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 the Quarter Ended March 31, 1997 Commission File Number 0-14018
BNH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
CONNECTICUT 06-1126899
(State of incorporation (I.R.S. Employer Identification
or organization) Number)
209 CHURCH STREET, NEW HAVEN, CONNECTICUT 06510
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 498-3500
Former name, former address and former fiscal year, if changed since
last report NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS May 1, 1997
Common Stock (no par value) 3,690,576
BNH BANCSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Page
Consolidated Statement of Financial Position as of March 31, 1997,
and December 31, 1996 3
Consolidated Statement of Operations for the three
months ended March 31, 1997 and March 31, 1996 4
Consolidated Statement of Changes in Shareholders' Equity for the
three months ended March 31, 1997 and March 31, 1996 5
Consolidated Statement of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Items 1-5 Not Applicable 24
Items 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS March 31, 1997 Dec. 31, 1996
(unaudited)
_______________ ______________
Cash and due from banks $ 18,133,793 $ 21,043,918
Federal funds sold 0 10,700,000
Investment securities:
Held to Maturity, at amortized cost 20,563,410 21,546,034
Available for Sale, at fair value 43,547,911 42,439,947
Loans less unearned discount 239,124,971 234,679,749
Less allowance for loan losses (4,697,935) (4,695,681)
___________ ___________
Loans - net 234,427,036 229,984,068
Property and equipment-net 4,738,360 4,335,019
Accrued interest receivable 2,462,702 2,159,525
Other real estate owned 588,019 558,706
Other assets 9,574,015 9,462,190
___________ ___________
TOTAL $334,035,246 $342,229,407
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 54,392,945 $ 58,108,856
NOW accounts 42,405,953 43,948,468
Money market accounts 32,261,345 30,709,756
Savings deposits 31,626,871 32,344,788
Time deposits under $100,000 112,108,348 117,008,717
Time deposits $100,000 or more 16,702,088 16,803,504
___________ ___________
Total deposits 289,497,550 298,924,089
Federal funds purchased and
securities sold under
repurchase agreements 576,907 4,740,797
FHLBB Advances 16,892,314 11,922,273
Accrued interest payable 430,712 434,339
Accrued income taxes
and other liabilities 873,702 596,624
___________ ___________
Total liabilities 308,271,185 316,618,122
Shareholders' equity:
Common stock, $.01, stated value;
issued 3,695,352, shares
Authorized 30,000,000 36,953 36,953
Capital surplus 47,718,180 47,717,466
Undivided losses (21,113,497) (21,597,946)
Net unrealized losses on investment
securities available for sale (630,404) (298,017)
Treasury stock (4,776 shares) (247,171) (247,171)
_____________ _____________
Total shareholders' equity 25,764,061 25,611,285
_____________ _____________
TOTAL $334,035,246 $342,229,407
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1997 1996
INTEREST INCOME:
Loans $5,029,047 $4,427,231
Investment securities:
Held to maturity 281,779 329,353
Available for sale 683,718 582,123
Federal funds sold 64,368 49,734
__________ __________
Total interest income 6,058,912 5,388,441
INTEREST EXPENSE:
Time deposits $100,000 or more 226,278 198,456
Time deposits under $100,000 1,582,123 1,474,004
Other deposits 636,708 583,470
Other borrowings 240,590 105,951
_________ _________
Total interest expense 2,685,699 2,361,880
_________ _________
NET INTEREST INCOME 3,373,213 3,026,561
PROVISION FOR LOAN LOSSES (326,000) (576,000)
_________ __________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,047,213 2,450,561
OTHER INCOME:
Service charges 555,872 508,813
Other income 242,723 271,721
Net gain on sale of investments 0 7,242
_________ _________
Total other income 798,595 787,776
_________ _________
OPERATING EXPENSES:
Salaries and employee benefits 1,604,413 1,371,341
Occupancy 389,874 354,428
Advertising and promotion 155,424 85,624
Office stationery and supplies 92,153 75,658
Examination and
professional fees 205,074 201,421
Insurance 55,860 106,973
Other real estate owned 37,449 46,244
Other 498,146 488,339
_________ _________
Total operating expenses 3,038,393 2,730,028
NET PROFIT BEFORE INCOME TAXES 807,415 508,308
PROVISION(BENEFIT) FOR INCOME TAXES 322,966 (225,500)
_________ __________
NET PROFIT $484,449 $ 733,808
NET PROFIT PER COMMON SHARE $0.13 $0.20
Weighted average number of common
shares outstanding
during the period 3,690,575 3,681,663
See accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
March 31, 1997 March 31, 1996
______________ ______________
<S> <C> <C>
SHAREHOLDERS' EQUITY at beginning of period $25,611,285 $15,592,723
COMMON STOCK:
Net proceeds of stock options exercised 1
CAPITAL SURPLUS:
Net proceeds of stock options exercised 713
UNDIVIDED LOSSES:
Net Income 484,449 733,808
Change in unrealized depreciation on investment
securities available for sale (332,387) (355,175)
___________ ___________
SHAREHOLDERS' EQUITY at end of period $25,764,061 $15,971,356
See accompanying Notes to Consolidated Financial Statements
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1997 1996
_____________________________
<S> <C> <C>
OPERATING ACTIVITIES
Net profit $ 484,449 $ 733,808
Adjustments for items not affecting cash:
Provision for loan losses 326,000 576,000
Depreciation and amortization of property and
equipment 134,062 51,351
Net accretion of bond premiums and discounts (18,752) (62,006)
Gain on available for sale securities 0 (7.242)
Loss/writedown on other real estate owned 12,687 20,684
