Back to GetFilings.com
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, 1996
[ ] 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)
(860) 355-7600
(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 5, 1996, is $28,869,716. The number of shares of Common Stock
outstanding as of September 5, 1996, is 4,051,890.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated September 23, 1996
for the 1996 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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. . . . . . . . . . . . . . . . . . . . . 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . 39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . 69
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . 70
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 70
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 70
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 70
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 71
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 13 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 1996, 1995 and 1994,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" on pages 21 through 23.
For a table and discussion of an analysis of the effect on net interest
income of volume and rate changes on the Company for 1996 over 1995 and
1995 over 1994, see "Management's Discussion and Analysis of Financial
condition and Results of Operations - Results of Operations" on pages 21
through 23. 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, 1996(a)
U.S. Treasury and Government
U.S Treasury Obligation
After 1 but within 5 years $16,201 $16,201 6.21%
Agency Obligations
After 1 but within 5 years 1,739 1,739 6.58
After 5 but within 10 years 938 938 6.15
Mortgage backed securities 7,771 7,771 7.01
Collateralized mortgage obligations 21,975 21,975 5.36
Federal Home Loan Bank Stock 1,547 1,547 6.00
Total Securities Available-for-sale $50,171 $50,171 5.96
June 30, 1995
U.S. Treasury and Government
Agency Obligations
After 1 but 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
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, 1996(a)
Mortgage backed securities $10,981 $10,758 6.32%
Collateralized mortgage obligations 64,431 62,606 6.24
Total Securities Held-to-maturity $ 75,412 $ 73,364 6.25
June 30, 1995(b)
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 1996 the Company transferred securities with a fair value of
$39,507,000 from held-to-maturity to available-for-sale. This
transfer was in conformity with the Special Report issued by the
Financial Accounting Standards Board, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities".
(b) 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.
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
and 24, "Financial Condition" on pages 33 and 34 and "Note 2 -
Securities" on pages 51 through 53.
Lending Activities
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.
One-to-Four Family Residential Mortgage Loans: The Bank offers a
variety of adjustable rate loans, including a one-year adjustable rate
loan and several adjustable rate loans that have fixed rates for an
initial period ranging from 3 to 10 years and adjust thereafter. The
Bank offers amortization periods of up to 30 years. The Bank's
adjustable rate loans generally have a limit on the maximum rate change
per interest rate adjustment of 2% to 3%, and have limits on the total
interest rate adjustments during the life of a loan ranging from 4.0% to
6.0%, depending on the initial rate and type of loan. The Bank's
adjustable rate loans include loans whose interest rate adjustments are
based on U.S. Treasury constant maturity indices and other indices.
The Bank's initial rates on adjustable rate mortgage loans are offered
at levels which are intended to be competitive within the Bank's service
area and which are frequently at a discount from fully indiced
contractual rates. The Bank charges origination fees ranging from no
fee to several percent, depending on the initial rate and type of loan.
Adjustable rate mortgage loans allow the Bank to maintain a degree of
rate sensitivity, though the extent of this sensitivity is limited by
the repricing intervals and caps contained in each loan type.
The Bank also offers a variety of fixed rate mortgage loans, most of
which are sold by the Bank either at the time of registration or after
closing. The Bank maintains an active secondary market distribution
capability, which allows the Bank to sell mortgages either on a service-
released or service-retained basis, enhancing fee income. The Bank's
residential mortgage loans are underwritten based on the borrower's
income in accordance with secondary market or investor standards. 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.
Collateral and Installment Loans: 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 or a spread over the prime rate.
Home equity loans and lines of credit have risks similar to those
associated with residential mortgages discussed above.
Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also
makes loans secured by mortgages on commercial and multi-family
residential properties. Commercial and multi-family loans are
originated on an adjustable rate basis, generally with a daily repricing
frequency and with the interest adjustment tied to the Prime rate.
Loans may also be structured with fixed rate terms ranging from 1 to 5
years.
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 Loans: The Bank also makes construction loans to
individuals and professional builders for the purpose of constructing 1-
to-4 family residential properties, either as a primary residence or for
investment or resale.
Commercial and Industrial Loans: The Bank offers unsecured commercial
business loans, generally adjustable-rate loans with the adjustment of
interest based on the Prime Rate plus a spread. The Bank believes it
has been conservative in its underwriting standards for this market with
the goal of obtaining quality loans for the portfolio. The Bank also
offers SBA and other Government guaranteed loans. The Bank's loan
products are targeted for, and tailored to the needs of, the local
business and professional community in the Bank's market area.
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 31 through 33.
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):
1996 1995 1994 1993 1992
Real Estate Mortgages:
Residential
1-4 family $ 89,159 $ 98,766 $ 95,176 $ 89,077 $ 75,844
5-more family 3,262 3,171 3,199 7,934 7,906
Commercial 30,408 29,068 23,801 25,519 17,695
Land 9,472 12,067 15,403 17,452 25,685
Home equity credit 14,474 7,785 7,367 6,672 6,456
Total mortgage
loans 146,775 150,857 144,946 146,654 133,586
Commercial and
industrial 6,130 3,201 708 - -
Installment 502 284 256 692 486
Collateral and other 2,156 1,903 1,497 1,782 1,897
Total loans, gross 155,563 156,245 147,407 149,128 135,969
Deferred loan
origination (fees)
costs, net (139) (431) (386) (100) 64
Allowance for loan
losses (4,866) (5,372) (5,246) (5,331) (5,753)
Total loans, net $150,558 $150,442 $141,775 $143,697 $130,280
The following tables reflect the loan portfolio maturity distribution as
of June 30, 1996 (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 $ 3,154 $11,373 $74,632 $ 89,159
5-more family 33 162 3,067 3,262
Commercial 4,157 6,459 19,792 30,408
Land 420 1,589 7,463 9,472
Home equity credit lines 818 5,009 8,647 14,474
Commercial and industrial 274 10 5,846 6,130
Installment 143 85 274 502
Collateral and other 2,156 - - 2,156
Total loans, gross $11,155 $24,687 $119,721 $155,563
The following table shows as of June 30, 1996 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 $12,492 $ 73,513
5-more family residential - 3,229
Commercial 1,445 24,806
Land - 9,052
Home equity credit lines - 13,656
Commercial and industrial - 5,856
Installment 359 -
Collateral and other - -
Total loans, gross $14,296 $130,112
The following table sets forth non-performing loans as of June 30, for
the last five years (in thousands):
1996 1995 1994 1993 1992
Non-accruing loans $3,809 $7,175 $8,325 $11,336 $12,030
Accruing loans past due
90 days or more 166 34 379 329 78
Accruing restructured
loans 281 - - - 388
Total non-performing
loans $4,256 $7,209 $8,704 $11,665 $12,496
For information on the reduction in interest income associated with non-
accrual loans as of June 30, 1996 see "Note 4 - Non-Performing Assets"
on pages 54 and 55. 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 page 48. 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" on page 33.
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):
1996 1995 1994 1993 1992
Balance at beginning of
period $5,372 $5,246 $5,331 $5,753 $4,006
Provision for loan losses 400 400 208 450 11,036
Charge-offs:
Real estate mortgages 884 294 294 835 9,287
Commercial and industrial 30 - - - -
Consumer loans 5 1 14 44 7
Total charge-offs 919 295 308 879 9,294
Recoveries:
Real estate mortgages 10 20 4 1 -
Commercial and industrial - - - - -
Consumer loans 3 1 11 6 5
Total recoveries 13 21 15 7 5
Net charge-offs 906 274 293 872 9,289
Balance at end of period $4,866 $5,372 $5,246 $ 5,331 $5,753
Ratio of net-charge-offs
to average loans
outstanding 0.59% 0.19% 0.21% 0.64% 6.30%
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 25 and 26.
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.
1996 1995
Allowance Loans(a) Allowance Loans(a)
Real Estate Mortgages
1-4 family residential $1,258 57.31% $1,466 64.26%
5-more family residential 290 2.10 725 2.06
Commercial 1,942 19.55 1,865 18.91
Land 512 6.09 781 6.20
Home equity credit lines 147 9.30 83 5.06
Total mortgage loans 4,149 94.35 4,920 96.49
Commercial and industrial 139 3.94 71 2.08
Installment 12 0.32 6 0.18
Other 0 1.39 0 1.25
Unallocated 566 - 375 -
Total allowance $4,866 100.00 $5,372 100.00
1994
Allowance Loans(a)
Real Estate Mortgages
1-4 family residential $1,684 66.23%
5-more family residential 756 2.23
Commercial 1,439 16.43
Land 1,220 8.25
Home equity credit lines 97 5.15
Total mortgage loans 5,196 98.29
Commercial and industrial 6 0.49
Installment 5 0.18
Other 0 1.04
Unallocated 39 -
Total allowance $5,246 100.00
(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 21 through 23.
