (10,267) (10,092)
--------- ---------
Net loans 502,638 505,888
Loans held-for-sale 5,618 5,835
Premises and equipment 13,677 13,932
Other real estate owned 1,703 1,636
Goodwill 4,748 4,847
Other assets 14,292 14,102
--------- ---------
Total Assets $ 786,909 $ 803,887
========= =========
LIABILITIES:
Deposits:
Noninterest bearing $ 140,406 $ 160,876
Interest bearing 494,624 503,202
--------- ---------
Total deposits 635,030 664,078
Short-term borrowings 48,293 34,848
Long-term debt 27,115 27,279
Other liabilities 4,292 4,332
--------- ---------
Total Liabilities 714,730 730,537
SHAREHOLDERS' EQUITY:
Common stock, $0.10 par value, authorized 20,000,000 shares:
March 31, 1999,
7,036,000 outstanding; December 31, 1998,
7,031,000 outstanding 703 703
Additional paid-in capital 61,817 61,811
Retained earnings 10,705 9,452
Treasury Stock -March 31, 1999, 75,000 shares (1,498)
Net unrealized gain on securities
available-for-sale 452 1,384
--------- ---------
Total Shareholders' Equity 72,179 73,350
--------- ---------
Total Liabilities & Shareholders' Equity $ 786,909 $ 803,887
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
(Thousands of dollars; except per share data) Three Months Ended
March 31,
1999 1998
========================================================================================================
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $11,067 12,204
Securities:
Taxable interest 2,317 2,480
Interest exempt from federal income taxes 181 134
Dividends 335 162
Federal funds sold and other interest 217 121
------- ------
Total interest income 14,117 15,101
INTEREST EXPENSE:
Deposits 4,228 5,205
Borrowed funds 790 579
------- ------
Total interest expense 5,018 5,784
Net interest income 9,099 9,317
Provision for possible loan losses 165 439
------- ------
Net interest income after provision for possible loan losses 8,934 8,879
NONINTEREST INCOME:
Service charges, fees and commissions 1,077 946
Investment securities gains, net 175 1,242
Mortgage banking revenues 757 541
Other 70 78
------- ------
Total noninterest income 2,079 2,807
NONINTEREST EXPENSE:
Salaries and employee benefits 3,864 3,795
Occupancy 767 747
Furniture and equipment 470 426
Outside services 298 428
Postage and supplies 296 297
Losses, writedowns, expenses - other real estate owned 34 (78)
Amortization of goodwill 98 98
Loss on sale of portfolio loans 715
Restructuring provision 828
Other 923 1,145
------- ------
Total noninterest expense 7,578 7,573
------- ------
Income before taxes 3,435 4,112
Income taxes 1,253 1,616
------- ------
Net Income $2,182 $2,496
======= ======
Net income per share--Basic $0.31 $0.35
Net income per share--Diluted $0.31 $0.34
Weighted average shares of Common Stock outstanding--Basic 7,005 7,043
Weighted average shares of Common Stock outstanding--Diluted 7,143 7,264
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Thousands of dollars) Three Months Ended
March 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,182 $ 2,496
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 527 375
Losses from sale or disposal and provisions to reduce the carrying value
of other real estate owned, net 2 148
Securities losses (gains), net (175) (1,242)
Accretion of discounts and amortization of premiums on bonds, net (15) (24)
Accretion, net of amortization, of purchase accounting adjustments 9 (3)
Amortization of goodwill 98 98
Provision for possible loan losses 165 439
Loss on sale of portfolio loans, net 715
(Increase) decrease in other assets, net 107 826
Decrease (increase) in loans held-for-sale 3,123 (5,034)
(Decrease) increase in other liabilities, net (757) (122)
--------- ---------
Net cash provided by (used for) operating activities 5,266 (1,328)
--------- ---------
FINANCING ACTIVITIES:
Net decrease in noninterest-bearing accounts (20,470) (16,766)
Net (decrease) increase in interest-bearing accounts (8,578) 654
Net increase in short-term borrowings 13,445 14,291
Net increase in long-term borrowings (164) (2,729)
Proceeds from issuance of common stock (79) 103
Cash dividends paid (844) (465)
--------- ---------
Net cash used for financing activities (16,690) (4,912)
--------- ---------
INVESTING ACTIVITIES:
Loans originated, net of principal collections 2,459 1,237
Decrease in interest bearing time deposits 99 285
Proceeds from sale of portfolio loans 9,716
Purchases of securities available-for-sale (29,648) (3,825)
Proceeds from sales of securities available-for-sale 430 8,823
Proceeds from maturities of securities available-for-sale 32,892 9,829
Proceeds from maturities of securities held-to-maturity 465 1,410
Proceeds from sales of other real estate owned 282 1,510
Purchases of premises and equipment, net (168) (160)
Sales of premises and equipment 47
Capitalization of expenditures on other real estate owned (4) (49)
--------- ---------
Net cash provided by (used for) investing activities 6,854 28,776
--------- ---------
Increase (decrease) in cash and cash equivalents (4,570) 22,536
Cash and cash equivalents, beginning of period 52,844 50,633
--------- ---------
Cash and cash equivalents, end of period $ 48,274 $ 73,169
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
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"), Community Bank ("Community Bank"), and
Olde Port Bank (together the "Subsidiaries"). The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for 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 1998 Annual Report on Form 10-K.
