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, 1998
--------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file Number 000-23419
-----------------------------------------------------
NMBT CORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1496548
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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(b) of the Act: None
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. [ ]
On March 19, 1999, 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 $37,874,868.
The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 19, 1999 was 2,663,358.
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,
1998 - PART I & PART II
(2) Proxy Statement for Annual Meeting on May 4, 1999 - PART I & PART III
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
PART I
ITEM 1. BUSINESS
GENERAL
NMBT CORP (the "Company"), a Delaware corporation formed in 1997, is the
registered bank holding company for NMBT, a wholly owned subsidiary. NMBT is a
state-chartered bank and trust company founded in 1975. NMBT is the Company's
only subsidiary and its primary investment
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
or form, 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, inside New Milford Hospital 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, 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 regulator is the State of Connecticut Department of Banking
and the Company's primary regulator is the Federal Reserve Bank. 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 or operations other than conventional banking
operations. 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. Additional
information is set forth in NMBT CORP's 1998 Annual Report to Stockholders (an
Exhibit to this Form 10-K), on page 31, and is incorporated herein by reference.
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 1998 and has no present plans regarding a new
line of business that will require an investment of a material amount of its
total assets.
For information about the Company's Year 2000 readiness and disclosure
regarding forward-looking statements, see pages 20-21 of NMBT CORP's 1998 Annual
Report to Stockholders (an Exhibit to this Form 10-K), which is incorporated
herein by reference.
COMPETITION
NMBT's Main Office and four of its branch offices are located in Litchfield
County, Connecticut; four branch
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NMBT CORP
December 31, 1998
offices are located in Fairfield County, Connecticut and 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 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 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, 1998, NMBT employed a total of 194 full- and part-time
employees. (166 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 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
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FORM 10-K
NMBT CORP
December 31, 1998
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 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
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FORM 10-K
NMBT CORP
December 31, 1998
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
the initial formation and organization of a de novo community bank 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 acquiring 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 1998, 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
1999 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). 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 annual rates for NMBT were 1.256,
1.244, 1.22 and 1.164 basis points, for the first through fourth quarters of
1998, respectively, and were 1.296, 1.30, 1.26 and 1.264 basis points, for the
first through fourth quarters of 1997, respectively. The BIF FICO 1999 annual
rates for NMBT for the first two quarters of 1999 are 1.220 and 1.176 basis
points, respectively.
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, 1998, NMBT's capital exceeded these minimums.
See CAPITAL MANAGEMENT on page 19, the FINANCIAL
5
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FORM 10-K
NMBT CORP
December 31, 1998
GLOSSARY on page 22, and Note 8. STOCKHOLDERS' EQUITY, of the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS on page 35 of NMBT CORP's 1998 Annual Report
to Stockholders (an Exhibit to this Form 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, 1998 and 1997.
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 1998, these regulations generally required the
maintenance of reserves of 3.0% against transaction accounts of $47.8 million
($46.5 million effective December 1, 1998) 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, 1998, the Company was in full compliance
with all applicable capital requirements, and management believes that the
Company will maintain 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;
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FORM 10-K
NMBT CORP
December 31, 1998
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.
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.
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 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on pages 14 and
15, 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,
----------------- ------------------- -----------------
1998 1997 1996
----------------- ------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury and agency securities $75,212 $38,107 $23,702
Mortgage-backed securities 15,544 26,597 29,512
Municipal securities 20,797 16,968 8,785
Corporate securities 2,133 - -
- ----------------------------------------------------------------- ----------------- ------------------- -----------------
Total securities, at amortized cost 113,686 81,672 61,999
Federal Home Loan Bank stock 1,980 1,760 1,542
Unrealized gain on securities available for sale 1,024 573 220
----------------- ------------------- -----------------
Total carrying value of securities $116,690 $84,005 $63,761
================================================================= ================= =================== =================
</TABLE>
The following table sets forth the maturities of debt securities, using
amortized cost amounts, at December 31, 1998, and the weighted average yield of
such securities (calculated on the basis of the cost and effective yields
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NMBT CORP
December 31, 1998
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
-------------------- -------------------- -------------------- --------------------
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities $10,009 6.02% $10,547 5.12% $54,657 6.36% $ -
Mortgage-backed securities1 8,277 7.41% 7,267 7.30% - -
Municipal securities - 8,322 6.12% 12,475 6.89% -
Corporate securities - - 1,047 5.62% 1,085 6.88%
- ---------------------------------------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total $18,286 6.99% $26,136 6.39% $68,179 6.44% $1,085 6.88%
======================================== ========== ========= ========== ========= ========== ========= ========== =========
</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 1998. 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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NMBT CORP
December 31, 1998
III. LOAN PORTFOLIO
The following table shows loan distribution at the end of each of the last five
years:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------- ------------- ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate $192,381 $188,868 $184,486 $177,882 $173,346
Commercial and industrial 16,107 17,818 13,203 11,917 10,932
Installment and education 7,137 8,994 7,128 2,628 2, 493
Construction and development 13,443 7,299 5,999 4,891 3, 333
Cash reserve and credit cards 877 930 870 840 807
------------------------------------- ------------ ------------- ------------- ------------ ------------
TOTAL LOANS $229,945 $223,909 $211,686 $198,158 $190,911
===================================== ============ ============= ============= ============ ============
</TABLE>
The following table shows nonaccrual, past due 90 days or more and
restructured loans at the end of each of the last five years:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,694 $3,208 $4,025 $4,523 $5,056
Accruing loans past due 90 days or more 2 25 236 - 257
Troubled debt restructurings - 261 264 269 638
</TABLE>
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NMBT CORP
December 31, 1998
The following table shows the maturity data for fixed and floating rate loans
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Floating or
adjustable rate
Fixed rate loans loans Total loans
------------------- -------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Commercial and industrial
One year or less $264 $7,221 $7,485
Over one year through five years 2,357 4,009 6,366
Over five years 776 1,165 1,941
----------------------------------------------- ------------------- -------------------- -------------------
Total 3,397 12,395 15,792
----------------------------------------------- ------------------- -------------------- -------------------
Construction and development
One year or less 3,737 5,202 8,939
Over one year through five years - 1,210 1,210
Over five years 568 2,726 3,294
----------------------------------------------- ------------------- -------------------- -------------------
Total 4,305 9,138 13,443
----------------------------------------------- ------------------- -------------------- -------------------
All other loans
One year or less 827 4,642 5,469
Over one year through five years 9,214 11,883 21,097
Over five years 34,703 136,747 171,450
----------------------------------------------- ------------------- -------------------- -------------------
Total 44,744 153,272 198,016
----------------------------------------------- ------------------- -------------------- -------------------
Total accruing loans 52,446 174,805 227,251
----------------------------------------------- ------------------- -------------------- -------------------
Total nonaccrual loans 816 1,878 2,694
=============================================== =================== ==================== ===================
TOTAL LOANS $53,262 $176,683 $229,945
=============================================== =================== ==================== ===================
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on pages 18, 29,
30-33 and 37, and is incorporated herein by reference.
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NMBT CORP
December 31, 1998
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan loss experience for each of the five years
ended December 31, 1998:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at January 1 $3,537 $3,212 $3,553 $3,965 $3,769
------------- ------------ ----------- ---------- -----------
Charge-offs:
Real estate loans 202 226 614 796 1,095
Commercial loans 14 166 4 13 198
Installment loans 13 7 11 12 4
Other loans 18 24 31 28 15
------------- ------------ ----------- ---------- -----------
247 423 660 849 1,312
------------- ------------ ----------- ---------- -----------
Recoveries:
Real estate loans 239 146 99 222 42
Commercial loans 42 34 26 53 30
Installment loans 3 4 2 1 2
Other loans 4 2 2 1 2
------------- ------------ ----------- ---------- -----------
288 186 129 277 76
------------- ------------ ----------- ---------- -----------
Net charge-offs (recoveries) (41) 237 531 572 1,236
Allowance acquired
from Candlewood - - - - 1,192
Additions charged to operations 371 582 390 160 240
Transfer to liability for
estimated losses from
off-balance sheet credit
instruments 110 20 200 - -
------------- ------------ ----------- ---------- -----------
Balance at December 31 $3,839 $3,537 $3,212 $3,965 $3,769
=========================================== ============= ============ =========== ========== ===========
Ratio of net charge-offs
(recoveries) during the period to
average loans outstanding during the
period (0.02%) 0.11% 0.27% 0.30% 0.74%
=========================================== ============= ============ =========== ========== ===========
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on pages 12 and
30, and is incorporated herein by reference.
11
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
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,
---------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ ------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing checking $39,203 $34,016 $28,681
Interest-bearing checking 92,364 1.66% 81,145 1.70% 72,251 1.58%
Savings 65,436 2.33% 60,907 2.45% 63,463 2.52%
Time deposits under $100 80,523 5.16% 81,516 5.39% 73,504 5.29%
Time deposits $100 or more 17,816 5.42% 16,432 5.36% 10,919 5.72%
- --------------------------------------------- ------------- ----------- ------------ ----------- ------------ -----------
TOTAL DEPOSITS $295,342 $274,016 $248,818
============================================= ============= =========== ============ =========== ============ ===========
</TABLE>
Remaining maturities of time deposits of $100,000 or more, all of which have
fixed rates, are summarized as follows:
<TABLE>
<CAPTION>
December, 31, 1998
------------------------
(In Thousands)
<S> <C>
Three months or less $7,747
Over three months through six months 5,005
Over six months through one year 3,539
Over one year 3,706
------------------------------------------------------- ------------------------
TOTAL TIME DEPOSITS OF $100 OR MORE $17,997
======================================================= ========================
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The dividend payout ratios were as follows for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Dividend payout ratio 28.68% 18.79% 15.62% 15.25% -
=========== ========= ========== =========== =========
</TABLE>
Other information required by this Item is set forth in NMBT CORP's 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on page 9, and is
incorporated herein by reference.
12
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
VII. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
Maturity Date Rate 1998 1997 1996
-------------------------- ------------------------ -------------------- --------------------- --------------------
(Dollars in Thousands)
<S> <C> <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 -
February 5, 1999 5.19% 2,000 - -
May 6, 1999 5.81% 2,000 - -
September 30, 1999 4.98% 5,000 - -
November 1, 1999 6.05% 1,138 2,310 3,412
November 1, 1999 6.36% 1,192 2,414 -
June 11, 2001 7.03% 550 550 550
June 19, 2001 6.65% 2,234 3,000 3,717
December 31, 2002 6.25% 1,611 1,650 -
January 15, 2003 5.88% 855 - -
August 14, 2003 6.02% 472 - -
March 19, 2007 6.95% 878 953 -
February 13, 2008 5.96% 1,888 - -
February 24, 2008 5.25% 10,000 - -
February 26, 2008 6.08% 756 - -
March 18, 2008 6.46% 552 593 -
May 8, 2008 5.52% 3,000 - -
May 28, 2008 6.25% 744 - -
August 21, 2008 6.18% 447 - -
October 9, 2008 5.41% 695 - -
October 22, 2008 5.50% 878 - -
October 29, 2008 5.68% 782 - -
-------------------- --------------------- --------------------
$37,672 $23,145 $ 14,564
==================== ===================== ====================
Maximum amount outstanding during period $39,597 $23,145 $26,058
Average amount outstanding during period $32,952 $17,269 $12,272
Average interest rate 5.89% 6.20% 5.92%
</TABLE>
ITEM 2. PROPERTIES
NMBT CORP and 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;
13
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
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.