Certificate of deposits with balances of $100,000 and greater amounted
to $8,458,000 and $8,239,000 at June 30, 1996 and 1995, respectively.
The following table shows the scheduled maturities of certificates of
deposit with balances in excess of $100,000 as of June 30, 1996 (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 $2,500 $2,420 $3,538 $8,458
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 pages 18 and 19.
Short-term Borrowings
For the information required by this item see "Note 6 - Short Term
Borrowed Funds" on page 56.
Competition
The Bank faces strong competition in attracting and retaining deposits
and in making mortgage and other loans. 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 originations
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,
Connecticut experienced a severe recession in 1989 and the early 1990's.
Although some economic stabilization has occurred, Connecticut as a
whole continues to be negatively affected by corporate downsizing,
defense reductions, and corporate consolidations. Real estate values,
particularly commercial real estate values, declined substantially and
have not recovered completely. During the past four fiscal years the
Company has worked to reduce non-performing assets, resulting from these
conditions, and has improved the credit quality of its loan portfolio.
However, should the general economic recovery stall, or reverse, the
Company's operations could be negatively impacted by adverse economic
conditions.
The Bank is regulated by the FDIC and the Connecticut Banking
Department. New Federal and State legislation and regulations are
adopted from time to time which have and may continue to have profound
affects on the Bank's operations. Federal legislation and regulations
in recent years has focused on capitalization, safety and soundness and
deposit insurance, and in providing federal regulators with additional
enforcement powers to address perceived problems with banking
institutions and individuals closely associated with them. Banks which
are weakly capitalized or which have safety and soundness problems are
likely to pay deposit insurance rates which are higher (in some cases
substantial) than healthier banks. The recent legislation and
regulations are not anticipated to have a significant impact on the
Bank.
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
Federal Bank Holding Company 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 focused on, among other things, the
protection of depositors' funds.
Connecticut Savings Bank Regulation: 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.
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 37 and 38. Such
information is incorporated herein by reference and made a part hereof.
Employees
The Bank, which had 112 full-time and 14 part-time employees at June 30,
1996, conducts its banking operations through 13 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, 1996, 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 12 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, 1996.
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 2000
Sherman Routes 37 & 39, Sherman, CT 1976 Leased 1997
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 ---
Winsted Edwards Supermarket
Route 44, Winsted, CT 1996 Leased 1999
(a) The information concerning the Bank's lease payments see Note 12 on
page 64.
(b) The Bank owns an additional building on this site which is leased
at an annual rent of $10,176.
(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 1996, 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 15 - Quarterly
Financial Data (unaudited)" on pages 69 and 70. 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 pages 37 and
38.
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.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
At or for the years ended June 30,
1996 1995 1994 1993 1992
Statement of Income
Interest and
dividend income $21,837 $20,283 $17,450 $16,978 $22,946
Interest expense 10,438 9,602 8,473 8,466 15,675
Net interest income 11,399 10,681 8,977 8,512 7,271
Provision for loan
losses 400 400 208 450 11,036
Non-interest income
Securities gains, net 27 226 404 2,453 2,569
Losses on interest
rate swaps, net - - - (804) (1,462)
Income from call
option sales - - - - 612
Gains on loans, net 10 28 99 101 -
Service fees and other 1,218 1,167 1,033 760 573
Non-interest expense 8,465 9,352 8,694 9,222 9,038
Income (loss) before
income taxes 3,789 2,350 1,611 1,350 (10,511)
Income tax expense
(benefit) 1,547 (3,874) (720) 23 (1,108)
Net income (loss) 2,242 6,224 2,331 1,327 (9,403)
Financial Condition
Total assets $309,363 $308,671 $315,159 $287,986 $266,358
Loans, net 150,558 150,442 141,775 143,697 130,280
Allowance for loan
losses 4,866 5,372 5,246 5,331 5,753
Securities 125,583 127,194 153,746 120,709 105,556
Deposits 259,267 252,420 236,182 228,090 238,471
Borrowings 14,776 20,499 51,850 28,000 -
Shareholders' equity 31,892 32,721 25,094 29,005 25,593
Non-performing assets 6,480 8,885 13,685 14,771 15,538
Per Share Data
Earnings (loss) $0.50 $1.37 $0.52 $0.30 $(2.10)
Cash dividends 0.17 0.06 - - -
Book value 7.84 7.29 5.59 6.47 5.71
Statistical Data
Net interest margin 4.01% 3.70% 3.10% 3.52% 2.58%
Efficiency ratio 66.90 77.28 82.70 83.67 94.51
Effective tax rate 40.83 (164.85) (44.69) 1.70 10.54
Return on average assets 0.75 2.08 0.76 0.51 (3.17)
Return on average
shareholders' equity 6.71 23.75 8.16 4.95 (29.44)
At or for the years ended June 30,
1996 1995 1994 1993 1992
Statistical Data -
continued
Dividend payout ratio 34.00 4.38 - - -
Allowance for loan
losses to total loans 3.13 3.45 3.57 3.58 4.23
Non-performing assets
to total assets 2.09 2.88 4.34 5.13 5.83
Tier 1 leverage capital 10.39 10.58 8.94 10.19 9.25
Total risk-based capital 20.98 21.36 21.90 22.39 20.33
Average shareholders'
equity to average
assets 11.22 8.74 9.30 10.28 10.77
Weighted average equivalent
shares outstanding,
primary 4,505 4,544 4,511 4,488 4,484
Shares outstanding
at June 30 (excluding
Treasury stock) 4,070 4,491 4,486 4,484 4,484
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
NewMil Bancorp, Inc. (the "Company"), a Delaware corporation, is a bank
holding company for New Milford Savings Bank (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the
"FDIC") insured savings bank headquartered in New Milford, Connecticut.
The principal business of the Company consists of the business of the
Bank. The Bank is engaged in customary banking activities, including
general deposit taking and lending activities, and conducts its business
from thirteen offices in Litchfield and northern Fairfield Counties.
The Company and the Bank were formed in 1987 and 1858, respectively.
OVERVIEW
The Company earned net income of $2,242,000, or $0.50 per share, for the
year ended June 30, 1996, compared with net income of $6,224,000, or
$1.37 per share, for fiscal year 1995. Net income before income taxes
grew 61% in 1996 to $3,789,000, up from $2,350,000 in 1995. The growth
in pre-tax earnings reflects significantly improved core earnings driven
by an increased net interest margin (4.01% for 1996 versus 3.70% for
1995) and decreased operating expenses, principally collection expenses
and FDIC insurance premiums. The Company returned to a fully-taxable
reporting basis on July 1, 1995 following the recognition of
substantially all of its deferred tax asset at June 30, 1995. Net
income for 1996 included an income tax provision of $1,547,00, or 41%,
as compared to a tax benefit of 3,874,000 for the prior year.
The Company has achieved a steady improvement in core earnings over the
past three years. The core earnings improvement can be attributed to a
continuing strategy which includes refining both the mix and the quality
of the Company's assets, controlling operating expenses, and reducing
non-performing assets. With a loan to deposit ratio of only 58% at June
30, 1996, the Company has ample opportunity to continue to refine its
product mix.
During 1996 deposits grew 2.7% to $259.3 million, and non-performing
assets declined 27.1% to $6.5 million, or 2.09% of assets, while net
loans remained flat, at $150.6 million at June 30, 1996. Book value per
share increased 7.5% to $7.84 at June 30, 1996, after cash dividends of
$.17, representing a 34% payout ratio. In addition, during 1996 the
Company repurchased 10% of its outstanding shares of common stock. In
July 1996 the Company announced its intentions to repurchase up to
another 10% of its outstanding shares of common stock over the next
twelve month period. At June 30, 1996 the Company's tier 1 leverage and
total risk-based capital ratios were 10.39% and 20.98%, 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 1996 and 1995
Analysis of Net Interest and Dividend Income
Net interest income grew $718,000, or 6.7%, to $11,399,000 in 1996 from
$10,681,000 in 1995. This increase resulted from a 31 basis point
increase in net interest margin, to 4.01% from 3.70%, while total
average earning assets decreased $4,802,000, or 1.7%. The improvement
in net interest margin was driven by changes in asset mix , the
reduction in non-performing assets, and the benefit from higher interest
rates on the Company's earning assets which repriced upwards more than
deposit liabilities. The change in asset mix was achieved through both
loan growth and refinements in loan mix, 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 each of the past three years.