Note 2 - Mergers and Acquisitions
- ---------------------------------
During the third quarter of 1998, NECB completed two acquisitions.
On, July 10, 1998, Olde Port Bank & Trust Company ("Olde Port"), a New
Hampshire state-chartered bank and trust company, became NECB's fourth wholly
owned banking subsidiary. NECB acquired Olde Port by issuing 585,986 shares of
the Company's common stock for all of the outstanding common shares of Olde Port
and all fully vested and exercisable stock options.
On August 14, 1998, NECB acquired Bank of South Windsor ("South Windsor"),
of South Windsor, Connecticut, by issuing 1,270,720 shares of the Company's
common stock for all of the outstanding common shares of South Windsor. In
conjunction with the transaction, shares of South Windsor common stock
beneficially owned by NECB were cancelled and retired.
The acquisitions of Olde Port and South Windsor were accounted for as
poolings of interests and, as such, all prior period results have been restated
as though the companies had been combined as of the earliest period presented.
Note 3 - Disclosure for Statements of Cash Flows
- ------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule of noncash investing and financing activities:
Loans charged off, net of recoveries $(10) $1,931
Real estate acquired through foreclosure 364 828
Loans originated to facilitate sales of other real estate owned 104 0
Income tax paid 2,181 1,132
Interest paid 5,235 5,828
</TABLE>
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<PAGE>
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 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 discussed in Note 2 above,
the acquisitions of South Windsor and Olde Port were accounted for as poolings
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 1999 of
$2,182,000, or $0.31 per diluted share, compared to net income of $2,496,000, or
$0.34 per diluted share, reported in 1998. This represented a decrease of
$314,000 or 13% compared to net income reported in the previous year. On an
earnings per share basis, 1999 net income decreased 9% from the first quarter of
1998. Returns on assets ("ROA") and equity ("ROE") improved from 1998 and were
1.30% and 13.99%, respectively, for 1999 compared to 1.21% and 12.13%,
respectively, for the comparative period.
Net interest income on a fully taxable-equivalent ("FTE") basis totaled
$9,287,000 for the quarter ended March 31, 1999 compared to $9,461,000 for the
same period in 1998. The net interest margin declined modestly from 5.26% to
5.20% in the quarter just ended. The decrease in net interest income resulted
primarily from lower interest rates partially offset by volume related changes
in both assets and liabilities. The average rate earned on earning assets
decreased 46 basis points while the average rate paid for the use of interest
bearing liabilities decreased 39 basis points.
The provisions for possible loan losses were $165,000 compared to $439,000
in the comparable period in 1998. The $274,000 decrease resulted from a decrease
in loans outstanding and improved loan quality.
Noninterest income excluding security gains increased $339,000 or 22% in
the first quarter including a $216,000 increase in mortgage banking revenues.
Securities gains, meanwhile, decreased $1,067,000 when compared to the unusally
high $1,242,000 reported in the first quarter of 1998. The first quarter of 1998
included $898,000 realized by the parent company.
Noninterest expense totaled $7,578,000 in the first quarter of 1999
compared to $7,573,000 in 1998. Both periods included unusual events which do
not recur on a regular basis. In 1999 an $828,000 charge was taken related to
the formation of a passive investment company, while a $715,000 expense was
recorded in the first quarter of 1998 to recognize the loss related to a bulk
sale of problem loans. When these actions are excluded, other noninterest
expenses amounted to $6,750,000 in the first quarter of 1999 compared to
$6,858,000 a year earlier. NECB's efficiency ratio, which measures how much a
dollar of revenue costs to produce, equaled 58.03% for the first quarter of 1999
compared to 61.76% for the same period in 1998.
