UNITED STATES 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
For the fiscal year ended December 31, 1997
------------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file Number 000-23419
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NMBT CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1496548
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization)
No.)
55 Main Street, New Milford, Connecticut 06776-2400
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 355-1171
------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 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. [ X ] Yes [ ] No
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (ss. 229.405 OF THIS CHAPTER) 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 AMENDMENT TO THIS FORM 10-K. [ X ]
On March 17, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on the last price at which such stock was
sold was $43,783,975.
The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 17, 1998 was 2,640,258.
Listed hereunder are documents incorporated by reference and the parts of
Form 10-K into which the documents are incorporated:
(1) Annual Report to Stockholders for the fiscal year ended December 31,
1997 - PART I & PART II
(2) Proxy Statement for Annual Meeting on May 5, 1998 - PART I & PART III.
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
PART I
ITEM 1. BUSINESS
GENERAL
NMBT CORP (the "Company"), a Delaware corporation formed in 1997, is the
registered bank holding company for NMBT (formerly The New Milford Bank & Trust
Company), a wholly owned subsidiary. NMBT, headquartered in New Milford,
Connecticut, is a state-chartered bank and trust company founded in 1975. The
Company's activity is currently limited to the holding of NMBT's outstanding
common stock. NMBT is the Company's only subsidiary and its primary investment.
The net income of the Company is presently derived entirely from the business of
NMBT.
On November 25, 1997, NMBT completed a change in its corporate structure with
the formation of its parent holding company, NMBT CORP. The Company provides the
capability to offer comprehensive banking services through NMBT and may provide,
through NMBT and any other subsidiaries that NMBT CORP may acquire, additional
banking and other permissible non-banking services. The holding company
structure provides the Company with maximum flexibility in pursuing financial
opportunities.
NMBT's business strategy is to operate primarily as an innovative
full-service community financial institution. NMBT offers a wide range of
consumer and commercial services to individuals and businesses in western
Connecticut. These services include checking accounts, N.O.W. accounts, regular
savings accounts, money market accounts, retirement accounts, savings
certificates, commercial demand deposit accounts and cash management. Deposits
are insured up to applicable limits by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation (FDIC). NMBT's lending activities include
residential and commercial real estate loans, home equity loans and lines of
credit, consumer loans, secured and unsecured commercial loans, letters of
credit and both consumer and commercial credit card services.
NMBT serves its market through a network of ten full service banking offices
located in New Milford, Kent, Bridgewater, New Fairfield, Southbury and Danbury.
Additionally, NMBT has automated teller machines (ATMs) at all office locations
and inside two grocery stores in Danbury and Southbury providing customers with
convenient 24-hour access to their accounts. NMBT's primary service area
includes the towns of New Milford, Kent, Bridgewater, and New Fairfield,
Southbury and Danbury; its secondary service area includes the towns of Bethel,
Brookfield, Middlebury, Newtown, Oxford, Roxbury, Sherman, Warren, Washington
and Woodbury.
NMBT's primary regulators are the Federal Reserve Bank and the State of
Connecticut Department of Banking. NMBT is authorized to transact general
banking business pursuant to the powers set forth in the Connecticut General
Statutes. NMBT is not offering trust services at this time.
While NMBT's business is not seasonal, the populations of a number of the
towns in its service areas increase substantially in the summer months,
requiring some additional personnel to handle the increased volume of
transactions during these months.
NMBT has no subsidiaries and no operations other than conventional banking
operations and has no foreign branches. NMBT has not obtained a material portion
of its deposits from a single person or small group of persons. No material
portion of NMBT's loans is concentrated within a single industry or group of
industries.
NMBT has not engaged in material research activities relating to the
development of new services or the improvement of existing banking services
during the past two years. However, during that time, NMBT's officers and
employees continually have engaged in marketing activities, including evaluation
and development of new services. The Company had no material commitments for
capital expenditures at year-end 1997 and has no present plans regarding a new
line of business that will require an investment of a material amount of its
total assets.
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 1998 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks anduncertainties, and that statements relating to subsequent
periods increasingly are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; competitive
pressures on loan and deposit product pricing; other actions of competitors;
changes in local and national economic conditions; the extent and timing of
actions of the Federal Reserve Board; customer deposit disintermediation;
changes in customers' acceptance of NMBT's products and services; and the extent
and timing of legislative and regulatory actions and reform.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duly to update them to reflect new, changing or unanticipated events
or circumstances.
COMPETITION
NMBT's Main Office and four of its branch offices are located in Litchfield
County, Connecticut; four branch
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FORM 10-K
NMBT CORP
December 31, 1997
offices are located in Fairfield County, Connecticut; the newest branch office
is located in New Haven County, Connecticut. Litchfield and Fairfield Counties
are located in the western portion of Connecticut bordering the State of New
York; New Haven County is located to the south and east of those counties.
Within this market area, NMBT encounters competition in its banking business
from many other financial institutions offering comparable products. These
competitors include other commercial banks (both locally based independent banks
and local offices of regional banks and money center banks), as well as mutual
and stock savings banks, savings and loan associations, credit unions, mortgage
banking companies, and loan production offices of out-of-state banks. In
addition, NMBT experiences competition in marketing some of its services from
local and national insurance companies and brokerage firms.
The banking business in western Connecticut generally is highly competitive.
Intense market demands, economic pressures, fluctuating interest rates and
increased customer awareness of product and service differences among financial
institutions have forced such institutions to continue to diversify their
services, increase returns on deposits and become more cost effective.
Competition for deposits includes competition not only from other deposit
accounts, but also competition with various other investment vehicles, such as
corporate and governmental securities and mutual funds, which may offer higher
rates of return. Interest rates, convenience of office locations, service and
marketing are all significant factors in NMBT's competition for deposits. From
time to time, competing financial institutions set rates higher than market
rates to attract or retain deposits, which may cause upward pressure on NMBT's
rate structure or a loss of deposits.
Recent proposed and completed banking combinations in New England have
increased and will increase the resources of several major banks and other
financial institutions that operate many offices over a wide geographic area,
including NMBT's primary market area. Because of their greater size and
capitalization, these other institutions have substantially higher lending
limits than NMBT. NMBT competes for loan origination through the interest rates
and loan fees it charges and the efficiency and quality of services it provides.
Competition is affected by availability of funds, general and local economic
conditions, current interest rate levels and other factors that are not readily
predictable.
In addition, recent Federal and Connecticut legislation likely will further
increase competition for deposits and loans in NMBT's primary market area.
Effective June 1, 1997, unless a state prohibits all interstate mergers, Federal
law generally permits interstate mergers between banks without regard to whether
such mergers are prohibited under the law of any state. Finally, Federal law
permits banks to branch into other states if a state "opts- in" to this
arrangement.
Since 1995, Connecticut has allowed interstate mergers and acquisitions, the
establishment of Connecticut chartered banks by foreign bank holding companies
and interstate de novo branching, subject to certain reciprocity requirements.
As permitted by Federal law, Connecticut law places a minimum permissible age of
five years on the target bank and a 30% limit on concentration of deposits in
both interstate and intrastate acquisitions.
EMPLOYEES
As of December 31, 1997, NMBT employed a total of 184 full- and part-time
employees. (160 employees employed on a full-time equivalent basis.) NMBT is an
equal opportunity employer and provides a variety of benefit plans including
group life, accident, medical, dental and retirement plans to its employees.
GOVERNMENT POLICIES AND ECONOMIC CONTROLS
The U.S. federal and state governments may enact laws and amendments to
existing laws to regulate further the banking and financial services industries
or to reduce finance charges or other fees or charges applicable to such
activities. NMBT is subject to such legislative and administrative developments.
Accordingly, there can be no assurance as to whether any legislation or
regulations will be adopted in the U.S. or its political subdivisions, or
3
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FORM 10-K
NMBT CORP
December 31, 1997
in any other jurisdiction in which NMBT operates, that may adversely affect
NMBT's financial position or results of its operations.
The earnings and growth of the banking industry and NMBT are affected by
general economic conditions, as well as by the credit policies of monetary
authorities, including the Federal Reserve System. An important function of the
Federal Reserve System is to regulate the national supply of bank credit to
combat recession and curb inflationary pressures. Its policies are used in
varying combinations to influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans or paid for
deposits.
In view of changing conditions in the national economy and the money markets,
as well as the effect of actions by monetary and fiscal authorities, including
the Federal Reserve System, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or their effects on the
business and earnings of NMBT.
REGULATION AND SUPERVISION
GENERAL
As a Connecticut-chartered bank and trust company, the deposits of which are
insured by the FDIC, NMBT is subject to extensive regulation and supervision by
both the Connecticut Department of Banking and the FDIC. The Company is also
subject to certain regulations of the Board of Governors of the Federal Reserve
System (the Federal Reserve Board). This governmental regulation is intended
primarily to protect depositors and the FDIC's BIF, not the Company's
stockholders.
CONNECTICUT REGULATION
The Connecticut Department of Banking (the Department) regulates NMBT's
internal organization as well as its deposit, lending and investment activities.
The approval of the Connecticut Banking Commissioner (the Commissioner) is
required, with other contingencies, for the establishment of branch offices and
business combination transactions. The Department, through its Bank Examination
Division, conducts periodic examinations of NMBT. The FDIC also regulates many
of the areas regulated by the Department.
Connecticut banking laws grant banks broad lending authority. Subject to
certain limited exceptions, however, total secured and unsecured loans made to
any one obligor pursuant to this statutory authority may not exceed 25% of
NMBT's equity capital and the allowance for loan losses.
Connecticut banking law prohibits NMBT from paying dividends in certain
situations. For reference to a further discussion of this limitation, see Part
II, Item 5.
Under Connecticut banking law, no person may acquire beneficial ownership of
more than 10% of any class of voting securities of a Connecticut-chartered bank,
or any bank holding company of such a bank, without prior notification of, and
lack of disapproval by, the Commissioner. Similar restrictions apply to any
person who holds in excess of 10% of any such class and desires to increase
these holdings to 25% or more of such class.
Any Connecticut-chartered bank meeting certain statutory requirements may,
with the Commissioner's approval, establish and operate branch offices in any
town or towns within the state. In 1996, legislation was enacted which permits
banks to establish mobile branches with the Commissioner's approval.
Connecticut law presently permits Connecticut banks to engage in stock
acquisitions of, and mergers with, depository institutions in other states with
reciprocal legislation. Many other states have enacted reciprocal legislation.
Several interstate mergers and acquisitions have been completed which involve
Connecticut bank holding companies or banks with offices in NMBT's primary
market area and bank holding companies or banks headquartered in other states.
As noted above, since 1995, Connecticut has allowed interstate mergers and
acquisitions, the
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FORM 10-K
NMBT CORP
December 31, 1997
establishment of Connecticut-chartered banks by foreign bank holding companies
and interstate de novo branching, subject to certain reciprocity requirements.
Connecticut law also places a minimum permissible age of five years on the
target bank and a 30% limit on concentration of deposits in both interstate and
intrastate acquisitions. Legislation was enacted in 1996 which expressly permits
an out-of-state bank to merge or consolidate with or acquire a branch of another
out-of-state bank which has a branch in Connecticut. This legislation may result
in further increased competition.
In 1996, legislation was enacted which requires the board of directors of
each Connecticut bank to adopt annually and to frequently and periodically
review an investment policy governing investments by such bank, which policy
must establish standards for the making of prudent investments. In addition,
Connecticut law now permits Connecticut banks to sell fixed and variable rate
annuities if licensed to do so by the Connecticut Insurance Commissioner.
Further, legislation was enacted in 1996 which expands the ability of
Connecticut banks to invest in debt and equity securities. Prior to the
legislation, Connecticut banks could invest in debt securities without regard to
any other liability to the Connecticut bank of the maker or issuer of the debt
securities, if the securities were rated in the three highest rating categories
or otherwise deemed to be a prudent investment, and as long as the total amount
of such debt securities did not exceed 15% of the bank's total equity capital
and allowance for loan losses and 15% of its assets. In 1996, these percentages
each were increased to 25%. In addition, prior to 1996, the percentage
limitation described above also applied to certain government and agency
obligations. As a result of the 1996 legislation, this limitation was deleted
for such obligations.
The 1996 legislation also expanded the ability of Connecticut banks to invest
in equity securities. Connecticut banks may now invest in such securities
without regard to any other liability to the Connecticut bank of the issuer of
such securities, so long as the total amount of equity securities of any one
issuer does not exceed 25% of the bank's total equity capital and allowance for
loan losses and 25% of its assets. Prior to the enactment of this legislation,
Connecticut banks could invest up to 15% of their assets in the equity
securities of corporations incorporated and doing a major portion of their
business in the United States, and only if the investment security was within
the top three rating categories or otherwise deemed to be a prudent investment
by the bank.
1997 Connecticut legislation permits Connecticut banks to sell insurance,
directly or indirectly. In addition, other Connecticut legislation now permits
organization of community banks with a minimum equity capital of $3 million (as
opposed to $5 million for other Connecticut banks), and clarifies certain powers
of Connecticut banks.
FDIC REGULATION
The FDIC insures NMBT's deposit accounts, generally, to a maximum of $100,000
for each insured depositor. As with all state-chartered, FDIC insured banks,
NMBT is subject to extensive supervision and examination by the FDIC. FDIC
insured banks also are subject to FDIC regulations governing many aspects of
their business and operations, including types of deposit instruments offered
and permissible methods of acquisition of funds.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), in September, 1992, the FDIC implemented a system of risk-related
deposit insurance assessments. Under this system, for the first six months and
the second six months of 1997, insurance premiums for all banks varied between
0.0% and 0.27% of total deposits, depending upon the capital level and
supervisory rating of the institution. The FDIC has stated that it will
reevaluate the adequacy of its assessment schedule every six months, and may
increase or decrease premium levels by up to 5 basis points for each six months.
The FDIC has announced that the assessment schedule for the first six months of
1998 will remain the same.
The Financing Corporation (FICO) debt service assessment became applicable to
all insured institutions as of January 1, 1997, in accordance with the Deposit
Insurance Act of 1996 (the Act). The Act authorizes FICO to levy assessments on
BIF-assessable deposits and stipulates that, from 1997 to 1999, the rate must
equal one-fifth the FICO assessment rate that is applied to deposits assessable
by the Savings Association Insurance Fund (SAIF).
5
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FORM 10-K
NMBT CORP
December 31, 1997
The rates for BIF and SAIF are determined quarterly. The FICO rate for NMBT is
not tied to the FDIC risk classification. The BIF FICO 1997 annual rates for
NMBT were 1.296, 1.30, 1.26 and 1.264 basis points, for the first through fourth
quarters of 1997, respectively. The BIF FICO 1998 annual rate for NMBT for the
first quarter of 1998 is 1.256 basis points.
Under the FDIC's risk-based capital requirements, each FDIC-insured bank is
required to maintain minimum levels of capital, as defined for these
requirements, based on the institution's total risk-weighted assets. All
FDIC-insured banks are required to maintain their capital at or above certain
minimum ratios. At December 31, 1997, NMBT's capital exceeded these minimums.
See "Management's Discussion and Analysis, Capital Management", on page 18, the
"Financial Glossary", on page 20, and Note 8. Stockholders' Equity, of the Notes
to Consolidated Financial Statements on pages 31 and 32 of NMBT CORP's Annual
Report to Stockholders (an Exhibit to this 10-K), which is incorporated by
reference, for more detailed descriptions of these requirements and the
Company's and NMBT's capital position at December 31, 1997 and 1996.
The FDIC regulations that implement FDICIA require an insured state bank to
obtain the FDIC's prior consent before directly, or indirectly through a
majority owned subsidiary, engaging "as principal" in any activity that is not
permissible for a national bank unless one of the exceptions contained in the
regulation applies. The Company does not believe that this regulation has had or
will have a material impact on the business of NMBT.
Pursuant to FDICIA, the federal bank regulatory agencies have issued rules
establishing standards for safety and soundness at FDIC-insured institutions and
their holding companies. These standards formalize in regulation the fundamental
standards used by the federal bank regulatory agencies to assess the operational
and managerial qualities of an institution. The rules establish operational,
managerial, asset quality and earnings standards for FDIC-insured banks and
their holding companies and standards that prohibit as an unsafe and unsound
practice the payment of compensation that is excessive or could lead to material
financial loss to such institutions. These standards are designed to identify
potential safety and soundness concerns and ensure that action is taken to
address those concerns before they pose a risk to the deposit insurance funds.
The FDIC may terminate FDIC insurance of NMBT's deposits after notice and a
hearing upon a finding by the FDIC that NMBT has engaged in unsafe or unsound
practices or is in an unsafe and unsound condition to continue operations or has
violated any applicable law, regulation, rule or order of, or conditions imposed
by, the FDIC. NMBT is not aware of any practice, condition or violation that
might lead to termination of its deposit insurance.
FEDERAL RESERVE SYSTEM REGULATION
Under the regulations of the Federal Reserve System, depository institutions
such as NMBT are required to maintain reserves against their transaction
accounts. In 1997, these regulations generally required the maintenance of
reserves of 3.0% against transaction accounts of $49.3 million or less and 10.0%
of the amount of such accounts in excess of such amount. These amounts and
percentages are subject to further adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a
registered bank holding company. The Federal Bank Holding Company Act of 1956,
as amended (the BHCA), under which the Company is registered, limits the types
of companies which the Company may acquire or organize and the activities in
which they may engage. In general, a bank holding company and its subsidiaries
are prohibited from engaging in or acquiring direct control of any company
engaged in non-banking activities unless such activities are so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
The Company has not determined which, if any, of these or other permissible
non-banking activities it might seek to engage in.
The Federal Reserve Board has established capital adequacy guidelines for
bank holding companies that are similar to the FDIC's capital requirements
described above. As of December 31, 1997, the Company was in full compliance
with all applicable capital requirements, and management believes that the
Company will maintain
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FORM 10-K
NMBT CORP
December 31, 1997
such compliance.
The BHCA requires, with certain exceptions, a bank holding company to obtain
the Federal Reserve Board's approval prior to acquiring more than 5% of the
outstanding voting stock of any bank or bank holding company, acquiring all or
substantially all of the assets of a bank or merging or consolidating with
another bank holding company.