Year ended June 30, 1996 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $153,024 $13,919 9.10%
Mortgage backed securities 21,752 1,332 6.12
Other securities (b) 109,165 6,586 6.03
Total earning assets 283,941 21,837 7.69
Other assets 13,756
Total assets $297,697
NOW accounts $23,032 343 1.49
Money market accounts 61,011 1,852 3.04
Savings & other 39,676 1,041 2.62
Certificates of deposit 122,118 6,744 5.52
Total interest-bearing deposits 245,837 9,980 4.06
Borrowings 7,973 458 5.74
Total interest-bearing funds 253,810 10,438 4.11
Demand deposits 8,964
Other liabilities 1,515
Shareholders' equity 33,408
Total liabilities and
shareholders' equity $297,697
Net interest income $11,399
Spread on interest-bearing funds 3.58
Net interest margin (c) 4.01
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 1,548 5.36
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 1,617 3.68
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
(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, 1996 versus 1995
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
Interest-earning assets:
Loans $ 599 $ 1,288 $ 65 $1,952
Mortgage backed securities (565) 235 (77) (407)
Other securities (96) 107 (2) 9
Total (62) 1,630 (14) 1,554
Interest-bearing liabilities:
Deposits 777 972 177 1,926
Borrowings (1,121) 110 (79) (1,090)
Total (344) 1,082 98 836
Net change to interest income $ 282 $ 548 $(112) $ 718
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 (252) (69)
Total (278) 1,626 (219) 1,129
Net change to interest income $ 709 $1,029 $ (34) $1,704
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 $1,554,000, or 7.7%, to
$21.8 million in 1996 from $20.3 million in 1995. Loan income increased
$1,952,000, or 16.3%, as a result of changes in loan mix, higher volume
and higher yields. The increase in the average loan yield resulted
primarily from upward portfolio repricing due to higher interest rates,
which affected new loan rates, the repricing of floating rate loans,
and, to a lesser extent, a change in loan mix as the Company increased
its originations of Prime based commercial loans. Average loans grew
$7.3 million, or 5.0%, to $153.0 million in 1996 as compared with 1995.
Interest and dividends from securities and federal funds decreased
$398,000, or 4.8%, in 1996 as a result of a lower volume despite a
higher yield. Average securities declined $12.1 million, or 8.5%, to
$130.9 million in 1996 as a result of sales and principal payments.
Average yield increased primarily as a result of the upward repricing of
floating rate securities. Portfolio reinvestments were minimal during
1996 as the Company downsized the securities portfolio to fund loan
growth and repay borrowings.
Interest Expense
Interest expense increased $836,000, or 8.7%, to $10.4 million in 1996
primarily as a result of higher costs on deposits and borrowings, offset
in part by lower borrowings. Deposit expense increased $1,926,000, or
23.9%, as a result of a 65 basis point increase in the average cost of
interest-bearing deposits (to 4.06% from 3.41%) and an increase of $9.7
million, or 4.1%, in average interest-bearing deposits. The increase in
deposit costs resulted from higher interest rates and a change in
deposit mix resulting from transfers from money market and savings
accounts into certificates of deposit. The change in deposit mix was
caused by an increased yield differential between money market accounts
and certificates of deposit. Deposit growth was concentrated in
certificates of deposit, NOW and demand deposit accounts. Interest
expense on borrowings decreased $1,090,000 as a result of a decrease in
average borrowings, down $20.9 million, or 72.4%, offset by higher
borrowing rates. The Company's borrowings are short term and rates
generally follow the one-month LIBOR index.
Provision and Allowance for Loan Losses
The Company provided $400,000 for loan losses in 1996, unchanged from
1995. The stable provision reflects the Company's resolve to provide
for modest loan growth and improve loan quality. Changes in the
allowance for loan losses are as follows:
Years ended June 30, 1996 1995 1994
(dollars in thousands)
Balance, beginning of year $5,372 $5,246 $5,331
Provision for losses 400 400 208
Charge-offs (919) (295) (308)
Recoveries 13 21 15
Balance, end of year $4,866 $5,372 $5,246
Ratio of allowance for loan losses:
to non-performing loans 114.3% 74.5% 60.3%
to total gross loans 3.1 3.4 3.6
Loan loss provision to average loans 0.3 0.3 0.1
Net charge-offs to average loans 0.6 0.2 0.2
The Company's allowance for loan losses is strong as compared against
both total loans and non-performing loans. During the past year non-
performing loans decreased $3.0 million, or 41.0%. As a result of this
decrease the reserve coverage to non-performing loans increased to
114.3%. Past due performing loans (accruing loans 30-89 days past due)
have remained relatively stable throughout fiscal year 1996, and
averaged 1.9% of gross loans for the year. Loan charge-offs in 1996
included several losses that had been reserved for in prior years. For
a discussion of non-performing loans see "Asset Quality and Portfolio
Risk".
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, 1996, 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 Federal Deposit Insurance
Corporation in April 1996 and no additions to the allowance were
requested as a result of this examination.
Non-Interest Income
Non-interest income decreased $166,000, or 11.7%, to $1,255,000 in 1996
from $1,421,000 in 1995. The principal categories of non-interest
income are as follows:
Years ended June 30, 1996 1995 Change
(in thousands)
Service charges on
deposit accounts $ 830 $ 779 $ 51 6.5%
Securities gains, net 27 226 (199) (88.1)
Gains on loans, net 10 28 (18) (64.3)
Loan servicing 123 126 (3) (2.4)
Other 265 262 3 1.1
Total non-interest income $1,255 $1,421 $(166) (11.7)%
The increase in service charges on deposit accounts in 1996 resulted
from increased ATM fee income in 1996 due to higher transaction volume.
The net securities gains in 1996 and 1995 were realized on sales of
available-for-sale securities of $21.6 million and $20.7 million,
respectively. Gains on loans resulted from loan sales in 1996 and 1995
of $882,000 and $703,000, respectively. The Company has recently
expanded its residential mortgage operations with the objective of
generating fee income from pre-arranged service-released lending
activities. The decrease in loan servicing fees in 1996 resulted from
a decrease in the mortgage servicing portfolio in 1996. At June 30,
1996 the loan servicing portfolio totaled $31.2 million, down from $34.6
million at June 30, 1995. Other fee income, principally safe deposit
box fees and other miscellaneous income, increased slightly in 1996 as
compared with 1995.
Operating Expenses
Operating expenses decreased $887,000, or 9.5%, in 1996 primarily as a
result of significant decreases in both collection expenses and FDIC
insurance assessments. The principal categories of operating expenses
are as follows:
Years ended June 30, 1996 1995 Change
(in thousands)
Salaries $3,422 $3,295 $127 3.9%
Employee benefits 854 841 13 1.6
Occupancy 773 731 42 5.7
Equipment 584 543 41 7.6
Collections and REA 528 1,418 (890) (62.8)
Professional services 412 293 119 40.6
Postage and telecommunications 284 306 (22) (7.2)
Marketing 234 236 (2) (0.9)
Service bureau 157 156 1 0.6
Insurance 123 695 (572) (82.3)
Other operating 1,094 838 256 30.5
Total operating expenses $8,465 $9,352 $(887) (9.5)%
The increase in salaries in 1996 was due primarily to changes in
staffing levels and annual salary increases. Benefits expense increased
slightly as a result of higher taxes offset by lower health benefits
expense. The increase in occupancy expense was due principally to
higher utility expense and building maintenance as a result of the
harsher winter of 1995-1996. Equipment expense increased in 1996
primarily as a result of increased depreciation expense from equipment
purchases. 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 1996 results from the
Company's continuing effort to resolve its non-performing assets. For
a discussion of non-performing assets see "Asset Quality and Portfolio
Risk". Professional services increased primarily as a result of
increased legal services, consulting fees related to the opening of the
supermarket branch, and other corporate matters. The decrease in
insurance expense resulted from the virtual elimination of FDIC
insurance assessments to the Company. All other operating expenses,
including marketing, shareholder relations, office and other, increased
$255,000 or 20.7% in 1996. This increase is attributed principally to
increased lending activity, various deposit and loan marketing
promotions and other changes in operating activities.
During 1996 the Company's efficiency ratio, being the ratio between
operating expense and net interest and dividend income plus non-interest
income, averaged 66.9%, compared with 77.3% in 1995. This significant
improvement resulted from both the increase in net interest income and
decrease in operating expenses. Excluding collections and real estate
acquired expense the ratios were 62.7% and 65.6% for 1996 and 1995,
respectively.
Income Taxes
The Company returned to a fully-taxable reporting basis on July 1, 1995
following the recognition of substantially all of its deferred tax asset
at June 30, 1995. Net income for 1996 included an income tax provision
of $1,547,000, or 41%, as compared with an income tax benefit of
3,874,000 for 1995.
In 1995 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. In 1995, the Company
also recognized an additional deferred tax benefit reflected by a
$1,678,000 adjustment to shareholders' equity to record the tax effect
of unrealized securities gains and losses reported in shareholders'
equity. For further information on income taxes see Note 7 of Notes to
Consolidated Financial Statements.