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 CORP and
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 CORP
and 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, two drive-in teller stations 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
14
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
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. 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
On March 5, 1999, there were 1,819 shareholders of record of NMBT CORP's
Common Stock. Other information required by this Item is set forth in NMBT
CORP's 1998 Annual Report to Stockholders (an Exhibit to this Form 10-K), on
pages 19, 20, 35 and 39, and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in NMBT CORP's 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on page 9, 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 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on pages 10
through 22, 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 1998
Annual Report to Stockholders (an Exhibit to this Form 10-K), on pages 23
through 39, 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.
15
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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, 1998 are
incorporated herein by reference:
Consolidated Statements of Condition - December 31, 1998 and 1997
Consolidated Statements of Operations - Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income - Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Selected quarterly financial data - Years Ended December 31, 1998 and 1997
(B) REPORTS ON FORM 8-K - (FOURTH QUARTER OF 1998)
None
(C) EXHIBITS
2 Agreement and Plan of Reorganization (incorporated by reference to Exhibit
2 to the Company's
16
<PAGE>
FORM 10-K
NMBT CORP
December 31, 1998
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-A12G filed on November 25, 1997)
3.2 By-Laws (incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-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 1, 1999
10.7 Employment Agreement between NMBT and Peter R. Maher dated January 1, 1999
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 1998 Annual Report to Stockholders
20. Proxy Statement dated March 31, 1999, for the Annual Meeting of
Stockholders of NMBT CORP
21. Subsidiary of Registrant
27. Financial Data Schedule (included only with EDGAR filing).
(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, 1998
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 19, 1999
----------------------------- ---------------------
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 19, 1999
----------------------------- ---------------------
Michael D. Carrigan, Director, President and Chief
Executive Officer
By (Signature and Title) s/ Jay C. Lent Date March 19, 1999
----------------------------- ---------------------
Jay C. Lent, Executive Vice President, Chief Financial
Officer and Secretary
By (Signature and Title) s/ Deborah L. Fish Date March 19, 1999
----------------------------- ---------------------
Deborah L. Fish, Treasurer
By (Signature and Title) s/ Kevin L. Dumas Date March 19, 1999
----------------------------- ---------------------
Kevin L. Dumas, Director
By (Signature and Title) s/ Louis A. Funk, Jr. Date March 19, 1999
----------------------------- ---------------------
Louis A. Funk, Jr., Director
By (Signature and Title) s/ Lawrence Greenhaus Date March 19, 1999
----------------------------- ---------------------
Lawrence Greenhaus, Director
By (Signature and Title) s/ Ruth Henderson Date March 19, 1999
----------------------------- ---------------------
Ruth Henderson, Director
By (Signature and Title) s/ Robert W. X. Martin Date March 19, 1999
----------------------------- ---------------------
Robert W. X. Martin, Director
By (Signature and Title) s/ Terry C. Pellegrini Date March 19, 1999
----------------------------- ---------------------
Terry C. Pellegrini, Director
By (Signature and Title) s/ Walter G. Southworth Date March 19, 1999
----------------------------- ---------------------
Walter G. Southworth, Director
By (Signature and Title) s/ Harry H. Taylor, Jr. Date March 19, 1999
----------------------------- ---------------------
Harry H. Taylor, Jr., Director
By (Signature and Title) s/ Arthur C. Weinshank Date March 19, 1999
----------------------------- ---------------------
Arthur C. Weinshank, Director
EXHIBIT 10.6
EMPLOYMENT AGREEMENT BETWEEN NMBT AND JAY C. LENT DATED JANUARY 1, 1999
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of January,
1999, by and between NMBT, a Connecticut bank and trust company with its
principal office and place of business at 55 Main Street, New Milford,
Connecticut 06776 (the "Bank"), and Jay C. Lent, residing at 17 North Shore
Drive, New Fairfield, Connecticut 06813 ("Employee").
W I T N E S S E T H:
WHEREAS, Employee has been and continues to be employed by the Bank in
a management capacity;
WHEREAS, Employee is willing to continue to work for the Bank on the
terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual terms herein contained,
the parties hereto, intending to be legally bound, do hereby mutually covenant
and agree as follows:
I. EMPLOYMENT.
The Bank agrees to employ Employee for the Term of Employment, as such
term is defined in Section 2.6 hereof, in the same position that Employee holds
on the date of this Agreement, and Employee accepts such employment and agrees
to serve in such capacity upon the terms and conditions hereinafter set forth.
II. DEFINITIONS.
The following terms shall have the following meanings:
2.1 "Cause," shall mean:
(a) Employee's breach of his obligations under this
Agreement, if such breach shall not have been cured
by Employee within thirty (30) days after Employee's
receipt from the Bank of written notice of a claimed
breach; or
(b) willful misconduct by Employee, including, but not
limited to, the commission by Employee of a felony or
the perpetration by Employee of common law fraud upon
the Bank; or
(c) violation by Employee of one or more federal or state
banking laws, including regulations promulgated
thereunder, which, considered separately or together,
is deemed to be a significant violation, the
existence and significance of such violation or
violations to be determined in good faith by the
Board of Directors of the Bank (the "Board") after
consultation with counsel; such
<PAGE>
determination need not await final adjudication of an
alleged violation or violations by the applicable
federal or state bank regulatory agency
(collectively, "Bank Regulators"); or
(d) conduct by Employee which is subject to criticism by
Bank Regulators and which criticism the Board, after
consultation with counsel, deems in good faith to
adversely affect the Bank, including the Bank's
standing with Bank Regulators; or
(e) Failure To Adhere To Performance and Conduct
Criteria, as defined below; or
(f) prior to a Change-in-Control, as defined below, such
other conduct as may constitute cause under the laws
of Connecticut.
2.2 A "Change-in-Control" shall be deemed to have occurred
with respect to the Bank if any "Person," as defined in Section 2.5, has
acquired beneficial ownership or effective control of the Bank. A Person shall
be deemed to have acquired beneficial ownership or effective control if:
(a) the Person directly or indirectly or acting through
one (1) or more other Persons beneficially owns,
controls, or has power to vote twenty-five percent
(25%) or more of the voting common stock of the Bank;
or
(b) the Person acquires all or substantially all of the
assets and businesses of the Bank; or
(c) the Person controls the election of a majority of the
directors of the Bank; or
(d) the Board of Directors of the Bank determines that
the Person directly or indirectly exercises a
controlling influence over the management or policies
of the Bank; or
(e) the Person (i) is a party to a merger, consolidation,
or any other form of reorganization having
substantially the same effect as a merger or
consolidation with the Bank, and (ii) immediately
prior to such transaction the Person had total assets
as of the end of its most recent fiscal year equal to
or greater than twenty percent (20%) of the total
assets of the Bank as of the end of its most recent
fiscal year.
Notwithstanding the foregoing, a "Change-in-Control" shall not
be deemed to have occurred if (i) a majority of the directors of the Bank in
office prior to the events described in (a), (b), or (c) above shall so vote not
later than thirty (30) days following the event, and (ii) Employee shall so
agree in writing. Beneficial ownership shall be determined under the provisions
of Securities Exchange Act Rule 13d-3, (17 C.F.R. & 240.13d-3) as amended and in
effect on the date
2
<PAGE>
of this Agreement.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.4 "Failure To Adhere To Performance and Conduct Criteria"
shall mean failure by Employee to adhere to performance and conduct guidelines
set forth by the CEO and/or the Board, from time to time; and further that the
Employee, in the sole and good faith opinion of the Board, had not adequately
corrected such failure within 30 days after Employee's receipt from the Board
and/or the CEO of written notice that he has failed to adhere to such
guidelines.
2.5 A "Person" shall mean a natural person, corporation, or
other entity. When two (2) or more Persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring, holding, or
disposing of the Bank common stock, such partnership, syndicate, or group shall
be considered a Person.
2.6 "Term of Employment" shall mean the period commencing as
of the date of this Agreement and ending on December 31, 1999; provided,
however, the Term of Employment shall automatically be extended to the next
subsequent 31st day of December if the Board has not advised Employee in writing
prior to 30 days of the expiration date of each such Term of Employment that the
Term of Employment shall not be so extended. For example, if the Board of
Directors has not advised Employee by November 30, 1999 that the Term of
Employment will not be extended beyond December 31, 1999; then the Term of
Employment shall automatically be extended until December 31, 2000; if the Board
of Directors has not advised Employee by November 30, 2000 that the Term of
Employment will not be extended beyond December 31, 2000, then the Term of
Employment shall automatically be extended until December 31, 2001.
Notwithstanding anything to the contrary, the term of employment shall not be
extended beyond December 31, 2001.
III. DUTIES OF EMPLOYMENT.
3.1 The Bank hereby employs Employee and Employee hereby
accepts such employment as Executive Vice President and Chief Financial Officer
of the Bank during the Term of Employment upon the terms and conditions set
forth herein. During the Term of Employment, Employee will serve as Executive
Vice President and Chief Financial Officer of the Bank and will perform such
other duties commensurate with his position as Executive Vice President and
Chief Financial Officer as the CEO and/or the Board may assign to him. Employee
agrees that during the Term of Employment, he will apply, in good faith and on a
full-time basis (allowing for usual vacations and absence due to sickness), all
of his skill and experience to the performance of his duties in such employment,
and will adhere, in good faith, to the laws and regulations of federal and state
banking regulatory agencies which may be promulgated from time to time. It is
understood that Employee may have other business investments or directorships,
which may, from time to time, require minor portions of his time, but which
shall not interfere or be inconsistent with his duties hereunder.
3
<PAGE>
IV. COMPENSATION AND BENEFITS DURING TERM OF EMPLOYMENT.
4.1 The Bank shall pay Employee during the Term of Employment
$135,000 per annum paid on a monthly basis, with such increases as provided in
Section 4.2 below, as salary (the "Salary"). The Bank may also pay such bonus
compensation ("Bonus Compensation") as may be determined by the Board of
Directors of the Bank in its sole discretion.
4.2 If this Agreement is extended pursuant to Section 2.6
above, the Salary for such extension period, or periods, as the case may be,
will be determined by the Board of Directors in its sole discretion.
4.3 Employee shall be entitled to participate in any plan of
the Bank relating to stock options, stock purchases, pensions, thrift, profit
sharing, group life insurance, health, dental and disability coverage,
education, or other retirement or employee benefits that the Bank has adopted or
may adopt for the benefit of its employees. Employee shall also be entitled to
participate in any other fringe benefits which are now or may become applicable
to the Bank's employees and any other benefits which are commensurate with the
duties and responsibilities to be performed by Employee under this Agreement.