Effective April 21, 1997, the Federal Reserve Board adopted comprehensive
changes to certain banking regulations (the 1997 Amendments). The 1997
Amendments include amendments to Regulation Y, which implements the BHCA's prior
approval requirements. The changes are intended to improve the competitiveness
of bank holding companies by eliminating unnecessary regulatory burdens and
operating restrictions and by streamlining the application/notice process. Among
other changes, the 1997 Amendments incorporate a streamlined and expedited
review process for bank acquisition proposals by well-run bank holding
companies; eliminate certain notice and approval requirements and streamline
others that involve non-banking proposals by well-run bank holding companies;
and reorganize and expand the list of permissible non-banking activities.
As described above, the Company, NMBT and any other subsidiaries generally
are prohibited from engaging in certain reciprocal arrangements in connection
with any extension of credit or provision of any property or services. The 1997
Amendments contain significant amendments to the Federal Reserve Board's rules
regarding tying arrangements.
NMBT is subject to certain restrictions imposed by the Federal Reserve Act on
making any investments in the stock or other securities of the Company or any of
the Company's subsidiaries, and the taking of such stock or securities as
collateral for loans to any borrower.
NMBT also is subject to certain restrictions imposed by the Federal Reserve
Act on the amount of loans it can make to the Company or its affiliates. Such
loans must be collateralized as provided by the Federal Reserve Act. The amount
of such loans may not exceed (when aggregated with certain other transactions
between NMBT and the Company) 10% of the capital stock and surplus of NMBT.
Since formation of the Company, there have been no loans made by NMBT to the
Company.
The BHCA requires the Company to file reports of operations annually with the
Federal Reserve Board. The Company, NMBT and any other subsidiaries of the
Company also are subject to examination by the Federal Reserve Board. In
addition, the Company is registered as a bank holding company with the
Connecticut Department of Banking under the Connecticut Bank Holding Company and
Bank Acquisition Act.
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<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
STATISTICAL DISCLOSURES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The information required by this Item is set forth in NMBT CORP's 1997 Annual
Report to Stockholders (an Exhibit to this 10-K), on pages 13 and 14, and is
incorporated herein by reference.
II. INVESTMENT PORTFOLIO
The following table sets forth the carrying value of securities at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury and agency securities $38,107 $23,702 $18,504
Mortgage-backed securities 26,597 29,512 16,622
Municipal securities 16,968 8,785 3,166
- ------------------------------------------------------------------------------------------------------------------------
Total securities, at amortized cost 81,672 61,999 38,292
Federal Home Loan Bank stock 1,760 1,542 1,542
Unrealized gain on securities available for sale 573 220 372
--------------------------------------------------------
Total carrying value of securities $84,005 $63,761 $40,206
=========================================================================================================================
</TABLE>
The following table sets forth the maturities of debt securities, using
amortized cost amounts, at December 31, 1997, and the weighted average yield of
such securities (calculated on the basis of the cost and effective yields
weighted for the scheduled maturity of each security). Tax-equivalent
adjustments (using a 34% rate) have been made in calculating yields on
obligations of states and political subdivisions.
<TABLE>
<CAPTION>
Maturity or Expected Principal Repayment
----------------------------------------------------------------------------------
After One but After Five but
Within One Year Within Five Years within Ten Years After Ten Years
----------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities $6,007 6.38% $15,036 6.05% $17,064 7.26% $ -
Mortgage-backed securities1 8,498 7.57% 16,783 7.45% 1,295 6.79% 21 6.79%
Municipal securities 300 8.19% 4,056 6.25% 12,612 7.00% -
- --------------------------------------------------------------------------------------------------------------------------
Total $14,805 7.24% $35,875 6.91% $30,971 7.13% $21 6.79%
==========================================================================================================================
</TABLE>
1 The maturity or expected principal repayment periods for mortgage-backed
securities are based on expected average lives rather than contractual terms,
factoring in scheduled amortization and estimated prepayment activity on the
underlying mortgages. Prepayments were estimated based on interest rate levels
existing at year-end 1997. Lower interest rates would be expected to lead to
higher prepayment levels and a shorter distribution of principal cash flows,
while higher interest rates would be expected to lead to lower prepayment levels
and a longer distribution of cash flows.
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FORM 10-K
NMBT CORP
December 31, 1997
III. LOAN PORTFOLIO
The following table shows NMBT's loan distribution at the end of each of the
last five years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate $188,868 $184,486 $177,882 $173,346 $132,147
Commercial and industrial 17,818 13,203 11,917 10,932 5,946
Installment and education 8,994 7,128 2,628 2,493 2,238
Construction and development 7,299 5,999 4,891 3,333 3,000
Cash reserve and credit cards 930 870 840 807 830
------------------------------------------------------------------------------------------------------
TOTAL LOANS $223,909 $211,686 $198,158 $190,911 $144,161
======================================================================================================
</TABLE>
The following table shows NMBT's nonaccrual, past due 90 days or more and
restructured loans at the end of each of the last five years:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,208 $4,025 $4,523 $5,056 $5,294
Accruing loans past due 90 days or more 25 236 - 257 150
Troubled debt restructurings 261 264 269 638 377
</TABLE>
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FORM 10-K
NMBT CORP
December 31, 1997
The following table shows the maturity data for fixed and floating rate loans
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Floating or
Fixed rate adjustable rate
loans loans Total loans
------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Commercial and industrial
One year or less $529 $6,746 $7,275
Over one year through five years 2,802 6,352 9,154
Over five years 28 945 973
----------------------------------------------------------------------------------------------------------
Total 3,359 14,043 17,402
----------------------------------------------------------------------------------------------------------
Construction and development
One year or less 3,060 883 3,943
Over one year through five years - 695 695
Over five years - 2,658 2,658
----------------------------------------------------------------------------------------------------------
Total 3,060 4,236 7,296
----------------------------------------------------------------------------------------------------------
All other loans
One year or less 891 4,643 5,534
Over one year through five years 11,644 18,179 29,823
Over five years 32,897 127,749 160,646
----------------------------------------------------------------------------------------------------------
Total 45,432 150,571 196,003
----------------------------------------------------------------------------------------------------------
Total accruing loans 51,851 168,850 220,701
----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 837 2,371 3,208
==========================================================================================================
TOTAL LOANS $52,688 $171,221 $223,909
==========================================================================================================
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1997
Annual Report to Stockholders (an Exhibit to this 10-K), on pages 17, 27 and 30,
and is incorporated herein by reference.
10
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes NMBT's loan loss experience for each of the five
years ended December 31, 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
(Dollars in Thousands)
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $3,212 $3,553 $3,965 $3,769 $4,901
Charge-offs:
Real estate loans 226 614 796 1,095 1,358
Commercial loans 166 4 13 198 66
Installment loans 7 11 12 4 10
Other loans 24 31 28 15 31
-------------------------------------------------------------------------------------------------
423 660 849 1,312 1,465
-------------------------------------------------------------------------------------------------
Recoveries:
Real estate loans 146 99 222 42 127
Commercial loans 34 26 53 30 44
Installment loans 4 2 1 2 4
Other loans 2 2 1 2 3
-------------------------------------------------------------------------------------------------
186 129 277 76 178
-------------------------------------------------------------------------------------------------
Net charge-offs 237 531 572 1,236 1,287
Allowance acquired from Candlewood - - - 1,192 -
Additions charged to operations 582 390 160 240 155
Transfer to liability for estimated losses
from off-balance sheet credit instruments 20 200 - - -
-------------------------------------------------------------------------------------------------
Balance at December 31 $3,537 $3,212 $3,553 $3,965 $3,769
=================================================================================================
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.11% 0.27% 0.30% 0.74% 0.93%
============================================ ========= ========== ========== ========== =========
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1997
Annual Report to Stockholders (an Exhibit to this 10-K), on pages 11, 12 and 27,
and is incorporated herein by reference.
11
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
V. DEPOSITS
The average daily amount of deposits and weighted average rates paid on such
deposits is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ ------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing demand $34,016 $28,681 $22,605
Interest-bearing checking 81,145 1.70% 72,251 1.58% 69,831 1.70%
Savings 60,907 2.45% 63,483 2.52% 64,500 2.67%
Time deposits under $100 81,516 5.39% 73,504 5.29% 66,221 5.17%
Time deposits $100 or more 16,432 5.36% 10,919 5.72% 9,703 5.54%
--------------------------------------------------------------------------
TOTAL DEPOSITS $274,016 $248,818 $232,860
Remaining maturities of time certificates of deposit of $100,000 or more, all of
which have fixed rates, are summarized as follows:
<CAPTION>
December, 31, 1997
------------------------
(In Thousands)
<S> <C>
Three months or less $7,514
Over three months through six months 2,807
Over six months through one year 3,983
Over one year 3,107
-----------------------------------------------------------------------------
TOTAL TIME DEPOSITS OF $100 OR MORE $17,411
===================================================== ========================
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The dividend payout ratios were as follows for the periods indicated:
<TABLE>
<CAPTION>
December, 31, 1997
---------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Dividends payout ratio 18.79% 15.62% 15.25% -- --
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1997
Annual Report to Stockholders (an Exhibit to this 10-K), on page 8, and is
incorporated herein by reference.
12
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
VII. SHORT-TERM BORROWINGS
Advances from Federal Home Loan Bank of Boston were as follows:
<TABLE>
<CAPTION>
December 31,
Maturity Date Rate 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
January 30,1997 5.46% - $4,200 $ -
June 9, 1997 6.11% - 1,685 -
June 11, 1997 6.09% - 1,000 -
January 30, 1998 5.69% 3,100 - -
February 20, 1998 5.64% 5,575 - -
October 1, 1998 5.87% 3,000 - -
November 1, 1999 6.05% 2,310 3,412 -
November 1, 1999 6.36% 2,414 - -
June 11, 2001 7.03% 550 550 -
June 19, 2001 6.65% 3,000 3,717 -
December 31, 2002 6.25% 1,650 -
March 19, 2007 6.95% 953 -
March 18, 2008 6.46% 593 -
- -------------------------------------------------------------------------------------------------------------------
$23,145 $14,564 $ -
====================================================================================================================
Maximum amount $23,145 $26,058 $13,359
outstanding during
period
Average amount $17,269 $12,272 $2,958
outstanding during
period
Average interest rate 6.20% 5.92% 6.38%
</TABLE>
ITEM 2. PROPERTIES
NMBT's main office is located at 55 Main Street, in New Milford, Connecticut.
NMBT has nine other offices, all in Connecticut, all with Automated Teller
Machine facilities, and all being full service branch offices, located at:
186 Danbury Road in New Milford;
100 Park Lane Road in New Milford;
45 North Main Street in Kent;
29 Main Street South in Bridgewater;
105 Mill Plain Road in Danbury;
100 Route 37 in New Fairfield;
30 Germantown Road in Danbury;
30 Main Street in Danbury; and
325 Main Street South in Southbury.
13
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
NMBT's Main Office is located on The Green in New Milford in a two-story
building. Owned by NMBT, this facility has eight interior and three drive-in
teller stations and parking for approximately thirty automobiles. NMBT's
executive offices are in this facility. There are no encumbrances on this
facility.
NMBT's South Seven Office at 186 Danbury Road, in New Milford, which opened
in July, 1982, is located in a two-story building and has a floor area of
approximately 2,950 square feet. Leased by NMBT, current lease term expiring in
2012, this facility has six interior and two drive-in teller stations and
parking for approximately twenty-two automobiles. NMBT pays its pro rata share
of real estate taxes and other municipal charges assessed against the facility.
NMBT's Park Lane Office at 100 Park Lane Road in New Milford, which opened in
February, 1988, is located in a 21,000 square foot office building owned by
NMBT. This facility has eight interior and three drive-in teller stations and
parking for approximately 100 automobiles. This building also includes NMBT's
administrative, data processing and operations departments. There are no
encumbrances on this facility.
NMBT's Kent Office at 45 North Main Street in Kent is located in a two-story
building and has a floor area of approximately 1,800 square feet. This facility
opened for business in July, 1983. NMBT's current lease term on this facility
runs until 2005 with two five-year renewal options. This facility has five
interior and two drive-in teller stations and parking for approximately
twenty-two automobiles. NMBT pays its pro rata share of real estate taxes and
other municipal charges assessed each year against the facility.
NMBT's Bridgewater Office at 29 Main Street South in Bridgewater, in a small
shopping center, opened for business in February, 1985. The lease was renewed in
February, 1995 for a five-year term. NMBT pays its pro rata share of taxes and
other center expenses. This facility has three indoor teller stations and shares
a parking area with other center tenants.
NMBT's Mill Plain Office at 105 Mill Plain Road in Danbury, which opened in
August, 1992, is located in a two-story contemporary office building. The branch
floor area consists of approximately 2,500 square feet, with an additional 2,500
square feet leased in the lower level. Currently leased by NMBT until 2002, this
facility has 5 interior teller stations, 2 drive-in teller stations and parking
for approximately thirty-five automobiles. NMBT pays its pro rata share of taxes
and other municipal charges assessed each year against the facility.
NMBT's Candlewood Office at 100 Route 37 in New Fairfield was formerly the
Main office of Candlewood Bank and Trust Company (Candlewood). NMBT succeeded
Candlewood as the lessee when NMBT acquired that institution on April 29, 1994.
The office is located in a two-story office building and has a floor area of
approximately 5,500 square feet. This facility has six interior teller stations,
two drive-in teller stations and shares parking facilities with other building
tenants. The current lease expires September 30, 2006. NMBT pays its pro rata
share of taxes assessed against the facility.
NMBT's Germantown Office at 30 Germantown Road in Danbury was formerly the
branch office of Candlewood and the lease for this office was also assumed as
part of the acquisition. This office is located in the Germantown Plaza Shopping
Center and has a floor area of approximately 1,800 square feet. This facility
has four interior teller stations, one drive-in teller station and shares
parking spaces with other Center tenants. The present lease term expires in 2007
but may be renewed for two additional five-year terms. NMBT pays its pro rata
share of the Center's taxes and other expenses.
NMBT's Danbury Towers Office at 30 Main Street, Danbury, opened April 26,
1995. This branch is located in a five-story contemporary office building called
the Danbury Executive Towers, and has a floor area of approximately 3,700 square
feet. Subleased by NMBT until December, 1999, this facility has 5 interior
teller stations, 2 drive-in teller stations, 15 parking spaces reserved for
customers and shares additional available parking spaces with other Towers
tenants. NMBT pays its pro rata share of taxes and other municipal charges
assessed against the facility.
NMBT's newest branch, the Southbury Office, 325 Main Street South, Southbury,
opened September 15, 1997. Located in a two-story office building, this branch
has a floor area of approximately 3,200 square feet, 4 interior teller stations,
1 drive-in teller station and 1 drive-in ATM. Parking facilities are shared with
other building tenants.
14
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
NMBT pays its pro rata share of the property taxes and other expenses.
ITEM 3. LEGAL PROCEEDINGS
NMBT is a defendant in certain claims and legal actions that arose in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, these proceedings, in the aggregate, are not expected to
have a materially adverse effect on the financial position, results of
operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth in NMBT CORP's 1997 Annual
Report to Stockholders (an Exhibit to this 10-K), on pages 18, 32 and 35, and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in NMBT CORP's 1997 Annual
Report to Stockholders (an Exhibit to this 10-K), on page 8, and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is set forth in NMBT CORP's 1997 Annual
Report to Stockholders (an Exhibit to this 10-K), on pages 10 through 20, and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in NMBT CORP's 1997 Annual
Report to Stockholders (an Exhibit to this 10-K), on pages 21 through 35, and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred during the two
most recent fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
15
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
The information required by this Item is set forth in a definitive proxy
statement (to be filed pursuant to Regulation 14A) and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in a definitive proxy
statement (to be filed pursuant to Regulation 14A) and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in a definitive proxy
statement (to be filed pursuant to Regulation 14A) and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in a definitive proxy
statement (to be filed pursuant to Regulation 14A) and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of NMBT CORP included in the Annual Report
of NMBT CORP to its stockholders for the year ended December 31, 1997 are
incorporated herein by reference:
Consolidated Statements of Condition - December 31, 1997 and 1996
Consolidated Statements of Operations - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Selected quarterly financial data - Years Ended December 31, 1997 and 1996
(B) REPORTS ON FORM 8-K - (FOURTH QUARTER OF 1997)
None
(C) EXHIBITS
2 Agreement and Plan of Reorganization (incorporated by reference to
Exhibit 2 to the Company's Registration Statement on Form 8-A12G filed
on November 25, 1997)
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 2 to
the Company's Registration Statement on Form 8-
3.2 By-Laws (incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-
16
<PAGE>
A12G filed on November 25, 1997)
10. Material Contracts
10.1 Non-Statutory Stock Option Plan (1988) (incorporated by reference to
Exhibit 2 to the Company's Registration Statement on Form 8-A12G filed
on November 25, 1997)
10.2 1994 Stock Option Plan for Employees, Officers, Directors of NMBT
(incorporated by reference to Exhibit 2 to the Company's Registration
Statement on Form 8-A12G filed on November 25, 1997)
10.3 Amendment No. 1 to Non-Statutory Stock Option Plan (incorporated by
reference to Exhibit 2 to the Company's Registration Statement on Form
8-A12G filed on November 25, 1997)
10.4 Amendment No. 1 to 1994 Stock Option Plan (incorporated by reference to
Exhibit 2 to the Company's Registration Statement on Form 8-A12G filed
on November 25, 1997) 10.5 Employment Agreement between NMBT and
Michael D. Carrigan dated January 17, 1996 (incorporated by reference
to Exhibit 2 to the Company's Registration Statement on Form 8-A12G
filed on November 25, 1997)
10.6 Employment Agreement between NMBT and Jay C. Lent dated January 17,
1996 (incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A12G filed on November 25, 1997)
10.7 Employment Agreement between NMBT and Peter R. Maher dated January 17,
1996 (incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A12G filed on November 25, 1997)
11. Statement re: computation of per share earnings (incorporated by
reference to Exhibit 2 to the Company's Registration Statement on Form
8-A12G filed on November 25, 1997)
12. Statements re: computation of ratios (incorporated by reference to
Exhibit 2 to the Company's Registration Statement on Form 8-A12G filed
on November 25, 1997)
13. NMBT CORP's 1997 Annual Report to Stockholders
20. Proxy Statement dated April 3, 1998, for the Annual Meeting of
Stockholders of NMBT CORP
21. Subsidiary of Registrant
(D) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are required to be filed as Exhibits pursuant
to Item 14(d).
17
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1997
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.
(Registrant) NMBT CORP
--------------------------------------------------------------------
By (Signature and Title) s/ Michael D. Carrigan Date March 18, 1998
----------------------------- ------------------
Michael D. Carrigan, President
and Chief Executive Officer
Pursuant to the requirements 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 and as of the dates indicated.