Comparison between 1995 and 1994
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 deferred tax asset valuation allowance. 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 resulted from significantly
improved core earnings driven by an increase in the Company's net
interest margin which averaged 3.70% for 1995, up from 3.10% for 1994.
Analysis of Net Interest 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 higher interest rates
on the Company's earning assets, which repriced upwards more than
deposit liabilities, a change in asset mix and a 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.
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. 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. 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.
Provision and Allowance for Loan Losses
The Company provided $400,000 for loan losses in 1995, up 92% from a
provision of $208,000 in 1994. The higher provision reflected 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.
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 principal categories of non-interest
income are as follows:
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)%
The increase in service charges on deposit accounts resulted from
pricing increases, new service fees, the introduction of the ATM network
during 1994 and increased customer activity. The net securities gains
in 1995 and 1994 were realized on sales of available-for-sale securities
of $20.7 million and $54.6 million, respectively. Loan sales in 1995
totaled $703,000 as compared with $19.6 million 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 remained unchanged.
Operating Expenses
The principal categories of operating expenses are as follows:
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
Professional services 293 316 (23) (7.3)
Postage and telecommunications 306 278 28 10.1
Marketing 236 183 53 29.0
Other operating 994 779 215 27.6
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. 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. The increase in 1995 collections and REA expense reflects the
Company's continued effort to resolve its non-performing assets. 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 $174,000
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.
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. 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. 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.
ASSET QUALITY AND PORTFOLIO RISK
Non-performing assets
During 1996 non-performing assets decreased $2.4 million, or 27.1%, to
$6.5 million at June 30, 1996, 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) 1996 1995
Balance, beginning of year $ 8,885 $13,685
Loans placed on non-accrual status 2,728 2,524
Change in accruing loans past
due 90 or more days, net 132 (346)
Change in accruing loans
restructured, net 281 -
Payments to improve REA 723 1,320
Loan payments (713) (817)
Loans returned to accrual status (332) (240)
Loan charge-offs (918) (295)
REA provision and recoveries (262) (621)
Gross proceeds from REA sales (4,432) (6,734)
Gains on REA sales, net 388 409
Balance, end of year $ 6,480 $ 8,885
Percent of total assets 2.09% 2.88%
The following table details the composition of non-performing assets as
of the periods presented.
Non-Performing Assets Accruing Total
(dollars in thousands) loans non-
Non- past due Restruc- Real perform-
accrual 90 or tured Estate ing
loans more days loans Owned assets
June 30, 1996
Real estate:
Residential $1,974 $166 $ - $ 984 $3,124
Commercial 335 - 281 899 1,515
Land and land
development 1,500 - - 815 2,315
Valuation reserve - - - (474) (474)
Totals $3,809 $166 $281 $2,224 $6,480
June 30, 1995
Real estate:
Residential $2,933 $34 $ - $ 198 $3,165
Commercial 958 - - 349 1,307
Land and land
development 3,279 - - 1,442 4,721
Collateral and
installment loans 5 - - - 5
Valuation reserve - - - (313) (313)
Totals $7,175 $34 $ - $1,676 $8,885
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. Included in land and land
development real estate owned is a 34-lot residential sub-division with
a carrying value of $491,000 which the Company is developing and
marketing under a joint venture with a residential construction firm.
To date the Company has sold 16 building lots in addition to building
and selling 3 houses. The Company expects to recover its carrying value
and any future site development costs through sales of lots over the
next two years. The Company actively markets all real estate owned and
in 1996 sold $4.4 million of real estate from which net gains of
$388,000 were realized. During 1996 the Company provided $212,000 to
the REA valuation reserve, had recoveries of $50,000 and charged-off
$101,000 against the reserve. At June 30, 1996 the REA valuation
reserve totaled $474,000, or 17.6% 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, 1996 and 1995, been current in
accordance with their original terms, gross interest income of $385,000
and $417,000 would have been recorded in net income for 1996 and 1995,
respectively. The amount of interest on these loans that was included
in income was $96,000 and $116,000 in 1996 and 1995, respectively.
FINANCIAL CONDITION
At June 30, 1996 total assets, net loans and securities were
substantially unchanged as compared with June 30, 1995. However, the
considerable improvement in the Company's net interest margin in 1996
over 1995 (4.01% for 1996 versus 3.70% for 1995) resulted, in large
part, from the Company's continuing strategy to refine both the mix and
quality of its earning assets, and reduce non-performing assets.
Loans
The principal categories of the loan portfolio are as follows:
June 30, (in thousands) 1996 1995
Real estate mortgages
One-four family residential $ 89,159 57.3% $ 98,766 63.2%
Five or more family residential 3,262 2.1 3,171 2.0
Commercial 30,408 19.6 29,068 18.6
Land and land development 9,472 6.1 12,067 7.7
Commercial and industrial 6,130 3.9 3,201 2.1
Home equity lines of credit 14,474 9.3 7,785 5.0
Installment and other 2,658 1.7 2,187 1.4
Total loans, gross $155,563 100.0 $156,245 100.0
Since its formation in 1994, the Commercial Lending department has
focused on lending to small businesses with annual sales of up to $20
million, as well as to medical professionals and those companies that
can benefit from the Company's considerable expertise with government-
guaranteed lending programs. In addition to normal portfolio lending,
the Residential Mortgage Department has recently expanded its secondary
market distribution capability, which allows the Company the flexibility
to sell mortgages on a service-released basis. Between its portfolio
products and secondary market products, the Company now has one of the
most comprehensive product lines of any institution in northwest
Connecticut.
Securities
The principal categories of the securities portfolio are as follows
(including both available-for-sale and held-to-maturity):
June 30, (in thousands) 1996 1995
U.S. Treasury notes $ 16,201 12.9% $ - -
U.S. Government Agency notes 2,677 2.2 1,933 1.5%
Collateralized mortgage obligations 86,406 68.8 99,321 78.1
Mortgage Backed securities 18,752 14.9 24,394 19.2
Federal Home Loan Bank stock 1,547 1.2 1,547 1.2
Total securities $125,583 100.0 $127,194 100.0
At June 30, 1996 55.5% of the portfolio was invested in fixed rate
securities, 42.9% in adjustable rate securities and 1.6% in Federal Home
Loan Bank stock. Fixed rate securities include US Treasury and agency
obligations, CMOs and MBSs. The fixed rate portfolio had a consensus
weighted average duration and life of 2.6% and 3.1 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. Floating rate securities, which include CMOs and MBSs
which generally reprice monthly based on pre-determined spreads to
various underlying indices, subject to life-time caps and floors, had a
consensus weighted average duration and life of 0.1% and 14.7 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. All floating rate securities are
match funded with core deposits.
During 1996 the Company transferred securities with a fair value of
$39.5 million from held-to-maturity to available-for-sale. This
transfer was in conformity with the Special Report issued by the
Financial Accounting Standards Board, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". This one-time transfer, which included $29.2 million in
floating rate securities and $11.3 million in fixed rate securities,
will enable the Company to more prudently react to market and rate
fluctuations, and future liquidity needs. At June 30, 1996, securities
totaling $75.4 million, or 60.0%, were classified held-to-maturity and
securities totaling $50.2 million, or 40.0%, were classified available-
for-sale.
Substantially all of the Company's MBS and CMO securities were purchased
in 1993 and early 1994. Subsequent movements in interest rates and
market conditions through June 30, 1996 have resulted in a decline in
fair market value. At June 30, 1996 net unrealized losses for all
available-for-sale and held-to-maturity securities, being the difference
between current fair market value and amortized cost, totaled $5.0
million. No credit losses are anticipated and all unrealized gains and
losses are expected to reverse as securities approach maturity. Short-
term 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
For the fiscal year, ended June 30, 1996, total deposits increased $6.8
million, or 2.7%, while borrowings decreased $5.7 million, or 27.9%.
The Company experienced a shift in its deposit mix during 1996, due in
part to the continuing wide interest rate differential between
certificate of deposit and money market and savings rates which has
prevailed over the past two years. Certificates of deposit increased
$3.5 million, or 3.0%, NOW accounts increased $3.7 million, or 17.0% and
demand deposits increased $2.5 million, or 30.7%. These increases were
offset by decreases in savings and money market of $818,000 and $2.1
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 primary 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
sales of loans and available-for-sale securities.
Operating activities in 1996 provided net cash flows of $4.9 million, up
from $3.2 million in 1995 as a result of improved core earnings. During
1996 investing activities provided net cash of $1.1 million principally
from securities principal repayments, sales of available-for-sale
securities and sales of REA, offset in part by net loan advances and
security purchases. Funds provided by investing and operating
activities, together with a $6.9 million net increase in deposits, were
used to reduce short term borrowings by $5.7 million, pay dividends to
shareholders, purchase $3.2 million of treasury stock and increase cash
and cash equivalents by $3.3 million.
During 1995, operating activities 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.
