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 September 30, 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 October
31, 1999 was 6,935,311.
The total number of pages in this report is 19.
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<CAPTION>
NEW ENGLAND COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
<S> <C> <C>
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets--September 30, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Income--three and nine months ended September 30, 1999
and 1998 (unaudited) 4
Consolidated Statements of Cash Flows--nine months ended September 30, 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 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(thousands of dollars) (Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 36,737 $ 39,279
Short-term investments 5,849 12,080
Federal funds sold 19,750 1,485
----------- -----------
Cash and cash equivalents 62,336 52,844
Interest bearing deposits with banks 595 694
Securities held-to-maturity 4,207 5,675
Securities available-for-sale 185,992 191,867
Federal Home Loan Bank stock, at cost 5,020 4,881
Loans outstanding 516,618 515,980
Less: allowance for possible loan losses (10,204) (10,092)
----------- -----------
Net loans 506,414 505,888
Loans held-for-sale 2,937 7,721
Premises and equipment 13,181 13,932
Other real estate owned 1,680 1,636
Goodwill 4,552 4,847
Other assets 25,712 13,902
----------- -----------
Total Assets $ 812,626 $ 803,887
=========== ===========
LIABILITIES:
Deposits:
Noninterest bearing $ 142,434 $ 160,876
Interest bearing 469,147 503,202
----------- -----------
Total deposits 611,581 664,078
Short-term borrowings 101,117 34,848
Long-term debt 25,585 27,279
Other liabilities 3,184 4,332
----------- -----------
Total Liabilities 741,467 730,537
SHAREHOLDERS' EQUITY:
Common stock, $0.10 par value, authorized 20,000,000 shares:
September 30, 1999, 7,064,000 outstanding;
December 31, 1998, 7,031,000 outstanding 706 703
Additional paid-in capital 61,614 61,811
Retained earnings 14,060 9,452
Treasury Stock -September 30, 1999, 136,000 shares (2,681)
Net unrealized gain (loss) on securities available-for-sale (2,540) 1,384
----------- -----------
Total Shareholders' Equity 71,159 73,350
----------- -----------
Total Liabilities & Shareholders' Equity $ 812,626 $ 803,887
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED INCOME STATEMENTS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
(thousands of dollars; except per share data) 1999 1998 1999 1998
====================================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 33,124 $ 36,027 $10,974 $11,829
Securities:
Taxable interest 7,651 8,192 2,614 2,727
Interest exempt from federal income taxes 551 339 185 200
Dividends 811 138 250 47
Federal funds sold and other interest 620 327 317 99
--------- --------- -------- -------
Total interest income 42,757 45,023 14,340 14,902
INTEREST EXPENSE:
Deposits 12,074 15,229 3,899 4,938
Borrowed funds 3,007 1,984 1,217 755
--------- --------- -------- -------
Total interest expense 15,081 17,213 5,116 5,693
Net interest income 27,676 27,810 9,224 9,209
Provision for possible loan losses 478 1,192 145 387
--------- --------- -------- -------
Net interest income after provision for possible loan losses 27,198 26,618 9,079 8,822
NONINTEREST INCOME:
Service charges, fees and commissions 3,304 3,047 1,098 1,013
Investment securities gains, net (67) 1,504 (566) 87
Mortgage banking revenues 2,312 2,280 653 913
Other 193 211 68 46
--------- --------- -------- -------
Total noninterest income 5,742 7,042 1,253 2,059
NONINTEREST EXPENSE:
Salaries and employee benefits 11,546 11,749 3,708 3,942
Occupancy 2,196 2,086 717 675
Furniture and equipment 1,500 1,474 473 487
Outside services 1,129 1,571 349 573
Postage and supplies 923 854 275 242
Losses, writedowns, expenses - other real estate owned 168 (100) 22 14
Amortization of goodwill 354 294 119 99
Loss on sale of portfolio loans 715
Mergers & restructuring provisions 600 3,593 75 3,593
Other 4,458 3,082 1,301 750
--------- --------- -------- -------
Total noninterest expense 22,874 25,318 7,039 10,375
--------- --------- -------- -------
Income before taxes 10,066 8,342 3,293 506
Income taxes 3,477 3,637 1,049 426
--------- --------- -------- -------
Net Income $ 6,589 $ 4,705 $ 2,244 $ 80
========= ========= ======== =======
Net income per share--Basic $ 0.95 $ 0.67 $ 0.32 $ 0.01
Net income per share--Diluted $ 0.93 $ 0.65 0.32 $ 0.01
Weighted average shares of Common Stock outstanding--Basic 6,940 7,046 6,915 7,038
Weighted average shares of Common Stock outstanding--Diluted 7,218 7,218 7,106 7,147
</TABLE>
The accompanying notes are an integral part of these statements.