4.4 The Bank will reimburse Employee for necessary and
reasonable business expenses related to the business of the Bank incurred by him
in the performance of his duties hereunder. Employee will be entitled to such
reimbursement upon providing to the Bank appropriate documentation or receipts
reflecting any such business expenses.
4.5 Employee will be entitled to four weeks of paid vacation
during each calendar year during the Term of Employment hereof, to be taken at
such times as shall not unreasonably interfere with or impede the operation of
the Bank.
4.6 During the Term of this Agreement, the Bank will provide
Employee with the use of a 1998 vehicle. When the vehicle is 36 months old or
has been driven 50,000 miles, whichever comes first, the Bank will review this
policy and in its discretion furnish Employee with a new vehicle, allow Employee
to continue to use the vehicle noted above, or provide Employee with an
automobile allowance.
V. TERMINATION OF EMPLOYMENT.
5.1 If Employee's employment is unilaterally terminated by the
Bank during the Term of Employment for any reason other than (i) Cause, (ii)
permanent and total disability (as defined in Section 22(e) of the Code) or
death, or (iii) in connection with or within one year after a Change-In-Control,
Employee shall be entitled to receive, and the Bank shall be obligated to pay to
Employee, severance pay in an amount equal to the greater of (A) Employee's
Salary as defined in Section 4.1 for the number of months remaining in the Term
of Employment, or (B) an amount equal to the then current monthly portion of
Employee's Salary multiplied by the number (not to exceed 12) of years, or part
thereof, Employee has been employed by the Bank, or (C) Employee's Salary for a
period of six months.
5.2 In addition to the severance payment described in Section
5.1 that is payable
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<PAGE>
to Employee, the following shall apply in the event of any termination without
Cause or in the event of any termination subject to Section 5.3 hereof: (1)
Employee shall continue to receive life, health, dental and disability coverage
substantially equivalent to the coverage maintained by the Bank for Employee
prior to termination for a period of six months; provided the Bank continues to
provide such coverage to its executive officers; (2) and all insurance or other
provisions for indemnification or defense of officers or directors of the Bank
which are in effect on the date of termination of Employee shall continue for
the benefit of Employee with respect to all of his acts and omissions while an
officer or director as fully and completely as if such termination had not
occurred, and until the final expiration or running of all periods of limitation
which may be applicable to such acts or omissions, provided the Bank continues
to provide such coverage to its executive officers and directors.
5.3 If during the Term of Employment there is a
Change-In-Control and Employee's employment is terminated voluntarily for Good
Reason, as defined in Section 5.4, or involuntarily for a reason other than
Cause, in connection with or within one year after a Change-In-Control, Employee
shall be entitled to receive a cash severance as provided for in this Section
unless such termination occurs by virtue of normal retirement, permanent and
total disability (as defined in Section 22(e) of the Code) or death. Subject to
Section 5.4 below, the amount of the severance payment shall equal (i) two times
Employee's average annual Salary which was payable by the Bank and was
includable by Employee in his gross income for federal income tax purposes with
respect to the five most recent taxable years of Employee ending prior to such
Change-In-Control (or such portion of such period during which Employee was a
full-time employee of the Bank), less (ii) one dollar. Notwithstanding the
foregoing, Employee shall be required, at the sole option of the Bank, to
continue his employment hereunder through the occurrence of any such
Change-In-Control and a reasonable transition period thereafter. In addition,
Section 5.2 shall apply in the case of any termination of employment within the
scope of this Section 5.3.
5.4 "Good Reason" shall be deemed to have occurred if Employee
terminates his employment for any of the following reasons:
(a) without Employee's express written consent, the
assignment to Employee of any duties inconsistent
with Employee's positions, duties, responsibilities
and status with the Bank immediately before a
Change-In-Control, or any removal of Employee from,
or any failure to re-elect Employee to, any such
positions, except in connection with the termination
of Employee's employment as a result of permanent and
total disability (as defined in Section 22(e) of the
Code) or death;
(b) a reduction in Employee's Salary in effect
immediately before a Change-In-Control;
(c) the failure of the Person substantially to maintain
and to continue Employee's participation in the
benefit plans as in effect immediately before a
Change-In-Control, of the taking of any action which
would
5
<PAGE>
materially reduce the Employee's benefits under any
of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately before
a Change-In-Control;
(d) the change of Employee's principal place of
employment to a location more than 25 miles from
Employee's current principal place of employment.
5.5 Notwithstanding any other provisions of this Agreement or
of any other agreement, contract, or understanding heretofore or hereafter
entered into by Employee with the Bank (the "Other Agreements"), and
notwithstanding any formal or informal plan or other arrangement heretofore or
hereafter adopted by the Bank for the direct or indirect provision of
compensation to Employee (including groups or classes of participants or
beneficiaries of which Employee is a member), whether or not such compensation
is deferred, is in cash, or is in the form of a benefit to or for Employee (a
"Benefit Plan"), Employee shall not have any right to receive any payment or
other benefit under this Agreement, any Other Agreement, and all Benefit Plans,
which would cause any such payment to Employee to be considered a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code (a "Parachute
Payment"). In the event that the receipt of any such payment or benefit under
this Agreement, any Other Agreement, or any Benefit Plan would cause Employee to
be considered to have received a Parachute Payment, then Employee shall have the
right, in Employee's sole discretion to designate those payments or benefits
under this Agreement, any Other Agreements, and/or any Benefit Plans, which
should be reduced or eliminated so as to avoid having the payment to Employee
under this Agreement be deemed to be a Parachute Payment. In the event that
there is a dispute between the parties as to whether a reduction in such
payments to Employee is required to prevent such payment from constituting a
Parachute Payment, the parties agree that they shall be bound by the
determination of such matter by a partner resident in Hartford or Stamford,
Connecticut of one of the following accounting firms selected by the Bank (or
such other firm as shall be mutually agreed upon by the parties):
Pricewaterhouse Coopers LLP; Deloitte & Touche LLP; Ernst & Young LLP; or Price
Waterhouse LLP. In the event that Employee would otherwise be deemed to have
received an amount that would constitute a Parachute Payment, the amount paid to
him that exceeds the maximum amount permissible under this Section 5 shall be
treated as a loan to him and shall be repaid, with interest, to the extent
necessary to reduce the amount paid to the maximum permissible amount. The
interest rate and other terms of any such loan shall conform to terms that would
be applicable to loans of similar unsecured type made by the Bank to third
parties and to all regulatory requirements. Any such loan shall be repaid in
full six months after the date on which the Bank notifies Employee that a loan
relationship exists, and may be repaid by Employee without prepayment penalty at
any time during such six month period.
5.6 Employee shall have no duty to mitigate damages in the
event of a termination under the terms of Sections 5.1 and 5.4, and, if he
voluntarily obtains other employment (including self-employment), any
compensation or profits received or accrued, directly or indirectly, from such
other employment shall not reduce or otherwise affect the obligations of the
Bank to make payments hereunder, except as provided in Section 5.3.
5.7 If the employment of Employee shall terminate at a time
other than during the
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<PAGE>
Term of Employment, or is said employment shall terminate for Cause, as defined
in Section 2.1 hereof, or if Employee shall unilaterally terminate his
employment other than in connection with a Change-In-Control for Good Reason,
all payments that would have been due to Employee under the Agreement on or
after the date of such termination shall cease, and the Bank shall have no
further obligations under this Agreement other than for amounts accrued but not
paid as of the date of such termination.
5.8 As a condition of receiving any severance payments or
benefits in this Section, Employee must enter into a "Release Agreement" with
terms acceptable to the Bank or Person, releasing any and all legal claims the
Employee had, has or may have against the Bank or Person.
VI. OTHER BENEFITS.
6.1 If Employee shall become disabled or incapacitated to the
extent that Employee is unable to perform Employee's duties and responsibilities
hereunder, Employee shall be entitled to receive disability benefits of the type
provided for other executive employees of the Bank.
VII. EXPENSES.
7.1 Employee shall be entitled to recover any and all
reasonable fees and costs and expenses, including but not limited to, attorneys'
fees in the event employee is successful in asserting or defending any claim,
arising out of Employee's efforts to enforce any and all of the provisions of
this Agreement.
7.2 Employer shall be entitled to recover any and all
reasonable fees and costs and expenses, including but not limited to, attorneys'
fees in the event Employer is successful in asserting or defending any claim,
arising out of Employer's efforts to enforce any and all of the provisions of
this Agreement.
VIII. CONFIDENTIAL INFORMATION.
Employee understands that in the course of his employment by
the Bank, Employee will receive Confidential Information (as hereafter defined)
concerning the business of the Bank which the Bank desires to protect. Employee
agrees that he will not at any time during or after the Term of Employment
reveal to anyone (except for the Bank employees who have a need to know such
information in the course of their employment) or use for his own benefit any
Confidential Information, without specific written authorization by the Bank.
This Section applies to all information obtained by Employee in the course of
his employment unless such information is or becomes publicly known or known in
the banking community generally prior to any disclosure thereof by Employee.
Upon termination of employment for any reason, Employee shall return promptly to
the Bank at its direction and expense any and all copies, either prepared by the
Bank or Employee, of the records, materials, memorandums and other data
constituting Confidential Information. As used in this Agreement, the term
"Confidential Information" shall mean all business information of any nature and
in any form which at the time or times concerned is proprietary to the
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<PAGE>
Bank and regarded as such by it and which is not generally known to persons not
employed by the Bank or who are members of its Board (except for information
disclosed by the act or acts of a person not authorized by the Bank to disclose
such information) and which relates to any one or more of the aspects of the
present or past business of the Bank including, but not limited to, proposed
acquisitions, proposed branches, development projects, policies or other facts
relating to financial matters, customers , customers' lists and customers'
financial needs.
IX. PROPRIETARY RIGHTS.
9.1 Employee acknowledges that his services and
responsibilities are of particular significance to the Bank and that his
position with Bank has given, and will give him a close knowledge of its
policies and trade secrets. Employee covenants and agrees that he will not, for
a period of twelve months from the date of the termination of his employment
with the Bank (i) solicit or accept as customers or otherwise provide services
to any present customer or former customer of the Bank, (ii) in any manner
attempt to induce any customers of the Bank to withdraw their accounts or
business from the Bank or to induce any prospective customer to not become a
customer, (iii) induce or encourage any employee of the Bank to terminate such
employee's employment, or (iv) make any disparaging comment or statement, orally
or in writing, regarding the Bank or its employees or take any action or make
any other comment or statement that may harm the reputation or business of the
Bank.
9.2 For purposes of this Agreement, "present customer",
"former customer" shall be defined in the following manner:
A "present customer" of the Bank is a Person with
whom the Bank has a business relationship on the date
of termination of Employee's employment.
A "former customer" of the Bank is a Person with whom
the Bank has no business relationship at the time of
the termination of Employee's employment, but has had
such a relationship within the one-year period ending
on the date of termination of Employee's employment.