At June 30, 1996, 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 $193.3
million, to net deposits and short term unsecured liabilities, was
68.5%, well in excess of the Company's minimum guideline of 15%. At
June 30, 1996, the Company had outstanding commitments to fund new
mortgage loan originations of $6.3 million, construction mortgage
commitments of $33,000 and unused lines of credit of $13.3 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, 1996, 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, 1996 Within Within Non-
(in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
ASSETS
Securities $ 56,665 $ 6,231 $46,322 $19,307 $ - $128,525
Federal funds sold 10,960 - - - - 10,960
Loans 92,660 36,651 15,794 6,510 3,809 155,424
Other assets - - - - 14,454 14,454
Total assets 160,285 42,882 62,116 25,817 18,263 $309,363
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - - - 10,750 10,750
NOW accounts 25,653 - - - - 25,653
Money market 60,945 - - - - 60,945
Savings and other 40,531 - - - - 40,531
Certificates of
deposit 62,425 30,113 28,850 - - 121,388
Securities sold
under repurchase
agreements 14,776 - - - - 14,776
Other liabilities - - - - 3,428 3,428
Stockholders'
equity - - - - 31,892 31,892
Total sources
of funds 204,330 30,113 28,850 - 46,070 $309,363
Cumulative
interest-rate
sensitivity
gap $(44,045) $(31,276) $ 1,990 $27,807 $ -
Percent of
total assets (14.2%) (10.1%) 0.6% 9.0% -
The Company maintains a relatively balanced position for managing
interest rate risk and, at June 30, 1996, its one year cumulative gap
was -$31.3 million, or 10.1% of assets. A liability sensitive gap
implies that the Company's net interest margin could be adversely
affected by a sudden increase in interest rates.
During the past year the Company's net interest margin increased 31
basis points as compared with 1995, driven in part by the benefit, over
the past year, from higher interest rates on the Company's adjustable
rate assets which have repriced more quickly than deposit liabilities.
The Company's deposit rates, in particular savings and money market
rates, have not repriced over the past year and this together with the
refinements in asset mix, has been a principal contributor to the
increase in the Company's net interest margin.
The Company structures its loan and securities portfolios to provide for
portfolio repricing consistent with its interest rate risk objectives.
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.
CAPITAL RESOURCES
During 1996 shareholders' equity decreased 2.5% to $31.9 million, as a
result of the Company's stock buy-back program, while book value
increased 7.5% to $7.84, at June 30, 1996. The change in shareholders'
equity resulted primarily from the repurchase of 10% of the Company's
shares of common stock and the payment of cash dividends of $.17 per
share, a 34% payout ratio, offset by earnings of $2,242,000, or $0.50
per share, $127,000 from the exercise of stock options and reissuance of
Treasury Stock, and a $752,000 decrease in the adjustment to
shareholders equity for net unrealized securities losses reported in
shareholders equity. Shareholders' equity at June 30, 1996 included an
adjustment, net of taxes, for unrealized holding losses of $1,255,000 on
securities transferred from available-for-sale to held-to-maturity and
net unrealized holding losses of $511,000 on securities available-for-
sale.
In October 1994 the Company resumed dividend payments with the payment
of a $.02 quarterly cash dividend, following a four year lapse. In
October 1995 the Company increased its quarterly cash dividend to $.05.
For 1996 total dividends of $0.17 per share were declared and paid.
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, 1996 the Company's leverage capital ratio was
10.39% and its tier I and total risk-based capital ratios were 19.70%
and 20.98%, respectively. At June 30, 1996 the Bank's leverage capital
ratio was 10.04% and its tier I and total risk-based capital ratios were
19.06% and 20.33%, 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, 1996 is $6,241,000. In some instances, further
restrictions on dividends may be imposed on the Company by the FRB.
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 continued 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 March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"), which the Company will adopt on July 1, 1996.
SFAS 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The adoption of this
standard is not expected to have a material impact on the Company's
financial condition or its 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.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 establishes financial accounting and reporting
standards for stock-based compensation plans. SFAS 123 defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However,
SFAS 123 also allows the Company to continue to measure compensation
costs for stock-based compensation plans using the intrinsic value based
method of accounting prescribed by APB No. 25, "Accounting for Stock
Issued to Employees" and make pro forma disclosure of net income and
earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The Company has elected not to
adopt the accounting requirements of SFAS 123 and continue to account
for stock-based compensation plans in accordance with APB No. 25. The
Company's fiscal 1997 financial statements will include the pro forma
disclosure requirements of SFAS 123.
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The Company will
be required to adopt SFAS 125 for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31,
1996, on a prospective basis. The adoption of this standard is not
expected to have a material impact on the Company's financial condition
or its 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,
1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. 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, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended June 30, 1996 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
July 19, 1996
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,
1996 1995
ASSETS
Cash and due from banks $ 6,630 $ 5,791
Federal funds sold 10,960 8,500
Securities
Available-for-sale at market 50,171 7,102
Held-to-maturity at amortized
cost (fair value: $73,364 and $119,948) 75,412 120,092
Loans (net of allowance for loan losses:
$4,866 and $5,372) 150,558 150,442
Real estate acquired (net of valuation
reserve: $474 and $313) 2,224 1,676
Bank premises and equipment, net 6,219 6,125
Accrued income 1,874 1,918
Deferred tax asset, net 4,612 6,397
Other assets 703 628
Total Assets $309,363 $308,671
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 10,750 $ 8,224
NOW accounts 25,653 21,921
Money market 60,945 63,059
Savings and other 40,531 41,349
Certificates of deposit 121,388 117,867
Total deposits 259,267 252,420
Securities sold under repurchase agreements 14,776 15,499
FHLB advances - 5,000
Accrued interest and other liabilities 3,428 3,031
Total Liabilities 277,471 275,950
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,987,388 and 5,965,888 2,994 2,983
Paid-in capital 44,189 44,145
Retained earnings 5,413 3,915
Net unrealized holding (losses) gains on
securities available-for-sale, net of taxes (511) 91
Net unrealized holding losses on
securities transferred to held-to-
maturity, net of taxes (1,255) (2,609)
Treasury stock, at cost: 1,917,498 and
1,474,409 shares (18,938) (15,804)
Total Shareholders' Equity 31,892 32,721
Total Liabilities and Shareholders' Equity $309,363 $308,671
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Years ended June 30,
1996 1995 1994
Interest and dividend income
Interest and fees on loans $13,919 $11,967 $10,623
Interest and dividends on securities 7,655 8,247 6,742
Interest on federal funds sold 263 69 85
Total interest and dividend income 21,837 20,283 17,450
Interest expense
Deposits 9,980 8,054 6,856
Borrowed funds 458 1,548 1,617
Total interest expense 10,438 9,602 8,473
Net interest and dividend income 11,399 10,681 8,977
Provision for loan losses 400 400 208
Net interest and dividend income
after provision for loan losses 10,999 10,281 8,769
Non-interest income
Service charges on deposit accounts 830 779 652
Securities gains, net 27 226 404
Loan servicing fees 123 126 119
Gains on mortgage loans, net 10 28 99
Other 265 262 262
Total non-interest income 1,255 1,421 1,536
Non-interest expense
Salaries 3,422 3,295 2,916
Employee benefits 854 841 840
Occupancy 773 731 788
Equipment 584 543 571
Insurance 123 695 684
Collections and real estate acquired 528 1,418 1,339
Professional services 412 293 316
Marketing 234 236 183
Other 1,535 1,300 1,057
Total non-interest expense 8,465 9,352 8,694
Income before income taxes 3,789 2,350 1,611
Income tax provision (benefit) 1,547 (3,874) (720)
Net income $ 2,242 $ 6,224 $ 2,331
Earnings per share $0.50 $1.37 $0.52
Dividends per share $0.17 $0.06 $0.00
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Net un-
realized
Retained gains
earnings (losses) on Total
(accumu- Trea- securit- share-
Common Stock Paid-in lated sury ies net holders'
Shares Amount capitaldeficit) stock of taxes equity
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
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY - continued
(dollars in thousands)
Net un-
realized
Retained gains
earnings (losses) on Total
(accumu- Trea- securit- share-
Common Stock Paid-in lated sury ies net holders'
Shares Amount capitaldeficit) stock of taxes equity
Net income for
year - - - 2,242 - - 2,242
Proceeds from
exercise of
stock options 21,500 11 76 - - - 87
Cash dividends
declared - - - (744) - - (744)
Acquisition
of treasury
stock - - - - (3,206) - (3,206)
Proceeds from
issuance of
Treasury Stock - - (32) - 72 - 40
Change in net
unrealized gains
losses on securities,
net of taxes - - - - - 752 752
Balances at
June 30, 1996 5,987,388 $2,994$44,189 $ 5,413 $(18,938) $(1,766)$31,892
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years ended June 30,
1996 1995 1994
Operating Activities
Net income $ 2,242 $6,224 $2,331
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 400 400 208
Provision for losses on
real estate acquired 212 621 450
Provision for depreciation and
amortization 563 522 444
Decrease (increase) in deferred
income tax asset 1,284 (5,597) (800)
Amortization and accretion of securities
premiums and discounts, net 304 539 1,605
Securities gains, net (27) (226) (404)
Realized gains on loan sales, net (10) (28) (99)
Realized gains on sales of real
estate acquired, net (388) (409) (51)
Decrease in mortgage loans
held for sale - 130 2,351
Decrease (increase) in accrued income 45 (31) 169