(Increase)decrease in interest receivable (303,177) (68,691)
(Decrease)increase in interest payable (3,627) 34,893
Other,net 165,967 (392,318)
_________ _________
Net cash provided by operating activities 797,609 886,479
_________ _________
FINANCING ACTIVITIES
Net decrease in demand, NOW, money market and
savings accounts (4,424,754) (8,122,806)
Net (decrease)increase in time deposits (5,001,785) 4,055,774
Net (decrease)increase in federal funds purchased
and securities sold under repurchase agreements (4,163,890) 300,000
Proceeds from FHLBB advances 4,970,041 2,000,433
___________ __________
Net cash used by financing activities (8,620,388) (1,766,599)
___________ __________
INVESTING ACTIVITIES
Net (increase)decrease in federal funds sold 10,700,000 (3,675,000)
Maturities of securities held to maturity 1,000,000
Maturities of securities available for sale 1,542,450 11,202,977
Purchase of securities available for sale (2,981,425) (7,922,067)
Proceeds from the sale of available for sale
securities 0 10,392
Net loans originated and matured (4,768,968) (361,626)
Proceeds from sale of other real estate owned 46,746
Payments to acquire/improve other real estate owned (42,000) (1,070,725)
Purchase of property and equipment (537,403) (38,174)
___________ ___________
Net cash provided (used) by investing activities 4,912,654 (1,807,477)
Decrease in cash (2,910,125) (2,687,597)
Cash and due from banks at beginning of year 21,043,918 19,818,406
___________ ___________
Cash and due from banks at end of period $18,133,793 $17,130,809
Cash paid for:
Interest expense $ 2,682,072 $ 2,326,987
Income taxes $ 10,000 $ 5,500
Non-cash transfers from loans receivable to other real estate owned were $42,000
and $1,009,851 for the three months ending March 31, 1997 and 1996,
respectively.
There were no non-cash transfers from other real estate owned to loans
receivable for the three months ending March 31, 1997 and 1996, respectively.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
BNH BANCSHARES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and
include the accounts of BNH Bancshares, Inc. (the "Company") and its
subsidiaries, The Bank of New Haven (the "Bank") and Northeastern Capital
Corporation. The financial statements reflect, in management's opinion,
all appropriate reclassifications, all adjustments consisting of normal
recurring adjustments and adjustments to the loan loss reserve necessary
for a fair presentation of the Company's financial position, the results of
its operations and the change in 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 1996 Annual Report
to Shareholders.
Net income (loss) per common share is computed based on the weighted
average number of common shares outstanding during each year. Per share
earnings and weighted average shares of common stock for all periods
presented reflect all stock dividends and splits. The exercise of stock
options would not result in material dilution of earnings per share.
2. Loan Portfolio
March 31, Dec. 31,
1997 1996
(in thousands)
[S] [C] [C]
Commercial $ 54,810 $ 54,240
Real estate:
Construction 1,009 820
Commercial mortgage 59,983 59,283
Residential mortgage 54,591 54,651
Consumer 68,732 65,686
________ ________
Total loans 239,125 234,680
Allowance for loan losses (4,698) (4,696)
________ ________
Loans -net $234,427 $229,984
3. Pending Merger
On April 8, 1997, the Company announced that it is a party to a definitive
merger agreement (the "Agreement") pursuant to which Citizens Bank of
Connecticut, a subsidiary of Citizens Financial Group, Inc., will acquire
all of the outstanding shares of stock of the Company (other than certain
shares to be canceled pursuant to the Agreement and any objecting shares)
for $57.2 million, or $15.50 per share.
The acquisition, which is subject to shareholder and regulatory approval,
will be the fourth Connecticut acquisition by Citizens since 1993 and the
11th overall in Citizens' four-state franchise. When completed, the
acquisition will make Citizens Bank of Connecticut a $1.75 billion bank
with 42 branch offices. Assuming the required approvals are obtained, the
transaction is expected to be completed in the summer of 1997.
Citizens Financial Group, Inc. is a $16 billion financial services company
headquartered in Providence, Rhode Island, with 250 offices operating as
Citizens Bank in Connecticut, Massachusetts, New Hampshire and Rhode
Island. Citizens is 76.5 percent owned by The Royal Bank of Scotland plc,
with the remaining interest held by Bank of Ireland.
4. New Accounting Pronouncements
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 provides
accounting and reporting standards for the calculation of earnings per
share intended to simplify the computation by replacing the presentation of
primary earnings per share with the presentation of basic earnings per
share. The Company will be required to adopt SFAS 128 in the fourth
quarter of 1997. Had earnings per share for the quarter ended March 31,
1997 been computed in accordance with SFAS 128, basic and diluted earnings
per share would have both been $.13 and basic and diluted earnings per
share would have both been $.20 for the quarter ended March 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company earned net income, before tax, for the first three months ended
March 31, 1997 of $807,000 as compared to $508,000 for the same 1996
period. This increase in pre-tax income can be primarily attributed to a
$347,000 increase in net interest income and a $250,000 decrease in the
provision for loan losses offset by a $233,000 increase in salaries and
employee benefits.