9.3 Employee agrees that he shall not, for a period of one
year following his employment with the Bank, either directly or indirectly as
agent, stockholder, employee, officer, director, trustee, partner, proprietor or
otherwise engage in, render advice or assistance to or be employed on a
compensation basis by any person, firm or entity which is in competition with
the Bank. This paragraph shall only apply where such person, firm or entity has
its principal office within 15 miles of New Milford, Connecticut, or Danbury,
Connecticut; or where the office of Employee is situated, or Employee's primary
geographic areas of responsibility will be located within 15 miles of New
Milford, Connecticut, or Danbury, Connecticut.
9.4 The time periods referred to in Sections 9(1) and (2)
above shall each be extended by the amount of time that Employee fails to comply
with his obligations under Section 9, whether due to the issuance of a temporary
restraining order or injunction or otherwise.
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<PAGE>
9.5 In addition to any damages or other remedies to which the
Bank may be entitled by virtue of any breach of the covenants and agreements in
Section 8 or 9 hereof, Employee acknowledges that any such breach would cause
irreparable harm to the Bank and consents to the granting of injunctive and
other equitable relief to the Bank. Employee shall also pay all costs, including
reasonable attorney's fees, incurred by the Bank in seeking any such remedy or
in connection with the Bank otherwise enforcing its rights under this Agreement.
Any damages against Employee, which shall include, without limitation, any
amounts received as compensation or in any other capacity by Employee from any
third party as a result of or in connection with the breach of Employee's
obligations under this Agreement, may be applied as a set-off against any amount
owed to Employee by the Bank.
X. OTHER DUTIES OF EMPLOYEE DURING AND AFTER THE TERM OF
EMPLOYMENT.
Both during and after the Term of Employment, Employee shall,
upon reasonable notice furnish such information as may be in his possession to,
and cooperate with, the Bank as may reasonably be requested by the Bank in
connection with any litigation in which the Bank is, or may become, a party. The
Bank shall reimburse Employee for all of the reasonable expenses incurred by him
in fulfilling his obligation under this Section 10 (except that no such expenses
shall be paid to Employee with respect to any litigation or proceeding commenced
by Employee or as to which Employee is otherwise a party).
XI. NOTICES.
All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person to Employee or if the Bank, to the
Chairman of the Board of the Bank or CEO, or if sent, postage prepaid, certified
mail, return receipt requested, or by recognized overnight delivery service, as
follows:
If to Employee, as follows: Jay C. Lent
17 North Shore Drive
New Fairfield, Connecticut 06813
If to the Bank, as follows: NMBT
55 Main Street
New Milford, Connecticut 06776-2400
Attention: Louis A. Funk, Jr., Chairman or
Michael D. Carrigan, President
and CEO
or to such other address or addresses as hereafter shall be designated by notice
given in accordance with this Section by either of the parties hereto to the
other party.
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<PAGE>
XII. SUCCESSORS AND ASSIGNS.
The rights and obligations of the Bank under this Agreement
shall inure to the benefit of and shall be binding upon the Bank's successors
and assigns, including, without limitation, any Person which may acquire all or
substantially all of the assets and business of the Bank, or with or into which
the Bank may be consolidated or merged or any surviving corporation in any
merger involving the Bank. All references in this Agreement to the Bank shall be
deemed to include all of its successors and assigns.
XIII. ARBITRATION.
If any dispute arises between the parties hereto, the
Employee's sole recourse will be to submit such claim to binding arbitration in
the City of Waterbury, Connecticut, in accordance with the Commercial Rules of
the American Arbitration Association.
Prior to submitting a dispute to arbitration, the Employee
shall first submit such dispute to the Bank's Board of Directors for a period of
up to three months in an effort to resolve such dispute without resort to
arbitration. During such three month period, both the Employee and the Bank
agree to make a good faith effort to resolve the dispute amicably and to make
arbitration unnecessary.
If the dispute concerns the termination of the Employee's
employment, or the severance and benefits to which the Employee is entitled upon
the termination, at arbitration, the only issue before the arbitrator will be to
determine the nature of the Employee's termination (i.e., whether for cause,
without cause, or in a situation subject to Section 5.3, whether Employee had
Good Reason to voluntarily terminate his employment). Based on the arbitrator's
determination of the nature of the Employee's termination, the arbitrator may
award the appropriate severance payments and, if applicable, benefits, provided
under this Agreement.
XIV. SEVERABILITY.
If any of the terms and conditions of this Agreement shall be
declared void or unenforceable by any court or administrative body of competent
jurisdiction, such term or condition shall be deemed severable from the
remainder of this Agreement, and the other terms and conditions of this
Agreement shall continue to be valid and enforceable except that if any
provision of the release agreement is declared illegal or unenforceable as the
result of efforts by the Employee, or his agent, or Employee brings a claim
against any of the released entities released in that release agreement,
Employee will return to the Bank any consideration he has received in exchange
for entering into the release agreement.
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XV. OTHER AGREEMENTS.
This Agreement supersedes any and all prior written or oral
employment agreements between the Bank and Employee or between Employee and any
predecessor of the Bank.
XVI. CONSTRUCTION.
This Agreement shall be construed under the laws of the State
of Connecticut. Section headings are for convenience only and shall not be
considered a part of the terms and provisions of this Agreement. No
modifications of or amendments to this Agreement may be made except in writing
signed by the Bank and Employee. All references to gender shall, as the case may
be, refer to either the male or female gender.
XVII. MISCELLANEOUS PROVISIONS.
17.1 The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed a waiver of any
subsequent breach thereof.
17.2 Employee hereby acknowledges that the services to be
rendered hereunder are of a unique, special and extraordinary character which
would be difficult or impossible for the Bank to replace, and by reason thereof,
Employee hereby agrees that for violation of any of the provisions of this
Agreement, the Bank shall, in addition to any other rights and remedies
available hereunder, at law or otherwise, be entitled to an injunction to be
issued by any court of competent jurisdiction enjoining and restraining Employee
from committing any violation of this Agreement, and Employee hereby consents to
the issuance of such injunction.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
executed by a duly authorized officer and Employee has executed this Agreement
as of the day and year first above written.
NMBT
By: s/ Louis A. Funk, Jr.
--------------------------
Louis A. Funk, Jr.
Its Chairman
s/ Jay C. Lent
--------------------------
Jay C. Lent
EXHIBIT 10.7
EMPLOYMENT AGREEMENT BETWEEN NMBT AND PETER R. MAHER DATED JANUARY 1, 1999
<PAGE>
THIS AGREEMENT is made and entered into as of the 1st day of January,
1999, by and between NMBT, a Connecticut bank and trust company with its
principal office and place of business at 55 Main Street, New Milford,
Connecticut 06776 (the "Bank"), and Peter R. Maher, residing at 116 Brushy Hill
Road, Newtown, Connecticut 06470 ("Employee").
W I T N E S S E T H:
WHEREAS, Employee has been and continues to be employed by the Bank in
a management capacity;
WHEREAS, Employee is willing to continue to work for the Bank on the
terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual terms herein contained,
the parties hereto, intending to be legally bound, do hereby mutually covenant
and agree as follows:
I. EMPLOYMENT.
The Bank agrees to employ Employee for the Term of Employment, as such
term is defined in Section 2.6 hereof, in the same position that Employee holds
on the date of this Agreement, and Employee accepts such employment and agrees
to serve in such capacity upon the terms and conditions hereinafter set forth.
II. DEFINITIONS.
The following terms shall have the following meanings:
2.1 "Cause," shall mean:
(a) Employee's breach of his obligations under this
Agreement, if such breach shall not have been cured
by Employee within thirty (30) days after Employee's
receipt from the Bank of written notice of a claimed
breach; or
(b) willful misconduct by Employee, including, but not
limited to, the commission by Employee of a felony or
the perpetration by Employee of common law fraud upon
the Bank; or
(c) violation by Employee of one or more federal or state
banking laws, including regulations promulgated
thereunder, which, considered separately or together,
is deemed to be a significant violation, the
existence and significance of such violation or
violations to be determined in good faith by the
Board of Directors of the Bank (the "Board") after
consultation with counsel; such
<PAGE>
determination need not await final adjudication of an
alleged violation or violations by the applicable
federal or state bank regulatory agency
(collectively, "Bank Regulators"); or
(d) conduct by Employee which is subject to criticism by
Bank Regulators and which criticism the Board, after
consultation with counsel, deems in good faith to
adversely affect the Bank, including the Bank's
standing with Bank Regulators; or
(e) Failure To Adhere To Performance and Conduct
Criteria, as defined below; or
(f) prior to a Change-in-Control, as defined below, such
other conduct as may constitute cause under the laws
of Connecticut.
2.2 A "Change-in-Control" shall be deemed to have occurred
with respect to the Bank if any "Person," as defined in Section 2.5, has
acquired beneficial ownership or effective control of the Bank. A Person shall
be deemed to have acquired beneficial ownership or effective control if:
(a) the Person directly or indirectly or acting through
one (1) or more other Persons beneficially owns,
controls, or has power to vote twenty-five percent
(25%) or more of the voting common stock of the Bank;
or
(b) the Person acquires all or substantially all of the
assets and businesses of the Bank; or
(c) the Person controls the election of a majority of the
directors of the Bank; or
(d) the Board of Directors of the Bank determines that
the Person directly or indirectly exercises a
controlling influence over the management or policies
of the Bank; or
(e) the Person (i) is a party to a merger, consolidation,
or any other form of reorganization having
substantially the same effect as a merger or
consolidation with the Bank, and (ii) immediately
prior to such transaction the Person had total assets
as of the end of its most recent fiscal year equal to
or greater than twenty percent (20%) of the total
assets of the Bank as of the end of its most recent
fiscal year.
Notwithstanding the foregoing, a "Change-in-Control" shall not
be deemed to have occurred if (i) a majority of the directors of the Bank in
office prior to the events described in (a), (b), or (c) above shall so vote not
later than thirty (30) days following the event, and (ii) Employee shall so
agree in writing. Beneficial ownership shall be determined under the provisions
of Securities Exchange Act Rule 13d-3, (17 C.F.R. & 240.13d-3) as amended and in
effect on the date
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<PAGE>
of this Agreement.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.4 "Failure To Adhere To Performance and Conduct Criteria"
shall mean failure by Employee to adhere to performance and conduct guidelines
set forth by the CEO and/or the Board, from time to time; and further that the
Employee, in the sole and good faith opinion of the Board, had not adequately
corrected such failure within 30 days after Employee's receipt from the Board
and/or the CEO of written notice that he has failed to adhere to such
guidelines.
2.5 A "Person" shall mean a natural person, corporation, or
other entity. When two (2) or more Persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring, holding, or
disposing of the Bank common stock, such partnership, syndicate, or group shall
be considered a Person.
2.6 "Term of Employment" shall mean the period commencing as
of the date of this Agreement and ending on December 31, 1999; provided,
however, the Term of Employment shall automatically be extended to the next
subsequent 31st day of December if the Board has not advised Employee in writing
prior to 30 days of the expiration date of each such Term of Employment that the
Term of Employment shall not be so extended. For example, if the Board of
Directors has not advised Employee by November 30, 1999 that the Term of
Employment will not be extended beyond December 31, 1999; then the Term of
Employment shall automatically be extended until December 31, 2000; if the Board
of Directors has not advised Employee by November 30, 2000 that the Term of
Employment will not be extended beyond December 31, 2000, then the Term of
Employment shall automatically be extended until December 31, 2001.
