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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main Street, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(203) 354-4411
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
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
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked prices of such stock,
as of September 1, 1995, is $29,765,985. The number of shares of Common
Stock outstanding as of September 1, 1995, is 4,492,979.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated September
20, 1995 for the 1995 Annual Meeting of Shareholders are incorporated by
reference into Part III (Items 10, 11, 12 and 13).
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . 15
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 16
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . 39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 68
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . 69
Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 69
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . 69
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . 69
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 70
PART I
Item 1. BUSINESS
The Company and the Bank
NewMil Bancorp, Inc., (the "Company"), a Delaware corporation, is the
registered bank holding company for New Milford Savings Bank ("the
Bank"), a wholly-owned subsidiary. The Company's activity is currently
limited to the holding of the Bank's outstanding capital stock and the
Bank is the Company's only subsidiary and its primary investment. The
net income of the Company is presently derived from the business of the
Bank. Future establishment or acquisition of subsidiaries by the
Company is possible. Nevertheless, it is expected that the Bank will
account for most of the Company's net income in the foreseeable future.
The Bank is a Connecticut-chartered and Federal Deposit Insurance
Corporation (the "FDIC") insured savings bank headquartered in New
Milford, Connecticut.
Banking Services
The Bank's principal business consists of attracting deposits from the
public and using such deposits, with other funds, to make various types
of loans and investments. The Bank offers both consumer and commercial
deposit accounts, including checking accounts, interest bearing "NOW"
accounts, money market accounts, certificates of deposit, savings
accounts and Individual Retirement Accounts. The Bank offers 24-Hour
banking through automated teller machines in seven branches.
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank offers a broad range of mortgage and commercial loans to the
companies and small businesses of its service area including lines of
credit, term loans, Small Business Administration lending, commercial
real estate mortgages, and construction and development mortgages. In
addition, the Bank offers services including money orders, travelers'
checks and safe deposit boxes. Although empowered, the Bank is not
currently offering trust services.
Market Area
The Bank conducts its business through 12 offices located throughout its
service area, principally Litchfield County and northern Fairfield
County. The Bank's service area, which has a population of
approximately 70,000, enjoys a balance of manufacturing, trade, and
service employment and is home to a number of Fortune 500 companies.
Although the Bank's primary market area is Litchfield and northern
Fairfield counties, the Bank does have depositors and borrowers that
live outside of these areas.
Connecticut adopted legislation in 1990 which effectively provides for
full interstate banking effective immediately. Accordingly, out-of-
state banking institutions may now acquire Connecticut banks so long as
the home state of the acquiring institution would allow ("reciprocity")
a Connecticut institution to acquire a bank in that state. A federal
law adopted in 1994 enables out-of-state banking institutions to make
acquisitions in Connecticut regardless of reciprocity. The same federal
law permits interstate mergers of banking institutions as of June 1,
1997, unless a state elects to prohibit such mergers, or elects to allow
such mergers sooner. The federal legislation also allows states to
elect to authorize in that state "de novo" branching of out of state
institutions. Connecticut has recently adopted legislation that permits
interstate mergers and "de novo" branching immediately, provided that
the target institution of a merger proposal is at least five years old
and that no transaction will result in a concentration in any one
institution of more than 30% of the state's total deposits. The impact
of expected further competition under the new interstate banking laws
cannot be determined at this time. The Company may consider expansion
within or outside of New England provided appropriate opportunities and
conditions exist.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
For a table and discussion of the average balances, interest rates and
interest differential of the Company for the years 1995, 1994 and 1993,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" on pages 19 through 22
and pages 26 and 27. For a table and discussion of an analysis of the
effect on net interest income of volume and rate changes on the Company
for 1995 over 1994 and 1994 over 1993, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" on pages 19 through 22 and pages 26 and 27. In this
analysis, the change due to volume was calculated as the change in
average balance multiplied by the prior year's weighted average rate,
the change in rate was calculated as the change in average rate
multiplied by the prior year's average balance, and the change in
rate/volume was calculated as the change in average rate multiplied by
the change in average balance. Principal amounts of non-accruing loans
have been included in the average loan balances used to determine the
rate earned on loans. Interest income on non-accruing loans is included
in income only to the extent that cash payments have been received.
Securities
The composition, maturity distribution and weighted average yields of
securities available-for-sale at June 30 were as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1995(a)
U.S. Treasury and Government
Agency Obligations
Within 5 years $ 1,018 $ 1,018 8.01%
Mortgage backed securities 4,149 4,149 8.88
Collateralized mortgage obligations 388 388 7.70
Federal Home Loan Bank Stock 1,547 1,547 6.21
Total Securities Available-for-sale $ 7,102 $ 7,102 8.11
June 30, 1994
U.S. Treasury and Government
Agency Obligations
After 5 but within 10 years $ 916 $ 916 6.17%
Mortgage backed securities 35,101 35,101 4.77
Collateralized mortgage obligations 81,234 81,234 5.73
Other bonds and notes
After 1 but within 5 years 650 650 7.00
Marketable equity securities 1,240 1,240 5.57
Total Securities Available-for-sale $119,141 $119,141 5.38
June 30, 1993(b)
Mortgage backed securities $ 72,891 $ 72,891 5.67%
Collateralized mortgage obligations 45,717 45,717 5.27
Other bonds and notes
After 5 but within 10 years 300 300 7.00
Marketable equity securities 1,801 1,801 3.99
Total Securities Available-for-sale $120,709 $120,709 5.50
The composition, maturity distribution and weighted average yields of
securities held-to-maturity at June 30 were as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1995(a)
U.S. Treasury and Government
Agency Obligations
After 5 but within 10 years $ 915 $ 983 6.13%
Mortgage backed securities 20,245 20,158 6.37
Collateralized mortgage obligations 98,932 98,807 6.53
Total Securities Held-to-maturity $120,092 $119,948 5.38
June 30, 1994
Mortgage backed securities $ 9,985 $ 9,509 6.36
Collateralized mortgage obligations 24,620 23,186 5.96
Total Securities Held-to-maturity $ 34,605 $ 32,695 6.07
(a) During 1995 the Company transferred securities with a fair value of
$92,231,000 from available-for-sale to held-to-maturity pursuant to
a change in investment strategy.
(b) Effective June 30, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") which requires that all
securities be classified as either available-for-sale, held-to-
maturity or trading. See "Note 1 - Summary of significant
Accounting Policies - Securities" in the 1995 Annual Report.
For information concerning securities portfolio activities see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the captions "Results of Operations" on pages 21,
22 and 26, "Financial Condition" on pages 32 and 33 and "Note 2 -
Securities" on pages 48 and 49.
Loans
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank also offers a broad range of mortgage and commercial loans to
the companies and small businesses of its service area including lines
of credit, term loans, Small Business Administration ("SBA") lending,
commercial real estate mortgages, and construction and development
mortgages.
The Bank offers both adjustable-rate and fixed-rate residential mortgage
loans for the purchase or refinancing of residences with amortization
periods up to 30 years. The Bank's adjustable-rate mortgages have
generally provided for annual adjustments of interest based on either an
underlying United States Treasury Securities Index or the Bank's base
rate. Initial rates during the first year on adjustable-rate mortgages
are frequently at a discount from fully indexed contractual rates.
Currently, the maximum interest rate increase per year contractually
permitted on the Bank's adjustable-rate mortgages is 2% and the maximum
increase over the life of the mortgage is 6%.
While the interest received by the Bank on an adjustable-rate
residential mortgage loan will change during the life of the loan,
generally annually, the interest rates which must be paid by the Bank to
attract and retain deposits will generally change more frequently than
annually. Therefore, in times of rising interest rates, the net return
which the Bank would expect from its adjustable-rate mortgages may be
reduced. The Bank's residential mortgage loans are conservatively
underwritten based on the borrower's income in accordance with secondary
market standards.
Because of the risks to the Bank of owning fixed-rate loans at times of
rising interest rates, during which time competitive pressures require
that the Bank increase the rates of interest it pays on its deposits,
the Bank's current policy is to limit the amount of fixed-rate
residential mortgage loans in its loan portfolio. The Bank is an
approved FNMA seller and servicer and current fixed-rate residential
mortgage loans are being underwritten to FNMA standards. The Bank sells
the majority of its originations of conforming fixed rate residential
mortgage loans to the secondary market with servicing retained by the
Bank.
In evaluating a potential residential mortgage borrower, the Bank
considers a number of factors, including the creditworthiness of the
borrower, the capacity of the borrower to repay the loan, an appraisal
of the property to be mortgaged and a review of the loan to value ratio.
In general, real estate values in the Bank's service area for single-
family homes and condominiums have stabilized during the past two years
but market conditions remain soft. The Bank believes that this period
of stable values has had the same stabilizing effect on the delinquency
rate in the Bank's residential mortgage portfolio. Should values for
condominiums decline and values for single-family homes show decrease,
then the Bank's residential mortgage portfolio could be adversely
affected. Loans with a loan-to-value ratio of more than 80% at issuance
are insured by nationally rated private mortgage insurers. The Bank
does not currently underwrite new mortgages with a loan-to-value ratio
of greater than 95%.
Loans collateralized by commercial properties, including multi-family
residential properties, can involve greater credit risks than one- to
four-family residential mortgage loans. The commercial real estate
business is cyclical and subject to downturns, over-building,
fluctuations in market value and local economic conditions. Typically,
such loans are substantially larger than one- to four-family residential
mortgage loans. Because repayment is often dependent on the cash flow
of a successfully operated or managed property, repayment of such loans
may be more susceptible to adverse conditions in the real estate market
or the economy generally than is the case with residential mortgages.
Construction mortgages generally involve a higher risk of loss than
loans collateralized by improved real estate because of the completion
risk of the project. Moreover, because of the uncertainties inherent in
estimating construction costs, delays, labor problems, material
shortages and other unpredictable contingencies, it is relatively
difficult to evaluate accurately the total amount required to complete
a project and the related loan-to-value ratios. Furthermore, in the
event of foreclosure on an unfinished project, the Bank must either
incur the burden, delay and uncertain cost of finishing the construction
or, alternatively, it may be forced to liquidate the collateral at an
unfavorable price due to its incomplete state. During periods of rising
interest rates, borrowers' cash reserves are strained, usually at the
same time market conditions for sales deteriorate.
The Bank offers unsecured commercial loans, generally adjustable-rate
loans with the adjustment of interest based on the Prime Rate plus a
spread. The Bank has been conservative in its underwriting standards
for this market to assure the quality of loans in the portfolio. The
Bank also offers SBA loans. Both of these loan products are targeted
for, and tailored to the needs of, the local business and professional
community in the Bank's market area.
The Bank makes collateral and installment loans, including home equity
lines of credit, home equity loans, automobile and other personal loans.
While the Bank offers fixed rates on its consumer loans and home equity
loans, its home equity lines of credit are generally offered at a spread
over the prime rate. Home equity loans and lines of credit have risks
similar to those associated with residential mortgages discussed above.
For further information on the composition and quality of the loan
portfolio see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the captions "Asset Quality
and Portfolio Risk" and "Financial Condition" on pages 29 through 31.
The following table sets forth information on the composition of the
Bank's loan portfolio by loan type as of June 30 for the past five years
(in thousands):
1995 1994 1993 1992 1991
Real Estate Mortgages: (a)
Residential
1-4 family $ 98,766 $ 94,836 $ 88,592 $ 75,242
5-more family 3,171 3,199 7,934 7,906
Commercial 29,068 23,556 23,490 16,972
Land 9,524 11,833 13,148 19,767
Home equity credit 7,785 7,367 6,672 6,456
Total mortgage
loans 148,314 140,791 139,836 126,343 153,580
Commercial and
industrial 3,201 708 - -
Installment 284 256 692 486 902
Collateral and other 1,903 1,497 1,782 1,897 2,417
Total loans, gross 153,702 143,252 142,310 128,726 156,899
Deferred loan
origination (fees)
costs, net (431) (386) (100) 64 80
Allowance for loan
losses (5,372) (5,246) (5,331) (5,753) (4,006)
Total loans, net $147,899 $137,620 $136,879 $123,037 $152,973
(a) The Company revised its loan classifications during fiscal year
1992. Certain information is not available for the 1991 fiscal year.
The following tables reflect the loan portfolio maturity distribution as
of June 30, 1995 (in thousands); non-accrual loans have been presented
in the after 5 years category:
Within After
Within 1-5 5
1 year years years Total
Real Estate Mortgages:
Residential
1-4 family $ 2,846 $ 5,768 $ 90,152 $ 98,766
5-more family 238 440 2,493 3,171
Commercial 6,236 3,624 19,208 29,068
Land 1,648 1,781 6,095 9,524
Home equity credit lines 1,515 2,732 3,538 7,785
Commercial and industrial 640 876 1,685 3,201
Installment 134 87 63 284
Collateral and other 1,903 - - 1,903
Total loans, gross $15,160 $15,308 $123,234 $153,702
The following table shows as of June 30, 1995 the amount of loans due
after one year that have fixed interest rates and variable or adjustable
interest rates (in thousands):
Fixed Adjustable
interest interest
rates rates
Real Estate Mortgages:
1-4 family residential $13,419 $ 82,501
5-more family residential 181 2,752
Commercial 726 22,106
Land 194 7,682
Home equity credit lines - 6,270
Commercial and industrial 889 1,672
Installment 150 -
Collateral and other - -
Total loans, gross $15,559 $122,983
The following table sets forth non-performing loans as of June 30, for
the last five years (in thousands):
1995 1994 1993 1992 1991
Non-accruing loans $4,632 $4,170 $4,518 $4,787 $15,630
Accruing loans past due
90 days or more 34 379 329 78 4,417
Accruing restructured
loans - - - 388 -
Total non-performing
loans $4,666 $4,549 $4,847 $5,253 $20,047
For information on the reduction in interest income associated with non-
accrual loans as of June 30, 1995 see "Note 4 - Non-Performing Assets"
on pages 51 and 52. For discussion of the Bank's policy for placing
loans on non-accrual status refer to "Note 1 - Summary of Significant
Accounting Policies - Loans" on pages 45 and 46. For information
concerning loan portfolio composition and concentrations see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Financial Condition" and on page 31.
Summary of Loan Loss Experience
The following table sets forth changes in the allowance for loan losses
and other selected statistics for the five fiscal years ended June 30
(dollars in thousands):
1995 1994 1993 1992 1991
Balance at beginning of
period $5,246 $5,331 $5,753 $ 4,006 $1,361
Provision for loan losses 400 208 450 11,036 4,850
Charge-offs:
Real estate mortgages 294 294 835 9,287 2,001
Commercial and industrial - - - - -
Consumer loans 1 14 44 7 231
Total charge-offs 295 308 879 9,294 2,232
Recoveries:
Real estate mortgages 20 4 - 1 - -
Commercial and industrial - - - - -
Consumer loans 1 11 6 5 27
Total recoveries 21 15 7 5 27
Net charge-offs 274 293 872 9,289 2,205
Balance at end of period $5,372 $5,246 $5,331 $ 5,753 $4,006
Ratio of net-charge-offs
to average loans
outstanding 0.19% 0.21% 0.64% 6.30% 1.37%
For a discussion of the factors considered by management in determining
the provision for loan losses, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption
"Results of Operations - Provision and Allowance for Loan Losses" on
pages 22 and 23.
The following table sets forth the allocation of the allowance for loan
losses among the broad categories of the loan portfolio and the
percentage of loans in each category to total loans at June 30, for the
past three years. Although the allowance has been allocated among loan
categories for purposes of the table, it is important to recognize that
the allowance is applicable to the entire portfolio. Furthermore,
charge-offs in the future may not necessarily occur in these amounts or
proportions.
1995 1994
Allowance Loans(a) Allowance Loans(a)
Real Estate Mortgages
1-4 family residential $1,466 64.26% $1,684 66.23%
5-more family residential 725 2.06 756 2.23
Commercial 1,865 18.91 1,439 16.43
Land 781 6.20 1,220 8.25
Home equity credit lines 83 5.06 97 5.15
Total mortgage loans 4,920 96.49 5,196 98.29
Commercial and industrial 71 2.08 6 0.49
Installment 6 0.18 5 0.18
Other 0 1.25 0 1.04
Unallocated 375 - 39 -
Total allowance $5,372 100.00 $5,246 100.00
1993
Allowance Loans(a)
Real Estate Mortgages
1-4 family residential $1,169 62.90%
5-more family residential 551 5.48
Commercial 1,475 16.22
Land 1,427 9.08
Home equity credit lines 85 4.61
Total mortgage loans 4,707 98.29%
Commercial and industrial - -
Installment 11 0.48
Other 8 1.23
Unallocated 605
Total allowance $5,331 100.00
(a) Percent of loans in each category to total loans.