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NEW ENGLAND COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(thousands of dollars) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,589 $ 4,705
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 786 1,173
Losses from sale or disposal and provisions to reduce the carrying value
of other real estate owned, net 105 (257)
Securities gains, net (67) (1,504)
Accretion of discounts and amortization of premiums on bonds, net (72) 189
Amortization of goodwill and other intangibles 354 294
Provision for possible loan losses 478 1,192
(Gain) loss on sale of portfolio loans, net 715
(Increase) decrease other assets, net (7,485) (1,479)
Decrease (increase) in loans held-for-sale (4,784) (7,033)
(Decrease) increase in accrued interest payable and other liabilities, net (1,009) (1,182)
--------- ---------
Net cash provided by (used for) operating activities 4,463 (3,187)
FINANCING ACTIVITIES:
Net decrease in noninterest-bearing accounts (18,442) (8,020)
Net decrease in interest-bearing accounts (34,055) (29,333)
Net increase in short-term borrowings 66,269 10,522
Net increase (decrease) in long-term borrowings (1,694) 7,340
Proceeds from issuance of common stock 437
Purchases of common stock for treasury (2,681)
Cash dividends paid (2,524) (1,595)
--------- ---------
Net cash used for financing activities (6,873) (20,649)
INVESTING ACTIVITIES:
Loans originated, net of principal collections (2,358) (2,604)
Proceeds from sale of portfolio loans 11,988
Net (increase) decrease in interest-bearing time deposits 99 (99)
Purchases of Federal Home Loan Bank Stock (139)
Purchases of securities available-for-sale (80,082) (70,773)
Proceeds from sales of securities available-for-sale 11,994 21,355
Proceeds from maturities of securities available-for-sale 67,038 41,591
Proceeds from maturities of securities held-to-maturity 1,468 4,701
Proceeds from sales of other real estate owned 693 3,123
Purchases of premises and equipment, net (529) (1,755)
Sales of premises and equipment 49
Capitalization of expenditures on other real estate owned (28) (275)
--------- ---------
Net cash provided by (used for) investing activities (1,844) 7,301
--------- ---------
Increase (decrease) in cash and cash equivalents 9,492 (16,535)
Cash and cash equivalents, beginning of period 52,844 61,315
--------- ---------
Cash and cash equivalents, end of period $ 62,336 $ 44,780
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
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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"), 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.
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NOTE 3 - DISCLOSURE FOR STATEMENTS OF CASH FLOWS
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Schedule of noncash investing and financing activities:
Loans charged off, net of recoveries $366 $2,981
Real estate acquired through foreclosure 814 1,331
Income tax paid 3,793 3,097
Interest paid 13,766 14,612
</TABLE>
Part I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RECENT EVENTS
On June 30, 1999, NECB Board of Directors approved an agreement and plan of
merger with Webster Financial Corp., Waterbury, Connecticut. Shareholders of
record September 24, 1999 were sent a proxy on or about October 4, 1999. At the
special meeting of shareholders held November 9, 1999 a majority of the
outstanding voting shares of NECB voted in favor of the proposed transaction.
Pending final approval from the Office of Thrift Supervision, the transaction is
expected to be completed before year-end.
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 serviced loan portfolio. As noted in Note 2 above,
the acquisitions of Olde Port and South Windsor were accounted for as poolings
of interests. As such, all prior period results have been restated as though the
companies had been combined as of the earliest periods presented.