Notwithstanding anything to the contrary, the term of employment shall not be
extended beyond December 31, 2001.
III. DUTIES OF EMPLOYMENT.
3.1 The Bank hereby employs Employee and Employee hereby
accepts such employment as Executive Vice President and Chief Lending Officer of
the Bank during the Term of Employment upon the terms and conditions set forth
herein. During the Term of Employment, Employee will serve as Executive Vice
President and Chief Lending Officer of the Bank and will perform such other
duties commensurate with his position as Executive Vice President and Chief
Lending Officer as the CEO and/or the Board may assign to him. Employee agrees
that during the Term of Employment, he will apply, in good faith and on a
full-time basis (allowing for usual vacations and absence due to sickness), all
of his skill and experience to the performance of his duties in such employment,
and will adhere, in good faith, to the laws and regulations of federal and state
banking regulatory agencies which may be promulgated from time to time. It is
understood that Employee may have other business investments or directorships,
which may, from time to time, require minor portions of his time, but which
shall not interfere or be inconsistent with his duties hereunder.
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<PAGE>
IV. COMPENSATION AND BENEFITS DURING TERM OF EMPLOYMENT.
4.1 The Bank shall pay Employee during the Term of Employment
$113,900 per annum paid on a monthly basis, with such increases as provided in
Section 4.2 below, as salary (the "Salary"). The Bank may also pay such bonus
compensation ("Bonus Compensation") as may be determined by the Board of
Directors of the Bank in its sole discretion.
4.2 If this Agreement is extended pursuant to Section 2.6
above, the Salary for such extension period, or periods, as the case may be,
will be determined by the Board of Directors in its sole discretion.
4.3 Employee shall be entitled to participate in any plan of
the Bank relating to stock options, stock purchases, pensions, thrift, profit
sharing, group life insurance, health, dental and disability coverage,
education, or other retirement or employee benefits that the Bank has adopted or
may adopt for the benefit of its employees. Employee shall also be entitled to
participate in any other fringe benefits which are now or may become applicable
to the Bank's employees and any other benefits which are commensurate with the
duties and responsibilities to be performed by Employee under this Agreement.
4.4 The Bank will reimburse Employee for necessary and
reasonable business expenses related to the business of the Bank incurred by him
in the performance of his duties hereunder. Employee will be entitled to such
reimbursement upon providing to the Bank appropriate documentation or receipts
reflecting any such business expenses.
4.5 Employee will be entitled to four weeks of paid vacation
during each calendar year during the Term of Employment hereof, to be taken at
such times as shall not unreasonably interfere with or impede the operation of
the Bank.
4.6 During the Term of this Agreement, the Bank will provide
Employee with the use of a 1998 vehicle. When the vehicle is 36 months old or
has been driven 50,000 miles, whichever comes first, the Bank will review this
policy and in its discretion furnish Employee with a new vehicle, allow Employee
to continue to use the vehicle noted above, or provide Employee with an
automobile allowance.
V. TERMINATION OF EMPLOYMENT.
5.1 If Employee's employment is unilaterally terminated by the
Bank during the Term of Employment for any reason other than (i) Cause, (ii)
permanent and total disability (as defined in Section 22(e) of the Code) or
death, or (iii) in connection with or within one year after a Change-In-Control,
Employee shall be entitled to receive, and the Bank shall be obligated to pay to
Employee, severance pay in an amount equal to the greater of (A) Employee's
Salary as defined in Section 4.1 for the number of months remaining in the Term
of Employment, or (B) an amount equal to the then current monthly portion of
Employee's Salary multiplied by the number (not to exceed 12) of years, or part
thereof, Employee has been employed by the Bank, or (C) Employee's Salary for a
period of six months.
5.2 In addition to the severance payment described in Section
5.1 that is payable
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<PAGE>
to Employee, the following shall apply in the event of any termination without
Cause or in the event of any termination subject to Section 5.3 hereof: (1)
Employee shall continue to receive life, health, dental and disability coverage
substantially equivalent to the coverage maintained by the Bank for Employee
prior to termination for a period of six months; provided the Bank continues to
provide such coverage to its executive officers; (2) and all insurance or other
provisions for indemnification or defense of officers or directors of the Bank
which are in effect on the date of termination of Employee shall continue for
the benefit of Employee with respect to all of his acts and omissions while an
officer or director as fully and completely as if such termination had not
occurred, and until the final expiration or running of all periods of limitation
which may be applicable to such acts or omissions, provided the Bank continues
to provide such coverage to its executive officers and directors.
5.3 If during the Term of Employment there is a
Change-In-Control and Employee's employment is terminated voluntarily for Good
Reason, as defined in Section 5.4, or involuntarily for a reason other than
Cause, in connection with or within one year after a Change-In-Control, Employee
shall be entitled to receive a cash severance as provided for in this Section
unless such termination occurs by virtue of normal retirement, permanent and
total disability (as defined in Section 22(e) of the Code) or death. Subject to
Section 5.4 below, the amount of the severance payment shall equal (i) two times
Employee's average annual Salary which was payable by the Bank and was
includable by Employee in his gross income for federal income tax purposes with
respect to the five most recent taxable years of Employee ending prior to such
Change-In-Control (or such portion of such period during which Employee was a
full-time employee of the Bank), less (ii) one dollar. Notwithstanding the
foregoing, Employee shall be required, at the sole option of the Bank, to
continue his employment hereunder through the occurrence of any such
Change-In-Control and a reasonable transition period thereafter. In addition,
Section 5.2 shall apply in the case of any termination of employment within the
scope of this Section 5.3.
5.4 "Good Reason" shall be deemed to have occurred if Employee
terminates his employment for any of the following reasons:
(a) without Employee's express written consent, the
assignment to Employee of any duties inconsistent
with Employee's positions, duties, responsibilities
and status with the Bank immediately before a
Change-In-Control, or any removal of Employee from,
or any failure to re-elect Employee to, any such
positions, except in connection with the termination
of Employee's employment as a result of permanent and
total disability (as defined in Section 22(e) of the
Code) or death;
(b) a reduction in Employee's Salary in effect
immediately before a Change-In-Control;
(c) the failure of the Person substantially to maintain
and to continue Employee's participation in the
benefit plans as in effect immediately before a
Change-In-Control, of the taking of any action which
would
5
<PAGE>
materially reduce the Employee's benefits under any
of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately before
a Change-In-Control;
(d) the change of Employee's principal place of
employment to a location more than 25 miles from
Employee's current principal place of employment.
5.5 Notwithstanding any other provisions of this Agreement or
of any other agreement, contract, or understanding heretofore or hereafter
entered into by Employee with the Bank (the "Other Agreements"), and
notwithstanding any formal or informal plan or other arrangement heretofore or
hereafter adopted by the Bank for the direct or indirect provision of
compensation to Employee (including groups or classes of participants or
beneficiaries of which Employee is a member), whether or not such compensation
is deferred, is in cash, or is in the form of a benefit to or for Employee (a
"Benefit Plan"), Employee shall not have any right to receive any payment or
other benefit under this Agreement, any Other Agreement, and all Benefit Plans,
which would cause any such payment to Employee to be considered a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code (a "Parachute
Payment"). In the event that the receipt of any such payment or benefit under
this Agreement, any Other Agreement, or any Benefit Plan would cause Employee to
be considered to have received a Parachute Payment, then Employee shall have the
right, in Employee's sole discretion to designate those payments or benefits
under this Agreement, any Other Agreements, and/or any Benefit Plans, which
should be reduced or eliminated so as to avoid having the payment to Employee
under this Agreement be deemed to be a Parachute Payment. In the event that
there is a dispute between the parties as to whether a reduction in such
payments to Employee is required to prevent such payment from constituting a
Parachute Payment, the parties agree that they shall be bound by the
determination of such matter by a partner resident in Hartford or Stamford,
Connecticut of one of the following accounting firms selected by the Bank (or
such other firm as shall be mutually agreed upon by the parties):
Pricewaterhouse Coopers LLP; Deloitte & Touche LLP; Ernst & Young LLP; or Price
Waterhouse LLP. In the event that Employee would otherwise be deemed to have
received an amount that would constitute a Parachute Payment, the amount paid to
him that exceeds the maximum amount permissible under this Section 5 shall be
treated as a loan to him and shall be repaid, with interest, to the extent
necessary to reduce the amount paid to the maximum permissible amount. The
interest rate and other terms of any such loan shall conform to terms that would
be applicable to loans of similar unsecured type made by the Bank to third
parties and to all regulatory requirements. Any such loan shall be repaid in
full six months after the date on which the Bank notifies Employee that a loan
relationship exists, and may be repaid by Employee without prepayment penalty at
any time during such six month period.
5.6 Employee shall have no duty to mitigate damages in the
event of a termination under the terms of Sections 5.1 and 5.4, and, if he
voluntarily obtains other employment (including self-employment), any
compensation or profits received or accrued, directly or indirectly, from such
other employment shall not reduce or otherwise affect the obligations of the
Bank to make payments hereunder, except as provided in Section 5.3.
5.7 If the employment of Employee shall terminate at a time
other than during the
6
<PAGE>
Term of Employment, or is said employment shall terminate for Cause, as defined
in Section 2.1 hereof, or if Employee shall unilaterally terminate his
employment other than in connection with a Change-In-Control for Good Reason,
all payments that would have been due to Employee under the Agreement on or
after the date of such termination shall cease, and the Bank shall have no
further obligations under this Agreement other than for amounts accrued but not
paid as of the date of such termination.
5.8 As a condition of receiving any severance payments or
benefits in this Section, Employee must enter into a "Release Agreement" with
terms acceptable to the Bank or Person, releasing any and all legal claims the
Employee had, has or may have against the Bank or Person.
VI. OTHER BENEFITS.
6.1 If Employee shall become disabled or incapacitated to the
extent that Employee is unable to perform Employee's duties and responsibilities
hereunder, Employee shall be entitled to receive disability benefits of the type
provided for other executive employees of the Bank.
VII. EXPENSES.
7.1 Employee shall be entitled to recover any and all
reasonable fees and costs and expenses, including but not limited to, attorneys'
fees in the event employee is successful in asserting or defending any claim,
arising out of Employee's efforts to enforce any and all of the provisions of
this Agreement.
7.2 Employer shall be entitled to recover any and all
reasonable fees and costs and expenses, including but not limited to, attorneys'
fees in the event Employer is successful in asserting or defending any claim,
arising out of Employer's efforts to enforce any and all of the provisions of
this Agreement.
VIII. CONFIDENTIAL INFORMATION.
Employee understands that in the course of his employment by
the Bank, Employee will receive Confidential Information (as hereafter defined)
concerning the business of the Bank which the Bank desires to protect. Employee
agrees that he will not at any time during or after the Term of Employment
reveal to anyone (except for the Bank employees who have a need to know such
information in the course of their employment) or use for his own benefit any
Confidential Information, without specific written authorization by the Bank.