Loans outstanding at March 31, 1999 amounted to $512,905,000 compared to
$515,980,000 at December 31, 1998. Total deposits amounted to $635,030,000 at
March 31, 1999 compared to $664,078,000 at December 31, 1998. NECB's deposit
base typically declines during the first quarter of the year from year-end highs
and is a recurring phenomenon observed by management. To partially offset this
outflow, NECB increased its use of alternative funding sources by increasing its
short-term borrowings during the quarter to $48,293,000 at March 31, 1999
compared to $34,848,000 at year-end 1998.
At March 31, 1999, shareholders' equity was $72,179,000 and represented
9.17% of total assets. During the quarter NECB announced a program to repurchase
up to 5% or approximately 350,000 shares of the Company's outstanding shares of
common stock. By the end of the quarter, 75,000 shares were acquired at an
average price of $19.97 per share. Unrealized gains on securieties available for
sale decreased $932,000 during the quarter as a moderate rise in interest rates
reduced the market value of debt instruments. When goodwill resulting from
several previous acquisitions is excluded, tangible equity capital is reduced
Page -7-
<PAGE>
to $67,431,000, or 8.62% of total assets. The resulting tangible book value per
share amounted to $9.69 at March 31, 1999 compared to $9.74 at December 31,
1998.
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- -----------------------------------------------------------------
For the three months ended March 31, 1999, the Company reported net income
of $2,182,000, or $0.31 per diluted share, compared to $2,496,000, or $0.34 per
diluted share, for the same period of 1998. The quarter included a net change of
$500,000 arising from the provision of $828,000 related to the formation of a
passive investment corporation by the Connecticut subsidiary banks. When this
transaction is excluded, core operating income amounted to $2,682,000 or $0.38
per diluted share. This represents 7.5% increase in net operating income and an
11% increase in operating earnings per diluted share. This analysis has excluded
the effect of the loan sale in the first quarter of 1998 because it was
effectively offset by a gain from the sale of securities by the parent company.
The largest factor in the improvement was an increase of $1,574,000, or 165%, in
noninterest income.
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. These
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)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998 % Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income (financial statements) $14,117 $ 15,101 (6.5)%
Tax equivalent adjustment 188 144 30.6%
--------- --------
Total interest income (on an FTE basis) 14,305 15,245 (6.2)%
Interest expense (5,018) (5,784) (13.2)%
--------- --------
Net interest income (on an FTE basis) $ 9,287 $ 9,461 (1.8)%
========= ========
</TABLE>
For the first quarter of 1999 net interest income on an FTE basis was
$9,287,000, a 1.8% decrease from the $9,461,000 in the comparable period in
1998. A key factor in the $174,000 decrease in 1999 was the decrease in average
loans outstanding.
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, 1999 decreased to 5.20%
from 5.26% in 1998. The yield on earning assets was reduced by 46 basis points
and equaled 8.01% compared to 8.47%, while the average rate paid for
interest-bearing liabilities decreased 39 basis points to 3.62% for the quarter
ended March 31, 1999 compared to 4.01% a year earlier.