NECB reported net income for the quarter ended September 30, 1999 of
$2,244,000 or $$0.32 per share (diluted). While this is an increase of
$2,164,000 from the $80,000 or $0.01 per share reported in the third quarter of
1998, several special actions occurred to create this unusual result. In 1998
the Company incurred a significant merger related charge and in 1999 selected
fixed rate investments were sold at a loss. Adjusted to exclude these actions
and their related tax affect, net income for the quarter is $2,659,000 or $0.37
per share (diluted) compared to $2,707,000, or $0.38 per diluted share, reported
in the same quarter of 1998. This is a decrease of $48,000 or 2%.
The onetime charges in 1998 related to the acquisitions of Olde Port and
South Windsor amounted to $2,627,000, net of related tax benefits. Charges to
net income for mergers and acquisitions result from post-closing restructuring
costs and costs associated with completing the transactions--including fees paid
to advisors, attorneys and expenses related to proxy and registration
statements. For the third quarter of 1999, special charges were $340,000 from
the sale of investments and $75,000 related to the pending acquisition, net of
related tax benefit. These events are summarized below:
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<CAPTION>
(Amounts in thousands)
Quarter-ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Results as reported......................................... $ 2,244 $ 80
Plus:
loss from sale of bonds (net of related tax benefit) 340
merger related charges (net of related tax benefit) 75 2,627
---------- ----------
Net income from operations.............................. $ 2,659 $ 2,707
========== ==========
</TABLE>
Through the first nine months of 1999, returns on average assets and
average equity for the nine months ended September 30, 1998 were 1.24% and
13.66%, respectively, compared to 1.15% and 12.22%, respectively, for the same
period a year earlier. Including the onetime charges, net income amounted to
$4,705,000, or $0.65 per diluted share, compared to $4,769,000, or $0.69 per
diluted share, during the same period last year.
During the first nine months of 1999, net interest income on a fully
taxable-equivalent basis totaled $28,121,000 compared to $28,162,000 in 1998.
Provisions for loan losses were reduced to $478,000 from $1,192,000 during the
same period in 1998.
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Noninterest income decreased $1,300,000, from the previous year's total, and
amounted to $5,742,000. Gains from the sale of securities which amounted to
$1,504,000 in 1998 were replaced by a modest loss of $67,000 for the first nine
months of 1999. Mortgage banking revenues rose a modest $32,000 thus far in 1999
while core banking fees increased a strong 8.4% or $257,000. Noninterest expense
totaled $22,874,000 in 1999 compared to $25,318,000 in 1998. The decrease
primarily resulted from decrease in merger and acquisition charges in 1999.
These charges amounted to $3,593,000 in 1998 and $600,000 in 1999. An $828,000
charge was taken early in 1999 related to the formation of a Passive Investment
Corporation. This expense has been offset by a reduction in provisions for
Connecticut state income tax through September 30, 1999.
Total assets at September 30, 1999 were $812,626,000 compared to
$803,887,000 at December 31, 1998. Loans outstanding at September 30, 1999
amounted to $516,618,000 compared to $515,980,000 at December 31, 1998. Total
deposits amounted to $611,581,000 at September 30, 1999 compared to $664,078,000
at December 31, 1998. Short-term borrowings (primarily repurchase agreements and
advances from the Federal Home Loan Bank) increased substantially totaling
$101,117,000 compared to $34,848,000 at December 31, 1998.
Shareholders' equity increased $2,191,000 from $73,350,000 at December 31,
1998 to $71,159,000 at quarter-end. At September 30, 1999, the ratio of equity
to total assets equaled 8.76%. When goodwill resulting from the Equity Bank,
Manchester State Bank and Community Bank acquisitions is excluded, tangible
equity capital is reduced to $66,607,000,or 8.24% of total assets. The resulting
tangible book value per share amounted to $9.61 at September 30, 1999 compared
to $9.74 at December 31, 1998. The stock repurchase program conducted in the
first quarter of 1999 resulted in a $0.20 per share reduction in net book value.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The provisions for possible loan losses in the third quarter of 1999 were
$145,000 compared to $387,000 in the comparable period in 1998. Despite this
reduction in provisions, the allowance for loan losses increased $112,000 during
the first nine months of 1999. The absence of overall growth in the loan
portfolio and the high quality of the loan portfolio lessened the need for
additional funding. The ratio of nonperforming assets to total assets equaled
1.07% of total assets at September 30, 1999 compared to 0.87% a year earlier.