Increase (decrease) in accrued interest
and other liabilities 351 989 (851)
(Increase) decrease in other
assets, net (75) 88 (167)
Net cash provided by
operating activities 4,901 3,222 5,186
Investing Activities
Proceeds from sales of securities
available-for-sale 20,625 6,684 30,481
Proceeds from maturities and principal
repayments of securities 4,225 6,051 34,323
Purchases of securities available-
for-sale (27,914) (5,413) (125,449)
Proceeds from sales of mortgage backed
securities available-for-sale 942 15,710 24,112
Principal collected on mortgage backed
securities 4,710 4,852 16,654
Purchases of mortgage backed securities - - (20,606)
Loan advances, net of repayments (4,638) (10,688) (1,373)
Purchases of loans - (819) -
Proceeds from sale of real estate
acquired 4,432 6,879 2,123
Payments to improve real estate acquired (673) (1,320) (1,212)
Net purchases of Bank premises
and equipment (657) (253) (720)
Net cash provided (used) by
investing activities 1,052 21,683 (41,667)
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Years ended June 30,
1996 1995 1994
Financing Activities
Net increase in deposits 6,893 16,247 8,085
Net (repayments of) proceeds from
repurchase agreements (723) (36,351) 23,850
Net (repayments of) proceeds from
FHLB advances (5,000) 5,000 -
Treasury stock purchased (3,207) - -
Net proceeds from Treasury Stock reissued 40 27 -
Cash dividends paid (744) (269) -
Proceeds from exercise of stock options 87 - 6
Net cash (used) provided by
financing activities (2,654) (15,346) 31,941
Increase (decrease) in cash and
cash equivalents 3,299 9,559 (4,540)
Cash and federal funds sold, beginning
of year 14,291 4,732 9,272
Cash and federal funds sold, end of year $17,590 $14,291 $ 4,732
Cash paid during year
Interest to depositors $ 9,933 $ 8,046 $ 6,849
Interest on borrowings and
interest rate swaps 463 1,633 2,022
Income taxes 277 72 71
Non-cash transfers
From securities held-to-maturity to
securities available-for-sale 39,507 - -
From securities available-for-sale
to securities held-to-maturity - 92,231 -
From loans to real estate acquired 4,132 853 522
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 1996 financial presentation.
Basis of Financial Statement Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the statement of condition, and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowance for loan losses and valuation of
real estate, management obtains independent appraisals for significant
properties.
The Company's loans are generally collateralized by real estate located
principally in Connecticut, which has experienced decline in the market
value of real property in the recent past. In addition, substantially
all of the real estate owned is located in those same markets.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and real estate acquired through foreclosure is
particularly susceptible to changes in market conditions.
While management uses available information to recognize losses on loans
and other real estate, future additions to the allowance or write-downs
of other real estate may be necessary based on changes in economic
conditions, particularly in Connecticut. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and
valuation of other real estate. Such agencies may require the Company
to recognize additions tot he allowance or write-downs based on their
judgements of information available to them at the time of their
examination.
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 their 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.
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.
Effective July 1, 1996 the Company implemented 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 requires the Company 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, the
Company measures 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 Company
recognizes an impairment by creating a valuation allowance. A loan is
impaired when, based on current information, it is probable that the
Company will be unable to collect all amounts due according to the
contractual terms of the loan.
As permitted by the FASB statement, smaller-balance homogeneous loans
consisting of residential mortgages and consumer loans are evaluated for
collectability by the Company based on historical loss experience rather
than on an individual loan-by-loan basis. Impaired loans are primarily
commercial mortgages, secured by real estate.
The adoption of SFAS 114 and 118 resulted in no additional provision for
loan losses. Prior to the adoption of SFAS 114, loans for which
foreclosure was probable were accounted for as in-substance foreclosed
and classified as real estate acquired. Under SFAS 114 such loans are
accounted for as loans. Consistent with the Company's adoption of SFAS
114, loans previously classified as in-substance foreclosed but for
which the Company had not taken possession of the collateral have been
reclassified to loans. This reclassification did not impact the
Company's financial condition or results of operations. All prior
period data has been reclassified to conform to current period
classifications.
Real estate acquired
Real estate acquired through foreclosure, forgiveness of debt and in
lieu of debt, are stated at the lower of cost (principally loan amount)
or fair value minus estimated selling expenses. 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 using 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.
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 1996, 1995 and 1994 were 4,505,575,
4,543,782 and 4,510,702, 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, 1996
U.S. Treasury and Government
Agencies
After one within 5 years $17,940 $ 22 $ 2 $17,920
After 5 and within 10 years 938 - 63 1,001
Mortgage backed securities 7,772 127 134 7,779
Collateralized mortgage
obligations 21,974 - 802 22,776
Total debt securities 48,624 149 1,001 49,476
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $50,171 $149 $1,001 $51,023
June 30, 1995
U.S. Government Agencies
After one 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
During 1996 the Company transferred securities with fair value of
$39,507,000 and an amortized cost of $40,530,000 from held-to-maturity
to available-for-sale. This transfer was made in conformity with the
Special Report issued by the Financial Accounting Standards Board, "A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". This transfer was made as
a result of a change in the Company's investment strategy.
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 were a 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, 1996 and 1995 are unrealized holding losses, net of taxes, of
$1,255,000 and $2,609,000, respectively, 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, 1996
Mortgage backed securities $10,980 $ - $ 222 $10,758
Collateralized mortgage
obligations 64,432 6 1,832 62,606
Total securities
held-to-maturity $75,412 $ 6 $2,534 $73,364
(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
(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, 1996
Mortgage backed securities
Available-for-sale $ 942 $ 4 $ -
Collateralized mortgage obligations
Available-for-sale 10,551 11 62
Trading assets 10,064 64 -
Marketable equity securities
Available-for-sale 10 10 -
Total $21,567 $ 89 $ 62
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
At June 30, 1996 securities with a carrying value aggregating
approximately $18,750,000 were pledged as collateral against public
funds and repurchase agreements (Note 6).
NOTE 3 - LOANS
The composition of the loan portfolio was as follows:
June 30, (in thousands) 1996 1995
Real estate mortgages
One-four family residential $ 89,159 $ 98,766
Five or more family residential 3,262 3,171
Commercial 30,408 29,068
Land loans 9,472 12,067
Commercial and industrial 6,130 3,201
Home equity lines of credit 14,474 7,785
Installment and other 2,658 2,187
Total loans, gross 155,563 156,245
Deferred loan origination fees, net (139) (431)
Allowance for loan losses (4,866) (5,372)
Total loans, net $150,558 $150,442
Impaired loans at June 30, 1996:
With valuation allowance $2,688
With no valuation allowance 3,900
Total impaired loans 6,588
Valuation allowance 813
Commitments to lend additional
amounts to impaired borrowers -
Average impaired loans 8,244
Amount of impaired loans based on:
Discounted cash flows -
Collateral values 6,588
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. 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) 1996 1995 1994
Balance at beginning of year $5,372 $5,246 $5,331
Provision for losses 400 400 208
Charge-offs (919) (295) (308)
Recoveries 13 21 15
Balance at end of year $4,866 $5,372 $5,246
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) 1996 1995
Non-accrual loans $3,809 $ 7,175
Accruing loans past due
90 days or more 166 34
Accruing troubled debt
restructured loans 281 -
Total non-performing loans 4,256 7,209
Real estate acquired in
settlement of loans 2,698 1,989
Valuation reserve (474) (313)
Total real estate acquired, net 2,224 1,676
Total non-performing assets $6,480 $ 8,885
The reductions in interest income associated with non-accrual loans were
as follows:
June 30, (in thousands) 1996 1995 1994
Income in accordance with
original terms $385 $417 $399
Income recognized 96 116 119
Reduction in interest income $289 $301 $280
The components of collection and real estate acquired expense were as
follows:
Year ended June 30,
(dollars in thousands) 1996 1995 1994
Provision for estimated losses $ 212 $ 621 $ 450
Gains on sales of real
estate acquired, net (388) (409) (51)
REA holding expenses and
Collection expense 704 1,206 940
Total collection and
real estate acquired expense $ 528 $1,418 $1,339
Changes in the real estate acquired valuation reserve were as follows:
Year ended June 30,
(dollars in thousands) 1996 1995 1994
Valuation reserve at beginning of year $313 $ 367 $ 716
Charge-offs, net of recoveries (51) (675) (799)
Provision 212 621 450
Valuation reserve at end of year $474 $ 313 $ 367
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of Bank premises and equipment were as follows:
June 30, (in thousands) 1996 1995
Land $ 1,140 $ 1,140
Buildings and improvements 5,533 5,499
Equipment 3,772 3,523
Leasehold improvements 489 283
Total cost 10,934 10,445
Accumulated depreciation
and amortization (4,715) (4,320)
Bank premises and equipment, net $ 6,219 $ 6,125
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which the
Company will adopt on July 1, 1996. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of this standard is not expected to have a
material impact on the Company's financial condition or its results of
operations.