Deposits
For a table on the average balances and rates on deposits, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 19 through 21.
Certificates of deposits with balances of $100,000 and greater amounted
to $8,239,000 and $4,686,000 at June 30, 1995 and 1994, respectively.
The following table shows the scheduled maturities of certificates of
deposit with balances in excess of $100,000 as of June 30, 1995 (in
thousands):
Less Within Within Over
than 3 3 - 6 6 - 12 one
months months months year Total
Certificates of deposit
over $100,000 $2,824 $2,031 $2,316 $1,068 $8,239
The Bank generally attracts deposits from its market area and uses those
deposits to fund lending and investment activities. The Bank's deposit
base has no brokered deposits. Management does not feel that there will
be a need to utilize brokered deposits for the foreseeable future.
Return on Equity and Assets
For selected statistical information required by this item see "Selected
Financial Data" on page 17.
Short-term Borrowings
For the information required by this item see "Note 6 - Short Term
Borrowed Funds" on page 53.
Competition
The Bank faces strong competition in attracting deposits. Its most
direct competition for deposits has historically come from other savings
banks, commercial banks and savings and loan associations located in its
market area. Although the Bank expects this continuing competition to
have an effect upon the cost of funds, it does not anticipate any
substantial adverse effect on maintaining the current deposit base. The
Bank is competitive within its market area in the various deposit
products it offers to depositors. Due to this fact, management feels
they have the ability to maintain the deposit base. The Bank does not
rely upon any individual, group or entity for a significant portion of
its deposits.
The Bank's competition for real estate loans comes primarily from
mortgage banking companies, savings banks, savings and loan
associations, commercial banks, insurance companies, and other
institutional lenders. The Bank competes for loan origination primarily
through the interest rates and loan fees it charges and the efficiency
and quality of services it offers borrowers, real estate brokers and
builders. Factors which affect competition include, among others, the
general availability of funds and credit, general and local economic
conditions, current interest rate levels and volatility in the mortgage
markets.
Congress passed legislation in 1994 providing for a phase-in of full
interstate branching. Connecticut law has since 1990 provided for full
interstate banking and has recently adopted legislation allowing
interstate branching, subject to certain limitations. The Company and
the Bank believe that their competitive positions as community-based and
focussed institutions will not be materially adversely affected by the
recent federal and state expansion of full interstate banking and
branching powers.
Economic Conditions and Government Policies
The profitability of the Company is affected by general economic
conditions and governmental policies. Similar to all of New England,
over-building in Connecticut in recent years has resulted in a large
inventory of unsold real estate. The oversupply in the real estate
market, combined with a stagnant economy and weak employment, resulted
in 1991 and 1992 in increases in non-performing assets, loan loss
provision, loan charge-offs and expenses related to non-performing
assets. During the past three fiscal years the Company has worked to
reduce its non-performing assets and has improved credit quality within
its loan portfolio. However, should the general economic recovery
stall, or reverse, the Company's operations could be impacted by adverse
economic conditions.
In late 1991, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") was enacted into law. This legislation sought to
recapitalize the Bank Insurance Fund ("BIF") so that BIF could continue
to resolve failed banks. Re-capitalization was funded through, among
other things, increased deposit insurance rates, which increased banks'
non-interest expense. In August 1995 the FDIC voted to lower insurance
premiums for banks. The new rate for well capitalized banks, such as
the Bank, will be 4 cents per $100 of deposits, down from the current 23
cents. The effect of this will be to substantially decrease the
Company's deposit insurance expense if the deposit base remains at its
current level. FDICIA also provided for, among other things, enhanced
federal supervision of depository institutions; the establishment of
risk-based deposit insurance premiums; a requirement that the federal
banking agencies amend their risk-based capital requirements to include
components for concentrations of credit risk, and the risk of non-
traditional banking activities; expanded authority for cross-industry
mergers and acquisitions; and, mandated consumer protection disclosures
on deposit accounts. FDICIA also provided for restrictions on certain
investment activities of state chartered banks, such as investments in
equity securities and real estate development projects. The impact that
these provisions have had and will have on the Bank's operating results
has not and is not anticipated to be significant.
The Federal Reserve System regulates the national supply of bank credit
in order to influence general economic conditions. These policies have
a significant influence on overall growth and distribution of loans,
investments and deposits, and affect the interest rates charged on loans
or paid for time and savings deposits.
Fluctuations in interest rates, which may result from government fiscal
policies and the monetary policies of the Federal Reserve System, have
a strong impact on the income to be derived from loans and investments,
as well as cost of deposits. While the Company and its subsidiary
strive to anticipate changes and adjust their strategies for such
changes, the level of earnings can be materially affected by economic
circumstances beyond their control.
Supervision and Regulation
The Company is registered under, and is subject to, the Bank Holding
Company Act of 1956, as amended. This Act limits the types of companies
which the Company may acquire or organize and the activities in which it
or they may engage. In general, the Company and its subsidiary are
prohibited from engaging in or acquiring direct or indirect control of
any corporation engaged in non-banking activities unless such activities
are so closely related to banking as to be a proper incident thereto.
In addition, the Company must obtain the prior approval of the Board of
Governors of the Federal Reserve System to acquire control of any bank;
to acquire, with certain exceptions, more that 5 percent of the
outstanding voting stock of any other corporation; or, to merge or
consolidate with another bank holding company.
The Company is subject to examination by the Board of Governors of the
Federal Reserve System (the "FRB"). The Bank is subject to Federal and
State laws applicable to banks and is also subject to regulation and
examination by the Banking Commissioner of the State of Connecticut and
the FDIC. The Company is also subject to the Securities and Exchange
Commission regulations which require that an audit, by an independent
accounting firm, be performed at the end of the fiscal year. As a
result of such laws and regulation, the Company is restricted as to the
types of business activities it may conduct and is subject to
limitations on the type of loans it may make and the amount of loans it
may make to any one borrower.
As a registered bank holding company, the Company is subject to
regulation by FRB. Bank holding companies registered with the FRB are,
among other things, restricted from making direct investments in real
estate. Both the Company and the Bank are subject to extensive
supervision and regulation, which focus on, among other things, the
protection of depositors' funds.
The Bank is a state chartered savings bank organized under the Banking
Law of the State of Connecticut. Deposits are insured by the FDIC and
FDIC insurance premiums are assessed on the Bank's deposit base on a
semi-annual basis at variable rates dependent upon the Bank's capital
rating and other safety and soundness considerations. The Bank is
subject to regulation, examination and supervision by the Banking
Department and the FDIC. Both the Banking Department and the FDIC issue
regulations and require the filing of reports describing the activities
and financial condition of the banks under their jurisdiction. Each
agency conducts periodic examinations to test safety, soundness and
compliance with various regulatory requirements and generally supervises
the operations of such banks. In June, 1992, the Bank signed an
informal memorandum of understanding with the FDIC and the Connecticut
Banking Department. In accordance with this memorandum, the Bank
submitted to the regulators, among other things, updated policies, plans
to reduce classified assets and asset concentrations, a management plan,
and a three year profit plan and capital plan. This memorandum of
understanding was removed by the FDIC and Connecticut Banking Department
in April 1993.
The Company is also required by the Board of Governors of the Federal
Reserve System to maintain cash reserves against its deposits. After
exhausting all other sources of funds, the Company may request to borrow
from the Federal Reserve.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the FRB and the FDIC. For information on
these capital requirements and the Company and the Bank's capital ratios
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources" on pages 36 and 37. Such
information is incorporated herein by reference and made a part hereof.
Employees
The Bank, which had 102 full-time and 12 part-time employees at June 30,
1995, conducts its banking operations through 12 offices, all in
Litchfield County and northern Fairfield County. Management considers
the Bank's relationship with its employees to be good. The Bank's
employees are not represented by any collective bargaining groups.
Subsidiaries
The Bank is the only subsidiary of the Company and accounts for 100% of
the Company's income for the current fiscal year. At June 30, 1995, the
Bank had two wholly-owned subsidiaries, Asset Recovery Management
Company and New Mil Asset Company, both formed to hold and develop
certain foreclosed real estate.
Item 2. PROPERTIES
In addition to its main office, located at 19 Main Street, New Milford,
Connecticut, the Bank conducts its business through 11 branches located
throughout Litchfield and in Northern Fairfield counties. The Bank owns
its main office and seven of its branches.
The following table sets forth certain information regarding New Milford
Savings Bank's branch offices, as of June 30, 1995.
Lease
Owned expir-
Date or ation
Branch office Location opened leased date
(a)
Kent 50 North Main St., Kent, CT 1960 Owned ---
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 1999
Brookfield Route 7, Brookfield, CT 1964 Leased 1995
Sherman Routes 37 & 39, Sherman, CT 1976 Leased 1995
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ---
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ---
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ---
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ---
Morris Route 109 & 63, Morris, CT 1981 Owned ---
Sharon Route 41, Sharon, CT 1971 Leased 1997
Canaan Main St. & Granite Avenue,
Canaan, CT 1982 Owned ---
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ---
(a) The information concerning the Bank's lease payments is on page 30
of the Annual Report to Shareholders, for the year ended June 30,
1995.
(b) The Bank owns an additional building on this site which is leased
at an annual rent of $11,125.
(c) Main Office.
(d) The Bank owns an additional building on this site which is leased
at an annual rent of $14,800.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
the Bank or any of their properties, other than ordinary routine
litigation incidental to the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, no matter was submitted to a vote of
the shareholders of the Company.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For the information required by this item see "Note 16 - Quarterly
Financial Data (unaudited)" on pages 66 and 67. For a discussion of the
Company's dividend policy and restrictions on dividends see "Management
Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Dividend Restrictions" on page 37.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the consolidated financial and other data
of the Company at the dates and for the periods indicated. This data
has been derived from the audited consolidated financial statements of
the Company.
(in thousands except per share data)
At or for the years ended June 30,
1995 1994 1993 1992 1991
Restated
(a)
Statement of Operations
Interest and
dividend income $20,283 $17,450 $16,978 $22,946 $34,835
Interest expense 9,602 8,473 8,466 15,675 28,028
Net interest income 10,681 8,977 8,512 7,271 6,807
Provision for loan
losses 400 208 450 11,036 4,850
Non-interest income
Securities gains
(losses), net 226 404 2,453 2,569 (14,053)
Losses on interest
rate swaps, net - - (804) (1,462) -
Income from call
option sales - - - 612 2,174
Gains on loans, net 28 99 101 - -
Service fees and other 1,167 1,033 760 573 487
Non-interest expense 9,352 8,694 9,222 9,038 6,223
Income (loss) before
income taxes 2,350 1,611 1,350 (10,511) (15,658)
Income tax (benefit)
expense (3,874) (720) 23 (1,108) (1,106)
Net income (loss) 6,224 2,331 1,327 (9,403) (14,552)
Financial Condition
Total assets $308,671 $315,159 $287,986 $266,358 $333,704
Loans, net 147,899 137,620 136,879 123,037 152,973
Allowance for loan
losses (5,372) (5,246) (5,331) (5,753) (4,006)
Securities 127,194 153,746 120,709 105,556 154,137
Deposits 252,420 236,182 228,090 238,471 272,260
Borrowings 20,499 51,850 28,000 - 21,000
Shareholders' equity 32,721 25,094 29,005 25,593 34,996
Non-performing assets 8,885 13,685 14,771 15,538 21,824
Per Share Data
Earnings (loss) per share $1.37 $0.52 $0.30 $(2.10) $(3.25)
Dividends declared per
share 0.06 - - - 0.15
Book value per share 7.29 5.59 6.47 5.71 7.80
Statistical Data
Net interest margin 3.70% 3.10% 3.52% 2.58% 1.73%
Spread on interest-
bearing funds 3.41 2.90 3.30 2.10 1.31
Return on average assets 2.08 0.76 0.51 (3.17) (3.51)
Return on average
shareholders' equity 23.75 8.16 4.95 (29.44) (39.32)
Dividend payout ratio (b) 4.38 - - - N/A
Allowance for loan
losses to total loans 3.50 3.66 3.75 4.47 2.55
Non-performing assets
to total assets 2.88 4.34 5.13 5.83 6.54
Tier 1 leverage capital 10.58 8.94 10.19 9.25 10.55
Total risk-based capital 21.36 21.90 22.39 20.33 20.29
Average shareholders'
equity to average
assets 8.74 9.30 10.28 10.77 8.92
1995 1994 1993 1992 1991
Average number
of shares
outstanding 4,487,144 4,484,329 4,483,888 4,483,888 4,483,888
(a) In 1992 the financial statements for fiscal 1989 through 1991 and
for the first nine months of 1992 were restated to account for
certain marketable equity securities as "held for sale", previously
accounted for as "held for investment". The Statements of
Operations were restated to include net unrealized losses on
securities "held for sale"; previously such losses were accounted
for as a deduction from shareholders' equity.
(b) Not presented in 1991 as there were net losses.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company earned net income of $6,224,000, or $1.37 per share, for the
year ended June 30, 1995, compared with net income of $2,331,000, or
$0.52 per share, for fiscal year 1994. Net income for 1995 included a
deferred income tax benefit of $3,919,000, or $.87 per share, as the
Company reduced its valuation allowance on its deferred tax asset in
accordance with SFAS 109. Net income for 1994 included an $800,000
deferred income tax benefit. Net income before income taxes grew 46% in
1995 to $2,350,000, up from $1,611,000 in 1994. The growth in pre-tax
earnings reflects significantly improved core earnings driven by the
increase in the Company's net interest margin which averaged 3.70% for
1995, up from 3.10% for 1994.
The 1995 fiscal year was a year of significant progress for the Company.
The improvement in operating performance, reflected in the 46% increase
in pre-tax earnings, resulted from the steps taken in recent years to
establish a small business and commercial lending function, strengthen
credit administration and loan workout, and improve customer service
through the addition of an automated teller network. These efforts have
resulted in a continuing improvement in asset mix and increase in net
interest margin. Net loans grew 7% to $147.9 million and deposits grew
7% to $252.4 million, while non-performing assets declined 35% to $8.9
million, or 2.9% of assets, at June 30, 1995. In September 1994 the
Company resumed the payment of a $.02 per share quarterly cash dividend,
following a four year lapse. At June 30, 1995 book value per share was
$7.29, up 30% from $5.59 at June 30, 1994, as a result of the improved
operating results and the recognition of remaining deferred income tax
benefits. At June 30, 1995 the Company's tier 1 leverage and total
risk-based capital ratios were 10.58% and 21.36%, respectively, and the
Company was "well capitalized" as defined by the Federal Reserve Board.
The following discussion and analysis of the Company's consolidated
results of operations should be read in conjunction with the
Consolidated Financial Statements and footnotes.
RESULTS OF OPERATIONS
Comparison Between 1995 and 1994
Analysis of Net Interest and Dividend Income
Net interest income grew $1,704,000, or 19.0%, to $10,681,000 in 1995
from $8,977,000 in 1994. This increase resulted from a 60 basis points
increase in net interest margin, to 3.70% from 3.10%, while total
average earning assets remained substantially unchanged. The
improvement in net interest margin was driven by the benefit from higher
interest rates on the Company's earning assets which repriced upwards to
a greater extent than deposit liabilities, the change in the mix of
earning assets and the reduction in non-performing assets. Average
earning assets decreased $488,000, or 0.2%, while average interest
bearing funds decreased $5,888,000, or 2.2%. The change in asset mix
was achieved through loan growth offset by a reduction in securities.
The following table sets forth the components of the Company's net
interest income and yields on average interest-earning assets and
interest-bearing funds for the past three years.