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<PAGE>
Consolidated Average Balances/Interest Earned or Paid/Rates
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Amounts in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold $ 2,425 $ 24 4.01% $ 8,938 $ 122 5.54%
Other short-term investments 18,789 257 5.55%
Investment securities:
Securities held-to-maturity 6,101 95 6.31% 11,509 167 5.88%
Securities available-for-sale 178,049 2,862 6.52% 166,367 2,788 6.80%
Mortgages held for sale 5,257 89 6.87% 3,949 71 7.29%
Loans (A) 513,254 10,978 8.67% 538,903 12,097 9.10%
---------- ------- --------- -------
Total interest-earning assets 723,875 14,305 8.01% 729,666 15,245 8.47%
Allowance for loan losses (10,188) (10,087)
Cash and due from banks 36,781 34,611
Other assets 33,525 38,002
---------- ---------
Total Assets $783,993 $792,192
======== ========
LIABILITIES:
Regular savings deposits $156,395 $ 873 2.26% $146,836 $ 790 2.18%
NOW account deposits 85,760 310 1.47% 85,340 325 1.54%
Money market deposits 1,883 16 3.45% 8,921 82 3.73%
---------- ------- --------- -------
Total savings deposits 244,038 1,199 1.99% 241,097 1,197 2.01%
Time deposits 252,503 3,029 4.87% 299,896 3,954 5.35%
Short-term borrowings 34,216 341 4.04% 17,814 237 5.40%
Long-term borrowings 30,798 449 5.91% 26,098 396 6.15%
---------- ------- --------- -------
Total interest-bearing liabilities 561,555 5,018 3.62% 584,905 5,784 4.01%
Demand deposits 144,330 128,861
Other liabilities 3,973 7,789
---------- ---------
Total Liabilities 709,858 721,555
Equity 74,135 70,637
Total Liabilities & Equity $783,993 $792,192
======== ========
Net interest income--FTE basis $9,287 $9,461
Less adjustment for
Tax-exempt income (188) (144)
---------- -----------
Net interest income $9,099 $9,317
========== ===========
Net interest margin 5.20% 5.26%
Net interest spread 4.39% 4.46%
</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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<TABLE>
<CAPTION>
Total Change due to
Increase Change in:
(Amounts in thousands) (Decrease) Rate Volume
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON:
Federal funds sold $ (98) $ (27) $ (71)
Other short-term investments 257 0 257
Securities held to maturity (72) 11 (83)
Securities available for sale 74 (117) 191
Mortgages held for sale 18 (4) 22
Loans (1,119) (557) (562)
-------- -------- -------
Total interest-earning assets $ (940) $ (693) $ (247)
-------- -------- -------
INTEREST PAID ON:
Regular savings deposits $ 83 $ 309 $ 53
NOW account deposits (15) (17) 2
Money market deposits (66) (6) (60)
-------- -------- -------
Total savings deposits 2 8 (6)
Time deposits (925) (336) (589)
Short-term borrowings 104 (71) 175
Long-term borrowings 53 (16) 69
-------- -------- -------
Total interest-bearing liabilities (766) (415) (351)
--------- --------- --------
Net interest income change $ (174) $ (278) $ 104
========= ======== =======
</TABLE>
Noninterest Income
- ------------------
For the quarter ended March 31, 1999, noninterest income amounted to
$2,079,000, compared to $2,807,000 reported for the first quarter in 1998. NECB
realized gains from the sale of securities during the first quarter of 1999 of
$175,000 compared to $1,242,000 in the first quarter of 1998. In addition to
gains recorded by the Subsidiaries, during the first quarter of 1998 the parent
company recorded a gain of $898,000 from the sale of its own investment
securities. This gain effectively offset the $715,000 loss recorded on the bulk
sale of problem loans during that quarter. Mortgage Banking revenues increased
$216,000 as New England Community Mortgage ("NECM") expanded into New Hampshire
with facilities in Portsmouth and Hampton. Expansion also continues in
Connecticut as NECM prepares to open a new production facility in Middlebury to
serve a rapidly growing real estate market in that area.
Service charges, fees and commissions also increased $131,000 or 14% in the
first quarter of 1999. This increase resulted from several factors including
continuing expansion of commercial banking services such as cash management,
lock-box and merchant card sales processing.
Noninterest Expense
- -------------------
Noninterest expenses amounted to $7,578,000 during the first quarter of 1999
compared to $7,573,000 a year earlier. These results included an $828,000 charge
related to the formation of a passive investment corporation in 1999 and
$718,000 related to the bulk sale of loans in 1998. When these nonrecurring
transactions are excluded, the expenses are $6,750,000 in 1999 compared to
$6,858,000 a year earlier. NECB's efficiency ratio, which measures how much a
dollar of revenue costs to produce, equaled 58.03% for the first quarter of 1999
compared to 61.76% for the same period in 1998.
Page -10-
<PAGE>
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 1999 were $786,909,000, a decrease of $16,978,000
from $803,887,000 at December 31, 1998. During the first quarter of 1999 loan
production remained strong, especially residential mortgage loans. These loans
are typically sold in the secondary market upon closing.
Loans consisted of the following:
(Amounts in thousands)
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------
Commercial and financial $ 150,840 $ 146,962
Real estate:
Construction 22,926 23,862
Residential 116,674 123,446
Commercial 180,993 176,139
Consumer 41,472 45,571
----------- -----------
Loans outstanding $ 512,905 $ 515,980
Securities available-for-sale and held-to-maturity decreased from December
31, 1998 and ended the first quarter of 1999 at $186,293,000 and $5,210,000,
respectively, compared to $191,867,000 and $5,675,000, respectively, at
year-end.