By (Signature and Title) s/ Michael D. Carrigan Date March 18, 1998
------------------------------ ------------------
Michael D. Carrigan, Director,
President and Chief Executive Officer
By (Signature and Title) s/ Jay C. Lent Date March 18, 1998
------------------------------ ------------------
Jay C. Lent, Executive Vice President,
Chief Financial Officer and Secretary
By (Signature and Title) s/ Deborah L. Fish Date March 18, 1998
------------------------------ ------------------
Deborah L. Fish, Treasurer
By (Signature and Title) s/ Kevin L. Dumas Date March 18, 1998
------------------------------ ------------------
Kevin L. Dumas, Director
By (Signature and Title) s/ Louis A. Funk, Jr. Date March 18, 1998
------------------------------ ------------------
Louis A. Funk, Jr., Director
By (Signature and Title) s/ Lawrence Greenhaus Date March 18, 1998
------------------------------ ------------------
Lawrence Greenhaus, Director
By (Signature and Title) s/ Ruth Henderson Date March 18, 1998
------------------------------ ------------------
Ruth Henderson, Director
By (Signature and Title) s/ Robert W. X. Martin Date March 18, 1998
------------------------------ ------------------
Robert W. X. Martin, Director
By (Signature and Title) s/ Terry C. Pellegrini Date March 18, 1998
------------------------------ ------------------
Terry C. Pellegrini, Director
By (Signature and Title) s/ Walter G. Southworth Date March 18, 1998
------------------------------ ------------------
Walter G. Southworth, Director
By (Signature and Title) s/ Jack W. Straub Date March 18, 1998
------------------------------ ------------------
Jack W. Straub, Director
By (Signature and Title) s/ Harry H. Taylor, Jr. Date March 18, 1998
------------------------------ ------------------
Harry H. Taylor, Jr., Director
By (Signature and Title) s/ Arthur C. Weinshank Date March 18, 1998
------------------------------ ------------------
Arthur C. Weinshank, Director
18
EXHIBIT 13
1997 ANNUAL REPORT
It is Our Mission to:
o Be the premier community commercial bank in western Connecticut.
o Create and deliver quality banking products and services that represent
exceptional value. o Provide a stimulating and challenging work environment that
encourages, develops and rewards excellence.
o Serve our local communities with integrity and pride.
Through uncompromising dedication and commitment to the above, we will
continue to be a responsible corporate citizen in the communities in which we
serve and achieve consistent superior financial performance that creates value
for our stockholders.
Contents
Page
----
Financial Highlights....................................... 1
Message to Stockholders.................................... 2
Community Focus............................................. 4
Financial Review............................................ 8
Management's Discussion and Analysis........................ 9
Financial Glossary.......................................... 20
Financial Statements........................................ 21
Quarterly Results of Operations............................. 35
Stock Information........................................... 35
Officers and Board of Directors............................. 36
Offices in: in Fairfield County: New Haven County:
- ----------- --------------------- -----------------
Litchfield County Candlewood Office Southbury Office
Main Office 100 Route 37 325 Main Street South
55 Main Street New Fairfield, CT 06812 Southbury, CT 06488
New Milford, CT 06776 (203) 746-2443 (203) 264-6463
(860) 355-1171
Mill Plain Office NMBT Telephone Banker
South Seven Office 105 Mill Plain Road (860) 350-0104
186 Danbury Road Danbury, CT 06810 (800) 368-6398
New Milford, CT 06776 (203) 748-NMBT
(860) 355-1171
Germantown Office
Park Lane Office 30 Germantown Road
100 Park Lane Road Danbury, CT 06810
New Milford, CT 06776 (203) 743-6004
(860) 355-1171
Danbury Towers Office
Kent Office 30 Main Street
45 North Main Street Danbury, CT 06810
Kent, CT 06757 (203 )792-bank
(860) 927-4681
Bridgewater Office
29 Main Street South
Bridgewater, CT 06752
(860) 355-1137
Branch Officers
- ---------------
Michelle Scott Vice
President - Branch Operations
Nancy Achen Assistant Vice President &
Manager - Main Office
Ann Gollsneider
Assistant Vice President &
Manager - South Seven Office
Suzanne Lee
Assistant Vice President &
Manager - Mill Plain Office
Sharon Maynard
Assistant Vice President &
Manager - Park Lane Office
Glynis Powanda
Assistant Vice President &
Manager - Southbury Office
Linda Wagner
Assistant Vice President &
Manager - Germantown Office
Jean Docktor
Manager - Bridgewater Office
Bonnie Hawthorne
Manager - Kent Office
Candice O'Connell
Manager - Candlewood Office
Florinda Pereira
Manager - Danbury Towers Office
Martha McMahon
Floating Manager
Patrick Perillo
Assistant Manager - Main Office
Renee Lynne Storti
Branch Operations
Advisory Board
- --------------
Frank Benham
Alan Dretel
James Driscoll, III
M. Adela Eads
James Faure
*Norman Flayderman
William Francis
Richard Gabriel
Suzanne Gallup
Maurice Goldstein
Covington Hardee
Kevin Hart
Sanford Kaufman
John Kawulicz
George Kilberg
Robert Kornhaas
*Victor Lautier
Vincent Lucas
Ambrose McGill
Edward Mohr
Gerald Nahley
Mark Prince
*Henry Perlowsky
Thomas Pilla
*Frederick Planz
Richard Pugh
John Rountos
Albert Salame
Thomas Sheehy
Thomas Sides
Terrence Smith
Robert Stebbins
John Stetson
*Edward Tierney
Dolph Traymon
James Winter
* Former member of the
Board of Directors
<PAGE>
December 31,
- --------------------------------------------------------------------------------
Dollars in thousands, except per share data 1997 1996 1995
For the Year Ended:
Net interest and dividend income $13,489 $12,306 $11,379
Noninterest income 1,991 1,640 1,275
Noninterest expense 10,110 10,385 9,798
Net income 2,898 2,792 2,159
At Year End:
Assets $336,566 $305,545 $269,176
Loans 223,909 211,686 198,158
Deposits 285,595 266,161 247,067
Stockholders' equity 25,330 22,565 20,157
Per Share:
Basic earnings $1.12 $1.09 $0.85
Diluted earnings 1.05 1.04 0.83
Book value 9.69 8.72 7.87
Closing bid price 20.00 11.75 9.25
Closing ask price 22.00 12.50 10.25
Selected Ratios:
Return on average assets 0.91% 0.98% 0.84%
Return on average equity 12.25% 13.23% 11.56%
Loan loss allowance to nonperforming loans 110.23% 79.79% 78.57%
Nonperforming assets to total assets 1.02% 1.48% 2.17%
<PAGE>
MESSAGE TO STOCKHOLDERS
NEW HOLDING COMPANY
We are pleased to report to you under our new holding company - NMBT CORP.
In November 1997, we completed the reorganization of The New Milford Bank &
Trust Company ("NMBT") into a holding company structure. The holding company is
known as NMBT CORP, a stock corporation under the laws of the State of Delaware.
NMBT CORP will provide us with the capability to offer comprehensive banking
services through NMBT and may provide, through NMBT and any other subsidiaries
that NMBT CORP may acquire, additional banking and other permissible non-banking
services. The holding company also provides us with additional flexibility with
respect to capitalization and financing, as well as certain tax advantages by
virtue of the consolidated tax rules as they relate to holding companies.
NMBT CORP acquired in a single transaction all of the issued and
outstanding shares of NMBT so that, immediately thereafter, all shares of NMBT
were converted automatically and without further action by our stockholders into
shares of NMBT CORP. By virtue of the reorganization, NMBT stockholders now own
shares of NMBT CORP. Stockholders of NMBT may, but are not required to, exchange
their present NMBT certificates for new certificates representing NMBT CORP
common stock.
CASH DIVIDEND
In January 1998, based upon the financial results for 1997, the Board of
Directors declared a quarterly cash dividend of $0.08 per share. This represents
a 45 percent increase over the dividend declared in the previous quarter. We are
proud to have increased the cash dividend each year since 1995.
STOCK PERFORMANCE
Investor response to our financial results has been gratifying. During the
past two years NMBT CORP's common stock has recorded excellent price
appreciation, closing on December 31, 1997 at $20.00 per share, up 60 percent
over 1996's close of $12.50 per share, and up 105 percent over 1995's close of
$9.75 per share.
FINANCIAL PERFORMANCE
We are pleased to report that NMBT CORP's 1997 net income increased 4
percent to $2,898,203, or $1.05 diluted earnings per share for the year ended
December 31, 1997, as compared to net income of $2,791,563, or $1.04 diluted
earnings per share for fiscal 1996. Basic earnings per share were $1.12 for
1997, as compared to $1.09 for 1996. This represents the fifth consecutive year
of increased earnings. The past three years have been record earnings years for
the Company. For comparative purposes, pre-tax income increased 51 percent to
$4,788,203 for the year ended December 31, 1997, as compared to pre-tax income
of $3,170,563 for fiscal 1996.
The increase in operating earnings was accomplished despite an increase in
the effective tax rate from 12 percent in 1996 to approximately 40 percent in
1997. In addition, during the fourth quarter the holding company reorganization
was completed and we opened a new full service office in Southbury. The
improvement in net income for fiscal 1997, as compared to 1996, is a reflection
of increased interest-earning assets and continued improvement in operating
efficiency. Growth in earning assets is the product of strong loan growth and an
increase in investment securities,
<PAGE>
which assets were funded by a 7.3 percent increase in deposits coupled with a
continuation of a modest leverage strategy. Also contributing to the improved
financial performance was a 21.4 percent increase in noninterest income, due to
better than expected activity in mortgage banking and increased fee income.
NETWORK EXPANSION
In 1997, NMBT opened its tenth full service office on Main Street in
Southbury. We are targeting the Southbury area due to its recent and projected
growth. We have installed a new drive-up automated teller machine ("ATM") as an
added convenience for our customers in the Southbury area. NMBT is making its
debut in New Haven County and intends to look for other towns in Fairfield
County and New Haven County for expansion in 1998. By opening our newest office
we have expanded our network by adding Newtown, Southbury and Woodbury to our
market territory. This expansion strategy has enabled NMBT to increase deposits
by $19.4 million, or 7.3 percent, in 1997. We also added two ATM's inside
grocery stores in 1997. We corroborated with Deep's Market in Danbury and The
Southbury Food Center in an effort to provide greater convenience to our
customers and the community at large.
We continued to invest in equipment and personnel to achieve growth and
efficiency. In 1997, we generated almost $100 million in new loans. In
particular, our mortgage banking operation is expanding rapidly. Residential
mortgage originations (excluding home equity loans) were $49 million in 1997, an
increase of 75 percent over the previous year. Commercial loans also grew during
1997. Commercial loan officers are focusing on building total relationships with
local businesses throughout western Connecticut.
RETIREMENT OF JACK STRAUB
At the annual meeting of stockholders scheduled for May 5, 1998, Jack
Straub will retire from the Board of Directors after 23 years of service. Since
NMBT's inception in 1975, Jack and NMBT have been synonymous. Jack was one of
the major forces that brought NMBT into existence. His hard work helped make
NMBT prosper in the early years. Jack became Chairman of the Board in 1986. Jack
guided NMBT through rough economic times in the late eighties and early
nineties, the merger with Candlewood Bank and Trust Company in 1994 and
ultimately to prosperity and record earnings. On behalf of all NMBT
stockholders, employees and friends, we would like to thank Jack for his
guidance, dedication, understanding and support. It is an understatement to say
that his presence will be greatly missed.
CLOSING THOUGHTS
As we look ahead, the traits that differentiate NMBT - teamwork, strong
credit quality, personalized service and a strong commitment to the community -
will continue to serve our stockholders well as financial services industry
challenges escalate. We will continue to focus on bringing more revenue to the
bottom line without impacting customer service and to continue investing our
capital wisely.
Focus on achievement of our goals and teamwork produced the results that
are reflected in our stock price and our asset growth. We want to thank each and
every one of our dedicated employees for staying focused on the basics, which
resulted in another successful year.
Finally, we want to thank our stockholders, customers, suppliers, Board of
Directors and the communities in which we operate for their confidence and
support.
2
<PAGE>
COMMUNITY FOCUS
COMMUNITY BANKING
NMBT's success story rests soundly on years of experience as a true
community bank. An original hometown bank, NMBT keeps banking local. All
decisions are made locally. All employees are neighbors living in the
communities they serve. Plus we reinvest back into our communities to help them
grow and thrive.
Each NMBT branch is staffed with dedicated personnel thoroughly trained and
educated to provide leading-edge financial services to consumer and business
customers. Exceptional banking services, combined with personal customer
service, is the driving force behind the success of NMBT. And it's working.
Starting from a united town effort to create a bank that meets the needs of the
community, NMBT opened in New Milford in 1975. From that one branch emerged a
community bank that has grown to serve the surrounding communities from Kent to
Danbury to Southbury.
REINVESTING IN THE COMMUNITY
NMBT's accomplishments rest in the generations of tradition set in our
local communities. NMBT customers are quick to identify - and reward - a
community bank that recognizes the needs of area residents and businesses.
"Reinvesting resources in the community is a good investment," said Michael D.
Carrigan, President and CEO of NMBT. "But more importantly, it's the right thing
to do."
NMBT has long been a cornerstone of the communities it serves, providing
not only the necessary loans and investments to grow the community, but with a
fundamental dedication which manifests itself in volunteer work and gifting
programs.
NEW MILFORD HOSPITAL'S RADIATION ONCOLOGY PROJECT
"I want to express deep appreciation for your support for our Radiation
Oncology Project. I truly believe that the commitment NMBT has made will insure
our success and will be a gift that will keep on giving for decades to come,"
said Richard E. Pugh, President and CEO of New Milford Hospital.
New Milford Hospital and Columbia - Presbyterian Medical Center are
completing the final phase of their Comprehensive Cancer Center with the
addition of one of the finest radiation therapy programs available in the State
of Connecticut. Serving the needs of cancer patients and their families, this
center will expand radiation therapy services to patients who now drive
considerable distances for treatment. NMBT was one of the leading institutional
donors with a pledge of $200,000 to get the project funding off to a start.
"NMBT is proud to do our small part by donating much needed funds to this
phenomenal project," said Mr. Carrigan. "NMBT considers such contributions as
part of its corporate goals: Effectively servicing the communities with more
than sound financial advice and services. With daily gratitude as well."
3
<PAGE>
COMMUNITY FOCUS
NMBT SOUTHBURY 10K FALL CLASSIC
The newest NMBT branch opened in September of 1997 in Southbury, and NMBT
became the major sponsor of Southbury's community road race. Launched 8 years
ago by the Southbury Business Association, the NMBT 10K Fall Classic is the
funding vehicle for scholarship funds for Pomperaug High School. "This year's
race raised funds for a deserving Southbury high school student," said Glynis
Powanda, Assistant Vice President and Southbury Branch Manager of NMBT. "It's an
outpouring of community support," Ms. Powanda said. "Over 250 runners
participated, and hundreds of local residents rallied to donate time, money and
the best food at any race in Connecticut."
ANN'S PLACE - HOME OF I CAN
Founded in 1991 by cancer survivors for cancer survivors, I CAN has long
provided services and support groups for the residents of Danbury and
surrounding towns whose lives have been affected by cancer. "It's always been a
dream of I CAN to have a free-standing home to be easily recognized, on a bus
route, accessible to the clients served," said Nancy K. Dolan, Vice President of
Business Development for NMBT. In December, NMBT with the City of Danbury,
donated the land and building at 24 Padanaram Road to I CAN.
4
<PAGE>
"Our commitment to I CAN does not stop with this donation," Ms. Dolan said.
"This is where it starts. My job is to organize the entire community for
restoration and construction of a new building. This is an ongoing support
commitment from NMBT."
FUTURE TRENDS
With technology ever-changing, NMBT is committed to keep up with the
technologies and provide the most sophisticated banking services available to
the communities we serve. Offering Cash Management for Businesses, Corporate
Lines of Credit, Telephone Banking and MasterMoney(TM) Debit Cards keeps NMBT
current with even the "biggest" bank.
With record growth, successful new branches, and thousands of satisfied
customers, we highly anticipate a prosperous future for NMBT. We look forward to
expansive opportunities in Fairfield and New Haven counties as we expand to meet
the needs of these Connecticut neighbors. By growing with technology and
maintaining superior customer service, more and more of our neighbors look to
NMBT for a stronger, more personal, more reliable banking relationship. A
community relationship.
"By reinvesting in the communities we serve, we are investing in our
customer's future, and subsequently our own future. It's a priority amongst
individual NMBT branches as well as the company as a whole: It's part of who we
are."
5
<PAGE>
FINANCIAL REVIEW
The following selected financial data for the five years ended December 31, 1997
is derived from the consolidated financial statements of NMBT CORP. Balances are
as of and for the years ended December 31.
<TABLE>
<CAPTION>
Dollars in thousands, except for per share data 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Statements of condition:
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $336,566 $305,545 $269,176 $252,485 $202,244
Securities 84,005 63,761 40,206 38,859 41,111
Loans, net 220,372 208,474 194,605 186,946 140,392
Deposits 285,595 266,161 247,067 225,758 176,324
Stockholders' equity 25,330 22,565 20,157 17,546 16,775
Statements of operations:
- --------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 22,709 $ 20,300 $ 18,463 $ 14,797 $ 12,673
Interest expense 9,220 7,994 7,084 4,757 4,965
Net interest income 13,489 12,306 11,379 10,040 7,708
Provision for loan losses 582 390 160 240 155
Noninterest income 1,991 1,640 1,275 1,214 1,154
Noninterest expense 10,110 10,385 9,798 9,336 7,899
Income before income taxes 4,788 3,171 2,696 1,678 808
Provision for income taxes 1,890 379 537 339 52
Net income 2,898 2,792 2,159 1,339 756
Common stock data:
- --------------------------------------------------------------------------------------------------------------------------
Book value per share $9.69 $8.72 $7.87 $6.93 $6.63
Tangible book value per share 9.49 8.43 7.48 6.40 6.63
Basic earnings per share 1.12 1.09 0.85 0.53 0.30
Diluted earnings per share 1.05 1.04 0.83 0.53 0.30
Cash dividends per share 0.21 0.17 0.13 0.00 0.00
Selected ratios:
- --------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.91% 0.98% 0.84% 0.58% 0.37%
Return on average equity 12.25% 13.23% 11.56% 7.83% 4.74%
Net interest spread 4.21% 4.33% 4.50% 4.50% 3.87%
Net interest margin 4.67% 4.73% 4.82% 4.74% 4.12%
Stockholders' equity to total assets 7.53% 7.39% 7.49% 6.95% 8.29%
Nonperforming assets to total assets 1.02% 1.48% 2.17% 2.62% 3.76%
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
NMBT CORP (the "Company"), a Delaware corporation formed in 1997, is the
registered bank holding company for The New Milford Bank & Trust Company
("NMBT"), a wholly-owned subsidiary formed in 1975. The Company's activity is
currently limited to the holding of NMBT's outstanding common stock. NMBT is the
Company's only subsidiary and its primary investment. The net income of the
Company is presently derived entirely from the business of NMBT.