This Section applies to all information obtained by Employee in the course of
his employment unless such information is or becomes publicly known or known in
the banking community generally prior to any disclosure thereof by Employee.
Upon termination of employment for any reason, Employee shall return promptly to
the Bank at its direction and expense any and all copies, either prepared by the
Bank or Employee, of the records, materials, memorandums and other data
constituting Confidential Information. As used in this Agreement, the term
"Confidential Information" shall mean all business information of any nature and
in any form which at the time or times concerned is proprietary to the
7
<PAGE>
Bank and regarded as such by it and which is not generally known to persons not
employed by the Bank or who are members of its Board (except for information
disclosed by the act or acts of a person not authorized by the Bank to disclose
such information) and which relates to any one or more of the aspects of the
present or past business of the Bank including, but not limited to, proposed
acquisitions, proposed branches, development projects, policies or other facts
relating to financial matters, customers , customers' lists and customers'
financial needs.
IX. PROPRIETARY RIGHTS.
9.1 Employee acknowledges that his services and
responsibilities are of particular significance to the Bank and that his
position with Bank has given, and will give him a close knowledge of its
policies and trade secrets. Employee covenants and agrees that he will not, for
a period of twelve months from the date of the termination of his employment
with the Bank (i) solicit or accept as customers or otherwise provide services
to any present customer or former customer of the Bank, (ii) in any manner
attempt to induce any customers of the Bank to withdraw their accounts or
business from the Bank or to induce any prospective customer to not become a
customer, (iii) induce or encourage any employee of the Bank to terminate such
employee's employment, or (iv) make any disparaging comment or statement, orally
or in writing, regarding the Bank or its employees or take any action or make
any other comment or statement that may harm the reputation or business of the
Bank.
9.2 For purposes of this Agreement, "present customer",
"former customer" shall be defined in the following manner:
A "present customer" of the Bank is a Person with
whom the Bank has a business relationship on the date
of termination of Employee's employment.
A "former customer" of the Bank is a Person with whom
the Bank has no business relationship at the time of
the termination of Employee's employment, but has had
such a relationship within the one-year period ending
on the date of termination of Employee's employment.
9.3 Employee agrees that he shall not, for a period of one
year following his employment with the Bank, either directly or indirectly as
agent, stockholder, employee, officer, director, trustee, partner, proprietor or
otherwise engage in, render advice or assistance to or be employed on a
compensation basis by any person, firm or entity which is in competition with
the Bank. This paragraph shall only apply where such person, firm or entity has
its principal office within 15 miles of New Milford, Connecticut, or Danbury,
Connecticut; or where the office of Employee is situated, or Employee's primary
geographic areas of responsibility will be located within 15 miles of New
Milford, Connecticut, or Danbury, Connecticut.
9.4 The time periods referred to in Sections 9(1) and (2)
above shall each be extended by the amount of time that Employee fails to comply
with his obligations under Section 9, whether due to the issuance of a temporary
restraining order or injunction or otherwise.
8
<PAGE>
9.5 In addition to any damages or other remedies to which the
Bank may be entitled by virtue of any breach of the covenants and agreements in
Section 8 or 9 hereof, Employee acknowledges that any such breach would cause
irreparable harm to the Bank and consents to the granting of injunctive and
other equitable relief to the Bank. Employee shall also pay all costs, including
reasonable attorney's fees, incurred by the Bank in seeking any such remedy or
in connection with the Bank otherwise enforcing its rights under this Agreement.
Any damages against Employee, which shall include, without limitation, any
amounts received as compensation or in any other capacity by Employee from any
third party as a result of or in connection with the breach of Employee's
obligations under this Agreement, may be applied as a set-off against any amount
owed to Employee by the Bank.
X. OTHER DUTIES OF EMPLOYEE DURING AND AFTER THE TERM OF
EMPLOYMENT.
Both during and after the Term of Employment, Employee shall,
upon reasonable notice furnish such information as may be in his possession to,
and cooperate with, the Bank as may reasonably be requested by the Bank in
connection with any litigation in which the Bank is, or may become, a party. The
Bank shall reimburse Employee for all of the reasonable expenses incurred by him
in fulfilling his obligation under this Section 10 (except that no such expenses
shall be paid to Employee with respect to any litigation or proceeding commenced
by Employee or as to which Employee is otherwise a party).
XI. NOTICES.
All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person to Employee or if the Bank, to the
Chairman of the Board of the Bank or CEO, or if sent, postage prepaid, certified
mail, return receipt requested, or by recognized overnight delivery service, as
follows:
If to Employee, as follows: Peter R. Maher
116 Brushy Hill Road
Newtown, Connecticut 06470
If to the Bank, as follows: NMBT
55 Main Street
New Milford, Connecticut 06776-2400
Attention: Louis A. Funk, Jr., Chairman or
Michael D. Carrigan,
President and CEO
or to such other address or addresses as hereafter shall be designated by notice
given in accordance with this Section by either of the parties hereto to the
other party.
9
<PAGE>
XII. SUCCESSORS AND ASSIGNS.
The rights and obligations of the Bank under this Agreement
shall inure to the benefit of and shall be binding upon the Bank's successors
and assigns, including, without limitation, any Person which may acquire all or
substantially all of the assets and business of the Bank, or with or into which
the Bank may be consolidated or merged or any surviving corporation in any
merger involving the Bank. All references in this Agreement to the Bank shall be
deemed to include all of its successors and assigns.
XIII. ARBITRATION.
If any dispute arises between the parties hereto, the
Employee's sole recourse will be to submit such claim to binding arbitration in
the City of Waterbury, Connecticut, in accordance with the Commercial Rules of
the American Arbitration Association.
Prior to submitting a dispute to arbitration, the Employee
shall first submit such dispute to the Bank's Board of Directors for a period of
up to three months in an effort to resolve such dispute without resort to
arbitration. During such three month period, both the Employee and the Bank
agree to make a good faith effort to resolve the dispute amicably and to make
arbitration unnecessary.
If the dispute concerns the termination of the Employee's
employment, or the severance and benefits to which the Employee is entitled upon
the termination, at arbitration, the only issue before the arbitrator will be to
determine the nature of the Employee's termination (i.e., whether for cause,
without cause, or in a situation subject to Section 5.3, whether Employee had
Good Reason to voluntarily terminate his employment). Based on the arbitrator's
determination of the nature of the Employee's termination, the arbitrator may
award the appropriate severance payments and, if applicable, benefits, provided
under this Agreement.
XIV. SEVERABILITY.
If any of the terms and conditions of this Agreement shall be
declared void or unenforceable by any court or administrative body of competent
jurisdiction, such term or condition shall be deemed severable from the
remainder of this Agreement, and the other terms and conditions of this
Agreement shall continue to be valid and enforceable except that if any
provision of the release agreement is declared illegal or unenforceable as the
result of efforts by the Employee, or his agent, or Employee brings a claim
against any of the released entities released in that release agreement,
Employee will return to the Bank any consideration he has received in exchange
for entering into the release agreement.
10
<PAGE>
XV. OTHER AGREEMENTS.
This Agreement supersedes any and all prior written or oral
employment agreements between the Bank and Employee or between Employee and any
predecessor of the Bank.
XVI. CONSTRUCTION.
This Agreement shall be construed under the laws of the State
of Connecticut. Section headings are for convenience only and shall not be
considered a part of the terms and provisions of this Agreement. No
modifications of or amendments to this Agreement may be made except in writing
signed by the Bank and Employee. All references to gender shall, as the case may
be, refer to either the male or female gender.
XVII. MISCELLANEOUS PROVISIONS.
17.1 The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed a waiver of any
subsequent breach thereof.
17.2 Employee hereby acknowledges that the services to be
rendered hereunder are of a unique, special and extraordinary character which
would be difficult or impossible for the Bank to replace, and by reason thereof,
Employee hereby agrees that for violation of any of the provisions of this
Agreement, the Bank shall, in addition to any other rights and remedies
available hereunder, at law or otherwise, be entitled to an injunction to be
issued by any court of competent jurisdiction enjoining and restraining Employee
from committing any violation of this Agreement, and Employee hereby consents to
the issuance of such injunction.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
executed by a duly authorized officer and Employee has executed this Agreement
as of the day and year first above written.
NMBT
By: s/ Louis A. Funk, Jr.
--------------------------
Louis A. Funk, Jr.
Its Chairman
s/ Peter R. Maher
--------------------------
Peter R. Maher
11
EXHIBIT 13
All the Bank
You'll Ever Need(TM)
1998 ANNUAL REPORT
Our Mission
It is our mission to be the premier community commercial bank in western
Connecticut; to create and deliver quality banking products and services that
represent exceptional value; to provide a stimulating and challenging work
environment that encourages, develops and rewards excellence; and to serve our
local communities with integrity and pride.
Through uncompromising dedication and commitment to this mission, 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.
Litchfield County Park Lane Office Bridgewater Office
Main Office 100 Park Lane Road 29 Main Street South
55 Main Street New Milford, CT 06776 Bridgewater, CT 06752
New Milford, CT 06776 (860) 355-1171 (860) 355-1137
(860) 355-1171
Kent Office
South Seven Office 45 North Main Street
186 Danbury Road Kent, CT 06757
New Milford, CT 06776 (860) 927-4681
(860) 355-1171
Fairfield County Germantown Office New Haven County
Candlewood Office 30 Germantown Road Southbury Office
100 Route 37 Danbury, CT 06810 325 Main Street South
New Fairfield, CT 06812 (203) 743-6004 Southbury, CT 06488
(203) 746-2443 (203) 264-6463
Danbury Towers Office
Mill Plain Office 30 Main Street NMBT Telephone Banker
105 Mill Plain Road Danbury, CT 06810 (860) 350-0104
Danbury, CT 06810 (203) 792-BANK (800) 368-6398
(203) 748-NMBT
<PAGE>
FINANCIAL HIGHLIGHTS
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest and dividend income $ 14,070 $ 13,489 $ 12,306
Noninterest income 2,718 1,991 1,640
Noninterest expense 11,282 10,110 10,385
Net income 3,217 2,898 2,792
- ----------------------------------------------------------------------------------------------------------------------
At Year End:
Assets $380,481 $336,566 $305,545
Loans 229,945 223,909 211,686
Deposits 311,623 285,595 266,161
Stockholders' equity 28,688 25,330 22,565
- ----------------------------------------------------------------------------------------------------------------------
Per Share:
Basic earnings $ 1.22 $ 1.12 $ 1.09
Diluted earnings 1.15 1.05 1.04
Book value 10.77 9.69 8.72
Closing bid price 16.13 20.00 11.75
Closing ask price 17.38 22.00 12.50
- ----------------------------------------------------------------------------------------------------------------------
Selected Ratios:
Return on average assets 0.90% 0.91% 0.98%
Return on average equity 12.12 12.25 13.23
Loan loss allowance to nonperforming loans 142.48 110.23 79.79
Nonperforming assets to total assets 0.71 1.02 1.48
</TABLE>
[GRAPHICS OMITTED]
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<PAGE>
MESSAGE TO STOCKHOLDERS
To consumers and businesses, nmbt is all the bank they will ever need
To Our Stockholders,
Customers and Friends:
NMBT represents many things to many people. To our stockholders, it is a
public company with consistent dividends and dramatic growth in value over the
past few years. For our 170 employees in 10 offices throughout Litchfield,
Fairfield and New Haven counties, it is a source of income, pride and personal
career satisfaction. To consumers and businesses in our market area, NMBT is all
the bank they will ever need, providing a myriad of services with a personal
touch. To everyone in our market area, NMBT has earned a reputation for
consistency and stability in the face of a changing financial services
environment.