Net income after tax was $484,000 for the first three months ended March
31, 1997 as compared to $734,000 for the same 1996 period. During the
first quarter of 1997, the Company recognized an income tax expense of
$323,000 as compared to the recognition of an income tax benefit for the
same 1996 period. Because of improved operating performance and the
anticipation of continued profitability, the Company had recorded income
tax benefits during 1996 to reduce its valuation allowance on deferred tax
assets. The Company has since returned to a fully taxable reporting basis.
The return on average assets was .6% for the three months ended March 31,
1997 compared to 1% for the same 1996 period. Net income was $.13 per
share for the first quarter of 1997 as compared to $.20 per share for the
first quarter of 1996.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on loans
and investments and the interest paid on deposits and other borrowings.
Net interest income was $3,373,000 for the three month period ended March
31, 1997 as compared to $3,027,000 for the same 1996 period, an increase of
$346,000. This increase in net interest income for the comparable three
month period is primarily attributed to the growth of the Company's loan
portfolio partially offset by increased interest expense related to
deposits and other borrowings. Net interest margins for the three month
periods ended March 31, 1997 and 1996 were 4.48% and 4.49%, respectively.
Total interest income increased $671,000 to $6,059,000 for the first three
months in 1997 as compared to $5,388,000 for the same period in 1996. This
can be primarily attributed to an increase in interest income derived from
the Company's loan portfolio, from $4,427,000 for the first three months of
1996 to $5,029,000 for the same 1997 period. This $602,000 increase is
primarily volume related. The Company's average net loans increased
$31,927,000 or 16% to $235,138,000 in the first quarter of 1997 from
$203,211,000 in the first quarter of 1996.
Interest expense increased $324,000, to $2,686,000 for the first three
months 1997 as compared to $2,362,000 for the same period in 1996. Total
average interest bearing liabilities increased from $226,000,000 to
$254,000,000, or $28,000,000, from the quarter ended March 31, 1996 to the
quarter ended March 31, 1997. The Company's average interest rate on
paying liabilities remained relatively stable increasing 7 basis points
from 4.21% for the three months ended March 31, 1996 to 4.28% for the three
months ended March 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands)
(Unaudited)
1997 | 1996
<S> <C> <C> <C> | <C> <C> <C>
Average Average | Average Average
ASSETS Balance Interest Yield | Balance Interest Yield
|
Investments: |
Held to Maturity, |
at amortized cost $ 20,875 $ 282 5.47% |$ 23,832 $ 329 5.56%
|
Available for |
Sale(2) 44,378 684 6.25% | 40,041 582 5.85%
|
Federal funds sold 5,052 64 5.17% | 3,834 50 5.22%
|
Loans - net(1) 235,138 5,029 8.67% | 203,211 4,427 8.76%
________ ______ _____ |________ ______ _____
|
Total average |
earning assets (1) $305,443 $6,059 8.04% |$270,918 $5,388 8.00%
|
INTEREST BEARING |
LIABILITIES |
____________________________ |
Deposits: |
|
NOW accounts $ 40,235 $ 148 1.49% |$ 39,452 $ 148 1.51%
|
Money markets 31,420 279 3.61% | 28,970 239 3.31%
|
Savings deposits 32,168 210 2.64% | 31,296 197 2.53%
|
Time deposits |
under $100,000 115,666 1,582 5.55% | 104,182 1,474 5.69%
|
Time deposits of |
$100,000 or more 16,685 226 5.50% | 14,626 198 5.46%
________ ______ _____ |________ ______ _____
Total interest |
bearing deposits $236,174 $2,445 4.20% |$218,526 $2,256 4.15%
|
Other borrowings 18,302 241 5.33% | 7,214 106 5.91%
________ ______ _____ |________ ______ _____
Total interest |
bearing deposits |
& other borrowings $254,476 $2,686 4.28% |$225,740 $2,362 4.21%
|
Net interest |
income $3,373 | $3,026
|
Interest rate |
spread (1) 3.76% | 3.79%
|
Net interest |
margin (1) 4.48% | 4.49%
(1) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities (which do not include non-interest bearing demand accounts),
and net interest margin represents net interest income as a percentage of average
interest-earning assets, including the average daily amount of non-performing
loans.
(2) The average balance and related weighted average yield calculations are
based on average historical amortized cost for the period presented.
OTHER INCOME
Other income increased slightly to $799,000 for the three month period ended
March 31, 1997 as compared to $787,000 for the same 1996 period. Service fees
related to NOW and demand accounts, a major component of other income, increased
$47,000 or 9%, to $556,000 for the three months ended March 31, 1997 from
$509,000 for the same 1996 period. This increase was partially offset by a
decrease of $32,000 in loan placement fees, which are fees the Company earns on
loans that are originated and subsequently sold to third parties, and
miscellaneous loan fees, which are fees the Company earns in connection with
closing loans. Loan placement fees and miscellaneous loan fees were $99,000 for
the first three months of 1997 as compared to $131,000 for the same 1996 period.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operations reflects management's
analysis of the loan portfolio and determination of an adequate allowance for
loan losses to provide for probable losses in the loan portfolio. The potential
for loss in the portfolio reflects the risks and uncertainties inherent in the
extension of credit.