Noninterest income declined in the third quarter of 1999 and totaled
$1,253,000 compared to $2,059,000 in the third quarter of 1998. The $806,000
decrease resulted primarily resulted from the $566,000 loss from the sales of
investment securities and $260,000 decrease in mortgage banking revenues. The
securities losses resulted when management sold selected lower yielding fixed
rate bonds to invest the proceeds in higher yielding investments currently
available in the market. This followed the recent rise in market interest rates
following the actions of the Federal Open Markets Committee to increase short
term rates 25 basis points on two occasions recently. The higher yielding
investments are expected to increase future interest revenues by more than the
loss incurred. Mortgage banking revenues decreased following the announcement of
the merger with Webster Financial as borrowers showed a reluctance to apply for
credit with the change pending. This slowdown was followed quickly by the loss
of several key origination staff which further added to the slowdown. Core
banking fees increase $85,000 during the quarter reflecting continued growth in
sale of commercial banking services.
Noninterest expense totaled $7,039,000 in the third quarter of 1999
compared to $10,375,000 in 1998. The $3,336,000 decrease is largely from the
absence of major merger and acquisition charges in 1999. Gross
acquisition-related expense totaled $3,593,000 in the quarter ended September
30, 1998 compared to $75,000 in same period this year. Excluding these charges,
and other non-operating transactions such as the costs of OREO property
ownership and the loss resulting from the sale of fixed rate bonds, NECB's
efficiency ratio equaled 61.1% for the third quarter of 1999 compared to 59.2%
for the same period in 1998. The efficiency ratio measures how much a dollar of
revenue costs to produce.
For the three months ended September 30, 1999, the Company reported net
income of $2,244000, or $0.32 per diluted share, compared to $80,000, or $0.01
per diluted share, for the same period of 1998.
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.
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(Amounts in thousands)
Three Months Ended September 30, 1999 1998 % Change
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<S> <C> <C> <C>
Interest income (financial statements) $ 14,340 $ 14,902 (3.8%)
Tax equivalent adjustment 117 148 (20.9%)
-------- --------
Total interest income (on an FTE basis) 14,457 15,050 (3.9%)
Interest expense (5,116) (5,693) (10.1%)
-------- --------
Net interest income (on an FTE basis) $ 9,341 $ 9,357 (1.7%)
======== ========
</TABLE>
For the third quarter of 1999, net interest income on an FTE basis was
$9,341,000, a 1.7% decrease over the $9,357,000 in the comparable period in
1998. NECB faced intense pressure to reduce interest rates on both new and
existing loans throughout much of 1999. The impact upon the third quarter of
1999 was minimized by increasing the use of low cost borrowed funds and
expanding the size of the investment portfolio resulting virtually no change in
the net interest income for the period compared to the year earlier. .
The net interest margin is the ratio of net interest income, expressed on
on fully taxable equivilent basis, and average earning assets for the period
measured. As shown in the table below, the margin for the quarter ended
September 30, 1999 decreased to 4.96% from 5.23% in 1998. The yield on the loan
portfolio decreased 0.72% to 8.36% in the quarter ended September 30, 1999
compared to 9.08% for the same period a year ago. The average yield on the
Company's available-for-sale investments also decreased, to 6.13% from 6.78%
last year. The average rate paid on interest-bearing liabilities decreased 57
basis points and equaled 3.47% for the quarter ended September 30, 1999 compared
to 4.04% a year earlier.