On November 25, 1997, NMBT completed a change in its corporate structure
with the formation of its parent holding company -- NMBT CORP. The Company
provides the capability to offer comprehensive banking services through NMBT and
may provide, through NMBT and any other subsidiaries that NMBT CORP may acquire,
additional banking and other permissible non-banking services. The holding
company structure provides the Company with maximum flexibility in pursuing
financial opportunities as they present themselves.
NMBT, headquartered in New Milford, Connecticut, is a state-chartered bank
and trust company. NMBT's principal business is to provide full banking services
to individuals and businesses in western Connecticut. Deposits are insured up to
applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"). NMBT's lending activities consist of originating
loans collateralized by residential and commercial properties, and extending
collateralized and uncollateralized loans to consumers and businesses. NMBT
serves its market through a network of ten banking offices located in New
Milford, Kent, Bridgewater, New Fairfield, Southbury and Danbury.
As of December 31, 1997, the Company had total assets of $336.57 million,
up from $305.55 million as of December 31, 1996. The growth in assets is the
product of strong loan growth and an increase in securities, which assets were
funded by an increase in deposits coupled with a modest leverage strategy. Loans
grew $12.22 million or 5.8 percent, mainly in higher yielding commercial and
installment loans. During 1997, the Company's Board of Directors declared four
quarterly cash dividends totaling $0.54 million, or $0.21 per share.
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and notes to financial statements.
RESULTS OF OPERATIONS
SUMMARY
Results of operations are largely dependent upon net interest income, which
is the difference between interest and dividend income on earning assets, such
as loans and securities, and interest expense on deposits and borrowings.
Interest and dividend income on loans, securities and interest-bearing deposits
is a function of the average balances outstanding during the period and the
average yields earned. Interest expense on deposits and borrowings is similarly
a function of average balances outstanding and the average rates paid. Results
of operations are also affected by: the provision for loan losses, noninterest
income, such as service charges on deposits and other fee-based revenues;
noninterest expense; and income taxes.
Operating results have benefited considerably in the past three years from
continued improvements in overall asset quality and reduced noninterest expenses
as a percent of net revenues. The Company recorded net income of $2.90 million
or $1.05 diluted earnings per share for 1997, compared to net income of $2.79
million or $1.04 diluted earnings per share for 1996 and net income of $2.16
million or $0.83 diluted earnings per share for 1995. The 4 percent rise in net
income from 1996 to 1997 results primarily from the increase in interest-earning
assets, continuation of a modest leverage strategy and marked improvement in
operating efficiency. The 29 percent rise in net income from 1995 to 1996
results primarily from an increase in interest-earning assets, which assets were
funded by a favorable mix of low cost deposits and Federal Home Loan Bank
("FHLB") advances, coupled with improved operating efficiency.
COMPARISON OF YEARS ENDED
DECEMBER 31, 1997 AND 1996
NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income (interest income less interest expense)
increased $1.18 million, or 9.6 percent from 1996 to 1997. During the same time
period, the net interest margin declined from 4.73 percent in 1996 to 4.67
percent in 1997. The decrease in the margin can be attributed to a strategy of
increasing the size of the bank with leverage and maintaining certificates of
deposit by matching the rates of competitors when necessary so as to maintain
market share in existing markets and penetrate new markets. The effect of this
approach is to increase the overall level of growth, albeit at a lower interest
rate spread. Overall, deposits increased $19.4 million from December 31, 1996 to
December 31, 1997, mostly in interest-bearing checking and certificates of
deposit. In addition, FHLB advances were utilized to match fund material fixed
rate commercial loans to lock in spreads when variable rate loans were not
suitable to the borrower. These funding strategies had the effect of increasing
the overall cost of funds. Interest expense increased at a faster rate than
interest income from 1996 to 1997 mainly due to the change in the mix of
deposits mentioned above, and the addition of new business at lower spreads than
in previous years.
NONINTEREST INCOME
Noninterest income increased from $1.64 million in 1996 to $1.99 million in
1997, primarily due to increases in insufficient funds charges, fee income from
ATM and debit cards, and expanded mortgage-banking activities. Service charges
on deposit accounts increased $0.07 million due to increased ATM servicing fee
income from higher transaction volume and additional ATM machines, increased
fees for insufficient funds and higher fees from an increase in the number of
Mastermoney debit card transactions. Income from mortgage banking activities
increased $0.18 million due to increased loan servicing fees and gains on the
sales of fixed rate mortgages. Increases in mortgage banking income reflects the
Company's strategy of increasing its mortgage servicing portfolio, which grew
from $12.2 million at December 31, 1996 to $20.9 million at December 31, 1997.
Other charges, commissions and fees increased $0.03 million mainly on the
strength of additional merchant credit card transactions as the Company
continues to expand its network of merchant credit card processing sites. Other
income increased $0.07 million due to interest income received from the recovery
of federal and state income taxes from amending prior year income tax returns
and a greater increase in the cash surrender value of life insurance for
contracts related to the 1986 deferred compensation plan.
NONINTEREST EXPENSE
Noninterest expense decreased $0.28 million or 2.6 percent to $10.11
million in 1997, down from $10.39 million in 1996. The decrease is primarily
attributable to an overall improvement in operating efficiency from 1996 to 1997
as a result of management's continued focus on cost control, asset growth
without increases to staff, migration to more part-time workers and the
reduction of nonperforming assets. All of these factors served to control
noninterest expenses, despite a 10.2 percent increase in total assets.
Compensation and benefits increased $0.34 million or 6.8 percent mainly due to
the opening of the Southbury Office and increased staffing in the loan
departments to accommodate demand. Other operating expenses were down $0.19
million or 12.2 percent due to stronger cost controls. In addition, 1996 other
operating expenses included approximately $0.10 million for settlement of a
legal claim and the associated legal fees and a $0.02 million loss in connection
with the robbery of the Mill Plain Office. Improvements in 1997
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
operating efficiency more than offset the opening of NMBT's tenth full service
office in Southbury in September 1997 and approximately $0.08 million in
expenditures associated with reorganization into a holding company structure.
None of the expenses associated with establishing the holding company were
capitalized.
COMPARISON OF YEARS ENDED
DECEMBER 31, 1996 AND 1995
NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income increased $0.93 million, or 8.1 percent
from 1995 to 1996. The net interest margin decreased during that same time frame
from 4.82 percent in 1995 to 4.73 percent in 1996. The increase in net interest
income is the product of strong loan growth and an increase in securities, which
assets were funded by a $19.09 million, or 7.7 percent, increase in deposits
coupled with a modest leverage strategy using $14.56 million in FHLB advances.
Loans grew more than $13.53 million, fueled mainly by commercial and installment
loans, almost all variable rate in nature. This caused net interest and dividend
income to accelerate at a pace, which outdistanced the nominal contraction in
the net interest spread. The decrease in the spread was primarily the result of
increased competition and the addition of FHLB advances to fund the modest
leverage strategy. These FHLB advances were used to fund securities at an
average spread between 1 and 2 percent, thereby lowering the overall spread.
Beginning in 1996, the FDIC has all but eliminated the federal deposit
premiums banks pay to insure deposits. This elimination of FDIC premiums for
most of the nation's banks may encourage banks to raise core deposit rates
without negatively impacting earnings. If disintermediation accelerates,
financial institutions may be forced to raise core deposit rates to maintain
deposits. This could negatively impact NMBT's net interest income and spread.
NONINTEREST INCOME
Noninterest income increased from $1.28 million in 1995 to $1.64 million in
1996, principally due to increases in service charge and fee income and expanded
mortgage banking activities since management began a program of selling
principally all fixed rate mortgages servicing-retained in May 1994.
NONINTEREST EXPENSE
Noninterest expense increased $0.60 million or 6.1 percent to $10.39
million in 1996, up from $9.80 million in 1995. The increase was primarily
attributable to increased general operating expenses, which included, among
other normal expense increases reflective of volume, a one-time charge of $0.12
million for a reduction in the assumed discount rate used to record the deferred
compensation liability, an increase of $0.08 million in advertising
expenditures, $0.10 million for settlement of litigation and associated legal
fees, and $0.02 million related to a robbery of the Mill Plain Office. Overall
operating efficiency improved from 1995 to 1996 as a result of management's
continued focus on cost control, continued efficiencies derived from the second
full year of combined operating results after the Candlewood merger, migration
to part-time workers, technological upgrades in data processing, and the
reduction of nonperforming assets. All of these factors served to control
noninterest expense and kept their increase below the increase in asset growth
and revenues.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses totaled $0.58 million for 1997, compared to
$0.39 million for 1996 and $0.16 million in 1995.
Net loan charge-offs for fiscal 1997 were $0.24 million, versus $0.53
million in 1996 and $0.57 million in 1995. The increased provision for loan
losses in 1997 and 1996 reflects growth in the commercial and installment loan
portfolios. The provision for loan losses reflects management's assessment of
the adequacy of the allowance for loan losses. The amount of future provisions
will be a function of the regular monthly review of the allowance for loan
losses, which considers among other things the risk characteristics of the loan
portfolio and economic conditions existing at the time. The provisions for loan
losses reflect management's analysis of the risk elements of the loan portfolio,
current delinquency rates and payment trends (including the reduced level of
charge-offs in 1997 compared to 1996).
The Company determines its allowance and provisions for loan losses based
upon a detailed evaluation of the loan portfolio through a process, which
considers numerous factors. These factors include estimated credit losses based
on 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 by regulatory authorities.
Determining the level of the allowance at any given period is difficult,
particularly during deteriorating or uncertain economic times. Management must
make estimates using assumptions and information, which is often subjective and
changing rapidly. The review of the loan portfolio is a continuing process in
light of a changing economy and the dynamics of the banking and regulatory
environment.
Management believes the overall level of the allowance for loan losses was
adequate at December 31, 1997 and 1996. Should the economic climate deteriorate
borrowers could experience difficulty and the level of nonperforming loans,
charge-offs and delinquencies could rise and require increased provisions for
loan losses. In
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
------------------------------------------
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $3,212 $3,553 $3,965
Provision for loan losses charged against income 582 390 160
Transfer to liability for estimated losses from off-balance sheet
credit instruments (20) (200) -
Loan losses, net of recoveries (237) (531) (572)
Allowance for loan losses at end of year $3,537 $3,212 $3,553
- ----------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses:
to nonperforming loans 110.2% 79.8% 78.6%
to total loans 1.6% 1.5% 1.8%
Provision for loan losses to average loans 0.3% 0.1% 0.1%
Loan losses, net of recoveries to average loans 0.1% 0.3% 0.3%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 judgments of information available to them at the time of their
examination. NMBT was examined by the State of Connecticut Department of Banking
as of September 30, 1997, and no additions to the allowance for loan losses were
requested as a result of this examination. For a discussion of nonperforming
assets, see "Asset Quality."
PROVISION FOR INCOME TAXES
The Company returned to a fully taxable reporting basis on January 1, 1997
following the recognition of substantially its entire deferred tax asset at
December 31, 1996. Net income for 1997 included an income tax provision of $1.89
million (a 39.5 percent effective tax rate), as compared to the 1996 provision
for income taxes of $0.38 million (a 12.0 percent effective tax rate) and the
1995 provision for income taxes of $0.54 million (a 19.9 percent effective tax
rate). The 1996 provision for income taxes was lower due to the recognition of
deferred tax benefits in the fourth quarter of 1996. The 1995 provision for
income taxes was also positively impacted by the recognition of deferred tax
benefits.
The recognition of deferred tax benefits resulted from a reduction in the
Company's valuation allowance on its deferred tax asset, which reflected
improved financial performance marked by improving core earnings, consistent
reductions in nonperforming assets, and a positive outlook for earnings in the
future. Recognition of these future tax benefits in 1996 required that earnings
in 1997 and future periods be tax effected at the statutory federal and state
rates, adjusted for any permanent differences. As a result, the Company's 1998
fiscal year quarterly earnings will, in all likelihood, continue to be reported
on a fully taxable basis with an effective tax rate of approximately 40 percent
of pre-tax income.
ASSET/LIABILITY MANAGEMENT
One of the Company's primary financial objectives is to manage the interest
rate risk inherent in its business. This is accomplished by reducing the
sensitivity of its earnings to interest rate fluctuations, improving its
interest rate spread, improving the ratio of its interest-earning assets to
interest-bearing liabilities and achieving a better matching of the maturities
and interest rate sensitivities of its assets and liabilities. A better matching
is achieved through originating adjustable rate or short-term mortgage and
commercial loans, obtaining longer duration sources of funds, and selling
long-term, fixed rate loans. These efforts can be expected to result in shifts
in the Company's one-year gap from time to time to reflect management's
forecasts of the interest rate environment.
The Company monitors its interest rate risk exposure on a quarterly basis
using both traditional gap analysis to identify short and long-term interest
rate risk positions, and simulation analysis to measure the amount of short-term
earnings at risk under rising and falling interest rate scenarios.
Gap analysis measures the difference between the amount of assets and the
amount of liabilities that mature or are repriced during a given time frame. A
"positive" gap results when more assets than liabilities mature or are repriced
in a given time frame (denotes asset sensitivity). Conversely, a "negative" gap
results when more liabilities than assets mature or are repriced during a given
time frame (denotes liability sensitivity).
The following table sets forth the Company's interest rate sensitivity
position, or gap position, at December 31, 1997, measured in terms of the volume
of interest rate sensitive assets and liabilities that are subject to repricing
in future time periods. For purposes of this analysis, all checking and savings
accounts have been presented within the one-month category. Nonaccrual loans
have been presented in the noninterest-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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents average balance sheets (daily averages),
interest income and interest expense, and the corresponding yields earned and
rates paid. The average loan balances include both performing and nonperforming
loans. Interest income on loans does not include interest on loans for which
interest is no longer accrued.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
1997 1996 1995
---- ---- ----
TAX TAX TAX
ASSETS AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: Dollars in thousands
Loans (1) $216,665 $17,791 8.21% $203,928 $16,534 8.11% $193,751 $15,845 8.18%
Taxable securities 60,015 4,026 6.71% 50,952 3,371 6.62% 38,936 2,424 6.23%
Tax-exempt securities 12,959 887 6.85% 6,219 422 6.79% 483 36 7.43%
Interest-bearing deposits 5,612 301 5.37% 2,154 113 5.25% 2,958 170 5.74%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 295,251 23,005 7.79% 263,253 20,440 7.76% 236,128 18,475 7.82%
- ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 16,387 15,312 13,979
Premises and equipment, ne t 3,641 3,760 3,927
Other assets 5,751 5,597 6,005
Allowance for loan losses (3,434) (3,469) (3,552)
- ------------------------------------------------------------------------------------------------------------------------------
Total $317,596 $284,453 $256,487
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposit s $240,000 $8,144 3.39% $220,137 $ 7,255 3.30% $210,255 $ 6,869 3.27%
FHLB advances
and capital leases 17,301 1,076 6.22% 12,376 739 5.97% 3,113 215 6.91%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 257,301 9,220 3.58% 232,513 7,994 3.44% 213,368 7,084 3.32%
- ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
Deposits 34,016 28,681 22,605
Other liabilities 2,611 2,160 1,844
Total liabilities 293,928 263,354 237,817
Stockholders' equity 23,668 21,099 18,670
- ------------------------------------------------------------------------------------------------------------------------------
Total $317,596 $284,453 $256,487
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,785 $12,446 $11,391
Less FTE adjustment 296 14 12
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income per
income statement $13,489 $ 12,306 $11,379
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread (FTE) 4.21% 4.33% 4.50%
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin (FTE) 4.67% 4.73% 4.82%
- ------------------------------------------------------------------------------------------------------------------------------
(1) included in interest income from loans is accretion (amortization ) of net deferred loan fees and costs.
</TABLE>
The Company maintains a relatively balanced position for managing interest
rate risk. At December 31, 1997, the one-year negative gap was -$42.7 million,
or 12.7 percent of total assets. Management as warranted by market conditions
can quickly modify this gap position. The Board of Directors is briefed on
tactical and strategic issues inherent in the Company's gap position. The gap
analysis reflects liability sensitivity, while the income simulation displays
asset sensitivity. This difference in results between the two approaches is
caused by inclusion of all checking and savings deposits as immediately
repricable for purposes ofcomputing the gap. Management is unable to reliably
document customer behavior when rates change and has chosen to maintain its
position that, technically, all core deposits are immediately repricable.
Consequently, this causes the gap analysis to indicate liability sensitivity.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
To translate this into an effective income simulation, management documents
the relative changes in deposit rates in relation to changes in market interest
rates. This relationship is then used to adjust rates on core deposits in the
model to reflect a more accurate income simulation. Since the income simulation
takes into account the dynamics of management decisions, the proportionate
adjustments to core deposit rates relative to market rates, options risk and
predicted customer behavior; it has proven to be a reliable measure by which to
project earnings volatility. The income simulation shows that the Company is
actually asset sensitive and earnings do better in a rising rate environment
than they do in a falling rate environment.
The Company structures its loan and securities portfolios to provide for
portfolio repricing consistent with its interest rate risk objectives, and to
ensure that earnings at risk to short-term interest rate fluctuations will not
exceed +/- 10 percent of net interest income. 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
rate fluctuations than other funding sources and, therefore, provide a
reasonably stable and cost-effective source of funds.
Based on the Company's asset/liability mix at December 31, 1997,
management's simulation analysis of the effects of changing interest rates on
net income over a twelve month forecast horizon projects that a gradual 200
basis point increase or decrease in market interest rates would result in a net
interest income fluctuation of less than 5 percent.
The sensitivity table presents an analysis of the sensitivity inherent in
the Company's net interest income. The interest rate scenarios presented in the
table include interest rates at December 31, 1997 and as adjusted by gradual
rate changes upward and downward of 200 basis points over a one-year period.