The determination of the adequacy of the allowance for loan loss is based upon
management's assessment of risk elements in the portfolio, factors affecting
loan quality and assumptions about the economic environment in which the Company
operates. The Company utilizes a loan grading system, based upon FDIC
parameters, and utilizes that assessment of the overall quality of the loan
portfolio in the process of determining an adequate allowance for loan loss
level. This system involves an ongoing review of the commercial and real estate
loan portfolios, with added emphasis on the Company's larger commercial credits
and nonperforming loans. Various factors are involved in determining the loan
grade, including the cash flow and financial status of the borrower, the
existence and nature of collateral, and general economic conditions and their
impact on the borrower's industry. These reviews are dependent upon estimates,
appraisals and judgments, which can change quickly due to economic conditions
and the Company's perceptions as to how these conditions affect the collateral
securing its current and past due loans as well as the borrower's economic
prospects. In each reporting period, the allowance for loan losses is reviewed
based on the most recent loan grading data and is adjusted to the amount deemed
necessary, in the Company's judgment, to maintain adequate allowance for loan
loss levels.
The provision for loan losses charged against earnings in the first three months
of 1997 was $326,000 compared with $576,000 in the same 1996 period. Net loan
charge offs for the three months ended March 31, 1997 and 1996 were $324,000 and
$1,305,000, respectively.
In establishing the allowance for loan losses, management has considered the
possible deterioration of the collateral securing its past due loans. As of
March 31, 1997, the Company's allowance for loan losses was $4,698,000, or 2.0%
of total loans, as compared to $5,164,000, or 2.5%, as of March 31, 1996. The
allowance for loan losses was $4,696,000, or 2.0% of total loans as of December
31, 1996. The ratio of the allowance for loan losses to nonaccrual and
restructured loans and accruing loans past due 90 days or more was 65.3% as of
March 31, 1997 as compared to 69.2% and 80.0% as of March 31, 1996 and December
31, 1996, respectively.
As of March 31, 1997, nonaccrual loans were $3,062,000 as compared with
$3,622,000 as of December 31, 1996 and $5,273,000 as of March 31, 1996. As of
March 31, 1997, approximately $2,600,142 of the loans in the nonaccrual
portfolio were collateralized partially by commercial or residential real estate or
business assets. The Company believes that its allowance for loan losses is
adequate to absorb any potential reduction of net carrying value in the
nonaccrual portfolio. The ratio of nonaccrual loans to total loans declined
from 2.6% as of March 31, 1996 to 1.3% at March 31, 1997.
As of March 31, 1997, the Company's recorded investment in loans that are
considered to be impaired under SFAS 114 was $2,548,000 of which $1,789,000 were
on a nonaccrual status. The remaining $758,000 of loans classified as impaired,
which are also classified as potential problem loans, have either experienced
slight delinquency problems or collateral deterioration though the contractual
terms of the loans continue to be met. The Company has also identified five
additional problem loans in the amount of $316,990 as of March 31, 1997.
Potential problem loans are defined as loans where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms. These accruing commercial loans have experienced frequent delinquency
problems, 2 or more delinquencies between 60-89 days during the last seven
quarterly periods. However, they continue to be less than 90 days delinquent
as of March 31, 1997. If these credits continue to have financial difficulties,
they could be classified as nonaccrual loans and become potential loan charge-
offs in future quarterly periods.
At March 31, 1997, December 31, 1996 and March 31, 1996, the Company had
restructured loans of $2,937,000, $1,580,000 and $1,650,000, respectively.
Interest income recorded on these loans during the three month periods ended
March 31, 1997 and 1996 was $31,000 and $32,000, respectively. The weighted
average yield on restructured loans was 8.12% and 8.43% during the three months
ended March 31, 1997 and 1996, respectively. If these loans had earned interest
in accordance with their original terms, interest income for the first three
months of 1997 and 1996 would have been $10,000 and $10,000 higher,
respectively.
Management, after careful consideration of the above factors, is of the opinion
that the allowance for loan losses as of March 31, 1997 is adequate. However,
because the economic recovery in Connecticut appears to be progressing slower
than in the nation it is difficult to predict how the future economy may impact
the Company's loan customers. If economic conditions continue to slowly
improve, management believes that the level of its nonaccrual loans could
gradually decline during the next several quarterly periods. However, the
level of the Company's nonperforming assets will continue to negatively impact
the Company's profitability in future quarterly periods. The nature of the
Connecticut economy will continue to influence the levels of loan charge-offs,
nonaccrual loans and the allowance for loan losses, and management will
appropriately adjust the allowance as considered necessary to reflect future
changes in risk.