1998 was another successful year for NMBT. We enjoyed growth in all areas
of the bank. These favorable forces and our commitment to providing outstanding
personal service contributed to net income of $3.2 million in 1998, up from $2.9
million in 1997.
2
<PAGE>
Despite our satisfaction with such a good year, we are consistently
reminded of the fierce competitive forces of the marketplace. These are
difficult times when it comes to profitable growth. The price competition we
have been facing over the past year has been intense; and when coupled with the
cost of starting new branch offices, our ability to grow at a desirable rate has
been challenged.
To address these concerns, NMBT has implemented plans to achieve growth. We
are revisiting our marketing campaign in an effort to bolster name recognition
and new business development. Our logo was redesigned and we received approval
in February 1998 to change the name of the bank from The New Milford Bank &
Trust Company to NMBT. In addition, we expect to continue our expansion by
capitalizing on the recent consolidation of larger banks. In this regard, we are
looking for opportunities to enlarge our branch network by moving into recently
abandoned or closed offices of larger banks as a cost-effective way of expanding
without incurring the start-up costs typically associated with new branch
offices. Together, our new graphic identity, marketing campaign and branch
expansion strategy will go a long way toward attracting new customers who will
value our service excellence and financial strength.
Internally, we are hard at work strengthening the infrastructure of our
bank. We are currently reviewing new platform equipment for branch personnel to
achieve more efficiency in branch delivery and on-line services. Our goal is to
utilize the best technology available so we can continue to deliver outstanding
customer service.
In addition to expending a tremendous amount of energy and resources to
achieve corporate growth, NMBT has always had a strong social conscience. The
Board of Directors has made a commitment to give back to the community by
donating the time of personnel and the corporate resources of NMBT to further
our philanthropy objectives. This is reflected in the Company's outstanding
Community Reinvestment Act rating received from regulatory authorities.
These days, when everyone seems to be reaching for the sky, few companies
manage to keep their feet on the ground and their eyes level to the horizon. We
insist on delivering the highest degree of customer service, on giving
unparalleled commitment to community endeavors, on meeting and exceeding the
expectations of the marketplace and in maximizing stockholder value without
taking undue risks. We remain committed to our marketplace and do not stray into
markets we do not understand. We also price rationally and have not forgotten
the credit underwriting standards we established after the last recession.
As we look toward the future, this focus on excellence and risk management
will serve us well. We have five solid years of steady earnings and asset growth
to draw upon. NMBT will follow its mission of providing financial services and
capital to companies, municipalities, non-profit organizations and individuals
in our service area with a personal touch.
We would like to thank our hardworking employees for a year of terrific
performance. Their continuing efforts make it possible for us to provide the
high-quality products and services demanded by our vital and expanding market.
Louis A. Funk, Jr.
Chairman of the Board
Michael D. Carrigan
President and Chief Executive Officer
3
<PAGE>
OUR PARTNERSHIP WITH THE UNPARALLED COMMITMENT TO COMMUNITY ENTERPRISE
Annual Walk America for the March of Dimes joins NMBT employees and friends
in their fund raising fight to end
Ann's Place Home of I Can provides counseling services and support groups
to families affected by cancer. NMBT and the City of Danbury donated the land
and building.
[GRAPHIC OMITTED]
4
<PAGE>
PEOPLE
NMBT sponsors concerts in village centers, bringing culture and
entertainment to thousands.
Why does NMBT give back so much to the community? Because NMBT is the
community. As a hometown bank, all employees are neighbors living in the
communities they serve. NMBT's experience proves that partnership, cooperation
and caring make communities special places to live in, work in and invest in.
NMBT is committed to these principles and to the people it calls neighbor.
NMBT's family of employees gives its unparalleled commitment to community
enterprise through volunteer work and gifting programs. Hundreds of NMBT branch
staff and management take active roles in helping to shape better lives through
their volunteer efforts. Schools, hospitals, teams, clubs and other
organizations throughout Litchfield, Fairfield and New Haven counties benefit
from the care giving efforts of NMBT's volunteer army.
NMBT has made a significant level of qualified investments, via donations,
within these counties. These investments consisting of real estate to Ann's
Place, financial support to New Milford Hospital and contributions to
nonprofits, represent a significant portion of NMBT's net income. Michael
Carrigan, NMBT's President and CEO, expressed the Bank's pledge to such
contributions when he said that effectively servicing the communities with more
than sound financial advice and services is part of NMBT's corporate goals.
New Milford Hospital
Danbury Chamber of
Commerce
New Milford Children's
Center
New Milford Rotary Club
Danbury Rotary Club
Northern Fairfield County
United Way
Shepaug Valley United Way
New Milford Chamber
of Commerce
Kent Chamber of Commerce
Danbury Industrial Corporation
Danbury Lions Club
Regional YMCA
Western CT State University
Southbury Business
Association
Hispanic Center of
Greater Danbury
Minority Business Association
American Red Cross
Kent Senior Center
Danbury Hospital
SCORE -- Service Core
of Retired Executives
Loaves and Fishes
New Milford Visiting
Nurse Association
Junior Achievement
Bethel Chamber of
Commerce
"DSABC" Danbury Schools
and Business Collaborative
Salvation Army Danbury
Advisory Board
City Center Danbury --
Business Development
Ann's Place, The Home
of I Can
Danbury Mayor's CRA
Task Force
Danbury/Torrington
Regional Workforce
Development Board
Kiwanis
American Heart Association
American Cancer Society
Dream Come True of
Western CT
New Fairfield Jaycees
Hospice
Bridgewater Fair
New Milford Housing
Partnership
Danbury Catholic Family
Services
New Milford Fair Days
5
<PAGE>
#1 MORTGAGE LENDER
PROVIDING SERVICES WITH A PERSONAL TOUCH
NMBT's Student Loan programs help families manage finances for their
children's future.
For a second successive year, independent statistics show that NMBT is
ranked as the number one mortgage lender in its designated market area.
Moreover, NMBT received an outstanding Community Reinvestment Act (CEA)
evaluation from regulatory authorities. This is due, in part, to our community
activities coupled with flexible
6
<PAGE>
and innovative lending programs delivered with a high level of personal service.
In addition, the Bank's expertise in lending to low- and moderate-income
borrowers greatly exceeded all other lenders in the area. NMBT is committed to
maintaining its strong market presence in residential and consumer lending and
to expanding mortgage banking activities.
NMBT operates 10 full-service branches and 14 automatic teller machines
(ATMs); they are accessible, many with drive-up options, and office hours are
suited to the needs of the community. NMBT also offers bilingual services to
help facilitate banking communications and accommodate the needs of its diverse
customer base.
Personal Loans and Mortgages
Fixed Rate Mortgages
Adjustable Rate
Mortgages
Construction-to-Permanent
Mortgages
CHFA Mortgage Program
CHFA Police Home
Ownership Program
CHFA Down Payment
Assistance
FHA Loans
FHA 203(k) Rehab Loans
VA Loans
NMBT's Express
Mortgage
No-Point/No-Closing
Cost Program
Pre-qualification
Home Equity Financing
Home Equity Loans
Home Equity Line
of Credit
Consumer Loans
Cash Reserve
Visa & MasterCard
Student Loans
Plus Loans
7
<PAGE>
BUSINESS PARTNERS
REINVESTING RESOURCES IN THE COMMUNITY IS A GOOD INVESTMENT
Small business owners relyon NMBT's lending programs for inventory
financing and growth initiatives.
NMBT focuses on commercial and industrial lending as a major component of
its growth strategy. NMBT continually partners with small business owners as
part of its pledge to build strong communities. By providing a ready lending
stream to local entrepreneurs, NMBT assists them with marketplace competition
and in their planning for future growth.
NMBT understands that with economic health, communities thrive. For more
than two decades, NMBT has continually reinvested its resources in the
commercial productivity of area residents. Small business owners have come to
rely on NMBT's expertise in strategic planning and ongoing training seminars.
Specialized lending officers and staff are available to work with loan and
investment needs of both
8
<PAGE>
FINANCIAL REVIEW
Dollars in thousands, except per share data
The following selected financial data for the five years ended December 31,
1998 is derived from the consolidated financial statements of NMBT CORP.
Balances are as of and for the years ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CONDITION:
Assets $380,481 $336,566 $305,545 $269,176 $252,485
Securities 116,690 84,005 63,761 40,206 38,859
Loans, net 226,106 220,372 208,474 194,605 186,946
Deposits 311,623 285,595 266,161 247,067 225,758
Stockholders' equity 28,688 25,330 22,565 20,157 17,546
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS:
Interest and dividend income $ 24,190 $ 22,709 $ 20,300 $ 18,463 $ 14,797
Interest expense 10,120 9,220 7,994 7,084 4,757
Net interest income 14,070 13,489 12,306 11,379 10,040
Provision for loan losses 371 582 390 160 240
Noninterest income 2,718 1,991 1,640 1,275 1,214
Noninterest expense 11,282 10,110 10,385 9,798 9,336
Income before income taxes 5,135 4,788 3,171 2,696 1,678
Provision for income taxes 1,918 1,890 379 537 339
Net income 3,217 2,898 2,792 2,159 1,339
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
Book value per share $10.77 $9.69 $8.72 $7.87 $6.93
Tangible book value per share 10.67 9.49 8.43 7.48 6.40
Basic earnings per share 1.22 1.12 1.09 0.85 0.53
Diluted earnings per share 1.15 1.05 1.04 0.83 0.53
Cash dividends per share 0.35 0.21 0.17 0.13 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets 0.90% 0.91% 0.98% 0.84% 0.58%
Return on average equity 12.12 12.25 13.23 11.56 7.83
Net interest spread 3.85 4.21 4.33 4.50 4.50
Net interest margin 4.33 4.67 4.73 4.82 4.74
Stockholders' equity to total assets 7.54 7.53 7.39 7.49 6.95
Nonperforming assets to total assets 0.71 1.02 1.48 2.17 2.62
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
NMBT CORP (the "Company"), a Delaware corporation formed in 1997, is the
registered bank holding company for NMBT, a wholly-owned subsidiary formed in
1975. 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, 1998, the Company had total assets of $380.48 million, up
from $336.57 million as of December 31, 1997. 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 $6.04 million, or 2.7 percent, mainly in real estate loans. During 1998,
the Company's Board of Directors declared four quarterly cash dividends totaling
$0.92 million, or $0.35 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 $3.22 million,
or $1.15 diluted earnings per share for 1998, compared to net income of $2.90
million, or $1.05 diluted earnings per share for 1997 and net income of $2.79
million, or $1.04 diluted earnings per share for 1996. The 11 percent rise in
net income from 1997 to 1998 results primarily from the increase in
interest-earning assets, continuation of a modest leverage strategy and dramatic
growth in mortgage-banking activities. The 24 percent rise in net income from
1996 to 1997 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, 1998 AND 1997
NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income (interest income less interest expense)
increased $0.58 million, or 4.3 percent from 1997 to 1998. During the same time
period, the net interest margin declined from 4.67 percent in 1997 to 4.33
percent in 1998. The decrease in the margin can be attributed to customer demand
for fixed rate loans, increased price competition for loans and deposits,
matching time deposit rates of competitors when necessary so as to maintain
market share in existing markets and a high-rate savings special in Southbury to
attract new customers. The effect of this approach is to increase the overall
level of growth, albeit at a lower interest rate spread. Overall, deposits
increased $26.0 million from December 31, 1997 to December 31, 1998, mostly in
low-cost checking and savings accounts. 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. The strong increase in
core deposits and careful pricing of core accounts and time deposits by
management had the effect of decreasing the overall cost of funds. Despite the
drop in the yield on assets from 7.79 to 7.35 percent, interest income increased
at a faster rate than interest expense from 1997 to 1998 mainly due to the
strong increase in interest-earnings assets which were funded by a favorable mix
of new core deposits.