Each rate scenario reflects unique prepayment and repricing assumptions.
Since there are limitations inherent in any methodology used to estimate
the exposure to changes in market interest rates, this analysis is not intended
to be a forecast of the actual effect of a change in market interest rates on
the Company. The net interest income variability reflects the Company's asset
sensitivity (defined here) and does not include the decrease in earnimgs from an
increase in amortization of servicing intangible assets that may be caused by
higher prepayments when rates decline. Further, this analysis is based on the
Company's assets, liabilities and off-balance sheet instruments at December 31,
1997 and does not contemplate any actions the Company might undertake in
response to changes in market interest rates.
- --------------------------------------------------------------------------------
SENSITIVITY TABLE
Change in Interest Rates Board Limit Net Interest Income
- --------------------------------------------------------------------------------
(Basis points)
+200 10.00% 2.40%
0 0.00% 0.00%
-200 (10.00%) (4.42%)
- --------------------------------------------------------------------------------
Management currently anticipates that it will maintain a negative one-year
gap throughout 1998 to reflect, among other things, the lag in repricing of
checking and savings deposits, which deposits are all considered immediately
repricable in the gap analysis.
Management has continued to focus its marketing efforts on the origination
of adjustable rate loans for its own portfolio. The origination of adjustable
rate loans reduces interest rate risk by increasing the portion of the loan
portfolio that constitutes interest sensitive assets. Increased borrower demand
for fixed rate loans continued during 1997 as interest rates remained at
historical lows throughout the year. The increased refinancing activities as a
result of the favorable interest rate environment has made it much more
difficult to maintain the spread between yields on assets and rates paid on
liabilities.
Stable interest rates throughout the year allowed the Company to maintain
the yield earned on assets, which was offset by increases in interest-earnings
assets. This increase in assets was funded by mix of interest-bearing checking
accounts and higher-cost certificates of deposit. Larger fixed rate commercial
loans and longer-term consumer loans were match funded with FHLB advances. The
leveraging of the aforementioned growth with higher cost deposits and advances
combined to decrease the spread realized between the yield on assets and the
cost of funds. Stable rates in 1997 did nothing to slow the continued migration
from savings and transaction accounts to time deposits. This changing deposit
mix is expected to continue into 1998.
The table below summarizes the year-to-year changes in net interest income
resulting from fluctuations in interest rates and from volume changes in
interest-earning assets and interest-bearing liabilities. Changes due to rate
are the change in rate multiplied by the prior year's volume. Changes due to
volume are the change in volume multiplied by the prior year's rate. Changes in
volume and rate that cannot be separately identified have been allocated in
proportion to the relationship of the absolute dollar amounts of the changes in
rate and volume.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE)DUE TO INCREASE (DECREASE) DUE TO
------------------------- --------------------------
Dollars in thousands Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans $1,044 $213 $1,257 $ 824 ($135) $689
Taxable securities 608 47 655 787 160 947
Tax-exempt securities (FTE) 461 4 465 389 (3) 386
Interest-bearing deposits 185 3 188 (43) (14) (57)
- ---------------------------------------------------------------------------------------------------------------
2,298 267 2,565 1,957 8 1,965
- ---------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits 669 220 889 326 60 386
FHLB advances and capital leases 305 32 337 549 (25) 524
- ---------------------------------------------------------------------------------------------------------------
974 252 1,226 875 35 910
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST INCOME $1,324 $ 15 $1,339 $1,082 ($27) $1,055
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SECURITIES
The principal categories of the securities portfolio, including both
available for sale and held to maturity, are as follows:
<TABLE>
<CAPTION>
SECURITIES DECEMBER 31,
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $38,186 45.5% $23,777 37.3%
Municipal securities 17,385 20.7 8,859 13.9
Mortgage-backed securities 26,674 31.7 29,583 46.4
- --------------------------------------------------------------------------------
Total debt securities 82,245 97.9 62,219 97.6
FHLB stock 1,760 2.1 1,542 2.4
- --------------------------------------------------------------------------------
Total securities $84,005 100.0% $63,761 100.0%
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, 85.2 percent of the securities portfolio was invested
in fixed rate securities, 12.7 percent in adjustable rate securities and 2.1
percent in FHLB stock. Fixed rate securities include US Treasury and agency
obligations, mortgage-backed securities ("MBS") and Connecticut municipal
obligations. Fixed rate MBS are generally in securities with relatively stable
cash flows. Management actively monitors the prepayments of its MBS. Adjustable
rate securities, which consist of six-month and one-year ARM securities,
generally reprice monthly based on pre-determined spreads over various
underlying indices and are subject to annual and lifetime caps. Some fixed rate
agency securities are match funded with FHLB advances. Adjustable rate
securities are tied to the London Interbank Offered Rate ("LIBOR") or US
Treasury rates.
Securities purchased with the intent to hold to maturity for the purpose of
earning interest income are stated at cost, and adjusted for amortization of
premiums and accretion of discounts. Securities which management does not intend
to hold to maturity are categorized as available for sale. Trading securities
are prohibited by policy.
At December 31, 1997, securities totaling $48.13 million, or 57.3 percent,
were classified as available for sale and securities totaling $35.88 million
were classified as held to maturity. Included in stockholders' equity at
December 31, 1997 is an adjustment of $0.38 million, net of taxes, relating to
the net unrealized gain on the available for sale portfolio. No credit losses
are anticipated and all unrealized gains and losses are expected to reverse as
the available for sale 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.
On occasion, available for sale securities are sold prior to maturity and
the proceeds are used to fund loans when deposit in-flows are not adequate, the
rates offered on FHLB advances are not favorable, and liquidity ratios support
sales. Management believes this restructuring to be prudent since it provides an
opportunity to reinvest the proceeds from sales of securities in higher yielding
loans. Management also occasionally sells available for sale securities to
restructure an asset/liability mismatch, reduce exposure to interest rate
fluctuations, improve its tax position or for other specific purposes.
LENDING ACTIVITIES
SUMMARY
The Company's lending operation is currently divided into three primary
functions: residential mortgage lending, commercial lending and consumer lending
(including automobile loans, personal loans, guaranteed student loans and home
equity loans).
Residential mortgage lending is the focus of the Company's community
strategy. To increase originations, the Company seeks referrals from real estate
brokers and other sources and originates residential first and second mortgage
loans. The Company generally receives fees for originating loans and making loan
commitments, which fees are generally deferred and amortized over the life of
the loan.
Statute and regulation limit the amount the Company is permitted to lend to
one borrower. At December 31, 1997, the maximum amount which the Company could
lend to one borrower (and related entities) was $4.32 million ($7.20 million for
loans fully secured by readily marketable collateral). At December 31, 1997, the
Company had no loans that exceeded either limit.
The Company uses its funds primarily for lending. Total loans increased by
$12.22 million or 5.8 percent from December 31, 1996 to December 31, 1997.
The principal categories of the loan portfolio are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
LOANS DECEMBER 31,
- -------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized by one to four family
residential properties $139,787 62.4% $137,008 64.7%
Collateralized by five or more family
residential properties 549 0.2 1,434 0.7
Commercial properties 48,532 21.7 46,044 21.8
Construction and development 7,299 3.3 5,999 2.8
Commercial and industrial 17,818 8.0 13,203 6.2
Installment and education 8,994 4.0 7,128 3.4
Cash reserve and credit cards 930 0.4 870 0.4
- -------------------------------------------------------------------------------------------
Total loans $223,909 100.0% $211,686 100.0%
- -------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is primarily a real estate lender. In recent years, management
has attempted to increase the proportion of commercial, industrial and
commercial real estate loans. The commercial lending department has focused on
lending to small businesses with annual sales of up to $20 million. The Company,
which began selling residential mortgage loans in May 1994, has had success
building its mortgage servicing portfolio, which grew $8 million in 1997 and now
totals more than $20 million at December 31, 1997. This trend is expected to
continue and produce higher levels of noninterest income from gains on the sales
of loans (primarily government-sponsored loans) and mortgage servicing fees. The
Company's policy is to emphasize loans utilizing variable rates as much as
possible to protect its net interest margin and liquidity when the cost of its
deposits fluctuate.
RESIDENTIAL LENDING
The Company's residential mortgage loan portfolio consists of loans and
increasingly reflects the Company's strong commitment to affordable housing and
its Community Reinvestment Act ("CRA") responsibilities. Underwriting and
purchase guidelines emphasize credit quality and potential returns on equity,
and not volume or market share alone. The Company has continued to focus on
residential first mortgage loan originations. The Company has increased its
originations of residential first mortgage loans through referrals from real
estate agents, community contacts, association with other mortgage origination
companies and its branches. The Company also employs commissioned mortgage
originators to foster better relations with Realtors and improve outreach to low
and moderate income buyers.
The Company originates fixed and variable interest rate loans having terms
to maturity of not more than 30 years, including among others, balloon loans
having terms to maturity of not more than ten years. Management currently
intends to emphasize in its portfolio variable rate loans bearing interest at a
rate adjusted within three years from the origination date. These transactions
reflect implementation of a strategy to invest in adjustable rate or
shorter-duration assets to manage interest rate risk.
It is the Company's policy to liquidate its current production of fixed
rate, Federal Housing Administration ("FHA"), Connecticut Housing Finance
Authority ("CHFA"), Veteran's Administration ("VA") and adjustable rate mortgage
("ARM") loans with initial adjustment periods exceeding three years. These loans
are sold into the secondary market to the Federal National Mortgage Association
("FNMA") or on a flow basis to CHFA and various institutional investors. The
Company intends to expand its originations of loans over agency size limits
(jumbos) using agency-underwriting standards, to retain variable rate jumbos
bearing interest at a rate adjusted within three years from the origination date
and to sell other jumbos through private parties.
In order to meet is commitment to affordable housing and its CRA
responsibilities the Company offers several residential loan programs involving
high loan-to-value ratios and flexible underwriting standards. Because of
refinancings and prepayments, residential mortgage loans generally remain
outstanding for shorter periods than stated. Whether residential mortgage loans
bear interest at a fixed or an adjustable rate depends upon consumer demand,
which is influenced by market conditions.
COMMUNITY REINVESTMENT PROGRAMS
The Company attempts to ascertain the credit needs of its communities,
including low and moderate income areas, through a number of means, including
reviewing the results of market research and the interaction of members of the
Board of Directors and management in the local communities. The Company also has
a CRA Committee of the Board of Directors whose function is to oversee all CRA
activities. The Company offers various loans and participates in various loan
programs designed to make credit available to low and moderate income persons.
Many of the loan programs are advertised in local newspapers, and local Realtors
and builders are informed by periodic mailings.
The Company is committed to treating all members of the community equally and
fairly. As such, the Company conducts seminars and training sessions with
employees regarding fair
lending practices and equal treatment in banking. NMBT has adopted
anti-discrimination and fair housing statements of policy, along with the
implementation of a second review policy for loans which have been rejected to
ensure fair treatment for each applicant.
The Company maintains ongoing contact with many civic groups in its market
area. These contacts, and joint sponsorship of various seminars and awareness
meetings, foster what we consider to be an excellent working relationship
between the Company and the community.
COMMERCIAL MORTGAGE LENDING
The Company is engaged in commercial mortgage lending on such properties as
industrial, retail, office and multi-family residential buildings and
condominiums. Generally, the Company will provide this type of lending only to
existing customers or to prospective customers who represent the potential for a
complete banking relationship. Such lending has been proven to be profitable,
but entails certain additional risks when compared with residential mortgage
lending. Accordingly, the Company has implemented standards on such loans, which
attempt to mitigate these risks. Required conservative loan-to-value ratios and
extensive research into the background of the borrower are among those
standards. Owner-occupied properties are encouraged and property and
environmental appraisals are conducted by qualified outside appraisers, and then
reviewed by Company officers.
Because the real estate market has stabilized, the Company will selectively
issue certain commercial mortgage loans that are speculative in nature. Such
loans will be issued only to the most credit-worthy borrowers who have the
financial strength to repay the loan outside of the real estate project
involved. These loans must be modest in terms of dollar amounts and involve
substantial equity. The Company recognizes the need to continue to serve the
commercial mortgage market, and its potential for providing profits to the
Company when done in a disciplined fashion.
COMMERCIAL LENDING
Commercial lending to small and medium-sized businesses is an integral part
of the Company's effort to achieve a higher level of profitability. Such lending
entails somewhat different risks compared with mortgage or consumer lending but
also produces higher yields, due in part to the Company's policy of requiring
depository relationships. Commercial loans tend to be directly affected by
changes in the economic cycle while consumer loans are indirectly affected. As
such, commercial loans must be more closely evaluated to ensure likely
repayment. In order to accomplish this, the Company has procedures and systems
to provide for not only proper underwriting, but appropriate follow-up and
monitoring of commercial loans. As a result of less time being spent on
nonperforming assets, the Company enjoyed growth in this area and is poised for
an even greater effort in 1998. The Company has continued to enhance its
business calling effort with real emphasis on outreach into the Company's
communities.
The Company's commercial loan portfolio is generally amortizing, which
provides some additional margin of safety, but also generates quicker repayment.
As such, loan officers must be aggressive with their calling efforts in order to
assure continued loan growth. Fortunately, the local economy is improving
(albeit slowly) and management believes that hard work and community involvement
will produce commercial loan growth in 1998.
Notwithstanding the new business effort, management is acutely aware of its
obligation to assure the safety of its commercial loans. In that regard, the
Company's policy is generally to collateralize commercial loans with acceptable
collateral and to obtain the personal guarantees of responsible business owners.
The Company has an active SBA-lending program to originate government-insured
commercial loans. Emphasis will continue to be placed upon origination of the
various types of SBA loans in an effort to more fully serve the credit needs of
small businesses.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management is also aware of the need to provide appropriate ancillary
services to expand its commercial loan base. Accordingly, a lock-box program is
in place to facilitate collection of accounts receivable by customers. Corporate
cash management via remote personal computers, wire transfer services,
commercial letters of credit and various international services are available.
NMBT offers one of the most attractive fee schedules for commercial deposit
accounts in its market area.
ASSET QUALITY
During 1997 nonperforming assets decreased $1.10 million, or 24.4 percent,
to $3.42 million at December 31, 1997, due principally to sales of real estate
owned, loan payments and loans returned to accrual status. These reductions were
partially offset by loans placed on nonaccrual, and capital improvements to real
estate owned.
The Company has a Special Assets Committee, which is a subcommittee of the
Officer's Loan Committee, whose primary responsibility is to provide senior
management oversight and ongoing review of the loan and real estate owned
portfolios. Management pursues the resolution of all nonperforming assets
through restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
management generally initiates action to foreclose the property or to acquire it
by deed in lieu of foreclosure.
There were no accruing loans past due 90 days or more at December 31, 1995.
Accruing loans past due 90 days or more totaled $0.24 million at December 31,
1996 and $0.02 million at December 31, 1997. Nonaccruing loans and real estate
owned are depicted in the chart below. Nonaccruing loans consisted principally
of residential and commercial loans collateralized by real estate.
There are no loans to foreign borrowers, no leveraged buyout loans and no
undue concentrations of loans for commercial construction. NMBT generally, and
as a matter of policy, does not lend outside of its market area.
Real estate owned consisted of commercial and residential properties. The
amount of real estate owned, net of valuation allowances, decreased $0.29
million from 1996 to 1997, and totaled $0.21 million at December 31, 1997. NMBT
actively markets all real estate owned and in 1997 sold $0.83 million of real
estate owned from which net gains of $0.02 million were realized. During 1997
NMBT provided $0.03 million to the valuation allowance. At December 31, 1997,
the valuation allowance totaled $0.06 million, or 22.2 percent of real estate
owned. There continues to be an oversupply of commercial and residential real
estate in Connecticut, and any further decline in the real estate market could
adversely affect the market values of real estate owned, requiring additional
provisions to the valuation allowance.
LIQUIDITY MANAGEMENT
Liquidity is a measure of the Company's ability to meet its cash needs at a
reasonable cost. Cash needs arise primarily as a result of the need to fund
lending opportunities, the maturity of liabilities such as borrowings and the
withdrawal of deposits. Asset liquidity is achieved through the management of
earning asset maturities, loan amortization, deposit growth and access to
borrowed funds. At December 31, 1997, liquid assets totaled $71.13 million, or
21.1 percent of total assets.
NMBT is also a member of the Federal Home Loan Bank of Boston (FHLB), which
makes substantial borrowings available to its members. NMBT is eligible to
borrow against assets an amount not to exceed collateral as defined by the FHLB.
At December 31, 1997, this gave NMBT potential access to additional financing
well in excess of NMBT's annual financing requirements. NMBT also maintains an
interest-bearing checking account with the FHLB on which it may overdraw up to
$6.11 million. This arrangement allows NMBT to obtain advances from the FHLB
rather than having to rely on commercial bank lines of credit or federal funds
purchased. At December 31, 1997, NMBT had approximately $59.05 million in loan
commitments outstanding. It is expected deposits, loan repayments and maturing
investments will fund these future loans.
DEPOSITS AND BORROWINGS
For the year ended December 31, 1997, total deposits increased $19.43
million, or 7.3 percent, while FHLB borrowings increased $8.58 million, or 58.9
percent. During 1997, the deposit mix shifted to interest bearing checking and
certificates of deposit. There was virtually no net growth in savings accounts
or noninterest-bearing checking. These changes in mix are due in part to the
continuing interest rate differential between certificates of deposit and
savings accounts, which have caused savers to reach for yield in certificates.
In addition, most transaction account holders are no longer satisfied with a
noninterest-bearing checking account and are finding ways to earn interest on
their checking accounts. These trends are increasing the overall cost of funds
and reducing the net interest spread.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
NONPERFORMING REAL ESTATE NONPERFORMING % OF
LOANS OWNED ASSETS TOTAL
------------- ----------- ------------ -----
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized by residential properties $1,617 $122 $1,739 50.8%
Collateralized by commercial properties 1,462 90 1,552 45.4%
Commercial, industrial and all other 129 - 129 3.8%
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets on December 31, 1997 $3,208 $212 $3,420 100.0%
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets on December 31, 1996 $4,025 $496 $4,521 100.0%
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets on December 31, 1995 $4,523 $1,314 $5,837 100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company maintains a favorable liquidity position in large part due to
stable core deposits generated from its branch network and from a high quality
securities portfolio. Core deposits (checking and savings accounts) represent a
stable, low-cost source of funds, which amounted to 65.2 percent of total
deposits at December 31, 1997.