Year ended June 30, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $145,726 $11,967 8.21%
Mortgage backed securities 32,229 1,739 5.40
Other securities (b) 110,788 6,577 5.94
Total earning assets 288,743 20,283 7.03
Other assets 11,154
Total assets $299,897
NOW accounts $22,258 327 1.47
Money market accounts 73,562 2,035 2.77
Savings & other 44,456 1,166 2.62
Certificates of deposit 95,891 4,526 4.72
Total interest-bearing deposits 236,167 8,054 3.41
Borrowings 28,881 1,549 5.36
Interest rate swaps, net - (1) -
Total interest-bearing funds 265,048 9,602 3.62
Demand deposits 7,262
Other liabilities 1,385
Shareholders' equity 26,202
Total liabilities and
shareholders' equity $299,897
Net interest income $10,681
Spread on interest-bearing funds 3.41
Net interest margin (c) 3.70
Year ended June 30, 1994 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $142,866 $10,623 7.44%
Mortgage backed securities 58,500 2,201 3.76
Other securities (b) 87,865 4,626 5.27
Total earning assets 289,231 17,450 6.03
Other assets 17,822
Total assets $307,053
NOW accounts $21,240 332 1.56
Money market accounts 87,136 2,344 2.69
Savings & other 42,979 1,170 2.72
Certificates of deposit 75,548 3,010 3.98
Total interest-bearing deposits 226,903 6,856 3.02
Borrowings 44,033 1,621 3.68
Interest rate swaps, net - (4) -
Total interest-bearing funds 270,936 8,473 3.13
Demand deposits 5,881
Other liabilities 1,681
Shareholders' equity 28,555
Total liabilities and
shareholders' equity $307,053
Net interest income $ 8,977
Spread on interest-bearing funds 2.90
Net interest margin (c) 3.10
Year ended June 30, 1993 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $137,144 $10,979 8.01%
Mortgage backed securities 64,426 4,053 6.29
Other securities (b) 40,140 1,946 4.85
Total earning assets 241,710 16,978 7.02
Other assets 19,323
Total assets $261,033
NOW accounts $18,988 451 2.38
Money market accounts 85,254 2,827 3.32
Savings & other 42,448 1,416 3.34
Certificates of deposit 79,993 3,627 4.53
Total interest-bearing deposits 226,683 8,321 3.67
Borrowings 960 34 3.54
Interest rate swaps and caps, net - 111 -
Total interest-bearing funds 227,643 8,466 3.72
Demand deposits 4,512
Other liabilities 2,053
Shareholders' equity 26,825
Total liabilities and
shareholders' equity $261,033
Net interest income $ 8,512
Spread on interest-bearing funds 3.30
Net interest margin (c) 3.52
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds
sold.
(c) Net interest income divided by average interest-earning assets.
Years ended June 30, 1995 versus 1994
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
Interest-earning assets:
Loans $ 213 $1,109 $ 22 $1,344
Mortgage backed securities (989) 956 (429) (462)
Other securities 1,207 590 154 1,951
Total 431 2,655 (253) 2,833
Interest-bearing liabilities:
Deposits 280 885 33 1,198
Borrowings (558) 741 (255) (72)
Interest rate swaps, net - - 3 3
Total (278) 1,626 (219) 1,129
Net change to interest income $ 709 $1,029 $ (34) $1,704
Years ended June 30, 1994 versus 1993
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
Interest-earning assets:
Loans $ 458 $ (781) $ (33) $ (356)
Mortgage backed securities (373) (1,629) 150 (1,852)
Other securities 2,339 155 186 2,680
Total 2,424 (2,255) 303 472
Interest-bearing liabilities:
Deposits (68) (1,388) (9) (1,465)
Borrowings 1,526 1 60 1,587
Interest rate swaps and caps, net - - (115) (115)
Total 1,458 (1,387) (64) 7
Net change to interest income $ 966 $ (868) $ 367 $ 465
Net interest and dividend income represents the difference between
interest and dividends earned on loans and securities and interest paid
on deposits and borrowings. The level of net interest income is a
function of volume, rates and mix of both earning assets and
interest-bearing liabilities. Net interest income can be adversely
affected by changes in interest rate levels as determined by the
Company's "gap" position, measured by the differences between the volume
of assets and liabilities that are subject to repricing within different
future time periods.
Interest Income
Total interest and dividend income increased $2,833,000, or 16.2%, to
$20.3 million in 1995 from $17.5 million in 1994. Loan income increased
$1,344,000, or 12.7%, as a result of a higher yield and higher loan
volume. The increase in average loan yield resulted primarily from
upward portfolio repricing due to higher interest rates, which affected
new loan rates, floating rate loans and loan refinancing, and, to a
lesser extent, a change in loan mix as the Company increased its
originations of Prime based commercial loans. Average loans grew $2.9
million, or 2%, to $145.7 million in 1995 as compared with 1994.
Interest and dividends from securities and federal funds increased
$1,489,000, or 21.8%, in 1995 as a result of a higher yield despite a
small decline in average volume. Average yield increased primarily as
a result of the upward repricing of floating rate securities. Portfolio
reinvestments were minimal during 1995. Average securities declined
$3.3 million, or 2.3%, to $143.0 million in 1995 as a result of sales
and principal payments.
Interest Expense
Interest expense increased $1,129,000, or 13.3%, to $9.6 million in 1995
primarily as a result of higher costs on deposits and borrowings.
Deposit expense increased $1,198,000, or 17.5%, as a result of a 39
basis point increase in the average cost of interest-bearing deposits
(to 3.41% from 3.02%) and an increase of $9.3 million, or 4.1%, in
average interest-bearing deposits. The increase in deposit costs
resulted primarily from increases in certificate of deposit costs and
from a change in deposit mix resulting from transfers from money market
accounts into certificates of deposit. Average costs on other deposit
categories in 1995 did not change significantly from 1994. The change
in deposit mix was caused by an increased yield differential between
money market accounts and certificates of deposit. Bank deposit rates,
particularly savings and money market rates, have lagged changes in
Treasury yields over the past year and this lag has been a significant
contributor to the increase in net interest margin.
Interest expense on borrowings decreased $72,000 as a result of a
decrease in average borrowings, down $15.2 million, or 34.4%, offset by
higher borrowing rates. The Company's borrowing rates generally follow
the one-month LIBOR index.
Provision and Allowance for Loan Losses
The Company provided $400,000 for loan losses in 1995, up 92% from
$208,000 in 1994. The higher provision reflects the Company's strategy
to grow the loan portfolio and increase its emphasis on small business
and commercial lending. In 1994 the Company was predominately engaged
in residential mortgage lending. The following table details changes in
the allowance for loan losses.
Years ended June 30, 1995 1994 1993
(dollars in thousands)
Balance, beginning of year $5,246 $5,331 $5,753
Provision for losses 400 208 450
Charge-offs (295) (308) (879)
Recoveries 21 15 7
Balance, end of year $5,372 $5,246 $5,331
Ratio of allowance for loan losses:
to non-performing loans 115.1% 115.3% 110.0%
to total gross loans 3.5 3.7 3.8
During the past year non-performing loans increased $117,000, or 2.6%,
while the reserve coverage to non-performing loans remained
substantially unchanged at 115.1%. For a discussion of non-performing
loans see "Asset Quality and Portfolio Risk". Originations of
residential mortgage loans (which are assigned lower formula reserves
than other categories of loans), ongoing credit risk administration of
seasoned commercial real estate and land loans, and their replacement
with new commercial loans underwritten to more rigorous standards, have
stabilized the risk profile of the portfolio.
The Bank determines its allowance and provisions for loan losses based
upon a detailed evaluation of the loan portfolio through a process which
considers numerous factors, including estimated credit losses based upon
internal and external portfolio reviews, delinquency levels and trends,
estimates of the current value of underlying collateral, concentrations,
portfolio volume and mix, changes in lending policy, historical loan
loss experience, current economic conditions and examinations performed
by regulatory authorities. Determining the level of the allowance at
any given period is difficult, particularly during deteriorating or
uncertain economic periods. Management must make estimates using
assumptions and information which is often subjective and changing
rapidly. The review of the loan portfolio is a continuing event in the
light of a changing economy and the dynamics of the banking and
regulatory environment. In management's judgement the allowance for
loan losses at June 30, 1995, is adequate. Should the economic climate
deteriorate, borrowers could experience difficulty and the level of non-
performing loans, charge-offs and delinquencies could rise and require
increased provisions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies could require the
Company to recognize additions to the allowance based on their
judgements of information available to them at the time of their
examination. The Bank was examined by the State of Connecticut,
Department of Banking, in 1995. No additions to the allowance were
requested as a result of this examination.
Non-Interest Income
Non-interest income decreased $115,000, or 7.5%, to $1,421,000 in 1995
from $1,536,000 in 1994. The following table details the principal
categories of non-interest income:
Years ended June 30, 1995 1994 Change
(in thousands)
Service charges on
deposit accounts $ 779 $ 652 $ 127 19.5%
Securities gains, net 226 404 (178) (44.1)
Gains on loans, net 28 99 (71) (71.7)
Loan servicing 126 119 7 5.9
Other 262 262 - 0.0
Total non-interest income $1,421 $1,536 $(115) (7.5)%
Service charges on deposit accounts increased $127,000, or 19.5%, in
1995 over 1994 as a result of pricing increases, new service fees
following the introduction of the ATM network in 1994, and increased
customer activity. The net securities gains of $226,000 in 1995 were
realized on sales of $20.7 million of available-for-sale securities,
sold in conjunction with a portfolio restructuring in response to
changes in interest rates. The net securities gains of $404,000 in 1994
were realized on sales of $54.6 million of available-for-sale
securities, sold in response to changes in interest rates and
prepayments, and as part on an ongoing portfolio management process.
During 1994 100% of the portfolio was classified available-for-sale
whereas at June 30, 1995 95% was classified held-to-maturity and 5%
available-for-sale. The decline in gains on loans reflects a sharp
decline in the Company's secondary market loan origination activity. In
early 1995 the Company curtailed the origination of fixed rate
residential mortgage loans for sale to the secondary market in response
to declining margins and increased interest rate volatility. Loan sales
in 1995 totaled $703,000 as compared with $19.6 million in 1994. The
Company retained servicing on all loans sold in 1995 and 1994. The
increase in loan servicing fees in 1995 is attributed to the growth in
the mortgage servicing portfolio in 1994. At June 30, 1995 the loan
servicing portfolio totaled $34.6 million, down from $36.0 million at
June 30, 1994. Other fee income, principally safe deposit box fees and
other miscellaneous income, remained unchanged in 1995 as compared with
1994.
Operating Expenses
The following table details the significant components of operating
expenses for the periods presented.
Years ended June 30, 1995 1994 Change
(in thousands)
Salaries $3,295 $2,916 $379 13.0%
Employee benefits 841 840 1 0.1
Occupancy 731 788 (57) (7.2)
Equipment 543 571 (28) (4.9)
Insurance 695 684 11 1.6
Collections and REA 1,418 1,339 79 5.9
Postage and telecommunications 306 278 28 10.1
Professional services 293 316 (23) (7.3)
Marketing 236 183 53 29.0
Service bureau 156 62 94 151.6
Other operating 838 717 121 16.9
Total operating expenses $9,352 $8,694 $658 7.6%
The increase in salaries in 1995 was due primarily to changes in
staffing levels, performance awards due to improved core operating
performance and annual salary increases. Benefits expense remained
substantially unchanged in 1995 as increased 401(K) expense was offset
by lower health benefits expense. The decrease in occupancy expense was
due principally to a decrease in building maintenance and branch
refurbishment expenses. In 1994 the Bank begun a branch refurbishment
program. Equipment expense declined in 1995 primarily as a result of
lower data processing hardware and software maintenance costs.
Insurance expense, principally FDIC assessments, increased as a result
of higher FDIC assessments because of higher deposit balances, offset in
part by reduced renewal rates on certain other insurance policies. FDIC
assessment rates are expected to decrease in fiscal year 1996,
approximately $350,000, which would decrease the Company's expense if
the deposit base remains at its current level. Collection and REA (real
estate acquired) expense includes legal, appraisal, property tax,
insurance, and other out-of-pocket expenses incurred in connection with
the Company's non-performing assets and loan workout function together
with gains and losses on sales of REA and the provision for REA losses.
The increase in 1995 collections and REA expense reflects the Company's
continuing effort to resolve its non-performing assets. It includes a
provision for REA losses of $621,000, offset in part by net gains of
$409,000 on sales of $6.9 million of REA. The increase in postage and
telecommunications expense reflects increased business activity and
postal rates. Professional services declined primarily as a result of
a decrease in legal services. In 1995 the Company outsourced the
statement rendering process which increased service bureau charges. All
other operating expenses, including marketing, shareholder relations,
office and other, increased $174,0000 or 19.3% in 1995. This increase
is attributed principally to increased lending activity, various deposit
and loan marketing promotions and other changes in operating activities.
During 1995 the Company's efficiency ratio was 77.3%, compared with
82.7% in 1994. The efficiency ratio is defined as the ratio between
non-interest expense and net interest and dividend income plus non-
interest income. Excluding collections and real estate acquired expense
the ratios were 65.6% and 70.0% for 1995 and 1994, respectively.
Income Taxes
The Company recorded an income tax benefit of $3,874,000 in 1995 after
recognizing a deferred income tax benefit of $3,919,000, offset by an
$45,000 provision for minimum federal and state taxes currently payable.
The deferred income tax benefit resulted from a reduction in the
Company's valuation allowance on its deferred tax asset in accordance
with SFAS 109, as the Company recognized 100% of its remaining available
Federal income tax benefits (expiring 2007), excluding any capital loss
carryforwards, together with that portion of its remaining available
State income tax benefits (expiring 1997) which the Company expects to
utilize, and other book/tax temporary differences. The Company also
recognized a $1,678,000 adjustment to shareholders equity to record the
tax effect of unrealized securities gains and losses reported in
shareholders equity. The reduction in the deferred tax valuation
allowance reflects the Company's improved operating performance, marked
by three years of improving core earnings (exclusive of securities
gains), reductions in non-performing assets and a positive outlook for
earnings in the near term. These factors make it more likely than not
that these deferred tax items will be utilized in the future. Due to
the utilization of net operating loss carryforwards only minimum Federal
and State income taxes are currently payable. However, as a result of
the deferred tax benefit recognized in 1995, the Company's 1996 fiscal
year quarterly earnings will, in all likelihood, be reported on a fully-
taxed basis with an effective tax rate of approximately 41% of pre-tax
income.
In 1994 the Company recorded an income tax benefit of $720,000 after
recognizing a deferred income tax benefit of $800,000, offset by an
$80,000 provision for minimum federal and state taxes currently payable.
The Company also has federal and state capital loss carryforwards of
approximately $16.0 million and $20.5 million, respectively, (expiring
principally in 1996) which it does not expect to utilize because of the
discontinuation of investing in marketable equity securities. For
further information on income taxes see Note 7 of Notes to Consolidated
Financial Statements.
Comparison between 1994 and 1993
Overview
The Company earned net income of $2,331,000, or $0.52 per share, for the
year ended June 30, 1994, compared with net income of $1,327,000, or
$0.30 per share, for fiscal year 1993. The growth in earnings reflects
significantly improved core earnings and the recognition of an $800,000
income tax benefit from the reduction of the deferred tax asset
valuation reserve. Improved core earnings resulted from increased net
interest income, and reductions in operating expenses and loan loss
provision, offset by significantly reduced securities gains. Results of
operations for 1993 included securities gains, net of losses on interest
rate swaps, of $1,649,000 as compared to $404,000 in 1994.
Analysis of Net Interest Income
Net interest income grew $465,000, or 5.46%, to $8,977,000 in 1994 from
$8,512,000 in 1993. This was achieved through growth in average earning
assets of $48.0 million, or 20%, offset in part by a decrease in net
interest margin caused primarily by a change in asset mix. The growth
in average earning assets was achieved through leveraging the securities
portfolio with floating rate assets and, to a lesser degree, net loan
growth. The decrease in the net interest margin resulted primarily from
the addition of floating rate securities at narrower spreads and from
the reinvestment of loan paydowns and refinancings into new loans with
reduced spreads.
