Farmers & Mechanics Bank announces quarterly results and long term earnings improvements

Business Wire, Oct 25, 1995

MIDDLETOWN, Conn.--(BUSINESS WIRE)--Oct. 25, 1995--Farmers & Mechanics Bank (Nasdaq:FMCT) reports a net loss for the third quarter of $2.295 million, or $1.38 per share, as compared with a net loss of $488 thousand, or 29 cents per share for the comparable period in 1994.

For the first nine months of 1995, the Bank had a net loss of $1.267 million, or 76 cents per share, vs. net income of $242 thousand, or 15 cents per share, for the same period in 1994.

Commenting on the third quarter's results, John F. Beckert, president and CEO indicated that, "We have been dedicated to achieving significant progress in reducing nonperforming assets and increasing productivity to generate stronger and more sustainable core earnings. The decisive actions taken in the quarter represent an important step in this progress."

The net loss in the third quarter of 1995 results from successful efforts to achieve a 44% reduction in nonperforming assets ("NPAs") since June 30, 1995 to $12.3 million, or 2.42% of total assets, at Sept. 30, 1995. Further dispositions are expected to pare the ratio to less than 2.0% by year-end. During the third quarter, the Bank completed the sale of a $6 million NPA package, 95% of which consisted of nonperforming loans ("NPLs"), that resulted in a $2.7 special expense provision for loans sold. The Bank sold foreclosed properties ("REO") with a carrying value of $3.6 million during the third quarter. Net expense of REO operations for the quarter includes $723 thousand of net losses on REO sold. At quarter-end, the Bank had also executed sales contracts on 25 additional properties with a carrying value of $1.9 million that are expected to close during the fourth quarter. The REO provision expense of $1.8 million reflects the write-down of carrying values on pending sales to their contract prices as well as the reassessment of carrying values on unsold REO.

Excluding only the above-mentioned nonrecurring NPA-related charges, the Bank had approximately $765 thousand of core operating earnings during the third quarter. These core operating earnings were attributable to the relatively stable level of net interest income and non-interest income, combined with continued control of basic operating expenses and a modest benefit from a reduced provision for loan losses. Despite 5.5% growth in earning assets, net interest income was virtually unchanged from the same period last year as increased interest income from higher loan rates and higher investment returns was offset by a greater rise in funding costs associated with the renewal of time deposits and some customer redeployment of retail savings accounts. The net interest margin was 3.83% in the current quarter as compared with 4.02% in the third quarter of 1994. Reversal of accrued interest on the NPLs sold reduced the current quarter's margin by about .07%. For the first nine months of 1995 and 1994, the net interest margin was 3.90%.

Total non-interest income in the third quarter of 1995 was 5% above last year, as lower service charge income due to reduced loan delinquencies and higher deposit balances was more than offset by other income primarily related to the Bank's new business activities. On a year-to-date basis, the decline in total non-interest income resulted from lower gains on asset sales and decreased service charges.

Total loan provisions included the aforementioned provision for loans sold. A credit of $212 thousand in the provision for loan losses was attributable to the normal adequacy review of the allowance for loans losses. NPLs at Sept. 30, 1995 were $4.4 million, or 1.4% of total loans, a level which is 52% lower than June 30, 1995 and Sept. 30, 1994. In addition, loans delinquent 30-89 days declined to $4.1 million, or 1.3% of total loans, at Sept. 30, 1995 from $4.8 million, or 1.6% of total loans, at June 30, 1995 and $8.3 million, or 2.6% of total loans, at Sept. 30, 1994. Based on the NPL sale, the decline in loan delinquencies and $388 thousand of net loan charge-offs in the third quarter of 1995, Management established the allowance for loan losses at $5.0 million on Sept. 30, 1995. This level represents 1.60% of total loans and 322% of annualized net loan charge-offs. At quarter-end, allowance coverage was 112% of NPLs as compared with 61% at June 30, 1995 and 65% at Sept. 30, 1994.

Total non-interest expenses in the third quarter of 1995 were 40% above the level in the comparable quarter of 1994. Approximately 80% of this increase was attributable to the non-recurring NPA-related charges described earlier. Special factors account for the bulk of the other cost increases. Salaries and benefits include severance costs of $227 thousand associated with the total of 28 positions scheduled for elimination by year-end and approximately $88 thousand of benefits for certain prior and current senior executives that had been previously deferred. Fees and services include $70 thousand of contractual payments to a consultant which are directly related to the expected first year's earnings benefits from implementing his recommendations. A credit of $298 thousand for the four-month rebate of FDIC insurance premiums was reflected in fees and services.