CAPITAL MANAGEMENT
STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
At December 31, 1997, the Company had $25.33 million in stockholders'
equity, compared with $22.57 million at December 31, 1996. The growth in
stockholders' equity from the end of 1996 was due to the following: receipt of
$0.18 million in proceeds from the exercise of stock options; a $0.23 million
positive adjustment for net unrealized gains on securities available for sale;
and the retention of $2.90 million in net earnings, less cash dividends of $0.54
million.
The Company and NMBT are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board ("FRB") and the FDIC.
The regulatory risk-based capital requirements take into account the differing
risk profiles of organizations by assigning risk weights to both assets and the
credit equivalent amounts of off-balance sheet exposures. In addition, capital
is divided into two tiers, tier 1 and tier 2.
At December 31, 1997, banking organizations were required to meet a minimum
total capital ratio of 8 percent, with at least one-half being in the form of
tier 1 capital. Higher tier 1 and total capital ratios can be imposed on
particular institutions at the discretion of the regulatory agencies. Banking
organizations are also subject to a minimum leverage capital ratio of 3 percent.
The Company and NMBT have a capital planning process that seeks to ensure the
maintenance of appropriate capital levels and ratios. From a regulatory
standpoint, the Company and NMBT have capital ratios that place it in the
"well-capitalized" category. Well-capitalized, which is the highest capital
category as defined by the Prompt Corrective Action regulations issued by the
FRB and the FDIC, is defined as a company which maintains a total risk-based
ratio of 10 percent or above, a tier 1 risk-based ratio of 6 percent or above
and a leverage ratio of 5 percent 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.
DIVIDENDS AND RESTRICTIONS
The Company's ability to pay dividends is dependent on NMBT's ability to
pay dividends to the Company. There are certain restrictions on the payment of
dividends by NMBT to the Company. Connecticut Banking Laws limit the amount of
annual dividends that NMBT may declare on its common stock to net income for the
current year and retained net income for the preceding two years, net of
dividends previously paid during those periods. NMBT is also prohibited from
paying a cash dividend that would reduce its capital ratios below minimum
regulatory requirements. In addition, the FRB may impose further restrictions on
dividends on the Company.
The Company believes that payment of cash dividends to its stockholders is
appropriate, provided that such payment considers the Company's capital needs,
asset quality and overall financial condition. Furthermore, cash dividends
should not adversely affect the financial stability of the Company or NMBT. 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.
During the year ended December 31, 1997, the Company paid cash dividends of
$0.54 million, or $0.21 per share, which represents 18.8 percent of 1997 net
income. The Company's dividend payment policy generally limits dividends paid in
any year to no more than 40 percent of net earnings, absent mitigating factors.
This was done in the interest of preserving capital, which will be used in the
continued growth and expansion of the Company. The Company reviews its dividend
payment policy based on current earnings and by assessing the need to retain
earnings to support long-term growth.
RECENT RELEVANT FINANCIAL ACCOUNTING
STANDARDS BOARD RELEASES
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS 128") was issued in February 1997 and is effective for periods ending
after December 15, 1997. Earlier application is not permitted. SFAS 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards for computing EPS. This statement became
effective in the fourth quarter of 1997 for the Company, replacing primary EPS
with a presentation of basic and diluted EPS on the face of the statements of
operations. All periods presented in the annual report have been restated to
comply with this statement.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" ("SFAS 129") was issued in February 1997
and is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 129 establishes standards for disclosing information
about an entity's capital structure. The adoption of this standard had no effect
on the Company's financial statements. Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") were issued in June 1997. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL
DECEMBER 31,
-------------------------------
REGULATORY
NMBT CORP NMBT MINIMUM
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in thousands
Risk-based capital ratios:
Tier 1 capital ratio 12.19% 12.16% 4.00%
Total capital ratio 13.45% 13.42% 8.00%
- --------------------------------------------------------------------------------------------------------
Leverage ratio 7.36% 7.34% 3.00%
- --------------------------------------------------------------------------------------------------------
Tier 1 capital $24,428 $24,357
Total risk-based capital $26,948 $26,876
Total risk-adjusted assets $200,322 $200,322
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as "the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period, except those resulting from investments by owners and distributions to
owners." SFAS 130 is effective for fiscal years beginning after December 15,
1997. SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. Both of these statements relate to
disclosures that public companies must make in their financial statements.
Accordingly, implementation of these statements will not effect the results of
operations or financial condition of the Company.
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. Inflation, or disinflation, could continue to significantly affect the
Company's earnings in future periods.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send statements or
engage in similar normal business activities.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate the Year 2000 issue. The
Company relies on the ability of its outside suppliers for remedial action as
none of the Company's date-sensitive software has been programmed internally.
There can be no guarantee that the systems of these third party suppliers on
which the Company relies will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to replace
and/or test the software for Year 2000 modifications. The Company plans to have
all its critical hardware and software Year 2000 compliant not later than
December 31, 1998. The total remaining cost of the Year 2000 is estimated at
less than $100,000 and is being funded through operating cash flows. Some or all
of this expense will be for new hardware and software, which will be
capitalized. To date, the Company has not incurred any costs, other than
internal staff time, related to the assessment and preliminary efforts in
connection with the Year 2000 project and the development of a remediation plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant software issues and similar uncertainties.
16
<PAGE>
FINANCIAL GLOSSARY
BASIS POINT
A basis point is equal to one one-hundredth of one percent (25 basis points
equals 0.25 percent and 100 basis points equals one percent).
BOOK VALUE PER SHARE
The amount of the Company's net worth represented by each share of outstanding
common stock. lt is obtained by dividing common stockholders' equity by the
number of shares of common stock outstanding.
EFFICIENCY RATIO
The efficiency ratio is a measure of relative overhead expense levels and is
computed by dividing total noninterest expense (excluding provisions for real
estate owned write-downs), by the sum of tax-equivalent net interest income plus
noninterest income (excluding securities gains and losses).
FEDERAL FUNDS SOLD AND
INTEREST-BEARING DEPOSITS
Immediately available funds on deposit at a Federal Reserve Bank, the Federal
Home Loan Bank of Boston or a correspondent bank. Banks with excess reserves
lend such funds, generally on a overnight basis, to banks that are temporarily
deficient in required reserves or that want to borrow federal funds to fund
short-term assets.
INTEREST-EARNING ASSETS AND
INTEREST-BEARING LIABILITIES
Interest is a price paid by a lender for the use of money. Interest-earning
assets result from transactions in which the Company acts as a provider of
funds. These include loans to customers, purchases of debt securities and
various transactions in the short-term money markets. Interest-bearing
liabilities are those for which the Company acts as borrower and pays interest
to depositors and other suppliers of funds, such as the Federal Home Loan Bank
of Boston.
INTEREST RATE SENSITIVITY
The exposure to financial gain or loss due
to a change in the level of interest rates. In a given period, if more
interest-earning assets than interest-bearing liabilities are subject to a
change in interest rates because the assets are maturing or the contract calls
for a rate change, the Company is asset sensitive (or positive) for that period.
Rising interest rates during that time would enhance earnings, while declining
interest rates would reduce earnings. The reverse earnings effect would occur if
the Company were liability sensitive.
INTEREST RATE SPREAD
The difference between two interest rates. The phrase is most often used to
refer to the difference between the interest yield on average interest-earning
assets and the interest cost of average interest-bearing liabilities.
LEVERAGE RATIO
The ratio was established by federal bank regulators and is computed by dividing
tier 1 capital by average quarterly assets less goodwill and other intangibles.
A minimum leverage ratio of at least 3.00 percent must be maintained. This
leverage ratio is a minimum requirement for the most highly rated banking
organizations, and other banking organizations will be expected to maintain an
additional cushion of at least 100 to 200 basis points.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets and
the interest paid on liabilities. Interest income and expense are affected by
changes in the volume and mix of average interest-earning assets and
interest-bearing liabilities, as well as changes in the level of interest rates.
NET INTEREST MARGIN
Net interest margin represents the tax-equivalent yield on interest-earning
assets. This is obtained by dividing net interest income for a given accounting
period by the average level of interest-earning assets for the period. This
relationship is usually expressed on a tax-equivalent basis.
NONACCRUING LOANS
Loans on which the accrual of interest income has been discontinued because of
the uncertainty that exists regarding the collection of interest or principal.
This circumstance typically results from the borrower's financial difficulties.
Interest received on such loans is recorded as a reduction of principal or
interest income if there is no doubt as to the collectibility of the loan. Also
referred to as nonperforming loans.
NONPERFORMING ASSETS
Nonperforming assets consist of real estate acquired through foreclosure,
forgiveness of debt or otherwise in lieu of debt, and nonaccrual loans.
RESTRUCTURED LOANS
Loans with original terms which have been modified as a result of a change in
the borrower's financial condition. Typically, interest rate concessions are
made or repayment schedules are lengthened in these cases.
RETURN ON AVERAGE ASSETS
A ratio obtained by dividing net income by average assets. lt is a measure of
profitability in banking. Return on Average Equity A ratio obtained by dividing
net income by average stockholders' equity. This is a standard measure of the
rate of return on the stockholders' investment.
RISK-WEIGHTED ASSETS
Established by federal bank regulators, this is computed based on the sum of
risk-weighted balance sheet assets and off-balance sheet credit equivalent
amounts calculated in accordance with federal guidelines.
TAX-EQUIVALENT BASIS
An adjustment of income exempt from federal and state taxes or taxed at
preferential rates, such as interest income on state and municipal bonds, to an
amount that would yield the same pre-tax income had the income been subject to
taxation. The result is to equate the true earnings value of tax-exempt and
taxable income.
TIER 1 CAPITAL
Established by federal bank regulators, this is composed of common equity,
retained earnings and perpetual preferred stock, reduced by goodwill and certain
nonqualifying intangible assets. Tier 1 capital does not include the effect of
adjustments associated with SFAS 115.
TIER 1 CAPITAL AND TOTAL CAPITAL RATIOS
These measures of capital adequacy have been established by federal bank
regulators, who require institutions to have a minimum ratio of tier 1 capital
to risk-weighted assets of 4.00 percent and a minimum of total capital to
risk-weighted assets of 8.00 percent. The ratios are obtained by dividing tier 1
capital or total capital by risk-weighted assets.
TOTAL CAPITAL
Established by federal bank regulators, this consists of tier 1 capital plus a
limited amount of allowable debt, certain other financial instruments and a
limited amount of the allowance for loan losses.
17
<PAGE>
FINANCIAL STATEMENTS
REPORT OF MANAGEMENT
The accompanying consolidated financial statements were prepared by management,
which is responsible for the integrity and objectivity of the data presented,
including amounts that must be based on judgments and estimates. The
consolidated financial statements were prepared in conformity with generally
accepted accounting principles, and in situations where acceptable alternative
accounting principles exist, management selected the method that was most
appropriate.
Management depends upon internal controls in meeting its responsibilities for
reliable consolidated financial statements. Internal control is designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of internal
control, the Company has an internal auditor on staff who conducted operational,
financial and special audits, and coordinated audit coverage with the
independent auditors.
The consolidated financial statements have been audited by our independent
auditors, Deloitte & Touche LLP, who render an independent professional opinion
on management's financial statements. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the internal auditors, the independent
auditors and management to review the work of each to ensure that they are
properly discharging their responsibilities. The internal auditors and the
independent auditors have free access to the Audit Committee, without management
present, to discuss the results of their audit work, their evaluations of the
adequacy of internal controls and the quality of financial reporting.
Michael D. Carrigan, Jay C. Lent,
President & CEO Executive Vice President, Secretary & CFO
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS:
We have audited the accompanying consolidated statements of condition of
NMBT Corp and Subsidiary (the "Company") as of December 31, 1997 and 1996, and
the related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 20, 1998
18
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996
---------------------------------------
ASSETS Dollars in thousands, except share data
<S> <C> <C>
Cash and due from banks $18,737 $17,855
Interest-bearing deposits 4,025 6,135
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 22,762 23,990
- --------------------------------------------------------------------------------------------------------------------
Securities:
Available for sale, at fair value (amortized cost of $47,556 in 1997
and $28,020 in 1996) 48,129 28,240
Held to maturity, at amortized cost (fair value of $36,240 in 1997
and $35,611 in 1996) 35,876 35,521
- --------------------------------------------------------------------------------------------------------------------
Total securities 84,005 63,761
- --------------------------------------------------------------------------------------------------------------------
Loans 223,909 211,686
Less allowance for loan losses 3,537 3,212
- --------------------------------------------------------------------------------------------------------------------
Loans, net 220,372 208,474
Real estate owned, net 212 496
Premises, equipment and capital leases, net 3,706 3,648
Excess of cost over fair value of net assets acquired, net 506 741
Accrued interest and other assets 5,003 4,435
- --------------------------------------------------------------------------------------------------------------------
Total assets $336,566 $305,545
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing checking $ 36,999 $ 36,013
Interest-bearing checking 88,501 76,989
Savings 60,782 61,432
Time deposits under $100 81,902 79,320
Time deposits $100 or more 17,411 12,407
- --------------------------------------------------------------------------------------------------------------------
Total deposits 285,595 266,161
- --------------------------------------------------------------------------------------------------------------------
Advances from Federal Home Loan Bank of Boston (FHLB) 23,145 14,564
Accrued interest and other liabilities 2,496 2,255
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 311,236 282,980
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $0.01 par value
Shares authorized: 8,000,000
Shares outstanding: 1997 - 2,614,858; 1996 - 2,588,058 26 26
Additional paid-in capital 17,378 17,198
Retained earnings 7,548 5,195
Unrealized gain on securities available for sale, net of tax 378 146
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,330 22,565
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $336,566 $305,545
- --------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $17,791 $16,534 $15,845
U.S. Treasury and agency securities 3,918 3,272 2,315
Municipal securities 591 282 24
Dividends on FHLB stock 108 99 109
Interest-bearing deposits 301 113 170
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 22,709 20,300 18,463
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest-bearing checking 1,383 1,140 1,185
Savings 1,490 1,602 1,724
Time deposits under $100 4,390 3,888 3,423
Time deposits $100 or more 881 625 537
FHLB advances and capital leases 1,076 739 215
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,220 7,994 7,084
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 13,489 12,306 11,379
Provision for loan losses 582 390 160
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan losses 12,907 11,916 11,219
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposit accounts 1,034 965 766
Other service charges, commissions and fees 379 349 278
Loan servicing fees 42 23 8
Net gains from loans sold 339 178 60
Other income 197 125 163
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,991 1,640 1,275
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Compensation, payroll taxes and benefits 5,381 5,037 4,959
Occupancy 961 917 905
Furniture and equipment 875 953 971
Data processing 268 246 204
Stationery, printing and supplies 409 438 343
Marketing, advertising and investor relations 381 402 343
Legal and professional fees 264 412 224
Other general and administrative expense 1,302 1,425 1,351
- -----------------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense 9,841 9,830 9,300
- -----------------------------------------------------------------------------------------------------------------------------------
Operations of real estate owned 34 320 263
Amortization of intangible assets 235 235 235
Total noninterest expense 10,110 10,385 9,798
Income before provision for income taxes 4,788 3,171 2,696
Provision for income taxes 1,890 379 537
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $2,898 $2,792 $2,159
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $1.12 $1.09 $0.85
Diluted earnings per share $1.05 $1.04 $0.83
- -----------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 2,596 2,568 2,534
Average shares and share equivalents outstanding 2,752 2,684 2,590
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $2,898 $2,792 $2,159
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 880 982 957
Provision for loan losses 582 390 160
Provision for losses from real estate owned 26 314 207
Net amortization of securities 152 100 100
Deferred income tax benefit (46) (267) (241)
Loans originated for sale (26,169) (14,859) (10,342)
Proceeds from loans sold, net 25,928 14,652 9,809
Gains from loans sold, net (339) (178) (60)
Realized gains from real estate owned, net (133) (135) (80)
Net increase in interest receivable (498) (331) (113)
Net increase in other assets (37) (134) (288)
Net increase in interest payable 56 82 59
Net increase in other liabilities 216 282 63
Net cash provided by operating activities 3,516 3,690 2,390
Investing Activities
Purchases of held to maturity (HTM) securities (7,996) (28,242) (5,006)
Net loan originations (12,129) (13,764) (7,583)
Purchases of available for sale (AFS) securities (24,818) (9,671) (11,274)
Net purchases of permises and equipment (703) (484) (568)
Proceeds from sales of real estate owned 534 460 483
Proceeds from maturities of AFS securities 5,449 2,924 672
Proceeds from maturities of HTM securities 7,539 11,182 11,816
Proceeds from sales and early redemptions of AFS securties - - 2,960
Purchases of FHLB stock (218) - -
Net cash used for investing activities (32,342) (37,595) (8,500)
Financing Activities
Net increase (decrease) in advances from FHLB 8,581 14,564 (7,304)
Net increase in time deposits 7,586 11,004 16,603
Net increase in checking and savings deposits 11,848 8,090 4,707
Cash dividends (545) (436) (329)
Other 128 91 245
Net cash provided by financing activities 27,598 33,313 13,922
Increase (decrease) in cash and cash equivalents (1,228) (592) 7,812
Cash and cash equivalents, beginning of year 23,990 24,582 16,770
Cash and cash equivalents, end of year $22,762 $23,990 $24,582
Cash Paid During Year
Interest to depositors and creditors $9,164 $7,912 $7,026
Income taxes 1,474 957 778
Non-Cash Transfers
Transfer of loans to real estate owned 575 581 683
Net change in unrealized gains (losses) on AFS securities 232 (100) 489
Financial portion of sales and real estate owned 433 761 327
</TABLE>
See notes to financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Additional Gain (Loss)
Shares Common Paid-in Retainedon Securities
Outstanding Stock Capital Earnings Available for Sale Total
January 1, 1995 2,531 $26 $16,754 $1,009 ($243) $17,546
Net income 2,159 2,159
Net change in unrealized
gain (loss) on securities
available for sale 489 489
Cash dividends (329) (329)
Proceeds from exercise
of stock options 32 286 286
Other 6 6
December 31, 1995 2,563 26 17,046 2,839 246 20,157
Net income 2,792 2,792
Net change in unrealized
gain (loss) on securities
available for sale (100) (100)
Cash dividends (436) (436)
Proceeds from exercise
of stock options 24 145 145
Other 1 7 7
December 31, 1996 2,588 26 17,198 5,195 146 22,565
Net income 2,898 2,898
Net change in unrealized
gain (loss) on securities
available for sale 232 232
Cash dividends (545) (545)
Proceeds from exercise
of stock options 27 180 180
December 31, 1997 2,615 $26 $17,378 $7,548 $378 $25,330
In thousands
26
See notes to financial statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NMBT CORP (the "Company"), a Delaware Corporation formed in November 1997,
is the bank holding company for The New Milford Bank & Trust Company ("NMBT"), a
state-chartered commercial bank. The Company's activity is currently limited to
the holding of NMBT's outstanding common stock. 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 to
the 1997 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 owned ("REO") in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of REO, management obtains
independent appraisals for significant properties.