Interest Income
Total interest and dividend income grew $472,000 or 3%, to $17.5 million
in 1994 from $17.0 million in 1993. Interest and fees earned on loans
in 1994 declined $356,000 as a result of a decline in average yield
offset in part by higher loan volume. The decrease in average loan
yield was caused by the decline in interest rates which affected new
loan rates, floating rate loans and loan refinancing, as paydowns from
seasoned higher yielding mortgage loans were replaced with predominately
lower yielding new production adjustable rate residential mortgage
loans. Average loans grew $5.7 million, or 4.17%, to $142.9 million in
1994.
Securities income grew $828,000, or 14%, to $6.8 million in 1994.
Average securities grew $42.3 million, or 40.5%, to $146.9 million in
1994 as a result of the leveraging of the portfolio with floating rate
securities at narrower spreads. Average yield declined as a result of
the change in portfolio mix and the decline in interest rates, which
accelerated principal repayments and premium amortization on mortgage-
backed securities and collateralized mortgage obligations, and repriced
floating rate securities and re-investments to lower yields.
Interest Expense
Interest expense increased $7,000 to $8.5 million in 1994. This
increase reflects higher average borrowings offset by a decline in the
cost of funds. Interest expense on deposits declined $1.5 million, or
17.6%, from a decline in the average cost of interest-bearing deposits
(to 3.02% from 3.67%) due to lower interest rates. Average deposits and
deposit mix were relatively unchanged from year to year. Average
borrowings grew $43.1 million to fund securities purchases and loan
growth and interest expense on borrowings increased $1.6 million. Net
interest expense on interest rate swaps during 1994 was offset with
amortization from the valuation reserve established by the Company
against such swaps during 1993.
Provision and Allowance for Loan Losses
The Company provided $208,000 for loan losses in 1994, down 54% from a
provision of $450,000 in 1993. The lower provision reflected declines
in loan charge offs and non-performing loans, the effectiveness of the
Company's credit administration function in managing credit risk and the
absence of significant net loan growth.
Non-Interest Income
Non-interest income decreased $974,000, or 39%, to $1,536,000 in 1994
from $2,510,000 in 1993.
Years ended June 30, 1994 1993 Change
(in thousands)
Service charges
on deposit accounts $ 652 $ 496 $ 156 31.5%
Securities gains, net 404 2,453 (2,049) (83.5)
Losses on interest rate swaps - (804) 804 100.0
Gains on loans, net 99 101 (2) (2.0)
Loan servicing 119 35 84 240.0
Other 262 229 33 14.4
Total non-interest income $1,536 $2,510 $ (974) (38.8)%
Service charges on deposit accounts increased $156,000, or 31.5%, in
1994 over 1993 as a result of pricing increases, new service fees, the
introduction of the ATM network during 1994 and increased customer
activity. The net securities gains of $404,000 in 1994 were realized on
sales of available-for-sale securities of $54.6 million, sold in
response to changes in interest rates and prepayment speeds, and as part
of an ongoing portfolio management process. The net securities gains of
$2,453,000 in 1993 included realized gains of $2,068,000 on sales $40.7
million of mortgage-backed securities, gains of $472,000 on sales of
$8.0 million of marketable equity securities held-for-sale, unrealized
losses of $108,000 resulting from a decline in the market values of
marketable equity securities held-for-sale, and other gains of $21,000.
In 1993, as part of a portfolio restructuring for asset/liability
management purposes, the Company sold certain fixed rate mortgage-backed
securities, reinvested the proceeds into floating rate securities and
provided $804,000 for a valuation reserve against losses on $10 million
net remaining interest rate swap contracts. The securities sold and the
interest rate swaps had been part of a risk-controlled arbitrage program
curtailed in 1992. The swap valuation reserve is being amortized over
the remaining lives of the swaps as an offset to the net interest
expense. Sales of marketable equity securities occurred as the Company
resolved to ultimately eliminate this sector from its portfolio. Gains
from the origination and sale of fixed rate mortgage loans were
substantially unchanged in 1994 over 1993. Loan sales in 1994 totaled
$19.6 million as compared with $22.6 million in 1993. The Company
retained servicing on substantially all loans sold in 1993 and 1994 and
this is reflected in the increase in loan servicing fees in 1994 over
1993. At June 30, 1994 the loan servicing portfolio totaled $36.0
million, up from $21.3 million at June 30, 1993. Other fee income grew
14.4% to $262,000 in 1994 over 1993 as a result of pricing increases,
increased activity and the introduction of new service fees.
Operating Expenses
The following table details the significant components of operating
expenses for the periods presented.
Years ended June 30, 1994 1993 Change
(in thousands)
Salaries $2,916 $2,966 $ (50) (1.7)%
Employee benefits 840 856 (16) (1.9)
Occupancy 788 752 36 4.8
Equipment 571 486 85 17.5
Insurance 684 734 (50) (6.8)
Collections and REA 1,339 1,991 (652) (32.7)
Professional services 316 426 (110) (25.8)
Postage and telecommunications 278 211 67 31.8
Marketing 183 166 17 10.2
Other operating 779 634 145 22.9
Total operating expenses $8,694 $9,222 $(528) (5.7)%
The decline in salaries in 1994 was primarily due to changes in staffing
offset by annual salary increases. Benefits expense declined in 1994 as
a result of a curtailment gain arising from the curtailment of the
Company's defined benefit pension plan, offset by higher health benefits
expense and the accrual for post-retirement health and life insurance
benefit obligations. The Company curtailed its pension plan in
September 1993 and replaced it with a 401(K) plan, introduced in April
1994. The increase in occupancy expense was due principally to
increased building maintenance and branch refurbishment. During 1993
and 1994 the Company upgraded and enhanced its in-house data processing
capabilities and installed ATMs in 7 branch facilities. The increased
equipment expense in 1994 reflects increased depreciation and
amortization, additional service contracts and increased maintenance
costs. Insurance expense, principally FDIC deposit insurance, benefited
from a decrease in FDIC assessment rates in 1994 along with lower
renewal rates on certain other Company insurance policies. The decrease
in professional services, for 1994, is due in part to the inclusion in
1993 of legal services to address past regulatory criticism. Collection
and REA (real estate acquired) expense includes legal, appraisal,
property tax, insurance, and other out-of-pocket expenses incurred in
connection with the Company's non-performing assets and loan workout
function together with gains and losses on sales of REA and the
provision for REA losses. The decrease in collections and REA expense,
in 1994, was due primarily to a reduced provision for REA losses, net of
gains, and reduced REA holding costs, offset in part by increased legal
fees. Collections and REA expense for 1994 included a provision for REA
losses of $450,000, offset in part by net gains of $51,000 on sales of
$2.1 million of REA. Collections and REA expense for 1993 included a
provision for REA losses of $1,176,000, offset in part by net gains of
$206,000 on sales of $2.5 million of REA. All other operating expenses,
including postage and phone, marketing, shareholder relations, office
and other, increased $229,000 or 22.7% in 1994. This increase is
attributed principally to increased lending activity and other changes
in operating activities.
Income Taxes
The Company recorded an income tax benefit of $720,000 in 1994
consisting of an $800,000 tax benefit from the reduction of the deferred
tax asset valuation reserve, offset by an $80,000 provision for minimum
federal and state taxes currently payable. Due to the utilization of
net operating loss carryforwards only minimum taxes were payable for
federal and state purposes. At June 30, 1993 the Company's deferred tax
asset was reduced by a 100% valuation allowance which was considered
justified at the time due to the uncertainty of future profitability.
During 1994, as a result of improved core earnings, the Company reduced
the valuation allowance by $800,000 to approximately 95% of the deferred
tax asset, based on an estimated of 1995 taxable income.
ASSET QUALITY AND PORTFOLIO RISK
Non-performing assets
During 1995 non-performing assets decreased $4.8 million, or 35.1%, to
$8.9 million at June 30, 1995, due principally to sales of real estate
offset by loans placed on non-accrual and capital improvements to REA.
The following table summarizes changes in non-performing assets during
the periods presented.
Years ended June 30, (in thousands) 1995 1994
Balance, beginning of year $13,685 $14,771
Loans placed on non-accrual status 2,524 1,174
Change in accruing loans past
due 90 or more days, net (346) 51
Payments to improve REA 1,320 1,212
Loan payments (817) (254)
Loans returned to accrual status (240) (594)
Loan charge-offs (295) (308)
REA provision (621) (450)
Gross proceeds from REA sales (6,734) (1,968)
Gains on REA sales, net 409 51
Balance, end of year $ 8,885 $13,685
Percent of total assets 2.88% 4.34%
The following table details the composition of non-performing assets as
of the periods presented.
Non-Performing Assets Accruing Real estate acquired Total
(dollars in thousands) loans In- non-
Non- past due substance Valuat- perform-
accrual 90 or fore- ion ing
loans more days closed Owned reserve assets
June 30, 1995
Real estate:
Residential $2,933 $34 $ - $ 198 $ - $3,165
Commercial 958 - - 349 - 1,307
Land and land
development 736 - 2,543 1,442 - 4,721
Collateral and
installment loans 5 - - - - 5
Valuation reserve - - - - (313) (313)
Totals $4,632 $34 $2,543 $1,989 $(313) $8,885
June 30, 1994
Real estate:
Residential $2,284 $379 $340 $ 1,145 $ - $ 4,148
Commercial 890 - 2,004 1,707 - 4,601
Land and land
development 996 - 1,811 2,496 - 5,303
Collateral and
installment loans - - - - - -
Valuation reserve - - - - (367) (367)
Totals $4,170 $379 $4,155 $5,348 $(367) $13,685
The Company pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
the Company generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. Many of the real estate
loans classified as in-substance foreclosed involve bankruptcy and legal
proceedings, which, in general, have significantly delayed recovery
periods. Included in in-substance foreclosed real estate are two loans
with a carrying value of $2.5 million to two persons believed to be
principal shareholders of the Company based on 1987 and 1989 filings,
both of whom are in bankruptcy. The Company has instituted foreclosure
and legal actions and has charged off approximately $5.7 million against
such loans. Included in land and land development real estate owned is
a 34 lot residential sub-division with a carrying value of $936,000
which the Company is developing and marketing under a joint venture with
a residential construction firm. To date the Company has sold ten
building lots in addition to building and selling two houses. The
Company expects to recover its carrying value and future site
development costs through sales of lots over the next two-to-three
years. The Company actively markets all real estate owned and in 1995
sold $6.7 million of real estate from which net gains of $409,000 were
realized. During 1995 the Company added $621,000 to the REA valuation
reserve and charged-off $675,000 against the reserve. The REA valuation
reserve, which at June 30, 1995 totaled $313,000, or 6.9% of REA. There
continues to be an oversupply of commercial and residential real estate
in New England and any further decline in the real estate market could
adversely affect the market values of the Company's real estate acquired
which could require additional provisions to the valuation reserve and
reductions in the carrying values of properties.
Had non-accrual loans as of June 30, 1995 and 1994, been current in
accordance with their original terms, gross interest income of $417,000
and $399,000 would have been recorded in net income for 1995 and 1994,
respectively. The amount of interest on these loans that was included
in income was $116,000 and $119,000 in 1995 and 1994, respectively. The
Company had no troubled debt restructured loans at June 30, 1995 or
1994.
FINANCIAL CONDITION
At June 30, 1995 total assets were $308.7 million, down $6.5 million, or
2.1%, from June 30, 1994. In 1995 the Company down sized the securities
portfolio, through securities sales and principal repayments, to repay
borrowings and fund net loan growth. During 1995 net securities
declined $26.6 million, or 17.3%, and real estate acquired decreased
$4.9 million, or 53.8%, while net loans increased $10.3 million, or
7.5%. This change in asset mix resulted from steps taken in late 1994
to establish a small business and commercial lending function and
strengthen credit administration and loan workout, and has contributed
to the improvement in the Company's net interest margin. In 1994 the
Company grew total assets by $27.2 million, or 9.4%, through leveraging
the securities portfolio with floating rate securities, as a short term
strategy to increase net interest income until more profitable loan
growth could be achieved.
Loans
The following table details the composition of the loan portfolio as of
the periods presented.
June 30, (in thousands) 1995 1994
Real estate mortgages
One-four family residential $ 98,766 $ 94,836
Five or more family residential 3,171 3,199
Commercial 29,068 23,556
Land and land development 9,524 11,833
Commercial and industrial 3,201 708
Home equity lines of credit 7,785 7,367
Installment and other 2,187 1,753
Total loans, gross $153,702 $143,252
In late 1994 the Company reorganized its lending staff to place
increased emphasis on small business and commercial lending. During
1995 commercial mortgage and business loans increased by $8.0 million,
or 33.0%, to $32.3 million. The Company also added to its residential
mortgage portfolio, albeit at a slower pace that in prior years.
Predominately all of the Company's loans are adjustable rate.
Originations of fixed rate mortgage loans are generally sold on a
servicing retained basis. At June 30, 1995 loans serviced for others
totaled $34.6 million.
Securities
The securities portfolio consists primarily of collateralized mortgage
obligations ("CMOs") and mortgage-backed securities ("MBSs"), and to a
lesser extent, agency obligations and Federal Home Loan Bank capital
stock. There were no structured notes, inverse floaters, or interest-
only or principal-only strips in the portfolio. At June 30, 1995 49.6%
of the portfolio was invested in fixed rate securities, principally CMOs
and MBSs. The fixed rate portfolio had a consensus weighted average
duration and life of 3.2% and 3.9 years, respectively. Fixed rate CMOs
and MBSs are generally in securities with relatively stable cash flows.
The Company actively monitors the prepayment of its CMOs and MBSs. At
June 30, 1995 49.2% of the portfolio was invested in floating rate CMOs
and MBSs which generally reprice monthly based on pre-determined spreads
to various underlying indices, subject to life-time caps and floors.
The floating rate portfolio had a consensus weighted average duration
and life of -0.2% and 13.7 years, respectively. The floating rate
securities are tied to several indices including the eleventh district
cost of funds index ("EDCOFI"), one-month LIBOR and Treasury indices.
Securities tied to EDCOFI are match funded with core deposits while
securities tied to the one-month LIBOR index and Treasury indices are
generally matched against borrowings whose rates generally follow the
one-month LIBOR index. The remaining 1.2% of the portfolio at June 30,
1995, was represented by Federal Home Loan Bank stock.
In response to the sharp rise in interest rates during calendar year
1994, the Company restructured the securities portfolio during its first
and second quarters of its 1995 fiscal year. The Company sold
adjustable rate MBSs totaling $15.7 million and a corporate bond, both
classified available-for-sale, and used the proceeds to repay short term
borrowings whose rates had repriced higher than the MBSs. The Company
realized a loss of $491,000 on the sale of the MBSs which was offset by
a gain of $686,000 on the sale of the corporate bond. In addition, the
Company transferred securities with a fair value of $92.2 million from
available-for-sale to held-to-maturity pursuant to a change in
investment strategy. All held-to-maturity securities are part of the
Company's core portfolio which the Company has the ability and positive
intent to hold to maturity. Transfers from available-for-sale to held-
to-maturity were made at fair value at the time of transfer. Included
in shareholders' equity at June 30, 1995 was an adjustment of
$2,609,000, representing net unrealized holding losses at the time of
transfer adjusted for subsequent principal amortization and tax effects.
During the third quarter of fiscal 1995 the Company sold its remaining
$1.4 million of marketable equity securities and realized a net gain of
$30,000.
At June 30, 1995, securities totaling $120.1 million, or 94.4%, were
classified held-to-maturity and securities totaling $7.1 million, or
5.6%, were classified available-for-sale.
Substantially all of the Company's securities were purchased in 1993 and
early 1994. Subsequent movements in interest rates and market
conditions through June 30, 1995 have resulted in a decline in fair
market value. At June 30, 1995 net unrealized losses for securities
available-for-sale and held-to-maturity combined, being the difference
between current fair market value and amortized cost, totaled $4.2
million. No credit losses are anticipated and all unrealized gains and
losses are expected to reverse as securities approach maturity.
Fluctuations in fair market value caused by movements in interest rates
and market conditions will not necessarily adversely impact future
earnings. Refer to "Interest Rate Sensitivity" for a discussion of the
Company's exposure to interest rate risk.