The following tables set forth quarterly information on nonperforming assets,
restructured loans, accruing loans past due 90 days or more and loans
charged-off for the quarterly periods from March 31, 1996 to March 31, 1997.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Quarter Ended
(in thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C>
Balance beginning
of period $4,696 $4,696 $4,723 $5,164 $5,893
Provision charged to
income 326 362 500 526 576
Loans charged off:
Commercial 196 276 413 696 1,064
Real Estate:
Commercial Mtg. 70 0 33 182 15
Residential Mtg. 2 13 48 108 133
Consumer 103 128 108 109 117
______ ______ ______ ______ _______
Total Loans
charged-off 371 417 602 1,095 1,329
Recoveries 47 55 75 128 24
______ ______ _______ ______ _______
Net loans
charged-off 324 362 527 967 1,305
______ ______ ______ ______ ______
Balance, end of period $4,698 $4,696 $4,696 $4,723 $5,164
Ratios:
Net loans charged-off
to avg. loans 0.14% 0.16% 0.24% 0.46% 0.64%
Allowance for loan
losses to total loans 1.96% 2.00% 2.07% 2.22% 2.54%
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NONACCRUAL LOANS, RESTRUCTURED LOANS
AND OTHER REAL ESTATE OWNED
(in thousands)
QUARTER ENDED March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $ 924 $ 1,005 $ 1,213 $ 1,665 $ 1,375
Real Estate:
Commercial 1,769 2,255 2,316 2,336 3,140
Residential 110 99 99 185 520
Consumer 259 263 266 266 238
______ ______ ______ ______ ______
Total nonaccrual loans 3,062 3,622 3,894 4,452 5,273
Other Real Estate Owned-net 588 559 956 1,673 1,618
______ ______ ______ _______ _______
Total nonperforming assets 3,650 4,181 4,850 6,124 6,890
______ ______ ______ ________ _______
Restructured loans 2,937 1,580 1,592 1,622 1,650
Total nonperforming assets
& restructured loans $ 6,587 $ 5,761 $ 6,442 $ 7,746 $ 8,540
Accruing loans past due
90 days or more:
Commercial 142 97 514 5 215
Real Estate:
Construction 0 0 0 0 0
Commercial 260 103 0 0 0
Residential 473 346 0 0 199
Consumer 318 125 142 151 126
______ ______ ______ ______ ______
Total accruing loans past
due 90 days or more $ 1,193 $ 671 $ 656 $ 156 $ 540
Allowance for loan losses $ 4,698 $ 4,696 $ 4,696 $ 4,723 $ 5,164
SFAS 114 impaired loans $ 2,548 $ 2,507 $ 2,723 $ 2,997 $ 4,252
Ratio of nonperforming
assets to total assets 1.1% 1.2% 1.5% 2.0% 2.3%
Ratio of nonperforming
assets, restructured loans
& accruing loans past due
90 days or more to total
assets 2.3% 1.9% 2.2% 2.5% 3.1%
Ratio of nonperforming
assets to total loans
and OREO 1.5% 1.8% 2.1% 2.9% 3.4%
Ratio of nonperforming
assets, restructured loans,
and accruing loans past due
90 days or more to total
loans and OREO 3.3% 2.7% 3.1% 3.7% 4.5%
Ratio of allowance for loan
losses to nonaccrual loans,
restructured loans and
accruing loans past due
90 days or more 65.3% 79.9% 76.5% 75.8% 69.2%
Ratio of nonaccrual loans,
restructured loans and
accruing loans past due
90 days or more to
shareholders'equity and
allowance for loan losses 23.6% 19.4% 20.8% 29.3% 35.3%
</TABLE>
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) expense was $37,000 for the three month period
ended March 31, 1997 as compared to $46,000 for the three months ended March
31, 1996. These expenses reflect losses on sales and writedowns on OREO
properties and associated direct holding costs, such as property taxes,
insurance and utilities. OREO holding costs were $26,000 and $25,000 for
the three month periods ended March 31, 1997 and 1996, respectively.
The OREO balance as of March 31, 1997 is $588,000 and is comprised of nine
properties and has increased $29,000 from December 31, 1996. The OREO
portfolio consists of four residential properties, representing 69% of the
total OREO portfolio, and three commercial properties which constitutes 20%
of the total OREO portfolio. In addition, the Company has two parcels of
land comprising the remaining 11% of the portfolio.
OREO properties are carried at the lower of carrying value of the related loan
or fair value of the foreclosed property at the date acquired through
foreclosure less the cost to dispose. Fair value of OREO properties is
determined using the Company's most recent appraisal or a more recent
broker's valuation. In order to facilitate the sale and ultimate disposition
of OREO, the Bank may finance the sale of a property at market rates to
qualified, credit-worthy borrowers. The Company values its OREO properties
based on an asset by asset review and on the assumption that an active market
exists for those properties. The Company's primary valuation technique is to
derive values from available comparable sales data and not from other evaluation
criteria such as discounted cash flows. In making the assumption that an active
market exists for OREO properties, the Company has made the determination
that the properties are salable within approximately one year, and has valued
each property at an amount which the Company anticipates will permit the sale of
such property within approximately one year. Although the Company actively
markets all OREO properties for sale, no assurance can be given that properties
will actually sell in approximately one year, such sales being dependent upon
relevant market conditions which will vary from property to property, and
include such factors as the number of comparable properties available for
purchase at the time, the availability of financing and the stability or trends
of real estate values in the area. The following table reflects OREO activity
for the last five quarterly periods.
<PAGE>
<TABLE>
<CAPTION>
OTHER REAL ESTATE OWNED
QUARTERLY ANALYSIS
(in thousands)
QUARTER ENDED
<S> <C> <C> <C> <C> <C>
DESCRIPTION 03/31/97 12/31/96 09/30/96 06/30/96 03/31/96
_________________________________________________________________________________
Beginning book value $ 558 $ 956 $1,673 $1,617 $ 614
Properties added 42 104 1 620 1,071
Proceeds from OREO sold (480) (722) (563) (47)
(Losses)gains on
properties sold (22) 4 84 (8)
Property writedowns (12) (85) (13)
_______ _______ _______ _______ _______
Ending book value $ 588 $ 558 $ 956 $1,673 $1,617
</TABLE>
OPERATING EXPENSES
Operating expenses increased $308,000, or 11%, from $2,730,000 for the
three months ended March 31, 1996 to $3,038,000 for the same 1997 period.
Salary and Employee Benefits, Occupancy and Other Expenses were primarily
responsible for this increase in Operating Expenses.