The Company's loans are generally collateralized by real estate located in
western Connecticut. In addition, substantially all of the REO is located in
that market. Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio and REO acquired through foreclosure is
particularly susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans
and REO, future additions to the allowance for loan losses or write-downs of REO
may be necessary based on changes in economic conditions, particularly in
western Connecticut. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses and the valuation of REO. Such agencies may require the Company
to recognize additions to the allowance or write-downs based on their judgments
of information available to them at the time of their examination.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 125 (SFAS 125) "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishing liabilities occurring after December 31,
1996, except for certain provisions deferred by SFAS 127 "Deferral of the
Effective Date of Certain Provisions of SFAS Statement No. 125." The adoption of
these standards did not have a material effect on the Company's financial
condition or results of operations.
Effective December 31, 1997, the Company adopted SFAS 129 "Disclosure of
Information about Capital Structure". SFAS 129 establishes standards for
disclosing information about an entities capital structure. The adoption of this
standard did not have a material effect on the Company's financial statements.
SECURITIES
Securities that may be sold as part of the Company's asset/liability or
liquidity management, or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are
classified as available for sale and carried at fair value. Unrealized holding
gains and losses on such securities are reported net of related taxes, if any,
as a separate component of stockholders' 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 securities are reported in earnings and computed using the specific
identification cost basis. There are no trading account securities.
LOANS
Loans are reported at their principal outstanding balance, net of any
charge-offs, deferred loan origination fees and costs and unamortized premiums
or discounts on purchased loans. Loan origination and commitment fees and
certain direct loan 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 an aggregate loan basis. Changes in the carrying
value are reported in earnings as net gains from loans sold. 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 and interest is unlikely unless such
loans are well collateralized and in the process of collection. When a loan is
placed on nonaccrual, 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 deterioration in a borrower's financial
condition. Interest to be paid on a deferral 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 a
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 for loan losses. While the Company 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 January 1, 1995, the Company adopted SFAS 114 "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS 118 "Accounting for a
Loan - Income Recognition and Disclosure." 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.
The Company recognizes 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, smaller-balance homogeneous loans consisting of residential
mortgages and consumer loans are evaluated for collectibility based on
historical loss experience rather than on an individual loan-by-loan basis.
Impaired loans are primarily commercial mortgages secured by real estate.
23
<PAGE>
REAL ESTATE OWNED
Real estate acquired through foreclosure, forgiveness of debt or otherwise
in lieu of debt --- otherwise known as "real estate owned" -- is stated at the
lower of cost (principally the loan amount) or fair value, minus estimated
selling expenses. When a loan is reclassified as real estate owned, 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 selling expenses are charged to earnings
and classified as real estate owned expenses. Fair value is determined by a
current appraisal for collateral dependent loans.
PREMISES AND EQUIPMENT
Premises and equipment, including capital leases, are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the period of the related lease or the
useful life of the improvement, whichever is shorter.
INCOME TAXES
Deferred income taxes are provided for differences arising in the timing of
income and expenses for financial reporting purposes and for income tax
reporting 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 carry-forwards when realization is assured beyond a reasonable
doubt.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Because of the earning power or special values of certain assets, the
Company paid amounts in excess of the fair value of net assets acquired in the
1994 purchase transaction of Candlewood Bank and Trust Company. Such amounts are
being amortized on a straight-line basis over seven years. Accumulated
amortization of the excess cost over fair value of net assets acquired was
$861,552 as of December 31, 1997. On an ongoing basis, management assesses the
recoverability of this asset. If recoverability should become impaired, a charge
to the statements of operations would be recorded.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS 128 "Earnings Per
Share". SFAS 128 establishes standards for computing and presenting earnings per
share. SFAS 128 is applicable to all United States entities with publicly held
common stock or potential common stock. The statement requires disclosure of
basic earnings per share (i. e. common stock equivalents are not considered) and
diluted earnings per share (i. e. common stock equivalents are considered using
the treasury stock method) on the face of the statement of operations, along
with a reconciliation of the numerator and denominator of basic and diluted
earnings per share. SFAS 128 replaces Accounting Principles Board No. 15, issued
by the American Institute of Certified Public Accountants, as the authoritative
guidance for calculation and disclosure of earnings per share. Restatement of
prior periods is required. The adoption of SFAS 128 did not have a material
effect on the Company's earnings per share amounts.
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares, consisting solely of stock options, had been
issued.
Weighted average common shares outstanding used to calculate basic and
diluted earnings per share for the three years ended December 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Weighted average common shares:
Basic 2,596 2,568 2,534
Effect of stock options 156 116 56
Diluted 2,752 2,684 2,590
- --------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights". SFAS 122 amends
SFAS 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 also requires the Company to
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122, as superseded by SFAS 125, was applied
prospectively beginning January 1, 1996. The Company recognized servicing assets
for originated mortgages totalling $130,649 during 1997 and $76,954 during 1996.
$24,030 was amortized in 1997 and $7,318 was amortized in 1996. An asset of
$176,255 and $69,636 is recorded for mortgage servicing rights as of December
31, 1997 and 1996, respectively. These amounts are included in other assets on
the statement of condition.
STATEMENT OF CASH FLOWS
For definitional purposes, cash and cash equivalents include cash and due
from banks, interest-bearing deposits at other financial institutions and
overnight federal funds sold.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is defined as "the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period, except those
resulting from investments by owners and distributions to owners." SFAS 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for all prior periods presented.
SFAS 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS 131 establishes the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997.
Both of these statements relate to disclosures that public companies must
make in their financial statements. Accordingly, implementation of these
statements will not effect the results of operations or financial condition of
the Company.
24
<PAGE>
2. Securities The aggregate amortized cost and estimated fair
values of securities available for sale at December 31, 1997 and 1996 are as
follows:
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Dollars in thousands COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
U.S. Treasury and agency
securities $24,615 $99 $19 $24,695
Municipal securities 16,968 418 1 17,385
Mortgage-backed securities 4,213 80 4 4,289
Total debt securities 45,796 597 24 46,369
FHLB Stock 1,760 - - 1,760
Total securities
available for sale $47,556 $597 $24 $48,129
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Dollars in thousands COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
U.S. Treasury and agency
securities $12,527 $75 $- $12,602
Municipal securities 8,785 82 8 8,859
Mortgage-backed securities 5,166 80 9 5,237
- --------------------------------------------------------------------------------
Total debt securities 26,478 237 17 26,698
FHLB Stock 1,542 - - 1,542
- --------------------------------------------------------------------------------
Total securities
available for sale $28,020 $237 $17 $28,240
- --------------------------------------------------------------------------------
The aggregate amortized cost and estimated fair values of securities held to
maturity at December 31, 1997 and 1996 are as follows:
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Dollars in thousands COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
U.S. Treasury and agency
securities $13,492 $96 $33 $13,555
Mortgage-backed securities 22,384 310 9 22,685
Total securities
held to maturity $35,876 $406 $42 $36,240
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Dollars in thousands COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
U.S. Treasury and agency
securities $11,175 $30 $70 $11,135
Mortgage-backed securities 24,346 196 66 24,476
Total securities
held to maturity $35,521 $226 $136 $35,611
The aggregate amortized cost and estimated fair values of securities
available for sale at December 31, 1997 and 1996, by contractual maturity are
shown below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations without prepayment penalties.
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
AMORTIZED FAIR
Dollars in thousands COST VALUE
- -------------------------------------------------------------------------------
Due in one year or less $6,307 $6,331
Due after one year through five years 14,092 14,178
Due after five years through ten years 21,184 21,571
Due after ten years - -
- --------------------------------------------------------------------------------
41,583 42,080
Mortgage-backed securities 4,213 4,289
- --------------------------------------------------------------------------------
Total debt securities available for sale $45,796 $46,369
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
AMORTIZED FAIR
Dollars in thousands COST VALUE
- -------------------------------------------------------------------------------
Due in one year or less $4,495 $4,520
Due after one year through five years 9,792 9,851
Due after five years through ten years 7,025 7,090
Due after ten years - -
21,312 21,461
Mortgage-backed securities 5,166 5,237
Total debt securities available for sale $26,478 $26,698
- --------------------------------------------------------------------------------
The aggregate amortized cost and estimated fair values of debt securities
held to maturity at December 31, 1997 and 1996, by contractual maturity are
shown below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations without prepayment penalties.
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
AMORTIZED FAIR
Dollars in thousands COST VALUE
- -------------------------------------------------------------------------------
Due in one year or less $ - $ -
Due after one year through five years 5,000 4,988
Due after five years through ten years 8,492 8,567
Due after ten years - -
13,492 13,555
Mortgage-backed securities 22,384 22,685
Total debt securities held to maturity $35,876 $36,240
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
AMORTIZED FAIR
Dollars in thousands COST VALUE
- -------------------------------------------------------------------------------
Due in one year or less $ - $ -
Due after one year through five years 5,000 4,950
Due after five years through ten years 6,175 6,185
Due after ten years - -
11,175 11,135
Mortgage-backed securities 24,346 24,476
Total debt securities held to maturity $35,521 $35,611
- -------------------------------------------------------------------------------
Securities with a carrying value of $5.0 million were pledged as collateral
for public deposits as of December 31, 1997.
Mortgage-backed securities include participation certificates issued by the
Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) and the Federal National Mortgage Association (FNMA).
As required by the Federal Home Loan Bank, the Company must hold FHLB stock
equal to 1% of assets secured by residential housing. As of December 31, 1997
and 1996, the Company was in compliance with the FHLB stock requirement.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Loans and Allowance for Loan Losses
- --------------------------------------------------------------------------------
December 31,
Dollars in thousands 1997 1996
Loans
Collateralized by one to four family
residential properties $139,787 $137,008
Collateralized by five or more family
residential properties 549 1,434
Commerical properties 48,532 46,044
Construction and development 7,299 5,999
Commercial and industrial 17,818 13,203
Installment and education 8,994 7,128
Cash reserve and credit cards 930 870
Total loans 223,909 211,686
Less allowance for loan losses 3,537 3,212
Loans, net $220,372 $208,474
- --------------------------------------------------------------------------------
Included in total loans are net deferred loan origination costs of $0.41
million and $0.29 million as of December 31, 1997 and 1996 respectively.
As described in Note 1, effective January 1, 1995, the Company adopted SFAS
114 which defines when a loan is considered to be impaired and requires such
loans to be measured at the lower of cost or fair value. The recorded investment
in impaired loans was, in thousands, $3,588 at December 31, 1997 and $3,598 at
December 31, 1996 and consists of loans for which allowances of, in thousands,
$378 and $490, respectively have been established.
Generally, the fair value of impaired loans was determined using the fair
value of the underlying collateral of the loan.
Additional information regarding impaired loans is as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Income recorded on impaired loans during
the portion of the year that they were impaired $24 $75
Income recorded on impaired loans recognized on
the cash basis - 4
Average investment in impaired loans 3,728 3,953
- --------------------------------------------------------------------------------
Nonaccrual loans at December 31, 1997, 1996 and 1995, and related interest
income data are summarized as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
Nonaccrual loans $3,208 $4,025 $4,523
- --------------------------------------------------------------------------------
Interest income in accordance with
original terms $325 $309 $169
Interest income recorded 33 30 37
Reduction in interest income $292 $279 $132
Nonaccrual loans at December 31, 1997 and 1996 include, in thousands,
$2,215 and $2,812 of loans considered to be impaired under SFAS 114.
Loans to executive officers, principal stockholders, directors, companies
of which directors are principal owners, and individuals directly related to or
affiliated with directors and executive officers aggregated $2.50 million and
$2.82 million at December 31, 1997 and 1996, respectively. During 1997, new or
renewed loans totalling $0.89 million were granted, and payments of $1.21
million were received.
Changes in the allowance for loan losses were as follows:
- --------------------------------------------------------------------------------
December 31,
1997 1996 1995
Allowance for loan losses at beginning of year $3,212 $3,553 $3,965
Provision for loan losses charged against income 582 390 160
Transfer to liability for estimated losses from
off-balance sheet credit instruments (20) (200) -
Loan losses, net of recoveries (237) (531) (572)
Allowance for loan losses at end of year $3,537 $3,212 $3,553
- --------------------------------------------------------------------------------
4. Real Estate Owned
Real estate acquired through foreclosure is stated net of a valuation
allowance. Real estate owned properties consisted of the following:
- --------------------------------------------------------------------------------
December 31,
1997 1996
One-to-four family residential $182 $511
Commercial 90 405
Total real estate owned 272 916
Less: valuation allowance 60 420
Real estate owned, net $212 $496
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Changes in the Valuation Allowance
Valuation allowance at beginning of year $420 $364
Provision for real estate owned losses
charged against income 26 314
Real estate owned losses (386) (258)
Valuation allowance at end of year $60 $420
- --------------------------------------------------------------------------------
5. Premises and Equipment December 31, 1997
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
Owned Capital
Dollars in thousands Property Leases Total
Premises and improvements $3,927 $401 $4,328
Equipment and furniture 4,856 - 4,856
8,783 401 9,184
Less accumulated depreciation
and amortization 5,085 393 5,478
Premises, equipment and capital
leases, net $3,698 $8 $3,706
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
Owned Capital
Dollars in thousands Property Leases Total
Premises and improvements $3,751 $401 $4,152
Equipment and furniture 4,420 - 4,420
8,171 401 8,572
Less accumulated depreciation
and amortization 4,552 372 4,924
Premises, equipment and capital
leases, net $3,619 $29 $3,648
- --------------------------------------------------------------------------------
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Advances from FHLB
- --------------------------------------------------------------------------------
December 31
Maturity Date Rate 1997 1996
January 30, 1997 5.46% $ - $4,200 June 9, 1997 6.11% - 1,685 June 11, 1997
6.09% - 1,000 January 30, 1998 5.69% 3,100 - February 20, 1998 5.64% 5,575 -
October 1, 1998 5.87% 3,000 - November 1, 1999 6.05% 2,310 3,412 November 1,
1999 6.36% 2,414 - June 11, 2001 7.03% 550 550 June 19, 2001 6.65% 3,000 3,717
December 31, 2002 6.25% 1,650 - March 19, 2007 6.95% 953 - March 18, 2008 6.46%
593 - $23,145 $14,564
- --------------------------------------------------------------------------------
The Company has access to a preapproved line of credit with the FHLB for up to
2% of its total assets. In accordance with an agreement with FHLB, NMBT is
required to maintain qualified collateral, as defined in FHLB Statement of
Credit Policy, free and clear of liens, pledges and encumbrances, as collateral
for the advances and the preapproved line of credit. NMBT maintained qualified
collateral well in excess of the amount required to collateralize the
outstanding advances at December 31, 1997.
7. Stock Option Plans
The Company has two stock option plans for the benefit of employees,
officers and directors. The 1988 Non-Statutory Stock Option Plan (the 1988 Plan)
permits a maximum of 93,786 shares of common stock to be issued at exercise
prices at or above 85% of the fair market value.
The 1994 Non-Qualified Stock Option Plan (the 1994 Plan) permits a maximum
of 300,000 shares of common stock to be issued at fair market value. The Board
of Directors determine when such options will be granted, and when they will
become exercisable, with the term of each option not to exceed five years under
the 1988 Plan and ten years under the 1994 Plan. The Plans also provide for the
issuance of stock appreciation rights, at the discretion of the Board of
Directors, concurrent with the issuance of options. The number of shares of
common stock reserved, and outstanding, for stock options and stock appreciation
rights will be adjusted for any stock splits declared after establishment of the
Plans. Options have been granted to purchase common stock principally at the
fair market value at the date of the grant. Options are exercisable immediately
after the grant. Upon the exercise of options, proceeds received in excess of
par value are credited to additional paid-in capital.
Stock option transactions under the Plans were as follows:
- --------------------------------------------------------------------------------
Shares Exercise Weighted
Underlying Price Per Average Price Maturity
Outstanding Options Options Share Range Per Share Range
As of January 1, 1995 336,620 $5.00 - $6.00 $5.889 1995 - 2004
Granted 10,000 $9.75 $9.750 2004
Cancelled or expired (3,550) $5.00 - $6.00 $5.338 1995 - 1999
Exercised (31,770) $5.00 - $6.00 $5.893 1995 - 1999
As of December 31, 1995 311,300 $5.875 - $9.75 $6.018 1999 - 2004
Granted 7,500 $11.875 $11.875 2004
Cancelled or expired (600) $6.00 $6.000 1999
Exercised (24,600) $5.875 - $6.00 $5.914 1999 - 2004
As of December 31, 1996 293,600 $5.875 - $11.875 $6.177 1999 - 2004
Granted 33,000 $12.75 $12.750 1997 - 2002
Cancelled or expired (1,200) $6.00 $6.000 1999
Exercised (26,800)$5.875 - $12.75 $6.677 1997 - 2004
As of December 31, 1997 298,600 $5.875 - $12.75 $6.859 1999 - 2004
- --------------------------------------------------------------------------------
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" (APB 25) 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 25. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
- --------------------------------------------------------------------------------
1997 1996 1995
Net income As reported $2,898 $2,792 $2,159
Pro forma $2,808 $2,759 $2,125
Basic earnings per share As reported $1.12 $1.09 $0.85
Pro forma $1.08 $1.07 $0.84
Diluted earnings per share As reported $1.05 $1.04 $0.83
Pro forma $1.02 $1.03 $0.82
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with dividends. The following weighted
average assumptions were used for grants in 1997, 1996 and 1995, respectively:
dividend yield of 1.6%; expected volatility of 27.8%, 30.1% and 30.1%; risk-free
interest rate of 5.75%, 7% and 7%; and an expected term of 7, 8 and 8.67 years.
The 1997, 1996 and 1995 option grants expire in 2002, 2004 and 2004,
respectively. The weighted average fair value of options granted in 1997, 1996
and 1995 were $4.48, $4.97 and $4.21, respectively.