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) 1996 1995
Federal Home Loan Bank advances
Borrowings at June 30
maturing 30 days or less $ - $5,000
Average borrowings during year 160 863
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 6.93% 5.69%
Securities sold under repurchase
agreements
Borrowings at June 30
maturing 30 days or less $14,776 $15,499
Average borrowings during year 7,813 28,018
Maximum month-end borrowings 14,861 50,255
Accrued interest expense at June 30 17 21
Weighted average rate at June 30 5.41% 6.12%
Weighted average rate during year 5.73% 5.35%
Amount at risk by broker
Morgan Stanley $7,667 $2,588
Salomon Bros - 1,098
Average maturity by broker
Morgan Stanley 13 Days 29 Days
Salomon Bros - 13 Days
Collateral at June 30
Mortgage-backed securities,
collateralized mortgage
obligations and US Treasury
obligations:
Carrying amount $17,749 $19,126
Market value 17,619 18,443
Accrued interest income 149 80
Securities sold under repurchase agreements are generally issued on a
14-day or 30-day basis. At June 30, 1996 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, 1996.
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The Company will
be required to adopt SFAS 125 for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31,
1996, on a prospective basis. The adoption of this standard is not
expected to have a material impact on the Company's financial condition
or its results of operations.
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, 1996 1995 1994
Current provision (benefit)
Federal $223 $ 799 $ 793
State 40 264 268
Benefit from net operating
loss carry forwards
Federal - (777) (736)
State - (241) (245)
Total 263 45 80
Deferred provision (benefit)
Federal 949 (2,952) (580)
State 335 (967) (220)
Total 1,284 (3,919) (800)
Income tax provision (benefit) $1,547 $(3,874) $ (720)
The following is a reconciliation of the expected federal statutory tax
to the income tax provision (benefit):
Year ended June 30, 1996 1995 1994
Income tax at statutory
federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 6.5 0.6 0.9
Benefit of net operating loss
carryforwards - (32.5) (33.0)
Change in valuation reserve - (166.7) (49.7)
Dividends excluded - (0.7) (1.1)
Other 0.3 0.4 4.2
Effective income tax rates 40.8 (164.9) (44.7)
The components of the Company's net deferred tax asset were as follows:
(in thousands)
June 30, 1996 Federal State
Deferred tax assets
Net operating loss carryforwards $ 843 $ 1,227
SFAS 115 Securities available-for-sale 882 295
Capital loss carryforwards 1,622 519
Bad debt expense, book 1,472 535
Losses on real estate acquired 210 76
Accrued pension expense 161 59
Deferred income 47 17
Other 190 99
Tax credits 445 -
Total deferred tax assets 5,872 2,827
Deferred tax liabilities
Bad debt expense, tax 778 283
Deferred income 7 3
Total deferred tax liabilities 785 286
Net deferred tax asset 5,087 2,541
Valuation reserve (1,622) (1,394)
Net deferred tax asset $ 3,465 $ 1,147
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 expense, book 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 expense, tax 708 264
Deferred income 7 3
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
The allocation of deferred tax expense (benefit) involving items charged
to current year income and items charged directly to shareholders'
equity for the years ended June 30, are as follows:
(in thousands)
June 30, 1996 Federal State
Deferred tax expense allocated to:
Shareholders' equity $ 377 $ 124
Income 949 335
Total deferred tax expense $1,326 $ 459
June 30, 1995 Federal State
Deferred tax benefit allocated to:
Shareholders' equity $(1,259) $ (419)
Income (2,952) (967)
Total deferred tax benefit $(4,211) $(1,386)
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 expected to
utilize, and other book/tax temporary differences. At June 30, 1996,
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.
Included in the Company's deferred tax asset at June 30, 1996 were
federal net operating loss carryforwards of approximately $2.5 million
(expiring in 2007) and state net operating loss carryforwards of
approximately $8.0 million (expiring in 1997) which can be applied to
reduce future federal and state income taxes. Also included at June 30,
1996 were federal and state capital loss carryforwards of approximately
$4.8 million and $4.7 million, respectively (expiring principally in
1997) which the Company 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
cash, money market funds, bonds and equity securities. The components
of net pension expense are as follows:
Year ended June 30, (in thousands) 1996 1995 1994
Service cost - benefits
earned during the period $ - $ - $ 145
Interest cost on projected
benefit obligation 289 280 309
Actual return on plan assets 264 (81) (272)
Curtailment gain - - (177)
Net amortization and deferral - (187) (11)
Net pension expense (income) $ 25 $ 12 $ (6)
The funded status of the Pension Plan at March 31 was as follows:
March 31, (in thousands) 1996 1995
Actuarial present value of benefit
obligations:
Vested benefit obligation $(4,998) $(4,841)
Accumulated benefit obligation $(5,024) $(4,892)
Projected benefit obligation $(5,024) $(4,892)
Plan assets at fair value 5,642 4,491
Projected benefit obligation in
excess of Plan assets 618 (401)
Unrecognized net loss (962) 105
Accrued pension cost included
in other liabilities $ (344) $ (296)
The weighted average discount rates used to measure the actuarial
present value of the projected benefit obligation were 8.0% in 1996 and
6.0% in 1995 and 1994. The expected long-term rate of return on Pension
Plan assets were 8.0% in 1996 and 6.0% in 1995 and 1994. The Company
contributed $253,000 to the Pension Plan in 1994. There was no
contribution in 1996 or 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 1996.
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 $56,196, 50,817 and $10,000 to the Plan in 1996,
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 1996, 1995 and 1994.
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 1996, 1995 and
1994 employee benefit expense by approximately $60,000 for each of the
three 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
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, 1996 Bancorp, Inc. Savings Bank
Leverage ratio 10.39% 10.04%
Tier 1 risk-based ratio 19.70 19.06
Total risk-based ratio 20.98 20.33
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, 1996 is $6,241,000. 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, 1996
Balance, beginning of year $ 269 $2,500 $2,769
Advances 90 - 90
Repayments (147) - (147)
Change in related party
status (Note 1) - (2,500) (2,500)
Balance, end of year $ 212 $ - $ 212
Year ended June 30, 1995
Balance, beginning of year $ 479 $3,203 $3,682
Advances 31 - 31
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 $ 269 $2,500 $2,769
Note 1 - Adjustment to exclude loans outstanding to persons who are no
longer considered related parties.
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, 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
Granted 154,500 - 154,500 6.433 2005-2006 6.00-7.13
Exercised (21,500) - (21,500) 4.052 2002-2005 3.00-6.00
Lapsed (2,200) (1,900) (4,100) 7.676 1996-2003 3.00-12.06
June 30, 1996 370,620 8,000 378,620 $4.968 1996-2006 3.00-12.06
Stock options outstanding as of June 30, 1996 were exercisable as
follows:
Options Options
without with
SARS SARS Total
June 30, 1996 345,620 8,000 353,620
March 31, 1997 25,000 - 25,000
Total 370,620 8,000 378,620
As of June 30, 1996 options to purchases 13,130 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
were reelected at as non-employee directors. At the annual meeting in
1995 the plan was amended so that all non-employee directors would be
granted 2,000 options at June 30 of each subsequent year. 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.
Changes in outstanding stock options were as follows:
Average Price
Options Price Maturity Range
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
Granted 18,000 6.813 2005-2006 6.50-7.13
Lapsed - - - -
June 30, 1996 84,000 4.000 2002-2006 3.00-7.13
As of June 30, 1996 options to purchase 46,000 shares of Common Stock
were available to be granted under the 1992 Stock Option Plan for
Outside Directors.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 establishes financial accounting and reporting
standards for stock-based compensation plans. SFAS 123 defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However,
SFAS 123 also allows the Company to continue to measure compensation
costs for stock-based compensation plans using the intrinsic value based
method of accounting prescribed by APB No. 25, "Accounting for Stock
Issued to Employees" and make pro forma disclosure of net income and
earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The Company has elected not to
adopt the accounting requirements of SFAS 123 and continue to account
for stock-based compensation plans in accordance with APB No. 25. The
Company's fiscal 1997 financial statements will include the pro forma
disclosure requirements of SFAS 123.