At March 31, 1999 other real estate owned amounted to $1,703,000 or 0.2% of
total assets,virtually unchanged from $1,636,000, at the end of 1998. During the
first three months of the year the Company acquired properties with a value of
$364,000 through foreclosure and disposed of properties with a market value of
$282,000.
Total deposits, which constitute the principal funding source of the
Company's assets, decreased $29,048,000 from December 31, 1998 and amounted to
$635,030,000 at March 31, 1999. This is consistent with past years and reflects
seasonal cash flows of NECB's deposit customers--especially noninterest
deposits. During the quarter, short-term borrowings increased.
Total shareholders' equity was $72,179,000 at March 31, 1999, a decrease of
$1,171,000 since the start of the year. First quarter earnings, less the payment
of the increased quarterly dividend added $1,338,000 and the repurchase of
75,000 shares of the common stock under the buyback program announced in
February.
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 $5,675,000 at December 31, 1998 to $5,210,000 at March 31, 1999.
Page -11-
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<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 1,500 $ 1,506 $1,899 $1,914
Debt securities issued by states and
political subdivisions of the states 2,838 2,949 2,813 2,969
Mortgage-backed securities 607 612 672 678
Other debt securities 265 270 265 270
-------- -------- ------ ------
$ 5,210 $5,337 $5,675 $5,831
======== ======== ====== ======
</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.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Amortized Amortized
Cost Fair Cost Fair
(Amounts in thousands) Basis Value Basis Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable equity securities $ 14,555 $ 14,892 $ 29,826 $ 30,369
Debt securities issued by the U.S. Treasury
and other U.S. government agencies 102,506 102,548 102,029 102,937
Debt securities issued by states and
political subdivisions of states 13,076 13,237 13,186 13,417
Corporation debt securities 10,959 11,044 10,610 10,727
Asset-based securities 986 1,019
Mortgage-backed securities 44,338 44,572 32,950 33,398
-------- -------- -------- --------
$185,434 $186,293 $189,587 $191,867
======== ======== ======== ========
</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 -12-
<PAGE>
(Amounts in thousands)
March 31, 1999 December 31,1998
- --------------------------------------------------------------------------------
Nonaccrual loans $ 6,315 $ 5,340
OREO 1,703 1,636
------- -------
Total nonperforming assets $ 8,018 $ 6,976
======= =======
Loans past due in excess of ninety days and
accruing interest $ 918 $ 977
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, 1999 1998
- -------------------------------------------------------------------------------
December 31, 1998 and 1997 $7,241 13,034
Additions 1,668 2,671
Reductions:
Payments (300) (301)
Charge-offs and writedowns (233) (2,110)
Loans returned to accruing status (76)
Sales, net (282) (6,665)
-------- --------
Ending Balance, March 31, 1999 and 1998 $ 8,018 $ 6,629
======== ========
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, 1999 and 1998. The allowance is
maintained at a level consistent with identified loss potential and the
perceived risk in the portfolio.
Page -13-
<PAGE>
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance beginning of period $ 10,092 $12,081
Provisions charged to operations 165 439
Recoveries on loans previously charged-off 174 125
Charge-offs taken in conjunction with bulk loan sale
(i.e., specific allocated reserves) (1,392)
Loans charged-off (164) (1,183)
------- -------
Balance end of period $10,267 $10,070
======= =======
</TABLE>
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, 1999, the Company exceeded all regulatory capital ratios and
each of the banking subsidiaries were categorized as "well capitalized." The
various capital ratios of the Company for March 31, 1999 and 1998 were:
Minimum Level 1999 1998
------------- ---- ----
Total Risk-Based..................... 8% 13.8% 14.5%
Tier 1 Risk-Based.................... 4% 12.5% 13.2%
Leverage............................. 4% 8.6% 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
- ---------------------
In preparation for the year 2000 (the "Year 2000 Problem"), the Company has
developed a Year 2000 Plan (the "Plan") which has been presented to the Board of
Directors. The Plan was developed using the guidelines outlined in a report by
the Federal Financial Institutions Examination Council (FFIEC), The Effect of
2000 on Computer Systems. The Company assigned responsibility for the Plan to
the Year 2000 Coordinator who reports to the Board of Directors. The Plan
recognizes that the Company's operating, processing and accounting operations
are computer reliant and could be affected by the Year 2000 Problem.