Deposits and borrowings
As part of a balance sheet restructuring in conjunction with the
securities portfolio transactions discussed above, the Company raised
$15 million in certificates of deposit in the second quarter of fiscal
1995 and used the funds to repay short term borrowings and lengthen
deposit maturities. For the full fiscal year total deposits increased
$16.2 million, or 6.9%, while borrowings decreased $31.4 million, or
60.5%. In addition to the certificate of deposit promotion discussed
above, the Company experienced a significant shift in its deposit mix
during 1995 as a result of an unusually wide interest rate differential
between certificate of deposit and money market and savings rates.
Certificates of deposit increased $42.5 million, or 56.4%, with savings
and money market declining $5.6 million and $21.2 million, respectively.
LIQUIDITY
The Company manages its liquidity position to ensure that there is
sufficient funding availability at all times to meet both anticipated
and unanticipated deposit withdrawals, new loan originations, securities
purchases and other operating cash outflows. The principal sources of
liquidity for the Company are principal payments and maturities of
securities and loans, short term borrowings through repurchase
agreements and Federal Home Loan Bank advances, net deposit growth and
funds provided by operations. Liquidity can also be provided through
ales of loans and available-for-sale securities.
Operating activities in 1995 provided net cash flows of $3.2 million,
down from $5.2 million in 1994 as a result of a decrease in mortgage
loans held for sale at June 30, 1994, offset in part by improved core
earnings. During 1995 investing activities provided net cash of $21.7
million principally from securities principal repayments, sales of
available-for-sale securities and sales of REA, offset in part by net
loan advances. Funds provided by investing and operating activities,
together with a $16.2 million net increase in deposits, were used to
reduce short term borrowings by $31.4 million, pay dividends to
shareholders and increase cash and cash equivalents by $9.6 million.
During 1994 operating activities provided net cash flows of $5.2
million, up from $0.7 million in 1993 as a result of a decrease in
mortgage loans held for sale at June 30, 1994. Investing activities
used net cash of $41.7 million primarily to fund net securities
purchases of $40.5 million. In addition, the Company funded net loan
advances of $1.4 million, invested $1.2 million to improve REA and
realized $2.1 million from REA sales. Funding for investing activities
was provided with cash flows from operations, net deposit growth of $8.1
million, a $23.9 million increase in short term borrowings and a $4.5
million decrease in cash and cash equivalents.
At June 30, 1995, the Company's liquidity ratio, as represented by cash,
short-term available-for-sale securities, marketable assets, the ability
to borrow against held-to-maturity securities and loans through unused
FHLB and other short term borrowing capacity, of approximately $152
million, to net deposits and short term unsecured liabilities, was
68.0%, well in excess of the Company's minimum guideline of 15%. At
June 30, 1995, the Company had outstanding commitments to fund new
mortgage loan originations of $7.7 million, construction mortgage
commitments of $476,000 and unused lines of credit of $6.6 million.
These commitments will be met in the normal course of business. The
Company believes that its liquidity sources will continue to provide
funding sufficient to support operating activities, loan originations
and commitments, and deposit withdrawals.
INTEREST RATE SENSITIVITY
The following table sets forth the Company's interest rate sensitivity
position at June 30, 1995, measured in terms of the volume of interest
rate sensitive assets and liabilities that are subject to repricing in
future time periods. For the purposes of this analysis, money market
deposits have been presented in the within 1 month category and savings
and NOW deposits have been presented in the 2-to-3 months category,
although the interest rate elasticity of money market, savings and NOW
deposits cannot be tied to any one time category. Non-accrual loans and
overdrafts have been presented in the non-interest-bearing category.
Significant variations may exist in the degree of interest rate
sensitivity between individual asset and liability types within the
repricing periods presented due to differences in their repricing
elasticity relative to changes in the general level of interest rates.
June 30, 1995 Within Within Non-
(in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
ASSETS
Securities $ 61,900 $ 8,210 $29,319 $31,960 $ - $131,389
Interest bearing
deposits - 99 - - - 99
Federal funds sold 8,500 - - - - 8,500
Loans 89,192 43,244 10,527 5,677 4,632 153,272
Other assets - - - - 15,411 15,411
Total assets 159,592 51,553 39,846 37,637 20,043 $308,671
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - - - 8,224 8,224
NOW accounts 21,921 - - - - 21,921
Money market 63,059 - - - - 63,059
Savings and other 41,349 - - - - 41,349
Certificates of
deposit 52,806 34,522 30,539 - - 117,867
Securities sold
under repurchase
agreements 15,499 - - - - 15,499
FHLBB advances 5,000 - - - - 5,000
Other liabilities - - - - 3,031 3,031
Stockholders'
equity - - - - 32,721 32,721
Total sources
of funds 199,634 34,522 30,539 - 43,976 $308,671
Cumulative
interest-rate
sensitivity
gap (40,042) (23,011) (13,704) 23,933 -
Percent of
total assets (13%) (7%) (4%) 8% -
At June 30, 1995, the Company was liability sensitive as measured by a
negative cumulative one year gap of $23.0 million, or 7.5% of total
assets. As a result, the Company's net interest margin could be
adversely affected by a sudden increase in interest rates.
Despite the negative gap, during the past year the Company's net
interest margin increased 60 basis points as compared with 1994, driven
by the benefit, over the past year, from higher interest rates on the
Company's adjustable rate assets which have repriced faster that deposit
liabilities. The Company's deposit rates, in particular savings and
money market rates, lagged changes in treasury yields over the past year
and this lag, together with the improvements in asset mix, has been a
principal contributor to the increase in the Company's net interest
margin.
The low interest rate environment in 1993 contributed to a shortening of
deposit liabilities, as maturing certificates of deposits were rolled
over into more liquid savings and money market accounts. The Company
benefited from this favorable deposit mix over the past year as
certificate of deposit rates began to rise while money market and
savings rates remained substantially unchanged. Over the past year
deposit liabilities lengthened as the rate differential between money
market rates and certificate of deposit rates widened. Higher rates on
certificates of deposit have resulted in deposit flows from money market
and savings accounts into certificates of deposit. This trend may
continue and could adversely impact the Company's net interest margin.
Furthermore, a sudden increase in yields on money market and savings
accounts would adversely impact the Company's net interest margin.
However, the Company believes that this effect will be offset over time
as the Company's 1-year adjustable rate mortgage loans continue to
reprice upwards and as cash flows from securities and non-performing
assets are reinvested into higher yielding loans.
As evidenced by the past year, a significant factor in determining the
Company's ability to maintain its net interest margin in a changing
interest rate environment is its ability to manage its core deposit
rates. Essentially all of the Company's deposit base is composed of
local retail deposit accounts which tend to be somewhat less sensitive
to moderate interest fluctuations than other funding sources and,
therefore, provide a reasonably stable and cost-effective source of
funds. The Company also structures its loan and securities portfolios
to provide for portfolio repricing consistent with its interest rate
risk objectives.
CAPITAL RESOURCES
Stockholders' equity and book value per share increased 30% during 1995
to $32.7 million and $7.29, respectively, at June 30, 1995. The
increase of $7,627,000, or $1.70 per share, resulted primarily from the
Company's earnings of $6,224,000, or $1.37 per share, for the year,
together with a $1,678,000 adjustment to shareholders equity to tax
effect the net unrealized securities losses reported in shareholders
equity, offset in part by the cash dividends of $269,000.
Stockholders' equity at June 30, 1995 included an adjustment, net of
taxes, for unrealized holding losses of $2,609,000 million on securities
transferred from available-for-sale to held-to-maturity and net
unrealized holding gains of $91,000 on securities available-for-sale.
Refer to "Financial Condition - Securities" for a discussion of the
Company's securities portfolio.
In October 1994 the Company resumed the payment of a quarterly cash
dividend, following a four year lapse. During the fiscal year 1995
total dividends of $.06 per share were declared and paid. On July 25,
1995 the Company declared a $.02 dividend.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At June 30, 1995 the Company's leverage capital ratio was
10.58% and its tier I and total risk-based capital ratios were 20.09%
and 21.36%, respectively. At June 30, 1995 the Bank's leverage capital
ratio was 10.19% and its tier I and total risk-based capital ratios were
19.34% and 20.62%, respectively. The Company and the Bank are
categorized as "well capitalized". A well capitalized institution,
which is the highest capital category for an institution as defined by
the Prompt Corrective Action regulations issued by the FDIC and the FRB,
is one which maintains a total risk-based ratio of 10% or above, a tier
I risk-based ratio of 6% or above and a leverage ratio of 5% or above,
and is not subject to any written order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a
specific capital level.
Dividend Restrictions
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain restrictions
on the payment of dividends by the Bank to the Company. Under
Connecticut law a bank is prohibited from declaring a cash dividend on
its common stock except from its net earnings for the current year and
retained net profits for the preceding two years. Consequently, the
maximum amount of dividends payable by the Bank to the Company for the
year ended June 30, 1995 is $6,337,000. In some instances, further
restrictions on dividends may be imposed on the Company by the FRB.
In July 1995 the State of Connecticut Department of Banking and the FDIC
released the Bank from a requirement to obtain regulatory approval prior
to declaring any dividends. In August 1995 the FRB released the Company
from a requirement to provide notification prior to declaring any
dividends.
The Company believes that the payment of cash dividends to its
shareholders is appropriate, provided that such payment considers the
Company's capital needs, asset quality, and overall financial condition
and does not adversely affect the financial stability of the Company or
the Bank. The payment of cash dividends by the Company will be
dependent on the Company's future core earnings, financial condition and
capital needs, regulatory restrictions, and other factors deemed
relevant by the Board of Directors of the Company.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114")
which was later amended in October of 1994 by Statement of Financial
Accounting Standards No. 118 ("SFAS 118"), "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". SFAS 114 and
118, which the Company must adopt as of July 1, 1995, require creditors
to evaluate the collectability of both contractual interest and
contractual principal of all loans when assessing the need for a loss
accrual. When a loan is impaired, a creditor shall measure impairment
based on the present value of the expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the
collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. The creditor shall recognize an
impairment by creating a valuation allowance. In management's judgement
the allowance for loan losses at June 30, 1995 is adequate and the
Company does not believe that the adoption of SFAS 114 or SFAS 118 will
have a material impact on its financial condition and results of
operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights". SFAS
122 amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities" to require that the Company recognize an asset for rights to
service mortgage loans for others, however those servicing rights are
acquired. It will also require the Company to assess its capitalized
mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 must be applied prospectively for the Company's
fiscal year end beginning July 1, 1996. The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in terms of
historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest
rates have a more significant impact on a financial institution's
performance than the effect of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Notwithstanding this,
inflation can directly affect the value of loan collateral, in
particular real estate. Sharp decreases in real estate prices, as
discussed previously, have resulted in significant loan losses and
losses on real estate acquired. Inflation, or disinflation, could
continue to significantly affect the Company's earnings in future
periods.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEWMIL BANCORP, INC.
REPORT OF COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
of NewMil Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of NewMil
Bancorp, Inc. and Subsidiary (the "Company") as of June 30, 1995 and
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the
period ended June 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of NewMil Bancorp, Inc. and Subsidiary as of June 30, 1995 and
1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended June 30, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for investments as of June 30,
1993 and income taxes as of July 1, 1992.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
July 21, 1995
Coopers & Lybrand L.L.P., a registered limited liability partnership, is
a member firm of Coopers & Lybrand International.
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,
1995 1994
ASSETS
Cash and due from banks $ 5,791 $ 4,732
Federal funds sold 8,500 -
Securities
Available-for-sale at market 7,102 119,141
Held-to-maturity at amortized
cost (fair value: $119,948 and $32,695) 120,092 34,605
Loans (net of allowance for loan losses:
$5,372 and $5,246) 147,899 137,620
Residential mortgage loans held-for-sale - 130
Real estate acquired (net of valuation
reserve: $313 and $367) 4,219 9,136
Bank premises and equipment, net 6,125 6,393
Accrued income 1,918 1,887
Deferred tax asset, net 6,397 800
Other assets 628 715
Total Assets $308,671 $315,159
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 8,224 $ 7,111
NOW accounts 21,921 22,494
Money market 63,059 84,269
Savings and other 41,349 46,949
Certificates of deposit 117,867 75,359
Total deposits 252,420 236,182
Securities sold under repurchase agreements 15,499 51,850
FHLB advances 5,000 -
Accrued interest and other liabilities 3,031 2,033
Total Liabilities 275,950 290,065
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000 and 6,000,000
Shares issued: 5,965,888 2,983 2,983
Paid-in capital 44,145 44,182
Retained earnings (accumulated deficit) 3,915 (2,040)
Net unrealized holding gains (losses) on
securities available-for-sale, net of taxes 91 (4,163)
Net unrealized holding losses on
securities transferred to held-to-
maturity, net of taxes (2,609) -
Treasury stock, at cost: 1,474,409 and
1,480,000 shares (15,804) (15,868)
Total Shareholders' Equity 32,721 25,094
Total Liabilities and Shareholders' Equity $308,671 $315,159
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Years ended June 30,
1995 1994 1993
Interest and dividend income
Interest and fees on loans $11,967 $10,623 $10,979
Interest and dividends on securities 8,247 6,742 5,680
Interest on federal funds sold 69 85 319
Total interest and dividend income 20,283 17,450 16,978
Interest expense
Deposits 8,054 6,856 8,321
Borrowed funds 1,549 1,621 34
Interest rate swaps, net (1) (4) 111
Total interest expense 9,602 8,473 8,466
Net interest and dividend income 10,681 8,977 8,512
Provision for loan losses 400 208 450
Net interest and dividend income
after provision for loan losses 10,281 8,769 8,062
Non-interest income
Service charges on deposit accounts 779 652 496
Securities gains, net 226 404 2,453
Losses on interest rate swaps - - (804)
Loan servicing fees 126 119 35
Gains on mortgage loans, net 28 99 101
Other 262 262 229
Total non-interest income 1,421 1,536 2,510
Non-interest expense
Salaries 3,295 2,916 2,966
Employee benefits 841 840 856
Occupancy 731 788 752
Equipment 543 571 486
Insurance 695 684 734
Collections and real estate acquired 1,418 1,339 1,991
Professional services 293 316 426
Marketing 236 183 166
Other 1,300 1,057 845
Total non-interest expense 9,352 8,694 9,222
Income before income taxes 2,350 1,611 1,350
Income tax (benefit) provision (3,874) (720) 23
Net income $ 6,224 $ 2,331 $ 1,327
Earnings per share $1.37 $0.52 $0.30
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Net un-
realized
gains
Retained (losses)
earnings on Total
(accumul- Trea- securit- share-
Common Stock Paid-in ated sury ies net holders'
Shares Amount capital deficit) stock of taxes equity
Balances at
June 30, 1992 5,963,888 2,982 44,177 (5,698) (15,868) $ - $25,593
Net income for
year - - - 1,327 - - 1,327
Change in net
unrealized
gains (losses)
on securities - - - - - 2,085 2,085
Balances at
June 30, 1993 5,963,888 2,982 44,177 (4,371) (15,868) 2,085 29,005
Net income for
year - - - 2,331 - - 2,331
Proceeds from
exercise of
stock options 2,000 1 5 - - - 6
Change in net
unrealized
gains (losses)
on securities - - - - - (6,248) (6,248)
Balances at
June 30, 1994 5,965,888 2,983 44,182 (2,040) (15,868) (4,163) 25,094
Net income for
year - - - 6,224 - - 6,224
Cash dividends
declared - - - (269) - - (269)
Proceeds from
issuance of
Treasury Stock - - (37) - 64 - 27
Change in net
unrealized
gains (losses)
on securities - - - - - (33) (33)
Deferred taxes on
net unrealized
(gains) losses
on securities - - - - - 1,678 1,678
Balances at
June 30, 1995 5,965,888 $2,983 $44,145 $ 3,915 $(15,804) ($2,518) $32,721
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years ended June 30,
1995 1994 1993
Operating Activities
Net income $ 6,224 $2,331 $1,327
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 400 208 450
Provision for losses on
real estate acquired 621 450 1,176
Provision for depreciation and
amortization 522 444 416
Increase in deferred income tax asset (5,597) (800) -
Amortization and accretion of securities
premiums and discounts, net 539 1,605 339
Securities gains, net (226) (404) (1,649)
Realized gains on loan sales, net (28) (99) (101)
Realized gains on sales of real
estate acquired, net (409) (51) (206)
Decrease (increase) in mortgage loans
held for sale 130 2,351 (2,481)
(Increase) decrease in accrued income (31) 169 344
Decrease in refundable income taxes - - 1,451
Increase (decrease) in accrued interest
and other liabilities 989 (851) (204)
Decrease (increase) in other
assets, net 88 (167) (132)
Net cash provided by
operating activities 3,222 5,186 730
Investing Activities
Proceeds from sales of securities
available-for-sale 6,684 30,481 -
Proceeds from sales of securities
held-for-sale - - 8,001
Proceeds from maturities and principal
repayments of securities 6,051 34,323 28,082
Purchases of securities available-for-sale (5,413)(125,449) (43,151)
Proceeds from sales of mortgage backed
securities available-for-sale 15,710 24,112 -
Proceeds from sales of mortgage backed
securities held-for-sale - - 17,769
Proceeds from sales of mortgage backed
securities held-for-investment - - 22,977
Principal collected on mortgage backed
securities 4,852 16,654 17,874
Purchases of mortgage backed securities - (20,606) (62,505)
Loan advances, net of repayments (10,688) (1,373) (155)
Purchases of loans (819) - (16,491)
Proceeds from sale of real estate
acquired 6,879 2,123 2,517
Payments to improve real estate acquired (1,320) (1,212) (672)
Net purchases of Bank premises
and equipment (253) (720) (368)
Net cash provided (used) by
investing activities 21,683 (41,667) (26,122)
Financing Activities
Net increase (decrease) in deposits 16,247 8,085 (10,385)
Net (repayments of) proceeds from
repurchase agreements (36,351) 23,850 28,000
Net proceeds from FHLB advances 5,000 - -
Net proceeds from Treasury Stock reissued 27 - -
Cash dividends paid (269) - -
Proceeds from exercise of stock options - 6 -
Net cash (used) provided by
financing activities (15,346) 31,941 17,615
Increase (decrease) in cash and
cash equivalents 9,559 (4,540) (7,777)
Cash and federal funds sold, beginning
of year 4,732 9,272 17,049
Cash and federal funds sold, end of year $14,291 $ 4,732 $ 9,272
Cash paid (received) during year
Interest to depositors $ 8,046 $ 6,849 $ 8,325
Interest on borrowings and
interest rate swaps 1,633 2,022 516
Income taxes 72 71 (1,422)
Non-cash transfers
From securities held-for-investment
to securities available-for-sale - - 116,822
From securities held-for-sale to
securities available-for-sale - - 1,801
From securities available-for-sale
to securities held-to-maturity 92,231 - -
From loans to real estate acquire 853 522 2,922
The accompanying notes are an integral part of the consolidated financial
statements.