NOTE 12 - 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,
1996 the Company had commitments under outstanding construction
mortgages of $33,000, unused lines of credit of $13,293,000 and
outstanding commitments to fund loans of $6,314,000. 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. 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 2001. 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 $129,820, $128,413 and $121,591 for 1996, 1995 and 1994,
respectively. Future minimum lease payments at June 30, 1996 are as
follows:
1997 $156,544
1998 137,668
1999 134,960
2000 68,276
2001 22,561
$520,009
NOTE 13 - 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, 1996 1995
(dollars in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
Financial Assets
Cash and due from banks $ 6,630 $ 6,630 $ 5,791 $ 5,791
Federal funds sold 10,960 10,960 8,500 8,500
Securities available for sale 50,171 50,171 7,102 7,102
Securities held to maturity 75,412 73,364 120,092 119,948
Loans 155,563 153,841 156,245 152,558
Allowance for loan losses (4,866) - (5,372) -
Deferred loan origination
fees, net (139) - (431) -
Loans, net 150,558 153,841 150,442 152,558
Accrued interest receivable 1,874 1,874 1,918 1,918
Financial Liabilities
Deposits
Demand (non-interest bearing) $ 10,750 $ 10,750 $ 8,224 $ 8,224
NOW accounts 25,653 25,653 21,921 21,921
Money market 60,945 60,945 63,059 63,059
Savings and other 40,531 40,531 41,349 41,349
Certificates of deposit 121,388 121,414 117,867 118,122
Total deposits 259,267 259,293 252,420 252,675
Securities sold under
repurchase agreements 14,776 14,776 15,499 15,499
FHLB advances - - 5,000 5,000
Accrued interest payable 140 140 298 298
Other Financial Instruments
Interest rate swaps $ - $ - $ (18) $ -
NOTE 14 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL
INFORMATION
The unconsolidated balance sheets of NewMil Bancorp, Inc. at June 30,
and its statements of income and cash flows for each of the years ended
June 30, are presented as follows:
Balance Sheets June 30, June 30,
(in thousands) 1996 1995
Assets
Due from bank $ 957 $ 82
Note receivable - 1,100
Investment in New Milford Savings Bank 30,853 31,546
Other assets 84 4
Total Assets $31,894 $32,732
Liabilities and Shareholders' Equity
Liabilities $ 2 $ 11
Shareholders' equity 31,892 32,721
Total Liabilities and Shareholders' Equity $31,894 $32,732
Statements of Income Years ended June 30,
(in thousands) 1996 1995 1994
Interest income $ 36 $ 334 $ 42
Dividends from subsidiary 3,743 - -
Expenses 172 178 95
Income (loss) before taxes and
undistributed net income (loss)
of subsidiary 3,607 156 (53)
Income tax benefit (81) - -
Income (loss) before equity in
undistributed net income
of subsidiary 3,688 156 (53)
Equity in undistributed
(equity distributed in excess of)
net income of subsidiary (1,446) 6,068 2,384
Net income $2,242 $6,224 $2,331
Parent Company Only Financial Information continued:
Statements of Cash Flows Years ended June 30,
(in thousands) 1996 1995 1994
Net income $ 2,242 $ 6,224 $ 2,331
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed (equity
distributed in excess of)
net income of subsidiary 1,446 (6,068) (2,384)
Other (89) (22) 7
Net cash provided (used) by operating
activities 3,599 134 (46)
Investing Activities:
Net decrease in note receivable
from subsidiary 1,100 100 100
Net cash provided by investing
activities 1,100 100 100
Financing Activities:
Cash dividends declared (744) (269) -
Proceeds from Treasury Stock issued 40 27 -
Treasury stock purchased (3,207) - -
Proceeds from exercise of stock options 87 - 6
Net cash (used) provided by
financing activities (3,824) (242) 6
Increase (decrease) in cash and
cash equivalents 875 (8) 60
Cash and cash equivalents,
beginning of year 82 90 30
Cash and cash equivalents, end of year $ 957 $ 82 $ 90
NOTE 15 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 1996 and 1995 is as follows (in thousands
except ratios and per share amounts):
Year ended June 30, 1996
June 30, Mar 31, Dec 31, Sept 30,
Statement of Income
Interest and dividend
income $5,557 $5,315 $5,464 $5,501
Interest expense 2,560 2,571 2,647 2,660
Net interest income 2,997 2,744 2,817 2,841
Provision for loan losses 100 100 100 100
Non-interest income
Securities gains (losses), net - 72 (55) 10
Gains on loans, net 5 - - 5
Service fees and other 313 298 311 296
Non-interest expense 2,180 2,007 2,089 2,189
Income before income taxes 1,035 1,007 884 863
Income tax provision (benefit) 430 394 365 358
Net income 605 613 519 505
Financial Condition
Total assets $309,363 $291,578 $304,574 $303,259
Loans, net 150,558 146,739 147,378 149,077
Allowance for loan losses 4,866 5,200 5,133 5,242
Securities 125,583 110,455 118,989 124,827
Deposits 259,267 257,241 256,552 250,287
Borrowings 14,776 - 10,979 17,126
Shareholders' equity 31,892 32,459 34,381 33,209
Non-performing assets 6,480 8,403 8,093 8,322
Per Share Data
Earnings $0.14 $0.14 $0.11 $0.11
Cash dividends 0.05 0.05 0.05 0.02
Book value 7.84 7.77 7.65 7.39
Market price: (a)
High 7.750 7.750 7.500 7.000
Low 6.500 6.375 6.000 5.750
Statistical Data
Net interest margin 4.21% 3.91% 3.97% 3.96%
Efficiency ratio 65.76 64.45 67.98 69.45
Return on average assets 0.78 0.83 0.70 0.67
Return on average
shareholders equity 7.59 7.20 6.25 6.08
Weighted average equivalent
shares outstanding, primary 4,257 4,488 4,601 4,586
Quarterly Financial Data (unaudited)
continued:
Year ended June 30, 1995
June 30, Mar 31, Dec 31, Sept 30,
Statement of Income
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 150,442 147,388 143,552 141,356
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 $0.99 $0.13 $0.15 $0.10
Cash dividends 0.02 - 0.02 0.02
Book value 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
Statistical Data
Net interest margin 4.07% 3.78% 3.64% 3.33%
Efficiency ratio 78.30 77.03 74.56 79.37
Return on average assets 6.13 0.78 0.90 0.59
Return on average
shareholders equity 66.20 8.73 10.46 7.28
Weighted average equivalent
shares outstanding, primary 4,589 4,538 4,518 4,550
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 3, 1996, there were 1,831 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, 1996 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 23, 1996 for the 1996
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 8 and 9 of the
Company's Proxy Statement dated September 23, 1996 for the 1996 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 pages 5 through 7 of
the Company's Proxy Statement dated September 23, 1996 for the 1996
Annual Meeting of Shareholders, under the caption "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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 15 of the
Company's Proxy Statement dated September 23, 1996 for the 1996 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 (incorporated by reference to the
Registrant's 1994 Proxy Statement dated September 23, 1994,
page A-1).
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 NewMil Bancorp, Inc. Amended and Restated 1986 Stock
Option and Incentive Plan (incorporated by reference to the
Registrant's 1995 Proxy Statement dated September 20, 1995,
pages A-1 to A-11).
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994 (incorporated by reference to the Registrant's 1995
Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's
shareholders.
10.9 Change in control agreements between New Milford Savings
Bank and management.
10.10 The Amended and Restated 1992 Stock Option Plan for Outside
Directors of NewMil Bancorp, Inc. (incorporated by reference
to the Registrant's 1995 Proxy Statement dated September 20,
1995, pages B-1 to B-4).
11.1 Statement regarding Computation of Net Income Per Common
Share
18.3 Consent of Coopers & Lybrand
20.1 Proxy Statement dated September 23, 1996 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 17, 1996
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 17, 1996
/s/ Willis H. Barton, Jr.
Willis H. Barton, Jr.
Director
September 17, 1996
/s/ Herbert E. Bullock
Herbert E. Bullock
Director
September 17, 1996
/s/ Laurie G. Gonthier
Laurie G. Gonthier
Director
September 17, 1996
/s/ Dr. John V. Haxo
Dr. John V. Haxo
Director
September 17, 1996
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
September 17, 1996
/s/ Francis J. Wiatr
Francis J. Wiatr
Director and President
September 17, 1996
/s/ Mary C. Williams
Mary C. Williams
Director
September 17, 1996
/s/ B. Ian McMahon
B. Ian McMahon
Senior Vice President and
Chief Financial Officer
September 17, 1996