8. Stockholders' Equity
Capital Requirements
The Company and NMBT are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on their financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, they must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and NMBT to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997, that
both the Company and NMBT meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, NMBT was categorized as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized NMBT must
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
Actual capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Consolidated
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $26,948 13.5% $16,026 _ 8.0%
Tier 1 Capital
(to Risk-Weighted Assets) 24,428 12.2 % 8,013 _ 4.0%
Tier 1 Capital
(to Average Assets) 24,428 7.4% 13,276 _ 4.0%
- ---------------------------------------------------------------------------------------------------
NMBT Only
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $26,876 13.4% $16,026 _ 8.0% $20,032 _ 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 24,357 12.2% 8,013 _ 4.0% 12,019 _ 6.0%
Tier 1 Capital
(to Average Assets) 24,357 7.3% 13,276 _ 4.0% 16,595 _ 5.0%
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets) $23,997 13.0% $14,770 _ 8.0% $18,462 _ 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 21,678 11.7% 7,385 _ 4.0% 11,077 _ 6.0%
Tier 1 Capital
(to Average Assets) 21,678 7.2% 12,002 _ 4.0% 15,002 _ 5.0%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Dividends
The Company's ability to pay dividends is dependent on NMBT's ability to
pay dividends to the Company. There are certain restrictions on the payment of
dividends by NMBT to the Company. Connectict Banking Laws limit the amount of
annual dividends that NMBT may declare on its common stock to net income for the
current year and retained net income for the preceding two years, net of
dividends previously paid during those periods. NMBT is also prohibited from
paying a cash dvidend that would reduce its capital ratios below minimum
regulatory requirements. In addition, the FRB may impose further restrictions on
dividends on the Company.
9. Income Taxes
The following table represents a reconciliation of the provision for income
taxes as shown in the statements of operations with that which would be computed
by applying the statutory federal income tax rate (34%) to income before income
taxes:
- --------------------------------------------------------------------------------
Reconciliation of the Provision for Income Taxes
Years Ended December 31,
1997 1996 1995
Federal income tax provision
at statutory rate $1,628 $1,078 $917
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax effect 426 142 153
Changes in valuation allowance and other
deferred tax adjustments - (701) (640)
Other (164) (140) 107
Actual provision for income taxes $1,890 $379 $53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Components of the Provision for Income Taxes
Years Ended December 31,
1997 1996 1995
Current income tax expense:
Federal $1,291 $431 $546
State 645 215 232
1,936 646 778
Deferred income tax benefit (46) (267) (241)
Total provision for income taxes $1,890 $379 $537
- --------------------------------------------------------------------------------
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities at December 31, 1997 and 1996 are as follows:
Dollars in thousands 1997 1996
Deferred tax assets
Allowance for loan losses $997 $771
Deferred compensation 485 452
Capital loss carryforward 105 105
Deferred loan fees (130) (83)
Real estate owned 24 165
Other (48) (25)
Total deferred tax assets 1,433 1,385
Deferred tax liabilities
Securities (227) (106)
Total deferred tax liabilities (227) (106)
Valuation allowance (105) (105)
Net deferred tax assets $1,101 $1,174
- --------------------------------------------------------------------------------
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 but for which realization is in doubt. In
1996, the Company reduced the valuation allowance to approximately 6% of the
deferred tax asset to recognize the remaining available Federal income tax
benefits together with the remaining available State income tax benefits which
the Company expected to utilize, and other book/tax temporary differences. At
December 31, 1997 and 1996, the Company maintains a valuation reserve against
100% of the State and Federal capital loss carryforwards which NMBT does not
expect to utilize.
10. Benefit Plans
The Company has a defined contribution Retirement and Thift 401(k) Plan for
its employees who meet certain length of service and age requirements. The
provisions of the 401(k) Plan allow eligible employees to contribute between 1%
and 15% of their annual salary, with a matching contribution by the Company
equal to 100% of the employee's contribution, up to 4% of annual salary. The
Company can also make discretionary contributions to the Plan. The Company's
expense under this plan was $0.24 million, $0.23 million and $0.21 million in
1997, 1996 and 1995, respectively. In 1985 and 1986, the Board of Directors of
NMBT approved Deferred Compensation Agreements for its Directors and selected
Executive Officers. These agreements permitted the Directors and selected
Executive Officers to defer a portion of their cash compensation. The accrued
liability at December 31, 1997 was $1.06 million. In connection with this
liability, NMBT has purchased life insurance contracts on the applicable
parties. NMBT is the owner and beneficiary of such contracts. Although NMBT may
be obligated for certain cash payments prior to the receipt of proceeds from the
purchased life insurance policies, NMBT should ultimately be reimbursed in whole
from such life insurance proceeds.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distributions under the Plan are payable by NMBT as either a lump sum, in a
maximum of ten equal annual installments, or in either 120 or 180 equal monthly
installments depending upon the basis for the distribution. In cases of death,
attaining normal retirement age or other terminations, lump sum distributions or
installment payments are authorized. Retirement distributions are made upon
attaining normal retirement age. NMBT's aggregate distributions in 1997 pursuant
to this Plan totaled $0.14 million. In 1997, the Board of Directors of NMBT
approved a Supplemental Executive Retirement and Deferred Compensation Plan to
provide its senior officers and directors with additional retirement and tax
deferral benefits to the extent benefits under the qualified retirement plans of
NMBT are limited by applicable law or regulation. The Supplemental Plan will
permit addtional deferral of compensation and matching contributions (as
determined by the Board of Directors) to the extent the supplemental deferral
has been made into the 401(k) Plan. No matching contributions were made in 1997.
11. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET COMMITMENTS
NMBT is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and, from
time to time, to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These financial instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of condition. The contract amounts of those
instruments reflect the extent of involvement NMBT has in particular classes of
financial instruments. NMBT's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit, standby letters of credit and financial guarantees is represented
by the contractual amount of those instruments. NMBT uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. Commitments and conditional obligations at
December 31, 1997 were as follows:
- --------------------------------------------------------------------------------
Dollars in thousands Contract Amount
Financial Instrument Whose Contract
Amounts Represent Credit Risk
Commitments to extend credit $56,459
Letters of credit 2,587
- --------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. NMBT evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by NMBT upon the extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies, but is
principally real estate and other income producing property.
Letters of credit and financial guarantees are conditional commitments
issued by NMBT to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support commercial borrowing
arrangements. Most guarantees are for twelve months. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. NMBT holds certificates of deposit or real estate
as collateral supporting those commitments for which collateral is deemed
necessary. NMBT generally requires an initial loan to value ratio of no greater
than 80% when real estate collateralizes a loan commitment.
Concentrations of Credit Risk NMBT primarily grants loans to customers
located within its primary market area in western Connecticut. The majority of
NMBT's loan portfolio and commitments (83%) are comprised of loans
collateralized by real estate in western Connecticut. Of these loans,
approximately 74% are collateralized by residential real estate.
LEASE COMMITMENTS
NMBT leases certain of its premises and equipment under capital and
operating lease agreements. Rent expense for operating leases was, in thousands,
$304, $253 and $233 for the years ended December 31, 1997, 1996 and 1995,
respectively. The present value of future minimum lease payments under capital
leases is included in other liabilities.
The future minimum lease payments by year, and in the aggregate, under
capital and noncancelable operating leases consisted of the following at
December 31, 1997:
- --------------------------------------------------------------------------------
Capital Operating
Dollars in thousands Leases Leases
Years Ended December 31:
1998 $20 $354
1999 - 370
2000 - 290
2001 - 302
2002 - 288
2003 and thereafter - 1,269
Total future minimum lease payments $20 $2,873
Amounts representing interest (1)
Present value of future minimum
lease payments $19
==========================================================
LEGAL PROCEEDINGS
NMBT is a defendant in certain claims and legal actions that arose in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, these proceedings, in the aggregate, are not expected to
have a materially adverse effect on the financial position, results of
operations or liquidity of the Company.
CASH AND DUE FROM BANKS
Cash and due from banks includes reserve balances that NMBT is required to
maintain with the Federal Reserve Bank of Boston. These required reserves are
based upon deposits outstanding and were $6.7 million and $5.7 million at
December 31, 1997 and 1996, respectively. These reserve balances averaged $6.2
million and $5.1 million in 1997 and 1996, respectively.
EMPLOYMENT CONTRACTS
NMBT has employment agreements with certain members of senior management.
The agreements provide for an initial term of one year expiring on December 31,
1997, and provide for one year extensions unless the employee is terminated in
accordance with the terms contained therein. One agreement provides for the
payment of cash severance equal to three times average annual gross income for
the previous five years, less one dollar, upon voluntary or involuntary
termination within twelve months following a "change in control" (as such term
is defined therein). The agreements for two others provide for the payment of
cash severance equal to one time average annual gross income for the previous
five years, less one dollar, upon voluntary or involuntary termination within
twelve months following a "change in control" (as such term is defined therein).
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Estimated Fair Values of Financial Instruments
SFAS 107 "Disclosures About Fair Value of Financial Instruments", requires
disclosure of fair value information for certain financial instruments,
including loans, securities, deposits and borrowings. Quoted market prices are
not available for a significant portion of 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 judgments 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 premises and equipment, real estate owned and income taxes. In addition,
the tax ramifications relating to the realization of 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 financial instruments pursuant to SFAS 107.
Cash, Cash Equivalents and Other: The estimated fair value of cash and due
from banks, deposits with banks, federal funds sold, accrued interest receivable
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 to maturity was determined generally by
secondary market and independent broker quotations.
Loans: Estimated fair values for loans collateralized by real estate are
based on discounted projected cash flows using yield spreads determined by
property type, adjusted for prepayment assumptions, changes in credit risk and
interest rate parameters for variable rate loans. Estimated fair values for
commercial and consumer loans, not collateralized by real estate, are based on
applicable fixed yields. Credit cards and cash reserve loans are based on
carrying values.
Deposits: The estimated fair values disclosed for checking and savings
deposits are, by definition, equal to the amount payable on demand at the
reporting date. Estimated fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
FHLB Advances: The carrying amounts for FHLB advances approximate the fair
value because rates currently available for advances with similar terms
approximate actual rates on advances. Off-Balance Sheet Financial Instruments:
Estimated fair values for off-balance sheet financial instruments are based on
fees currently charged to enter into similar agreements taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
following table summarizes the carrying value and estimated fair values of on-
and off-balance sheet financial instruments at December 31:
1997 1996
Contract Estimated Contract Estimated
Dollars in thousands Amount Fair Value Amount Fair Value
Off-Balance Sheet
Financial Instruments
Commitments to extend credit $56,460 $663 $51,327 $564
Letters of credit 2,587 52 3,152 63
1997 1996
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Carrying Estimated Carrying Estimated
Dollars in thousands Value Fair Value Value Fair Value
Financial Assets
Cash and due from banks $18,737 $18,737 $17,855 $17,855
Interest-bearing deposits 4,025 4,025 6,135 6,135
Securities available for sale 48,129 48,129 28,240 28,240
Securities held to maturity 35,876 36,240 35,521 35,611
Loans, net 220,372 219,854 208,474 206,655
Accrued interest receivable 2,421 2,421 1,923 1,923
Financial Liabilities
Noninterest-bearing checking $36,999 $36,999 $36,013 $36,013
Interest-bearing checking 88,501 88,501 76,989 76,989
Savings 60,782 60,782 61,432 61,432
Time deposits 99,313 98,954 91,727 91,399
Accrued interest payable 392 392 336 336
FHLB advances 23,145 23,145 14,564 14,564
13. Parent Company Only Financial Statements
The unconsolidated statement of condition of NMBT Corp at December 31,
1997, and its statements of operations and cash flows for the period from
inception (November 25, 1997) to December 31, 1997, are as follows:
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Statement of Condition
Dollars in thousands December 31, 1997
Assets
Cash and due from bank $71
Investment in NMBT 25,259
Total assets $25,330
Liabilities and Stockholders' Equity
Stockholders' equity $25,330
Total liabilities and stockholders' equity $25,330
Statement of Operation
For the Period from
November 25,1997 to
Dollars in thousands December 31, 1997
Equity in undisturbed earnings of NMBT $398
Net Income $398
Statement of Cash Flows
For the Period from
November 25,1997 to
Dollars in thousands December 31, 1997
Operating Activities
Net Income $398
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undisturbed earnings of NMBT (398)
Net cash provided by operating activities -
Financing Activities
Proceeds from exercise of stock options 71
Net cash provided by financing activities 71
Increase in cash and cash equivalents 71
Cash and cash equivalents, beginning of period -
Cash and cash equivalents, end of year $71
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Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
30
Notes to Consolidated Financial Statements
31
Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
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Quarterly Results of Operations
Dollars in thousands,
except per share data
First Second Third Fourth
1997
Interest and dividend income $5,400 $5,648 $5,771 $5,890
Interest expense 2,153 2,241 2,381 2,445
Net interest income 3,247 3,407 3,390 3,445
Provision for loan losses 125 120 210 127
Noninterest income 432 488 509 562
Noninterest expense 2,493 2,609 2,436 2,572
Income before income taxes 1,061 1,166 1,253 1,308
Net income 634 697 765 802
Per share amounts:
Basic earnings per share (1) $0.24 $0.27 $0.30 $0.31
Diluted earnings per share (1) $0.23 $0.26 $0.27 $0.29
Cash dividends per share $0.050 $0.050 $0.055 $0.055
High bid price $11.750 $15.000 $18.500 $21.250
Low bid price $11.000 $11.000 $14.750 $15.000
1996
Interest and dividend income $4,804 $4,903 $5,205 $5,388
Interest expense 1,819 1,898 2,106 2,171
Net interest income 2,985 3,005 3,099 3,217
Provision for loan losses 60 90 90 150
Noninterest income 385 392 425 438 3,001
Income before income taxes 792 900 975 504
Noninterest expense 2,518 2,407 2,459
Net income 594 675 731 792
Per share amounts:
Basic earnings per share (1) $0.23 $0.26 $0.29 $0.31
Diluted earnings per share (1) $0.22 $0.25 $0.28 $0.29
Cash dividends per share $0.040 $0.040 $0.045 $0.045
High bid price $11.250 $10.000 $12.000 $12.750
Low bid price $9.250 $9.000 $9.000 $10.750
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(1) The sum of quarterly per share data may not equal the annual amounts due to
changes in the weighted average shares and share equivalents outstanding.
Stock Information
Investment Information
Stock Transfer Agent
Stockholders are encouraged to contact the Company with any questions or
comments about their investments. Direct letters to:
Jay C. Lent
NMBT CORP
100 Park Lane Road
New Milford, CT 06776-2400
Requests for changes in the registration of stock
certificates, replacement of lost or destroyed certificates, or undeliverable
dividend checks, should be referred to the transfer agent:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800)288-9541
Telecommunications Devices for the Deaf (TDD) for the hearing and speech
impaired are available by calling (800)231-5469.
Common Stock Listing
NMBT CORP's common stock is traded on the National Association of Securities
Dealers (NASDAQ) SmallCap Market under the symbol NMBT. As of December 31, 1997,
there were 1,928 stockholders of record.
Officers
Michael Carrigan President & Chief Executive Officer Jay Lent Executive Vice
President Chief Financial Officer & Secretary Peter Maher Executive Vice
President & Chief Lending Officer Deborah Fish Vice President & Treasurer Don
Mallozzi Senior Vice President - Consumer Lending Steven Breiner Vice President
- - Commercial Lending Roberta Buddle Vice President - Human Resources Nancy Dohl
Vice President - Sales & Production Nancy Dolan Vice President - Business
Development
Donna Downs
Vice President - Consumer Lending Mary Kay Duus Vice President - Loan
Administration James Matthiessen Vice President - Data Processing Joseph
Morrissey Vice President - Commercial Lending Linda Reyes Vice President -
Commercial Lending Alfred Schlemmer, Jr. Vice President - Commercial Lending
Anthony Ambrogio Assistant Vice President - Internal Audit Nancy Bentley
Assistant Vice President - Lending Eric Erdtmann Assistant Vice President
Commercial Lending
Rosemary Bradshaw
Consumer Loan Officer & Underwriter
Linda Hall
Loan Servicing Officer
Donna Moreau
Consumer Loan Officer & Underwriter
Rosemary Plue
Executive Assistant
James Silver, Sr.
Data Services
Dana Smith
Data Processing
Linda Smith
Deposit Operations
Janet Wittmann
Assistant Treasurer
Board of Directors
(Back Row from Left to Right)
Robert Martin
Jack Straub
Terry Pellegrini
Michael Carrigan
Lawrence Greenhaus
(Front Row from Left to Right)
Walter Southworth
Kevin Dumas
Louis Funk, Jr.
Ruth Henderson
Arthur Weinshank
Harry Taylor, Jr.
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Branch Officers
Michelle Scott Vice President - Branch Operations Nancy Achen Assistant Vice
President & Manager - Main Office Ann Gollsneider Assistant Vice President &
Manager - South Seven Office Suzanne Lee Assistant Vice President & Manager -
Mill Plain Office
Sharon Maynard Assistant Vice President & Manager - Park Lane Office Glynis
Powanda Assistant Vice President & Manager - Southbury Office Linda Wagner
Assistant Vice President & Manager - Germantown Office Jean Docktor Manager -
Bridgewater Office
Bonnie Hawthorne
Manager - Kent Office
Candice O'Connell
Manager - Candlewood Office
Florinda Pereira
Manager - Danbury Towers Office
Martha McMahon
Floating Manager
Patrick Perillo
Assistant Manager - Main Office
Renee Lynne Storti
Branch Operations
Advisory Board
Frank Benham
Alan Dretel
James Driscoll, III
M. Adela Eads
James Faure
*Norman Flayderman
William Francis
Richard Gabriel
Suzanne Gallup
Maurice Goldstein
Covington Hardee
Kevin Hart
Sanford Kaufman
John Kawulicz
George Kilberg
Robert Kornhaas
*Victor Lautier
Vincent Lucas
Ambrose McGill
Edward Mohr Gerald Nahley Mark Prince *Henry Perlowsky Thomas Pilla *Frederick
Planz Richard Pugh John Rountos Albert Salame Thomas Sheehy Thomas Sides
Terrence Smith Robert Stebbins John Stetson *Edward Tierney
Dolph Traymon James Winter
* Former member of the
Board of Directors
FORM 10-K
NMBT CORP
December 31, 1997
EXHIBIT 21
SUBSIDIARY OF REGISTRANT
NMBT (formerly The New Milford Bank & Trust Company) is the wholly owned
subsidiary of the Registrant.
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