NewMil Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewMil Bancorp, Inc. (the "Company") is the bank holding company for New
Milford Savings Bank (the "Bank"), a State-chartered savings bank. The
accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The following
is a summary of significant accounting policies:
Principles of Consolidation
The consolidated financial statements include those of the Company and
its subsidiary after elimination of all intercompany accounts and
transactions. Certain reclassifications have been made to prior years'
amounts to conform with the 1995 financial presentation.
Securities
Securities that may be sold as part of the Company's asset/liability or
liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at fair market
value. Unrealized holding gains and losses on such securities are
reported net of related taxes, if applicable, as a separate component of
shareholders' equity. Securities that the Company has the ability and
positive intent to hold to maturity are classified as held-to-maturity
and carried at amortized cost. Realized gains and losses on the sales
of all securities are reported in earnings and computed using the
specific identification cost basis. Securities that the Company has
transferred from available-for-sale to held-to-maturity are carried at
the fair value at the time of transfer, adjusted for subsequent
amortization or accretion and net of applicable taxes.
Effective June 30, 1993 the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115) and
revised its securities accounting policy, which is stated above.
Prior to June 30, 1993 all debt securities intended for sale and
marketable equity securities were carried at the lower of aggregate cost
or market value. All other securities that the Company had the
intention and ability to hold to maturity were carried at amortized
cost. Changes in the carrying value of securities held-for-sale were
reported in earnings as securities gains and losses. Changes in the
carrying value of marketable equity securities held-for-investment were
reported as a separate component of shareholders' equity.
Loans
Loans are reported at their principal outstanding balance net of charge-
offs, unearned income, deferred loan origination fees and costs, and
unamortized premiums or discounts on purchased loans. Loan origination
and commitment fees and certain direct origination costs are deferred
and recognized over the life of the related loan as an adjustment of
yield, or taken into income when the related loan is sold.
Mortgage loans held-for-sale are valued at the lower of cost or market
as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis.
Changes in the carrying value are reported in earnings as gains and
losses on mortgage loans. Realized gains and losses on sales of
mortgage loans are reported in earnings when the proceeds are received
from investors.
The accrual of interest on loans is generally discontinued when
principal or interest is past due by 90 days or more, or earlier when,
in the opinion of management, full collection of principal or interest
is unlikely unless such loans are well collateralized and in the process
of collection. When a loan is placed on non-accrual status, interest
previously accrued but not collected is charged against current income.
Income on such loans is then recognized only to the extent that cash is
received and future collection of principal is probable.
Loans are restored to accrual status when principal and interest
payments are brought current and future payments are reasonably assured,
following a sustained period of repayment performance by the borrower in
accordance with the loan's contractual terms.
Troubled debt restructurings ("TDR") are renegotiated loans for which
concessions, such as the reduction of interest rates, deferral of
interest or principal payments, or partial forgiveness of principal and
interest, have been granted due to a deterioration in a borrower's
financial condition. Interest to be paid on a deferred or contingent
basis is reported in earnings only as collected.
Allowance for Loan Losses
The Company periodically reviews the allowance for loan losses in order
to maintain the allowance at a level sufficient to absorb probable
credit losses. The Company's review is based upon a detailed evaluation
of the loan portfolio through a process which considers numerous
factors, including estimated credit losses based upon internal and
external portfolio reviews, delinquency levels and trends, estimates of
the current value of underlying collateral, concentrations, portfolio
volume and mix, changes in lending policy, historical loan loss
experience, current economic conditions and examinations performed by
regulatory authorities. The allowance for loan losses is increased
through charges to earnings in the form of a provision for loan losses.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance. While the
Bank uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in regional
economic conditions and related factors.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgements of information available to them at the time
of their examination.
Real estate acquired
Real estate acquired through foreclosure, forgiveness of debt or
otherwise in lieu of debt, and collateral which has been in-substance
foreclosed (known collectively as real estate acquired), are stated at
the lower of cost (principally loan amount) or fair value minus
estimated selling expenses. A property is considered to have been in-
substance foreclosed when it is determined that a borrower no longer has
equity in the property collateralizing a loan; proceeds for repayment
can be expected to come only from operation or sale of the collateral;
the borrower has formally or effectively abandoned control of the
collateral; or, the borrower has retained control, but because of
current financial condition or economic prospects, it is doubtful that
equity will be rebuilt in the foreseeable future. When a loan is
reclassified as real estate acquired any excess of the loan balance over
its fair value less estimated selling costs is charged against the
allowance for loan losses. Costs relating to the subsequent development
or improvement of a property are capitalized, to the extent realizable.
Holding costs and any subsequent provisions to reduce the carrying value
of a property to fair value minus estimated selling expenses are charged
to earnings and classified as real estate acquired expense. Fair value
is determined by current appraisal for collateral dependent loans.
Income Taxes
Deferred income taxes are provided for differences arising in the timing
of income and expenses for financial reporting and for income tax
purposes. Effective July 1, 1992 the Company adopted, on a prospective
basis, Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" (SFAS 109) which requires the use of the
asset/liability method of accounting for income taxes. Deferred income
taxes and tax benefits are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The Company provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when realization
is assured beyond a reasonable doubt.
Bank Premises and Equipment
Bank premises, furniture and equipment are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line basis over the shorter
of the estimated useful lives of the improvements or the term of the
related leases.
Statement of Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, cash and
cash equivalents include cash and due from banks, interest-bearing
deposits at other financial institutions and overnight federal funds
sold. Interest cash flows from interest rate swap contracts are
classified as operating cash flows consistent with the interest cash
flows relating to the underlying asset and liabilities. Cash flows
related to the purchase of interest rate caps or the termination of
interest rate swaps are classified in the same category as the cash
flows from the underlying assets or liabilities being hedged.
Computation of Earnings per Share
Earnings per share is computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding
during the period, which, during 1995, 1994 and 1993 were 4,487,144,
4,484,329 and 4,483,888, respectively. The computation does not give
effect to shares issuable upon exercise of stock options where the
effect of that inclusion would be anti-dilutive.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value) were as
follows:
(dollars in thousands) Estimated Gross un- Gross un- Amort-
fair realized realized ized
value gains losses cost
June 30, 1995
U.S. Government Agencies
Within 5 years $1,018 $ 17 $ - $1,001
Mortgage backed securities 4,149 142 7 4,014
Collateralized mortgage
obligations 388 - - 388
Total debt securities 5,555 159 7 5,403
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $7,102 $159 $ 7 $6,950
June 30, 1994
U.S. Government Agencies
After 5 and within 10 years $ 916 $ - $86 $1,002
Mortgage backed securities 35,101 127 828 35,802
Collateralized mortgage
obligations 81,234 1 3,889 85,122
Other bonds and notes
After 5 and within 10 years 650 640 - 10
Total debt securities 117,901 768 4,803 121,936
Marketable equity securities 1,240 - 128 1,368
Total securities
available-for-sale $119,141 $768 $4,931 $123,304
During 1995 securities with a fair value of $92,231,000 were transferred
from available-for-sale to held-to-maturity pursuant to a change in the
Company's investment strategy. These securities are part of the
Company's core portfolio which the Company has the ability and positive
intent to hold to maturity. Included in shareholders' equity at June
30, 1995 are unrealized holding losses, net of taxes, of $2,609,000 on
such securities, representing unrealized holding losses at the date of
transfer adjusted for subsequent amortization and taxation. Securities
classified held-to-maturity (carried at amortized cost) were as follows:
(dollars in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
June 30, 1995
U.S. Government Agencies
After 5 and within 10 years $ 915 $ 68 $ - $ 983
Mortgage backed securities 20,245 82 169 20,158
Collateralized mortgage
obligations 98,932 1,670 1,795 98,807
Total securities
held-to-maturity $120,092 $1,820 $1,964 $119,948
June 30, 1994
U.S. Government Agencies
After 5 but within 10 years $ - $ - $ - $ -
Mortgage backed securities 9,985 - 476 9,509
Collateralized mortgage
obligations 24,620 - 1,434 23,186
Total securities
held-to-maturity $34,605 $ - $1,910 $32,695
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
Cash proceeds and realized gains and losses from sales of securities
were as follows:
(dollars in thousands) Cash Realized Realized
proceeds gains losses
Year ended June 30, 1995
Mortgage backed securities
Available-for-sale $15,710 $ - $490
Collateralized mortgage obligations
Available-for-sale 2,910 - -
Other bonds and notes
Available-for-sale 696 696 -
Marketable equity securities
Available-for-sale 1,400 110 80
Total $20,716 $796 $570
Year ended June 30, 1994
Mortgage backed securities
Available-for-sale $24,112 $358 $ 42
Collateralized mortgage obligations
Available-for-sale 29,951 62 72
Marketable equity securities
Available-for-sale 530 98 -
Total $54,593 $518 $114
Year ended June 30, 1993
Mortgage backed securities
Held-for-sale $17,769 $ 556 $ -
Held-for-investment 22,977 1,512 -
Marketable equity securities
Held-for-sale 8,001 542 70
Total $48,747 $2,610 $70
At June 30, 1995 securities with a carrying value aggregating
approximately $19,126,000 were pledged as collateral against public
funds, repurchase agreements and interest rate swaps (Notes 6 and 12).
NOTE 3 - LOANS
The composition of the loan portfolio was as follows:
June 30, (in thousands) 1995 1994
Real estate mortgages
One-four family residential $ 98,766 $ 94,836
Five or more family residential 3,171 3,199
Commercial 29,068 23,556
Land loans 9,524 11,833
Commercial and industrial 3,201 708
Home equity lines of credit 7,785 7,367
Installment and other 2,187 1,753
Total loans, gross 153,702 143,252
Deferred loan origination fees, net (431) (386)
Allowance for loan losses (5,372) (5,246)
Total loans, net $147,899 $137,620
The Company's loans consist primarily of residential and commercial real
estate loans located principally in Litchfield County and northern
Fairfield County, the Company's service area. In addition, a
substantial portion of real estate acquired is located in this service
area. The Company offers a broad range of loan and credit facilities to
borrowers in its service area, including residential mortgage loans,
commercial real estate loans, construction loans, working capital loans,
and a variety of consumer loans, including home equity lines of credit,
and installment and collateral loans. All residential and commercial
mortgage loans are collateralized by first or second mortgages on real
estate. The ability and willingness of borrowers to satisfy their loan
obligations is dependent in large part upon the status of the regional
economy and regional real estate market, which, over the past three
years, has experienced a significant decline in the market value of real
property. Accordingly, the ultimate collectability of a substantial
portion of the Bank's loan portfolio and the recovery of a substantial
portion of real estate acquired is susceptible to changes in market
conditions.
Changes in the allowance for loan losses were as follows:
June 30, (in thousands) 1995 1994 1993
Balance at beginning of year $5,246 $5,331 $5,753
Provision for losses 400 208 450
Charge-offs (295) (308) (879)
Recoveries 21 15 7
Balance at end of year $5,372 $5,246 $5,331
SFAS 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
118, "Accounting by Creditors for Impairment of a Loan-Income
recognition and Disclosure", which are effective for fiscal year 1996,
require creditors to evaluate the collectability of both contractual
interest and contractual principal of all loans when assessing the need
for a loss accrual. When a loan is impaired, a creditor shall measure
impairment based on the present value of the expected future cash flows
discounted at the loan's effective interest rate, or the fair value of
the collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. The creditor shall recognize an
impairment by creating a valuation allowance. A loan is impaired when,
based on current information, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan. In management's judgement the allowance for loan losses at
June 30, 1995 is adequate and the Company does not believe that the
adoption of SFAS 114 or SFAS 118 will have a material impact on its
financial condition and results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights". SFAS
122 amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities" to require that the Company recognize an asset for rights to
service mortgage loans for others, however those servicing rights are
acquired. It will also require the Company to assess its capitalized
mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 must be applied prospectively for the Company's
fiscal year end beginning July 1, 1996. The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial condition or results of operations.
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
June 30, (in thousands) 1995 1994
Non-accrual loans $4,632 $ 4,170
Accruing loans past due
90 days or more 34 379
Accruing troubled debt
restructured loans - -
Total non-performing loans 4,666 4,549
Real estate acquired in
settlement of loans 1,989 5,348
In-substance foreclosed loans 2,543 4,155
Valuation reserve (313) (367)
Total real estate acquired, net 4,219 9,136
Total non-performing assets $8,885 $13,685
The reductions in interest income associated with non-accrual loans were
as follows:
June 30, (in thousands) 1995 1994 1993
Income in accordance with
original terms $417 $399 $379
Income recognized 116 119 145
Reduction in interest income $301 $280 $234
The components of collection and real estate acquired expense were as
follows:
Year ended June 30,
(dollars in thousands) 1995 1994 1993
Provision for estimated losses $ 621 $ 450 $1,176
Expenses of holding real estate acquired 480 231 371
(Gains) losses on sales of real
estate acquired, net (409) (51) (206)
Collection expense 726 709 650
Total collection and
real estate acquired expense $1,418 $1,339 $1,991
Changes in the real estate acquired valuation reserve were as follows:
Year ended June 30,
(dollars in thousands) 1995 1994 1993
Valuation reserve at beginning of year $ 367 $ 716 $ 180
Charge-offs (675) (799) (640)
Provision 621 450 1,176
Valuation reserve at end of year $ 313 $ 367 $ 716
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of Bank premises and equipment were as follows:
June 30, (in thousands) 1995 1994
Land $ 1,140 $ 1,140
Buildings and improvements 5,499 5,473
Equipment 3,523 3,508
Leasehold improvements 283 246
Total cost 10,445 10,367
Accumulated depreciation
and amortization (4,320) (3,974)
Bank premises and equipment, net $ 6,125 $ 6,393
NOTE 6 - SHORT TERM BORROWED FUNDS
The Company's short term borrowed funds include Federal Home Loan Bank
advances and short term repurchase agreements with major brokerage firms
that are primary dealers in government securities. The following is an
analysis of short term borrowed funds:
(dollars in thousands) 1995 1994
Federal Home Loan Bank advances
Borrowings at June 30
maturing 30 days or less $5,000 $ -
Average borrowings during year 863 -
Maximum month-end borrowings 5,575 -
Accrued interest expense at June 30 1 -
Weighted average rate at June 30 6.66% -
Weighted average rate during year 5.69% -
Securities sold under repurchase
agreements
Borrowings at June 30
maturing 30 days or less $15,499 $51,850
Average borrowings during year 28,018 44,033
Maximum month-end borrowings 50,255 59,534
Accrued interest expense at June 30 21 42
Weighted average rate at June 30 6.12% 4.46%
Weighted average rate during year 5.35% 3.68%
Amount at risk by broker
Morgan Stanley $2,588 $1,816
Merrill Lynch - 3,108
Salomon Bros 1,098 935
Average maturity by broker
Morgan Stanley 29 Days 5 Days
Merrill Lynch - 25 Days
Salomon Bros 13 Days 9 Days
Collateral at June 30
Mortgage-backed securities and
collateralized mortgage obligations:
Carrying amount $19,126 $57,458
Market value 18,443 57,458
Accrued interest income 80 293
Securities sold under repurchase agreements are generally issued on a
14-day or 30-day basis. At June 30, 1995 the Company had a pre-approved
line of credit with the Federal Home Loan Bank of Boston of $6,303,000.