Salary and Employee Benefits expense increased $233,000, or 17%, from $1,371,000
for the three month period ended March 31, 1996 to $1,604,000 for the comparable
1997 period. This increase can be primarily attributed to additional staffing
requirements needed to maintain three new branch locations which were opened
during 1996 and early 1997, one each in Milford, Branford and Guilford. The
Company's full time equivalent positions as of March 31, 1997 are 154 as
compared to 140 for March 31, 1996.
Occupancy expense also increased, from $354,000 for the first three months of
1996 to $390,000 for the same 1997 period. As with Salary and Employee
Benefits, this increase can be attributed to the new branch locations.
Advertising expense increased $69,000 to $155,000 for the three month period
ended March 31, 1997 as compared to $86,000 for the same 1996 period.
Printing and Office Supplies and Telephone expense also increased during
the first three months of 1997, to $139,000 from $111,000 for the same
1996 period. Effective the first quarter of 1996, the FDIC announced that
it was lowering its deposit insurance premiums for banks. As a result,
the Company's insurance expense decreased to $55,000 for the first three
months of 1997 as compared to $107,000 for the same 1996 period. Consulting
and Professional fees decreased to $87,000 for the first three months of 1997
as compared to $98,000 for the same 1996 period.
PROVISION (BENEFIT) FOR INCOME TAXES
During the first quarter of 1997, the Company recognized an income tax expense
of $323,000 as compared with the recognition of an income tax benefit of
$225,000 for the same period in 1996. Because of improved operating
performance and anticipation of continued future profitability, the Company
had recorded income tax benefits during 1996 to reduce its valuation allowance
on deferred tax assets. The Company has since returned to a fully taxable
reporting basis.
Gross deferred tax assets were approximately $11.2 million as of March 31,
1997. A valuation allowance of $2.2 million was established for a portion
of the deferred tax assets. The net deferred tax assets, after valuation
allowance, were $9 million as of March 31, 1997 and were included in other
assets in the financial statements. The level of the valuation allowance
is Management's best judgment regarding the amount and timing of future
taxable income and established reversal patterns of temporary differences.
As a result of the Company's net operating losses in prior years, it has Federal
and State net operating loss carryforwards of approximately $20 million
(expiring 2010) and $21 million (expiring 2000), respectively, as of December
31, 1996. Such net operating loss carryforwards can be used to offset future
taxable income based on Management's estimate of the amount of taxable income
to be generated in future periods.
CAPITAL ADEQUACY
The Company and the Bank are subject to the capital adequacy rules of several
regulators. Effective December 19, 1992, each federal banking agency issued
final rules to carry out the "prompt corrective action" provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Improvement Act"). The regulations adopted, among other things, defined
capital measures and the capital thresholds for each of the five capital
categories established in the statute and established a uniform schedule
for the filing of capital restoration plans by undercapitalized institutions.
The following table identifies generally the capital measures and thresholds
defined under the FDIC and Federal Reserve Board rules.
Total Tier 1 Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
Well Capitalized 10% or above & 6% or above & 5% or above
Adequately Capitalized 8% or above & 4% or above & 4% or above
Undercapitalized Under 8% or Under 4% or Under 4%
Significantly
Undercapitalized Under 6% or Under 3% or Under 3%
Critically Undercapitalized A ratio of
tangible equity
to total assets
equal to or
under 2%
The risk-based capital guidelines establish a measurement of capital adequacy
by relating a banking organization's capital to its financial risks, both on-
and off-balance sheet. The reporting of debt and equity securities (not held
for trading activities or to maturity) for the purposes of calculating Tier 1
capital for the Company and the Bank differs from reporting under SFAS 115.
Under final FDIC regulations, net unrealized losses for equity securities
that are available for sale are included in the calculation of Tier 1 capital.
All other net unrealized gains or losses on available for sale securities are
excluded from the definition of Tier 1 capital. As of March 31, 1997,
December 31, 1996 and March 31, 1996, the Company's total risk-based
capitalratio was 9.78%, 9.56%, and 9.76%, respectively. The second capital
measure is the Tier 1 risk-based ratio, which includes only core capital as
it measures the relationship to risk-weighted assets. As of March 31, 1997,
December 31, 1996 and March 31, 1996, the Company's Tier 1 risk-based ratio
was 8.52%, 8.30%, and 8.49%, respectively. The third capital adequacy measure
is the Tier 1 (or core) leverage capital (using the same definition of capital
as used in the risk-based guidelines) to average total assets. The Company's
Tier 1 leverage ratio was 5.94%, 5.75%, and 5.68% as of March 31, 1997,
December 31, 1996 and March 31, 1996, respectively. As of March 31, 1997,
based on the above criteria, the Company and the Bank fall within the adequately
capitalized category.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The liquidity process is monitored by the Company's Asset Liability Committee
("ALCO"), which meets regularly to implement its asset/liability and funds
management policy. ALCO's role is to evaluate liquidity and interest rate
risk and their impact on earnings. The Committee developed a reporting
system that integrates the current interest rate environment of the national
and local economies with the maturities and the repricing schedules of both
the assets and liabilities of the Company. The objective of ALCO is to manage
the Company's assets and liabilities to provide an optimum and stable net
interest margin and to facilitate a constant level of net interest income.