CONSOLIDATED AVERAGE BALANCES/INTEREST EARNED OR PAID/RATES
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Amounts in thousands) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Money market investments $ 15,742 222 5.58% $ 16,946 $ 229 5.36%
Investment securities
Held-to-maturity 2,987 58 7.76 6,523 128 7.79
Available-for-sale 207,433 3,203 6.13 167,618 2,864 6.78
Mortgages held for sale 4,974 91 7.26 7,890 130 6.54
Loans (A) 516,253 10,883 8.36 511,185 11,699 9.08
-------- ------- -------- -------
Total interest-earning assets 747,389 14,457 7.67% 710,162 15,050 8.41
Allowance for loan losses (10,212) (9,658)
Cash and due from banks 30,768 39,657
Other assets 35,128 38,176
-------- --------
Total Assets $803,072 $778,337
======== ========
LIABILITIES:
Regular savings deposits $150,823 $802 2.11% $160,693 $ 959 2.37%
NOW account deposits 85,857 197 0.91 66,696 200 1.19
Money market deposits 691 6 3.45 2,052 13 2.51
-------- ------- -------- -------
Total savings deposits 237,370 1,005 1.68 229,441 1,172 2.03
Time deposits 240,949 2,894 4.77 275,064 3,766 5.43
Short-term borrowings 53,590 445 3.29 25,950 312 4.77
Long-term borrowings 52,514 772 5.83 28,140 443 6.25
-------- ------- -------- -------
Total interest-bearing liabilities 584,422 5,116 3.47 558,595 5,693 4.04
Demand deposits 145,375 136,936
Other liabilities 3,242 9,425
-------- --------
Total Liabilities 733,039 704,946
Equity 70,033 73,391
-------- --------
Total Liabilities & Equity $803,072 $778,337
======== ========
Net interest income--FTE basis $9,341 $ 9,357
====== =======
Net interest margin 4.96% 5.23%
Net interest spread 4.20% 4.36%
(A) AVERAGE LOANS INCLUDE NONACCRUING LOANS.
</TABLE>
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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, which compares the three months ended
September 30, 1999 to September 30, 1998, is presented on a FTE basis.
<TABLE>
<CAPTION>
Change due to
Total Change in:
Increase --------------------------
(amounts in thousands) (Decrease) Rate Volume
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON:
Money market investments $ (7) $ 9 $ (16)
Investment securities
Held to maturity (70) (1) (69)
Available for sale 339 (344) 683
Mortgages held for sale (39) 9 (48)
Loans (816) (933) 117
--------- -------- -------
Total interest-earning assets (593) (1,260) 667
INTEREST PAID ON:
Regular savings deposits $ (157) $ (99) $ (58)
NOW account deposits (3) (61) 58
Money market deposits (7) 2 (9)
-------- -------- -------
Total savings deposits (167) (158) (9)
Time deposits (872) (408) (464)
Short-term borrowings 133 (201) 334
Long-term borrowings 329 (55) 384
-------- --------- -------
Total interest-bearing liabilities (577) (822) 245
--------- --------- -------
Net interest income change $ (16) $ (438) $ 422
========= ========= =======
</TABLE>
NONINTEREST INCOME
For the quarter ended September 30, 1999, noninterest income amounted to
$1,253,000, a decrease of $806,000 compared to the third quarter in 1998. The
change was largely the result of a $566,000 loss incurred on the sale of fixed
rate investments. This followed recent increases in market rates for such bonds.
The cash provided from the sales can be reinvested at higher current rates and
will result in increased earnings in future periods. New England Community
Mortgage Corp., a wholly owned subsidiary of New England Bank experienced a
significant reduction in volume of mortgages produced following the announcement
of the pending merger with Webster Bank. This reduced volume decreased mortgage
revenues $250,000 to $653,000 for the quarter. Core banking fees rose $85,000 or
8% principally on increased sales of commercial banking services.
NONINTEREST EXPENSE
Noninterest expenses amounted to $7,039,000 during the third quarter of
1999. This is a $3,336,000 decrease, or 32%, over $10,375,000 reported during
the same quarter in 1998. Of this decrease, $3,518,000 is related to charges for
mergers and acquisitions. Excluding these charges, noninterest expenses
increased $182,000, or 2.6%, over the quarter ended September 30, 1998.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1999
Through the first nine months of 1999, NECB reported net income of
$6,589,000 or $0.95 diluted share, an increase of $1,884,000 compared to
$4,705,000 or $0.67 per diluted share for the same period last year. These two
periods were afffected by special events not ordinarily included in bank
operations. As the following table shows, when these transactions are excluded
he net operating income through September 30, 1999 is $7,529,000, an increase of
$197,000 or 2.7% from the previous year.
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<TABLE>
<CAPTION>
Nine months ended September 30, 1999 1998
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<S> <C> <C>
Net income $ 6,589 $ 4,705
Acquisition Charges 2,627
Merger with Webster 600
Bond Sale 340
------- -------
Net operating income $ 7,529 $ 7,332
======= =======
Earning per share - Diluted $ 1.04 $ 1.02
</TABLE>
The increase in net income and earnings per share reflected in this analysis
during the first nine months of 1999 includes the new revenues and cost savings
achieved in conjunction with the Company's acquisitions and strong growth in
noninterest income. In particular, gains from the sale of mortgage loans and
gains from investment securities rose sharply compared to the previous year.