The Company is reliant on both in-house and third party vendors for its
computer output and processing, as well as other significant functions and
services (e.g., securities safekeeping services, securities pricing information,
etc.). The Coordinator completed an inventory and assessment of all of the
Company's mission critical systems and completed both the renovation and testing
phases of the project. In terms of the third party vendors, the Year 2000
Coordinator is continuing to work with those to assess and test their Year 2000
readiness. Management presently believes that these vendors are taking
appropriate steps to modify existing software and hardware to ensure that
critical systems will function properly. The most significant hurdle the Company
has encountered in verifying and testing all mission critical third parties is
Page -14-
<PAGE>
the limited ability the Company has to independently test the preparedness of
its telephone system and electric power providers. The Company has identified 67
mission critical (without which the Company cannot operate) and necessary
(applications that the Company can use for a moderate amount of time without
requiring Year 2000 compliance) applications operated by third party vendors.
The list is reviewed regularly to include new applications or remove unnecessary
applications. Of such mission critical and critical applications, the Company
has been informed that substantially all are Year 2000 compliant. While the
Company has received assurances from these third party vendors as to compliance,
their assurances are not guarantees and may not be enforceable. Many of the
Company's existing older contracts with the vendors do not include Year 2000
certifications or warranties. Thus, in the event such vendor's products and/or
services are not actually Year 2000 compliant, the Company's recourse may be
limited.
If any required modifications and conversions are not properly made, or are
not completed on a timely basis, there can be no assurance that potential system
interruptions or unanticipated additional expense incurred to obtain Year 2000
compliance would not have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects. Nevertheless,
the Company does not believe that the costs or the consequences of incomplete or
untimely resolution of its Year 2000 Problems represent a known material event
or uncertainty that is reasonably likely to affect its future financial results,
or cause its reported financial information not to be indicative of future
operating results or future financial condition.
The Year 2000 Problem also affects a certain limited number of the Company's
customers, particularly in the areas of access to funds and additional expense
incurred to achieve compliance. The Company has adopted a plan for evaluating
and assessing the level of Year 2000 preparedness of its large or commercial
credit customers. While no assurance can be given that the Company's customers
will be Year 2000 compliant, management has taken steps to verify that they are
adequately addressing or that they are not faced with material Year 2000
Problems. The Company's credit risk related to the Year 2000 Problem is
mitigated by the fact that only a few of such borrowers use networked computer
systems or data centers to conduct their operations. In addition, in
substantially all cases the credit extended to such borrowers is collateralized
by real estate which inherently minimizes the Company's exposure in the event
that some borrowers do experience problems or delays in becoming Year 2000
compliant. The Company has already begun to assess and make accommodations for
addressing the liquidity concerns that our regulators have raised. These plans
may include the off-site retention of extra cash, lines of credit, and
additional liquid investment vehicles to provide the ability to maintain smooth
operations in the event of abnormal withdrawals of funds by consumers concerned
with the effect of the Year 2000. In addition, the Company has embarked on an
extensive consumer education and awareness program regarding the Company's state
of preparedness. The program includes multiple correspondence and communication
pieces, in-branch materials and the like. The Company has its own company-wide
Year 2000 contingency plan. The Company has had a comprehensive business
interruption and disaster recovery contingency plan for many years. The plan is
continually updated. The Company has developed even more specific contingency
plans which address operational policies and procedures in the event of data
processing, electric power supply and/or telephone service failures associated
with the Year 2000. Such contingency plans are designed to provide documented
actions to allow the Company to maintain and/or resume normal operations in the
event of any failure in mission critical or critical applications. Such plans
identify participants, processes and equipment that will be necessary to permit
the Company to continue operations. Such plans may include providing off-line
system processing, back-up electrical and telephone systems, and other methods
to ensure the Company's ability to continue to operate.
The direct costs of modifications to the existing software and hardware,
staffing, customer awareness and other issues for completing the Year 2000
project have been and will continue to be expensed as incurred.
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 -15-
<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
Page -17-
<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 10, 1999 By:
-------------------------------------
Anson C. Hall
Vice President and Treasurer
Page -18-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000752324
<NAME> New England Community Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 39,256
<INT-BEARING-DEPOSITS> 595
<FED-FUNDS-SOLD> 18987
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 193,413
<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>