The primary focus of the Company's liquidity management is to match cash inflows
and outflows with funds provided by the Company's market for deposits and
loans. The Company's objective is to maintain adequate cash which is
invested in federal funds. During the first three months of 1997, the average
balance of federal funds sold was $1,761,000. In the event the Company needs
to borrow cash to manage its overnight position or short-term position, the
Company can borrow approximately $10 million, as of March 31, 1997, on an
overnight basis from the Federal Home Loan Bank of Boston ("FHLBB") and has
access to a $1,000,000 federal funds line of credit with a commercial
correspondent bank. As of March 31, 1997, the Company had $7,185,000 in
outstanding overnight borrowings at the FHLBB. In addition, the Company
has access to $10,000,000 in short-term funds via reverse repurchase
agreements with a brokerage firm. The Company also has the ability to borrow
term advances (from one week to twenty years) from the FHLBB. Its total
advance line, including overnight borrowings from the FHLBB, is
approximately $19,200,000 of which $16,892,000 was outstanding as of March
31, 1997. In order to utilize additional borrowing capacity from the FHLBB,
additional shares of capital stock would need to be purchased. The
Company's investment portfolio also provides a secondary source of liquidity.
At March 31, 1997, the Company's liquidity ratio as defined by FDIC criteria
is 24.53% compared to 26.96% and 28.26% as of December 31, 1996 and March 31,
1996. The liquidity ratio is defined as the total of net cash, short-term
investments and other marketable assets, divided by total net deposits and
short-term liabilities. Management believes that its liquidity position is
adequate as of March 31, 1997.
The Company generated a negative aggregate cash flow of $2,910,000 for the
three months ended March 31, 1997, as compared to a negative aggregate cash
flow of $2,688,000 for the same 1996 period. Cash flows provided by operating
activities were $798,000 and $886,000 for the three months ending March 31,
1997 and March 31, 1996, respectively. This slight decrease in net cash provided
by operating activities was due in part to a reduction in the provision for loan
losses and the net accretion of bond premiums and discounts offset by decreased
net income as a result of the Company returning to a fully taxable status.
There was also a significant increase in interest receivable offset by an
increase in other liabilities, mainly reserve for taxes.
During the first three months of 1997, net cash of $8,620,000 was used by
financing activities as compared to $1,767,000 for the same 1996 period. The
increase in cash used by financing activities in 1997 is primarily due to
decreases in time deposits, federal funds purchased and securities sold under
repurchase agreements. During the first three months of 1997, time deposits
decreased $5,002,000 as compared to an increase of $4,056,000 for the same
period in 1996. Federal Funds purchased and securities sold under repurchase
agreements decreased by $4,164,000 for the first three months of 1997 as
compared to increased by $300,000 for the same 1996 period. These decreases
are due mainly to increase competition in the marketplace and a less
aggressive pricing posture maintained by the Company.
Net cash provided by investing activities was $4,913,000 for the first three
months of 1997 compared to net cash used by investing activities of $1,807,000
for the same 1996 period. This increase in cash as a result of investing
activities was due primarily to a decrease in Federal Funds Sold resulting
from an increase in short term cash needs to offset the declining deposit base
as well as an increase in the dollar amount of net loans originated and matured.
There was also a significant decline in the payments to acquire and improve
other real estate owned. Net loans increased from $230,000,000 at March 31,
1996 to $234,000,000 as of March 31, 1997 while the ending balance on Other
Real Estate Owned remained relatively stable.
The table below compares rate sensitive assets and rate sensitive liabilities
according to when they will mature and/or reprice after March 31, 1997. The
comparison is expressed as a rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities) and an interest rate
sensitivity gap ratio (i.e., the rate sensitivity gap as a percentage of rate
sensitive assets). These measures are shown both for individual periods and
cumulatively. In an increasing rate environment, asset sensitivity (i.e.,
a positive gap) enhances earnings potential, whereas liability sensitivity
(i.e., a negative gap) negatively impacts earnings. The opposite results
occur in a declining rate environment. It should be noted that the table
does not necessarily indicate the impact of general interest rate movements
on net interest margin since the Company's repricing of different assets and
liabilities is also influenced by competitive pressures and the needs of
the Company's customers.
As of March 31, 1997 the Company has a positive cumulative gap through a 90 day
horizon. This results from having approximately 30% of the Company's loan
portfolio available to reprice within thirty days. However, the Company becomes
liability sensitive in the third month and remains so beyond one year, primarily
due to its demand and savings accounts, which are considered relatively stable
and not easily influenced by changes in interest rates. Cumulatively through
one year, the Company has a negative gap position of $7,940,000, representing a
negative 3% cumulative gap ratio.
ALCO manages the gap position on an ongoing basis according to its assessment
of the interest rate outlook and other factors in order to assure that interest
rate risk does not exceed a 3% change in net interest income for a one year
period. As the Company increases its total assets, the overall business plan
provides for matching assets and liabilities to minimize interest rate and
liquidity risk. If interest rates were to increase immediately by 200 basis
points, the negative impact on the Company would be within ALCO's tolerance
level.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Analysis
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997 Month 1 Month 2 Month 3 Months Months Over Total
4-6 7-12 1 Year
____________________________________________________________________________________________
Rate Sensitive Assets:
Loans 1 $70,036 $4,476 $2,467 $10,765 $18,341 $126,532 $232,617
Investments 4,088 2,001 4,233 3,604 6,987 44,013 64,926
_______ ______ ______ ______ _______ _______ ________
Total Rate
Sensitive Assets 74,124 6,477 6,700 14,369 25,328 170,545 297,543
Rate Sensitive
Liabilities:
Time deposits 15,636 11,126 8,441 19,238 33,013 40,325 127,779
Other deposits 23,8612 73 73 37 23,857 129,8033 177,704
_______ ______ ______ ______ ______ _______ _______
Total Rate
Sensitive Liabilities 39,497 11,199 8,514 19,275 56,870 170,128 305,483
Net Gap 34,627 (4,722) (1,814) (4,906) (31,542) 417 (7,940)
______ ______ _____ ______ ______ _______ ______
Cumulative Gap 34,627 29,905 28,091 23,185 (8,357) (7,940) (7,940)
Net Gap as % of total
rate sensitive assets 12% -2% -1% -2% -11% 0% -3%
Cumulative Gap as %
of total rate sensitive
assets 12% 10% 9% 8% -3% -3% -3%
1 Excludes nonaccrual loans
2 Includes borrowings
3 The Company has assumed that 90% of demand and savings deposits will not be
withdrawn in less than one year based on its analysis of Bank and industry
experiences for the rate of runoff of such deposits.