Provisions for loan losses decreased modestly from 1997 and totaled $1,192,000
in 1998 compared to $1,327,000 a year earlier. Noninterest expense totaled
$25,318,000 in 1999 compared to $20,521,000 in 1998. Including the onetime
charges, net income amounted to $4,705,000, or $0.67 per diluted share, compared
to $4,769,000, or $0.69 per diluted share, during the same period last year.
During the first nine months of 1999, net interest income on a fully
taxable-equivalent basis decreased $41,000 and totaled $28,121,000 compared to
$28,162,000 in 1998.
Page -11-
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income
(amounts in thousands)
Nine Months Ended September 30, 1999 1998 % Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income (financial statements) $42,757 $45,023 (5.03)%
Tax equivalent adjustment 445 352 26.42%
--------- ---------
Total interest income (on an FTE basis) 43,202 45,375 (4.79)%
Interest expense (15,081) (17,213) (12.39)%
--------- ---------
Net interest income (fully taxable equivalent) $ 28,121 $ 28,162 (0.15)%
========= =========
</TABLE>
NONINTEREST INCOME
Through the first nine months of 1999, noninterest income decreased
$1,300,000 and totaled $5,742,000, compared to $7,042,000 reported for the same
period in 1998. During the first nine months of 1999, NECB realized a loss from
the sales of securities of $67,000, including the $566,000 loss discussed in the
third quarter. This compared to gains of $1,504,000 through September 30, 1998
which included a gain of $898,000 from the sale of investment securities owned
by the parent company.
Service charges, fees and commissions also increased substantially,
totaling $3,304,000 through the nine month period ending September 30, 1999.
This represents a $257,000, or 8.4%, increase compared to the $3,047,000
recorded through the first nine months of 1998. Increased sales volume of core
banking products, especially commercial product sales, was chiefly the reason
for this increase.
NONINTEREST EXPENSE
Noninterest expenses amounted to $22,874,000 during the first nine months
of 1999 compared to $25,318,000 for the same period in 1998. During 1998 NECB
incurred merger related charges $3,593,000 related to the acquisitions of Bank
of South Windsor and Olde Port Bank. Generally recurring expenses were flat to
lower in 1999 reflecting NECB's ability to extract benefits from its
acquisitions as scale economies and other efficiencies are achieved. This result
is especially important when considering the expanded facilities undertaken in
1999. These included Olde Port's first branch office, in Hampton, New Hampshire,
the mortgage company's new operations in New Hampshire and Middlebury,
Connecticut. NECB also continued to invest in new equipment and technology,
doubling item processing capability and network upgrades to increase customer
service capability. Like all banking organizations and most businesses, NECB
also invested time and resources in testing and upgrading equipment for Y2K
readiness.
FINANCIAL CONDITION
Total assets at September 30, 1999 stood at $812,626,000, compared to
$803,887,000 at year-end. During the first nine months of 1999. These loans are
typically sold in the secondary market upon closing and, as such, do not serve
to increase loans outstanding. With the downward trend in interest rates in
1998--the majority of which occurred in third quarter--the Company experienced a
moderate rise in prepayments which was accurately forecasted by NECB's internal
interest rate risk models. Loan demand typically softens during the summer
months, and this taken together with increased prepayments, served to reduce
loans outstanding. On a year to date basis, when the effect of the March 30,
1998 bulk loan sale is excluded, loans outstanding decreased by $2,438,000.
Loans consisted of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
September 30, December 31,
1999 1998
<S> <C> <C>
Commercial and financial $ 151,531 $ 146,962
Real estate:
Construction 18,820 23,862
Residential 110,712 123,446
Commercial 196,329 176,139
Consumer 39,226 45,571
----------- -----------
Gross loans outstanding $ 516,618 $ 515,980
=========== ===========
</TABLE>
Securities available-for-sale decreased from December 31, 1998 and ended
the third quarter at $185,992,000 and held-to-maturity decreased and totaled
$4,207,000 at quarter end.