Under this agreement the Company is required to maintain qualified
collateral, as defined in the Federal Home Loan Bank of Boston's
Statement of Credit Policy, free and clear of liens, pledges and
encumbrances, as collateral for the advances and the pre-approved line
of credit. The Company maintains qualified collateral sufficient to
support Federal Home Loan Bank advances well in excess of the pre-
approved line of credit at June 30, 1995.
NOTE 7 - INCOME TAXES
The Company provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when realization
is more likely than not. The components of the income tax provision
(benefit) were as follows:
(in thousands)
Year ended June 30, 1995 1994 1993
Current provision (benefit)
Federal $ 799 $ 793 $ 255
State 264 268 109
Benefit from net operating
loss carry forwards
Federal (777) (736) (255)
State (241) (245) (86)
Total 45 80 23
Deferred (benefit)
Federal (2,952) (580) -
State (967) (220) -
Total (3,919) (800) -
Income tax (benefit) provision $(3,874) $(720) $ 23
The following is a reconciliation of the expected federal statutory tax
to the income tax (benefit) provision:
Year ended June 30, 1995 1994 1993
Income tax at statutory
federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 0.6 0.9 1.7
Benefit of net operating loss
carryforwards (32.5) (33.0) (18.9)
Change in valuation reserve (166.7) (49.7) -
Dividends excluded (0.7) (1.1) (2.5)
Loan loss provision - - (10.6)
Other 0.4 4.2 (2.0)
Effective income tax rates (164.9) (44.7) 1.7
The components of the Company's net deferred tax asset were as follows:
(in thousands)
June 30, 1995 Federal State
Deferred tax assets
Net operating loss carryforwards $ 1,764 $ 1,546
SFAS 115 Securities available-for-sale 1,259 419
Capital loss carryforwards 5,441 2,305
Bad debt deductions 1,621 604
Losses on real estate acquired 190 71
Accrued pension expense 141 53
Deferred income 129 48
Other 168 63
Tax credits 234 -
Total deferred tax assets 10,947 5,109
Deferred tax liabilities
Bad debt deduction 708 264
Deferred income 7 3
Other - -
Total deferred tax liabilities 715 267
Net deferred tax asset 10,232 4,842
Valuation reserve (5,441) (3,236)
Net deferred tax asset $ 4,791 $ 1,606
June 30, 1994
Deferred tax assets
Net operating loss carryforwards $ 3,937 $ 1,894
Capital loss carryforwards 5,265 2,302
Bad debt deductions 1,910 646
Security losses 128 43
Losses on real estate acquired 125 42
Accrued pension expense 157 53
Other 235 20
Tax credits (181) -
Total deferred tax assets 11,576 5,000
Deferred tax liabilities
Bad debt deduction 759 257
Deferred income 131 44
Other 97 73
Total deferred tax liabilities 987 374
Net deferred tax asset 10,589 4,626
Valuation reserve (10,009) (4,406)
Net deferred tax asset $ 580 $ 220
The allocation of deferred tax benefit involving items charged to
current year income and items charged directly to stockholders' equity
for the years ended June 30, are as follows:
(in thousands)
June 30, 1995 Federal State
Deferred tax benefit
allocated to shareholders' equity $(1,259) $ (419)
Deferred tax benefit
allocated to income (2,952) (967)
Total deferred tax benefit $(4,211) $(1,386)
June 30, 1994
Deferred tax benefit
allocated to shareholders' equity $ - $ -
Deferred tax benefit
allocated to income (580) (220)
Total deferred tax benefit $(580) $(220)
The Company will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not. A valuation
reserve is established for tax benefits available to the Company but for
which realization is in doubt. In 1995 the Company reduced the
valuation allowance to approximately 58% of the deferred tax asset to
recognize 100% of the remaining available Federal income tax benefits
(expiring 2007), together with a portion of the remaining available
State income tax benefits (expiring 1997) which the Company expects to
utilize, and other book/tax temporary differences. The Company also
recognized a $1,678,000 adjustment to shareholders equity to record the
tax effect of unrealized securities gains and losses reported in
shareholders equity. The reduction in the deferred tax valuation
allowance reflects the Company's improved operating performance, marked
by three years of improving core earnings (exclusive of securities
gains), reductions in non-performing assets and a positive outlook for
earnings in the near term. As a result of the deferred tax benefit
recognized in 1995, the Company's 1996 fiscal year quarterly earnings
will be reported on a fully-taxed basis. At June 30, 1995, the Company
recorded a valuation reserve against a portion of the State net
operating loss carryforwards and 100% of the State and Federal capital
loss carryforwards which the Company does not expect to utilize.
At June 30, 1995 the Company had federal net operating loss
carryforwards of approximately $5.1 million (expiring in 2007) and state
net operating loss carryforwards of approximately $13.7 million
(expiring in 1997) which can be applied to reduce future federal and
state income taxes. At June 30, 1995 the Company also has federal and
state capital loss carryforwards of approximately $16.0 million and
$20.4 million, respectively (expiring principally in 1996) which it does
not expect to utilize because of the discontinuation of investing in
marketable equity securities.
NOTE 8 - RETIREMENT PLANS
The Company has a non-contributory defined benefit pension plan (the
"Pension Plan") covering all eligible employees. The benefits are
primarily based on compensation and length of service. The Company's
policy is to contribute the actuarially computed normal cost, plus an
amount to fund liability for past service cost over 40 years.
Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the
future. On September 1, 1993 the Company suspended benefit accruals
under the Pension Plan for all employees and, as of a result of which,
recognized a pension curtailment gain of $177,713 as a reduction of net
pension expense in 1994. Pension Plan assets consist principally of
money market funds, bonds and equity securities. The components of net
pension expense are as follows:
Year ended June 30, (in thousands) 1995 1994 1993
Service cost - benefits
earned during the period $ - $ 145 $ 230
Interest cost on projected
benefit obligation 280 309 335
Actual return on plan assets (81) (272) (528)
Curtailment gain - (177) -
Net amortization and deferral (187) (11) 134
Net pension expense (income) $ 12 $ (6) $ 171
The funded status of the Pension Plan at March 31 was as follows:
March 31, (in thousands) 1995 1994
Actuarial present value of benefit
obligations:
Vested benefit obligation $(4,841) $(5,055)
Accumulated benefit obligation $(4,892) $(5,111)
Projected benefit obligation $(4,892) $(5,111)
Plan assets at fair value 4,491 4,529
Projected benefit obligation in
excess of Plan assets (401) (582)
Unrecognized net loss 106 274
Accrued pension cost included
in other liabilities $ (296) $ (308)
The weighted average discount rate and rate of increase in future
compensation levels used to measure the actuarial present value of the
projected benefit obligation were 6.0% and 4.0%, respectively, in 1995
and 1994 and 8.0% and 6.0%, respectively, in 1993. The expected long-
term rate of return on Pension Plan assets was 6.0% in 1995 and 1994 and
8.0% in 1993. The Company contributed $253,000 to the Pension Plan in
1994. There was no contribution in 1995.
On April 1, 1994 the Company introduced a 401(K) Savings Retirement Plan
covering all eligible employees. Participants may contribute up to 15%
of their compensation, subject to a maximum of $9,240 per year in 1995.
The Company contributes amounts equal to 50% of annual employee
contributions up to 6% of participants' compensation. Employees are
fully vested in the Company's contributions after five years of service.
The Company contributed $50,817 and $10,000 to the Plan in 1995 and
1994, respectively.
The Company has a non-contributory profit sharing plan covering all
eligible employees. Contributions are made at the discretion of the
Company. No contributions were made for 1995, 1994 and 1993.
Effective July 1, 1993 the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other than Pensions," (SFAS
106), which requires the Company to accrue its obligation for post-
retirement benefits other than pensions over the service lives of its
employees rather than on a cash basis.
The Company provides post-retirement health benefits for current
retirees and eligible employees. Post-retirement life insurance
benefits are provided for employees that were eligible for retirement as
of October 1, 1993 and current retirees. The cost of post-retirement
health care benefits is shared by the Company and the retiree, and
benefits are based on deductible and coinsurance provisions. The post-
retirement life insurance benefits are non-contributory, and benefits
are based on a percentage of the base pay at retirement. As of October
1, 1993 the Company adopted a resolution to suspend certain post-
retirement benefits and introduce a co-pay provision for new employees
hired on or after October 1, 1993. Prior to the adoption of SFAS 106,
the cost of these benefits for retired employees was expensed as paid.
In adopting SFAS 106 the Company chose to amortize the transition
obligation for past service cost of approximately $300,000 over 20 years
rather than recognize it immediately as a cumulative effect of an
accounting change. The adoption of SFAS 106 increased 1995 and 1994
employee benefit expense by approximately $60,000 for both years, being
the actuarially computed normal cost, plus the amortization of the
liability for past service cost over 20 years. The Company does not
advance-fund its post-retirement health care and life insurance benefit
plan.
NOTE 9 - SHAREHOLDERS' EQUITY
Liquidation Account
On February 14, 1986, the Company's wholly-owned subsidiary, New Milford
Savings Bank, converted from mutual to stock ownership in a public
offering. Upon conversion, eligible savings account holders as of
October 31, 1986 were granted a priority in the event of future
liquidation for a period of ten years, by establishing a special reserve
account in an amount equal to the net worth of $28.6 million at October
31, 1986. The amount of the special reserve account is being decreased
to the extent that the balances of eligible account holders are reduced
at annual determination dates, which commenced June 30, 1986. The
balance is approximately $2.5 million at June 30, 1995. No dividends
may be paid to the Company if such dividends reduce the net worth of the
Bank below the amount required for the special reserve account.
Capital Requirements
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the Federal Deposit Insurance Corporation (the "FDIC"). The Company's
and the Bank's regulatory capital ratios were as follows:
NewMil New Milford
June 30, 1995 Bancorp, Inc. Savings Bank
Leverage ratio 10.58% 10.19%
Tier 1 risk-based ratio 20.09% 19.34%
Total risk-based ratio 21.36% 20.62%
The Company and the Bank are categorized as "well capitalized". A well
capitalized institution, as defined by the Prompt Corrective Action
rules issued by the FDIC and the FRB, is one which maintains a total
risk-based ratio of 10% or above, a Tier 1 risk-based ratio of 6% or
above and a leverage ratio of 5% or above. In addition to meeting these
numerical thresholds, well capitalized institutions may not be subject
to any written order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital
level.
Restrictions on Subsidiary's Dividends and Payments
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain restrictions
on the payment of dividends and other payments by the Bank to the
Company. Under Connecticut law the Bank is prohibited from declaring a
cash dividend on its common stock except from its net earnings for the
current year and retained net profits for the preceding two years.
Consequently, the maximum amount of dividends payable by the Bank to the
Company for the year ended June 30, 1995 is $6,337,000. In some
instances, further restrictions on dividends may be imposed on the
Company by the Federal Reserve Bank.
NOTE 10 - RELATED PARTY TRANSACTIONS
In the normal course of business the Bank has granted loans to executive
officers, directors, principal shareholders and associates of the
foregoing persons considered to be related parties. Changes in loans
(including loans accounted for as in-substance foreclosed) to related
parties are as follows:
Principal
(in thousands) Officers/ share-
directors holders Total
Year ended June 30, 1995
Balance, beginning of year $ 479 $3,203 $3,682
Advances 22 - 22
Repayments (48) - (48)
Mortgage loans sold (193) - (193)
Charge-offs - (461) (461)
Foreclosures and real estate
acquired in lieu of foreclosure - (242) (242)
Balance, end of year $ 260 $2,500 $2,760
Year ended June 30, 1994
Balance, beginning of year $ 474 $3,684 $4,158
Advances 264 - 264
Repayments (259) - (259)
Sales contract deposits - (3) (3)
Charge-offs - (155) (155)
Foreclosures and real estate
acquired in lieu of foreclosure - (323) (323)
Balance, end of year $ 479 $3,203 $3,682
Loans to two principal shareholders at June 30, 1995 included loans with
principal indebtedness of $8.8 million, all of which were secured by
real estate. The Company has instituted foreclosure actions and has
charged off $5.7 million against such loans (in the current year the
Company charged off $461,000 against such loans). In management's
judgement adequate reserves have been provided against this
indebtedness.
NOTE 11 - STOCK OPTIONS
The Company's 1986 Stock Option and Incentive Plan (the "1986 Plan")
authorizes the granting of both incentive and non-incentive options and
stock appreciation rights (SARS) to officers and other key employees by
the Salary and Benefits Committee of the Board. The 1986 Plan provides
for the granting of options to purchase shares of Common Stock for terms
of up to 10 years at an exercise price not less than 85% of the fair
market value of the Company's stock on the date of the grant. Changes
in outstanding stock option and SARS were as follows:
Options Options
without with Average Maturity Price
SARS SARS Total price range range
June 30, 1992 146,120 17,400 163,520 $5.256 1996-2002 $4.00-12.06
Granted 63,000 - 63,000 3.000 2002 3.00
Lapsed (25,500) (7,400) (32,900) 4.764 1996-2000 3.00-11.09
June 30, 1993 183,620 10,000 193,620 4.448 1996-2002 3.00-12.06
Granted 141,450 - 141,450 4.005 2003-2004 3.19-4.25
Exercised (2,000) - (2,000) 3.000 2002 3.00
Lapsed (100,500) - (100,500) 3.995 2002 3.00-4.00
June 30, 1994 222,570 10,000 232,570 4.383 1996-2004 3.00-12.06
Granted 25,000 - 25,000 4.285 2003-2004 4.00-4.57
Lapsed (7,750) (100) (7,850) 6.253 1996-2004 3.00-12.06
June 30, 1995 239,820 9,900 249,720 $4.295 1996-2004 $3.00-12.06
Stock options outstanding as of June 30, 1995 were exercisable as
follows:
Options Options
without with
SARS SARS Total
June 30, 1995 189,820 9,900 199,720
March 21, 1996 25,000 - 25,000
March 21, 1997 25,000 - 25,000
Total 239,820 9,900 249,720
As of June 30, 1995 options to purchases 163,530 shares of Common Stock
were available to be granted under the 1986 Stock Option and Incentive
Plan.
The Company's 1992 Stock Option Plan for Outside Directors (the "1992
Plan") provides for automatic grants of options to non-employee
directors who were participants on the effective date of the plan and
newly elected and subsequently reelected non-employee directors. The
1992 Plan provides for the granting of options to purchase shares of
Common Stock for terms of up to 10 years at an exercise price of not
less than the fair market value of the Company's stock on the date of
the grant. Options granted under the 1992 Plan are exercisable only
during a fiscal quarter following a quarter in which dividends have been
declared on the Common Stock. Accordingly, all of the options were
exercisable at June 30, 1995.