REGULATORY MATTERS
The Federal Deposit Insurance Corporation ("FDIC"), after completion of a joint
examination of the Bank with the Connecticut Banking Department as of December
31, 1995, has removed its Memorandum of Understanding (the "Memorandum"), issued
on May 16, 1995. The Memorandum required, among other things, that the Bank
achieve certain Tier 1 leverage and total risk based capital requirements. The
Bank was required to have a Tier 1 leverage capital ratio of at least 5% by June
30, 1996 and 6% by June 30, 1997. Also, the Bank was required to maintain a
total risk-based capital ratio of at least 8% throughout the existence of the
Memorandum. As of September 30, 1995, the Bank met the first capital target
identified in the Memorandum, as its Tier 1 leverage capital and total
risk-based capital ratios were 5.0% and 8.8%, respectively. As of March 31, 1997, the
Bank's Tier 1 leverage capital and total risk-based capital ratios are 5.9% and
9.7%. The Company anticipates that it will achieve the second Tier 1 leverage
capital ratio requirement, 6%, through future earnings. In removing the
Memorandum, the FDIC and the Company have agreed that the Company will continue
efforts towards meeting the capital goals outlined in the Memorandum, notify the
State regulators prior to paying dividends, and establish a goal for the end of
1997 that classified assets will be equal to 30% of total capital and eligible
reserves.
RECENT DEVELOPMENTS
On April 8, 1997, the Company announced that it is a party to a definitive
merger agreement (the "Agreement") pursuant to which Citizens Bank of
Connecticut, a subsidiary of Citizens Financial Group, Inc., will acquire
all of the outstanding shares of stock of the Company (other than certain
shares to be canceled pursuant to the Agreement and any objecting shares)
for $57.2 million, or $15.50 per share.
The acquisition, which is subject to shareholder and regulatory
approval, will be the fourth Connecticut acquisition by Citizens since
1993 and the 11th overall in Citizens' four-state franchise. When
completed, the acquisition will make Citizens Bank of Connecticut a
$1.75 billion bank with 42 branch offices. Assuming the required
approvals are obtained, the transaction is expected to be completed
in the summer of 1997.
Citizens Financial Group, Inc. is a $16 billion financial services company
headquartered in Providence, Rhode Island, with 250 offices operating as
Citizens Bank in Connecticut, Massachusetts, New Hampshire and Rhode Island.
Citizens is 76.5 percent owned by The Royal Bank of Scotland plc, with the
remaining interest held by Bank of Ireland.
PART II - OTHER INFORMATION
ITEMS 1-5 Not applicable.
ITEM 6 Exhibits and Reports on Form 8-K:
(a) Exhibits- Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - A Current Report on Form 8-K, dated April 8, 1997, was
filed on April 21, 1997. The Filing reported on Item 5, "Other Events."
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.
Date: May 14, 1997 /s/ F. Patrick McFadden, Jr.
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: May 14, 1997 /s/ John F. Trentacosta
John F. Trentacosta
Executive Vice President/Chief Financial Officer
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.
Date: May 14, 1997
F. Patrick McFadden, Jr.
President/Chief Executive Officer
Date: May 14, 1997
John F. Trentacosta
Executive Vice President/Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains Summary Financial Information extracted from Form 10-Q
dated 3/31/97 and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,134
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,548
<INVESTMENTS-CARRYING> 20,563
<INVESTMENTS-MARKET> 20,328
<LOANS> 239,125
<ALLOWANCE> 4,698
<TOTAL-ASSETS> 334,035
<DEPOSITS> 289,498
<SHORT-TERM> 9,943
<LIABILITIES-OTHER> 1,031
<LONG-TERM> 7,526
0
0
<COMMON> 37
<OTHER-SE> 25,727
<TOTAL-LIABILITIES-AND-EQUITY> 334,035
<INTEREST-LOAN> 5,029
<INTEREST-INVEST> 965
<INTEREST-OTHER> 64
<INTEREST-TOTAL> 6,059
<INTEREST-DEPOSIT> 2,445
<INTEREST-EXPENSE> 2,686
<INTEREST-INCOME-NET> 3,373
<LOAN-LOSSES> 326
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,038
<INCOME-PRETAX> 807
<INCOME-PRE-EXTRAORDINARY> 807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 484
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 0.13
<LOANS-NON> 3,062
<LOANS-PAST> 142
<LOANS-TROUBLED> 2,937
<LOANS-PROBLEM> 701
<ALLOWANCE-OPEN> 4,696
<CHARGE-OFFS> 371
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 4,698
<ALLOWANCE-DOMESTIC> 4,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