Federal funds and short term investment increased $12,034,000 and totaled
$25,599,000 at quarter-end compared to $13,565,000 at December 31, 1998. Federal
funds, are overnight loans to other banks, and short term investments include
investments such as
Page -12-
<PAGE>
money market funds, Commercial paper, and money market preferred stock. Together
these funds represent excess reserves and are the Company's most liquid assets.
As such they are available to meet short-term cash flow needs of the Company and
its customers.
Other real estate owned was virtually unchanged at $1,680,000, or 0.21% of
total assets, at September 30, 1999. During the first nine months of the year
the Company acquired properties with a value of $814,000 through foreclosure and
disposed of properties with a market value of $693,000.
Total deposits, which constitute the principal funding source of the
Company's assets, decreased $52,497,000 from December 31, 1997 and amounted to
$611,581,000 at September 30, 1999. This decrease occurred principally in higher
cost time deposits with relatively short maturities. The deposits decreased
approximately $34,000,000 since the start of the year while noninterest bearing
transaction accounts decreased approximately $18,000,000 from the year-end high
$160,000,000 to $142,000,000 at September 30, 1999. NECB's noninterest-bearing
transaction accounts historically achieve their highest levels at year-end.
Total shareholders' equity was $71,159,000 at September 30, 1999, an
decrease of $2,191,000 over December 31, 1998. Equity was increased by
$6,589,000 in net income and $349,000 from issuance of common stock in
conjunction with employee benefit plans. Equity was reduced by $2,524,000 in
dividends paid to shareholders, $3,924,000 from the change in unrealized holding
gains on securities available-for-sale, and $2,681,000 from the repurchase of
$135,500 of common stock now held in the Treasury.
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 $4,207,000 at September 30,
1999.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Amortized
Cost Fair Cost Fair
(Amounts in thousands) Basis Value Basis Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $ $ $ 1,899 $ 1,914
Debt securities issued by states and
political subdivisions of the states 2,838 2,881 2,813 2,969
Mortgage-backed securities 509 500 672 678
Other debt securities 860 862 265 270
--------- --------- --------- ---------
$ 4,207 $ 4,243 $ 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. At September 30, 1999, the net unrealized loss on
securities available-for-sale was $4,116,000, while at December 31, 1998 the
unrealized gain was $2,181,000. As shown in the table below, investments in
securities available-for-sale totaled $185,992,000 at September 30, 1999 versus
$191,867,000 at December 31, 1998:
Page -13-
<PAGE>
<TABLE>
<CAPTION>
September 30, 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 $ 13,077 $ 12,924 $ 29,826 $ 30,369
Debt securities issued by the U.S. Treasury
and other U.S. government agencies 99,494 94,029 102,029 102,937
Debt securities issued by states and political sub-divisions 0 0 13,186 13,417
Corporation debt securities 16,648 16,206 10,610 10,727
Asset-based securities 13,409 13,066 986 1,019
Mortgage-backed securities 50,480 49,767 32,950 33,398
---------- ---------- ---------- ----------
$ 190,108 $ 185,992 $ 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."
<TABLE>
<CAPTION>
(Amounts in thousands)
September 30, 1999 December 31,1998
<S> <C> <C>
Nonaccrual loans $ 7,151 $ 5,340
OREO 1,680 1,636
---------- ----------
Total nonperforming assets $ 8,831 $ 6,976
========== ==========
Loans past due in excess of ninety days and accruing interest $ 60 $ 977
</TABLE>
NPAs increased $1,855,000 or 27% in the nine months ended September 30,
1999. Significantly, at quarter-end NPAs represented 1.09 percent of total
assets compared to 0.87 percent of total assets at December 31, 1998. This
increase in nonperforming assets primarily resulted from
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 possible loan losses are made to reduce the carrying amount of
such 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.
Page -14-
<PAGE>
<TABLE>
<CAPTION>
Activity in Nonperforming Assets
(Amounts in thousands)
Nine Months ending September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1998 and 1997 $6,976 $ 13,034
Additions 6,173 7,044
Reductions:
Loans returned to performing status (362)
Payments (2,324) (868)
Charge-offs and writedowns (939) (4,056)
Sales, net (693) (7,449)
--------- ---------
Ending Balance, September 30, 1999 and 1998 $8,831 $ 7,735
====== =========
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN POSSIBLE LOSSES
NECB's allowance for possible 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
possible 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 September 30, 1999 and 1998. The allowance is
maintained at a level consistent with identified loss potential and the
perceived risk in the portfolio.