Changes in outstanding stock options were as follows:
Average Price
Options Price Maturity Range
October 23, 1992
Granted 60,000 $3.000 2002 $3.00
Lapsed - - - -
June 30, 1993 60,000 3.000 2002 3.00
Granted 2,000 5.750 2003 5.75
Lapsed - - - -
June 30, 1994 62,000 3.089 2002-2003 3.00-5.75
Granted 4,000 5.000 2004 5.00
Lapsed - - - -
June 30, 1995 66,000 3.205 2002-2004 3.00-5.75
As of June 30, 1995 options to purchases 64,000 shares of Common Stock
were available to be granted under the 1992 Stock Option Plan for
Outside Directors.
NOTE 12 - INTEREST RATE EXCHANGE AGREEMENTS
Prior to 1992 the Company used interest rate swaps to manage interest
rate risk associated with a portfolio of fixed rate mortgage-backed
securities. This program was discontinued in 1992 and the portfolio was
downsized. As the underlying assets were sold, the Company terminated
several of its swap contracts, allowed other contracts with near term
maturities to expire, and, in the case of one contract maturing in 1995,
entered into an offsetting contract to eliminate interest rate risk.
Under these contracts the Company pays or receives a variable rate of
interest (based on the three month LIBOR index) and receives or pays a
fixed rate of interest based on the notional principal amounts listed
below. The offsetting contracts by type, maturity, market value and
rate were as follows:
Notional Rate Rate Market
(dollars in thousands) Maturity amount paid earned value
June 30, 1995
Pay fixed/
receive variable: 10/07/95 $6,000 8.52% 6.25% $(18)
Pay variable/
Receive fixed: 10/07/95 6,000 6.25 7.41 -
- (18)
Valuation reserve - 18
Swap obligations, net $ - $ -
June 30, 1994
Pay fixed/
receive variable: 10/07/95 $6,000 8.52% 4.06% $(345)
Pay variable/
Receive fixed: 10/07/95 6,000 4.06 7.41 255
- (90)
Valuation reserve - 85
Swap obligations, net $ - $ (5)
The Company fully reserved the interest differential between these
offsetting contracts in 1992 and this valuation reserve is being
amortized over the remaining lives of the swaps as an offset to the net
interest expense. As a result, these offsetting swaps have no effect on
results of operations and give rise to no interest rate risk.
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments and
contingent liabilities outstanding pertaining to the purchase and sale
of securities and the granting of loans and lines of credit which are
not reflected in the accompanying financial statements. At June 30,
1995 the Company had commitments under outstanding construction
mortgages of $476,000, unused lines of credit of $6,589,000 and
outstanding commitments to fund loans of $7,686,000. At June 30, 1994
the Company had commitments under outstanding construction mortgages of
$1,198,000, unused lines of credit of $5,594,000 and outstanding
commitments to fund loans of $2,814,000. The Company does not
anticipate any material losses as a result of these transactions. Since
many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company's exposure to credit loss in the event of
non-performance by the other party to the commitment is represented by
the contractual amount of the instrument. The exposure to credit loss
is limited by evaluating the customer's credit worthiness on a case-by-
case basis and by obtaining collateral if deemed necessary. Collateral
held generally includes residential and commercial properties. The
Company generally requires an initial loan to value ratio of no greater
than 80% when real estate collateralizes a loan commitment.
The Company leases facilities under operating leases which expire at
various dates through 1998. The leases have varying renewal options,
generally require a fixed annual rent, and provide that real estate
taxes, insurance, and maintenance are to be paid by the Company. Rent
expense totaled $128,413, $121,591 and $128,809 for 1995, 1994 and 1993,
respectively. Future minimum lease payments at June 30, 1995 are as
follows:
1996 $87,459
1997 57,025
1998 40,246
1999 40,246
2000 3,354
$228,330
NOTE 14 - ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), requires the Company
to disclose fair value information for certain of its financial
instruments, including loans, securities, deposits, borrowings, interest
rate swaps and other such instruments. Quoted market prices are not
available for a significant portion of the Company's financial
instruments and, as a result, the fair values presented may not be
indicative of net realizable or liquidation values. Fair values are
estimates derived using present value or other valuation techniques and
are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics, and other factors.
In addition, fair value estimates are based on market conditions and
information about the financial instrument at a specific point in time.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Such items include mortgage
servicing, core deposit intangibles and other customer relationships,
premises and equipment, foreclosed real estate and income taxes. In
addition, the tax ramifications relating to the realization of the
unrealized gains and losses may have a significant effect on fair value
estimates and have not been considered in the estimates.
The following is a summary of the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments pursuant
to SFAS 107.
Cash, cash equivalents and other: The fair value of cash and due from
banks, deposits with banks, federal funds sold, accrued interest
receivable, securities sold under repurchase agreements and accrued
interest payable, is considered to approximate the book value due to
their short-term nature and negligible credit losses.
Securities: Securities classified as available-for-sale are carried at
fair value. Fair value for securities held-for-sale was determined by
secondary market and independent broker quotations.
Mortgage loans held for sale: Fair value was estimated using current
dealer commitments to purchase loans and quoted secondary market prices.
Loans: Fair values for residential mortgage and consumer installment
loans were estimated by discounting cash flows, adjusted for
prepayments. The discount rates used for residential mortgages were
secondary market yields for residential mortgage loans, net of servicing
and adjusted for risk. The discount rates used for consumer installment
loans were current rates offered by the Company. Fair values for
commercial loans were estimated by assessing credit risk and interest
rate risk. Such loans were valued by discounting estimated future cash
flows at a rate that incorporates both interest and credit risk.
Deposit liabilities: The fair value for demand, savings and certain
money market deposits is equal to the amount payable on demand at the
balance sheet date which is equal to the carrying value. The fair value
of certificates of deposit was estimated by discounting cash flows using
rates currently offered by the Company for deposits of similar remaining
maturities.
Off-balance sheet: The fair value of interest rate swap contracts was
estimated by discounting cash flows using prevailing market rates.
The fair value information of the Company's financial instruments
required to be valued by SFAS 107 are as follows:
June 30, 1995 1994
(dollars in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
Financial Assets
Cash and due from banks $ 5,791 $ 5,791 $ 4,732 $ 4,732
Federal funds sold 8,500 8,500 - -
Securities available for sale 7,102 7,102 191,141 191,141
Securities held to maturity 120,092 119,948 34,605 32,965
Mortgage loans held for sale - - 130 134
Loans 153,702 152,558 143,252 142,222
Allowance for loan losses (5,372) - (5,246) -
Deferred loan origination
fees, net (431) - (386) -
Loans, net 147,899 152,558 137,750 142,222
Accrued interest receivable 1,918 1,918 1,887 1,887
Financial Liabilities
Deposits
Demand (non-interest bearing) $ 8,224 $ 8,224 $ 7,111 $ 7,111
NOW accounts 21,921 21,921 22,494 22,494
Money market 63,059 63,059 84,269 84,269
Savings and other 41,349 41,349 46,949 46,949
Certificates of deposit 117,867 118,122 75,359 75,703
Total deposits 252,420 252,675 236,182 236,526
Securities sold under
repurchase agreements 15,499 15,499 51,850 51,850
FHLB advances 5,000 5,000 - -
Accrued interest payable 298 298 288 288
Other Financial Instruments
Interest rate swaps $(18) $ - $(85) $(90)
NOTE 15 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL
INFORMATION
The unconsolidated balance sheets NewMil Bancorp, Inc. at June 30, and
its statements of operations and cash flows for each of the years ended
June 30, are presented as follows:
Balance Sheets June 30, June 30,
(in thousands) 1995 1994
Assets
Due from bank $ 82 $ 90
Note receivable 1,100 1,200
Investment in New Milford Savings Bank 31,546 23,834
Other assets 4
Total Assets $32,732 $25,131
Liabilities and Shareholders' Equity
Liabilities $ 11 $ 37
Shareholders' equity 32,721 25,094
Total Liabilities and Shareholders' Equity $32,732 $25,131
Statements of Operations Years ended June 30,
(in thousands) 1995 1994 1993
Interest income $ 334 $ 42 $ 41
Expenses 178 95 93
Income (loss) before taxes and
undistributed net income (loss)
of subsidiary 156 (53) (52)
Income tax provision - - 33
Income (loss) before equity in
undistributed net income
of subsidiary 156 (53) (85)
Equity in undistributed net
income of subsidiary 6,068 2,384 1,412
Net income $6,224 $2,331 $1,327
Statements of Cash Flows Years ended June 30,
(in thousands) 1995 1994 1993
Net income $ 6,224 $ 2,331 $ 1,327
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in net income of subsidiary (6,068) (2,384) (1,412)
Other (22) 7 85
Net cash provided (used) by operating
activities 134 (46) -
Investing Activities:
Repayment of advances to subsidiary, net - - 1,330
Purchase of note receivable
from subsidiary - - (1,300)
Net decrease in note receivable
from subsidiary 100 100 -
Net cash provided by investing
activities 100 100 30
Financing Activities:
Cash dividends declared (269) - -
Proceeds from Treasury Stock issued 27 - -
Proceeds from exercise of stock options - 6 -
Net cash (used) provided by
financing activities (242) 6 -
(Decrease) Increase in cash and
cash equivalents (8) 60 30
Cash and cash equivalents,
beginning of year 90 30 -
Cash and cash equivalents, end of year $ 82 $ 90 $ 30
NOTE 16 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 1995 and 1994 is as follows ($ in thousands
except per share amounts):
Year ended June 30, 1995
June 30, Mar 31, Dec 31, Sept 30,
Statement of Operations
Interest and dividend
income $5,512 $5,103 $4,872 $4,796
Interest expense 2,609 2,423 2,266 2,304
Net interest income 2,903 2,680 2,606 2,492
Provision for loan losses 100 100 100 100
Non-interest income
Securities gains (losses), net - 30 196 -
Gains (losses) on loans, net 24 - - 4
Service fees and other 304 276 291 296
Non-interest expense 2,530 2,300 2,306 2,216
Income before income taxes 601 586 687 476
Income tax (benefit) provision (3,911) 12 13 12
Net income 4,512 574 674 464
Financial Condition
Total assets $308,671 $294,868 $295,627 $310,489
Loans, net 147,899 144,383 140,430 138,226
Allowance for loan losses (5,372) (5,518) (5,418) (5,298)
Securities 127,194 129,268 131,578 149,482
Deposits 252,420 246,798 245,452 233,429
Borrowings 20,499 18,078 21,886 49,857
Shareholders' equity 32,721 26,475 25,565 25,110
Non-performing assets 8,885 10,734 11,081 11,438
Per Share Data
Earnings per share $0.99 $0.13 $0.15 $0.10
Dividends declared per share 0.02 - 0.02 0.02
Book value per share 7.29 5.90 5.70 5.60
Market price: (a)
High 6.250 5.250 5.750 5.750
Low 5.000 4.750 3.875 4.500
Statement of Operations
Interest and dividend income $4,684 $4,292 $4,295 $4,179
Interest expense 2,281 2,094 2,074 2,024
Net interest income 2,403 2,198 2,221 2,155
Provision for loan losses 60 60 28 60
Non-interest income
Securities gains (losses), net (43) 157 168 122
Gains (losses) on loans, net - (53) 52 100
Service fees and other 299 268 250 216
Non-interest expense 2,116 2,092 2,298 2,188
Income before income taxes 483 418 365 345
Income tax (benefit) provision (757) 12 12 13
Net income 1,240 406 353 332
Financial Condition
Total assets $315,159 $323,656 $311,214 $299,816
Loans, net 137,620 139,688 134,594 135,705
Allowance for loan losses (5,246) (5,412) (5,370) (5,333)
Securities 153,746 158,478 146,712 138,791
Deposits 236,182 234,672 234,065 229,347
Borrowings 51,850 59,534 46,156 38,591
Shareholders' equity 25,094 27,098 28,601 29,310
Non-performing assets 13,685 14,687 14,861 14,692
Per Share Data
Earnings per share $0.27 $0.09 $0.08 $0.07
Dividends declared per share - - - -
Book value per share 5.59 6.04 6.38 6.54
Market price: (a)
High 5.000 5.250 6.250 5.000
Low 3.750 3.750 4.250 3.500
NewMil Bancorp, Inc.'s Common Stock, par value $.50 per share ("Common
Stock") trades on the NASDAQ Stock Market under the symbol NMSB. As of
September 1, 1995, there were 1,914 shareholders of record of the
Company's Common Stock.
(a) The above market prices reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent
actual transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures
between the Company and its independent accountants for which a Form 8-K
was required to be filed during the two most recent fiscal years or for
the period from June 30, 1995 to the date hereof.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears on pages 5 through 7 of
the Company's Proxy Statement dated September 20, 1995 for the 1995
Annual Meeting of Shareholders, under the captions "Nominees for
Election for a Three Year Term and Directors Continuing in Office".
Such information is incorporated herein by reference and made a part
hereof.
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 7 through 13 of
the Company's Proxy Statement dated September 20, 1995 for the 1995
Annual Meeting of Shareholders, under the caption "Executive
Compensation". Such information is incorporated herein by reference and
made a part hereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item appears on page 2 and pages 5
through 7 of the Company's Proxy Statement dated September 20, 1995 for
the 1995 Annual Meeting of Shareholders, under the caption "Nominees for
Election for a Three Year Term". Such information is incorporated
herein by reference and made a part hereof.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 14 of the
Company's Proxy Statement dated September 20, 1995 for the 1995 Annual
Meeting of Shareholders, under the caption "Transactions with Management
and Others". Such information is incorporated herein by reference and
made a part hereof.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as exhibits to this report and
appear on the pages indicated.
Financial Statements
None.
(b) Reports on Form 8-K
None.
(c) Exhibits
The following documents are filed as Exhibit to this Form 10-K, as
required by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (No. 33-10693) filed on December 9,
1986)
3.1.1 Amendment to Certificate of Incorporation of the Company
increasing authorized shares of common stock from
6,000,000 to 20,000,000
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4 (No. 33-10693) filed on December 9, 1986)
4.1 Instruments Defining Rights of Security Holders (Included
in Exhibits 3.1 and 3.2)
10.1 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-4 (No.
33-10693) filed on December 9, 1986)
10.2 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan Incentive Stock Option Agreement and Non-
Qualified Stock Option Agreement (incorporated by
reference to the Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan For Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the
Registrant's 1992 Proxy Statement dated
September 22, 1992, pages 17 through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and
American Stock Transfer and Trust Company as Rights Agent
dated as of July 19, 1994 concerning NewMil Bancorp's
shareholder rights plan of same date (incorporated by
reference to the Registrant's 1994 Form 10-K).
10.6 The New Milford Savings Bank 1986 Stock Option Plan and
Incentive as amended at the Company's annual meeting of
Shareholders on October 28, 1994.
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994.
11.1 Statement regarding Computation of Net Income Per Common
Share
18.3 Consent of Coopers & Lybrand
20.1 Proxy Statement dated September 20, 1995 for the Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
21.1 Subsidiaries of the Registrant
(d) Financial Statement Schedules
No financial statement schedules are required to be filed as
Exhibits pursuant to Item 14(d).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NEWMIL BANCORP, INC.
/s/ Anthony J. Nania
Anthony J. Nania
Chairman of the Board and
Chief Executive Officer
September 19, 1995
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated, on the
dates indicated below.
/s/ Anthony J. Nania
Anthony J. Nania
Chairman of the Board and
Chief Executive Officer
September 19, 1995
/s/ Willis H. Barton, Jr.
Willis H. Barton, Jr.
Director
September 19, 1995
/s/ Herbert E. Bullock
Herbert E. Bullock
Director
September 19, 1995
/s/ Laurie G. Gonthier
Laurie G. Gonthier
Director
September 19, 1995
/s/ Dr. John V. Haxo
Dr. John V. Haxo
Director
September 19, 1995
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
September 19, 1995
/s/ Francis J. Wiatr
Francis J. Wiatr
Director and President
September 19, 1995
/s/ Mary C. Williams
Mary C. Williams
Director
September 19, 1995
/s/ B. Ian McMahon
Senior Vice President and
Chief Financial Officer
September 19, 1995