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended September 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance beginning of period $ 10,092 $ 12,081
Provisions charged to operations 478 1,192
Recoveries on loans previously charged-off 468 675
Charge-offs taken in conjunction with bulk loan sale (i.e., specific allocated reserves) (1,392)
Loans charged-off (834) (2,264)
-------- ---------
Balance end of period $ 10,204 $ 10,292
======== =========
</TABLE>
Provisions for possible loan losses charged to operations for the first
nine months of 1999 were $478,000 compared to $1,192,000 for the same period in
1998. During the nine-month period, total charge-offs decreased by $3,822,000
due to the bulk sale in 1998 and the overall improved quality of the loan
portfolio.
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 September 30, 1999, the Company exceeded all regulatory capital
ratios and the subsidiaries were categorized as "well capitalized." The various
capital ratios of the Company for September 30, 1999 and 1998 were:
<TABLE>
<CAPTION>
Minimum Level 1999 1998
------------- ---- ----
<S> <C> <C> <C>
Total Risk-Based............................ 8% 13.44% 13.31%
Tier 1 Risk-Based........................... 4% 12.18% 12.06%
Leverage.................................... 4% 8.64% 8.37%
</TABLE>
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
Page -15-
<PAGE>
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.
YEAR 2000 READINESS
In preparation for December 31, 1999, the Company has developed a Year 2000
Plan (the "Plan") which has been approved by Senior management and the Boards of
Directors of NECB and each of its subsidiaries. The Plan was developed using the
guidelines outlined in a report by the Federal Financial Institutions
Examination Council (FFIEC), The Effect of Year 2000 on Computer Systems. The
Company assigned responsibility for the Plan to the Year 2000 Coordinator who
reports to the Board of Directors. The Coordinator chairs a committee of key
managers providing constant oversight to the process of Year 2000 readiness. The
committee reviews all actions related to the implementation of the Plan. The
Plan recognizes that the Company's operating, processing and accounting
operations are computer reliant and could be affected by the Year 2000.
The Year 2000 readiness 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. 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 completed its assessment and made accommodations for
addressing the liquidity concerns that our regulators have raised. These plans
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 completed an extensive
consumer education and awareness program regarding the Company's state of
preparedness. The program included 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 -16-
<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: November 10, 1999 By: s/s Anson C. Hal
-----------------------------------
Anson C. Hall
Vice President and Treasurer
Page -18-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000752324
<NAME> New England Community Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 36,737
<INT-BEARING-DEPOSITS> 595
<FED-FUNDS-SOLD> 19,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 185,992
<INVESTMENTS-CARRYING> 4,207
<INVESTMENTS-MARKET> 0
<LOANS> 519,555
<ALLOWANCE> 10,204
<TOTAL-ASSETS> 812,626
<DEPOSITS> 611,581
<SHORT-TERM> 25,585
<LIABILITIES-OTHER> 3,184
<LONG-TERM> 101,117
0
0
<COMMON> 706
<OTHER-SE> 70,453
<TOTAL-LIABILITIES-AND-EQUITY> 812,626
<INTEREST-LOAN> 33,124
<INTEREST-INVEST> 9,013
<INTEREST-OTHER> 620
<INTEREST-TOTAL> 42,757
<INTEREST-DEPOSIT> 12,074
<INTEREST-EXPENSE> 15,081
<INTEREST-INCOME-NET> 27,198
<LOAN-LOSSES> 478
<SECURITIES-GAINS> (67)
<EXPENSE-OTHER> 22,874
<INCOME-PRETAX> 10,066
<INCOME-PRE-EXTRAORDINARY> 6,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,589
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 4.96
<LOANS-NON> 7,151
<LOANS-PAST> 60
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 14,291
<ALLOWANCE-OPEN> 10,092
<CHARGE-OFFS> 834
<RECOVERIES> 468
<ALLOWANCE-CLOSE> 10,292
<ALLOWANCE-DOMESTIC> 10,292
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