NONINTEREST INCOME
Noninterest income increased from $1.99 million in 1997 to $2.72 million in
1998, primarily due to increases in loan servicing fees and gains on the sale of
mortgages resulting from a strategic decision to expand mortgage-banking
activities. Service charges on deposit accounts decreased $0.02 million due to
reduced overdraft fees and customers' consolidating accounts and increasing
balances to avoid monthly fees. These negative trends in service charges were
partially offset by increased ATM servicing fee income from higher transaction
volume and additional ATM
10
<PAGE>
machines and higher fees from an increase in the number of Mastermoney debit
card transactions. Income from mortgage- banking activities increased $0.71
million due to increased loan servicing fees and gains on the sales of mortgages
with fixed rates and adjustable rate mortgages with initial adjustment periods
of more than three years. Increases in mortgage-banking income reflects the
Company's strategy of increasing its mortgage-servicing portfolio, which grew
from $20.9 million at December 31, 1997 to $79.0 million at December 31, 1998.
NONINTEREST EXPENSE
Noninterest expense increased $1.17 million, or 11.6 percent, to $11.28
million in 1998, up from $10.11 million in 1997. The increase is primarily
attributable to an increase in assets of 13.0 percent, an increase in
mortgage-banking staff to handle a tripling of volume, the opening of the
Southbury Office in late 1997 and increased donations. Compensation and benefits
increased $0.68 million, or 12.6 percent, mainly due to salary increases, the
opening of the Southbury office and increased staffing in the loan departments
to accommodate demand. Data processing expense increased $0.12 million due to
$0.04 million in costs associated with Year 2000, the addition of a drive-up and
in-store ATM in Southbury, communications and equipment in the Southbury branch,
increases to service contracts on the mainframe computer and new hardware and
software for the mortgage department. Other operating expenses increased $0.20
million, or 15.5 percent, due to $0.12 in donations to New Milford Hospital in
connection with NMBT's pledge for the new oncology center, a full year of costs
associated with the opening of NMBT's tenth full service office in Southbury in
September 1997 and a full year of costs associated with establishing the holding
company in November 1997.
COMPARISON OF YEARS ENDED
DECEMBER 31, 1997 AND 1996
NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income 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 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.
11
<PAGE>
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
Dollars in thousands 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $3,537 $3,212 $3,553
Provision for loan losses charged against income 371 582 390
Transfer to liability for estimated losses from
off-balance sheet credit instruments (110) (20) (200)
Loan losses, net of recoveries 41 (237) (531)
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $3,839 $3,537 $3,212
====================================================================================================================================
Ratio of allowance for loan losses:
to nonperforming loans 142.5% 110.2% 79.8%
to total loans 1.7% 1.6% 1.5%
Provision for loan losses to average loans 0.1% 0.3% 0.1%
Loan losses, net of recoveries to average loans 0.0% 0.1% 0.3%
====================================================================================================================================
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses totaled $0.37 million for 1998, compared to
$0.58 million for 1997 and $0.39 million in 1996.
In 1998, the Company recorded net recoveries of $0.04 million. Net loan
charge-offs for fiscal 1997 were $0.24 million, versus $0.53 million in 1996.
The decreased provisions in 1998 reflect lower charge-offs and declining
nonperforming loans. The increased provision for loan losses in 1997 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 1998 and 1997).
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, 1998 and 1997. 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 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. 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 1998 included an income tax provision of $1.92
million (a 37.4 percent effective tax rate), as compared to the 1997 provision
for income taxes of $1.89 million (a 39.5 percent effective tax rate) and the
1996 provision for income taxes of $0.38 million (a 12.0 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 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.
Effective January 4, 1999, NMBT has formed a Passive Investment Company
("PIC") to take advantage of changes in Connecticut tax statutes. The statutes,
effective January 1, 1999, allow NMBT to transfer mortgages into the PIC, a
wholly-owned subsidiary of NMBT. Income of the PIC and its dividends to NMBT are
exempt from Connecticut Corporation Business Tax. Consequently, the Company's
consolidated 1999 effective tax rate is expected to be 2-4 percent less than in
1998. The formation of the PIC will require the Company to establish a valuation
allowance against its deferred state tax assets that are no longer expected to
be realized in future years.
12
<PAGE>
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, 1998, 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.
GAP ANALYSIS
<TABLE>
<CAPTION>
WITHIN 6 7-12 AFTER NONINTEREST-
DOLLARS IN THOUSANDS MONTHS MONTHS 1-5 YEARS 5 YEARS BEARING TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities $ 19,040 $ 7,051 $30,739 $59,860 $ -- $116,690
Loans 143,581 34,973 42,007 6,690 2,694 229,945
Interest-bearing deposits 13,730 -- -- -- -- 13,730
Other assets -- -- -- -- 20,116 20,116
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $176,351 $ 42,024 $72,746 $66,550 $ 22,810 $380,481
- ------------------------------------------------------------------------------------------------------------------------------------
SOURCES OF FUNDS
Noninterest-bearing checking $ -- $ -- $ -- $ -- $ 44,414 $ 44,414
Interest-bearing checking 99,216 -- -- -- -- 99,216
Savings 72,334 -- -- -- -- 72,334
Time deposits 53,571 25,338 16,750 -- -- 95,659
FHLB advances 6,256 7,041 7,836 16,539 -- 37,672
Other liabilities -- -- -- -- 2,498 2,498
Stockholders' equity -- -- -- -- 28,688 28,688
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources of funds $231,377 $ 32,379 $24,586 $16,539 $ 75,600 $380,481
- ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (55,027) $ 9,645 $48,160 $50,013 $ (52,791) $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ (55,027) $(45,382) $ 2,778 $52,791 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a
percentage of assets (14.46)% (11.93)% 0.73% 13.87% --%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company maintains a relatively balanced position for managing interest
rate risk. At December 31, 1998, the one-year negative gap was $(45.4) million,
or 11.9 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 repriceable for purposes of computing 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
repriced. Consequently, this causes the gap analysis to indicate liability
sensitivity.
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.
13
<PAGE>
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.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- --------------------------
TAX Tax Tax
AVERAGE EQUIVALENT YIELD/ Average Equivalent Yield/ Average Equivalent Yield/
Dollars in thousands BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> C>
ASSETS
INTEREST-EARNING ASSETS:
Loans (1) $229,504 $17,952 7.82% $216,665 $17,791 8.21% $203,928 $16,534 8.11%
Taxable securities 77,915 4,961 6.37% 60,015 4,026 6.71% 50,952 3,371 6.62%
Tax-exempt securities 19,337 1,274 6.59% 12,959 887 6.85% 6,219 422 6.79%
Interest-bearing deposits 8,323 428 5.15% 5,612 301 5.37% 2,154 113 5.25%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 335,079 24,615 7.35% 295,251 23,005 7.79% 263,253 20,440 7.76%
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 17,011 16,387 15,312
Premises and equipment, net 3,684 3,641 3,760
Other assets 5,408 5,751 5,597
Allowance for loan losses (3,758) (3,434) (3,469)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $357,424 $317,596 $284,453
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits $256,139 $ 8,178 3.19% $240,000 $ 8,144 3.39% $220,137 $ 7,255 3.30%
FHLB advances and capital leases 32,957 1,942 5.89% 17,301 1,076 6.22% 12,376 739 5.97%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 289,096 10,120 3.50% 257,301 9,220 3.58% 232,513 7,994 3.44%
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
Deposits 39,203 34,016 28,681
Other liabilities 2,587 2,611 2,160
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 330,886 293,928 263,354
Stockholders' equity 26,538 23,668 21,099
- ----------------------------------------------------------------------------------------------------------------------------------
Total $357,424 $317,596 $284,453
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,495 13,785 $12,446
Less FTE adjustment 425 296 140
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income per
income statement $14,070 $13,489 $12,306
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread (FTE) 3.85% 4.21% 4.33%
Net interest margin (FTE) 4.33% 4.67% 4.73%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in interest income from loans is accretion (amortization) of net
deferred loan fees and costs.
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 1998 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.
Declining interest rates throughout the year caused the yield earned on
assets to fall, which was offset by increases in interest-earnings assets. This
increase in assets was funded by favorable mix of savings and checking accounts.
Larger fixed rate commercial loans were selectively match funded with FHLB
advances. The leveraging of the aforementioned growth with advances and a
decrease in market interest rates combined to decrease the spread realized
between the yield on assets and the cost of funds. Lower interest rates in 1998
reversed the migration from savings and transaction accounts to time deposits
because of the convergence of savings and time deposit rates.
14
<PAGE>
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, 1998, 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 10 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, 1998 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 earnings 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,
1998 and does not contemplate any actions the Company might undertake in
response to changes in market interest rates.
Management currently anticipates that it will maintain a negative one-year
gap throughout 1999 to reflect, among other things, the lag in repricing of
checking and savings deposits, which deposits are all considered immediately
replicable in the gap analysis.
SENSITIVITY TABLE
<TABLE>
<CAPTION>
Simulated Change in
Change in Interest Rates Board Limit Net Interest Income
- --------------------------------------------------------------------------------
<S> <C> <C>
(Basis points)
+200 10.00% 4.64%
0 0.00% 0.00%
-200 (10.00)% (6.68)%
================================================================================
</TABLE>
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.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-----------------------------------------------------------------------
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 $ 805 $(644) $ 161 $1,044 $213 $1,257
Taxable securities 1,127 (192) 935 608 47 655
Tax-exempt securities (FTE) 419 (32) 387 461 4 465
Interest-bearing deposits 139 (12) 127 185 3 188
- ------------------------------------------------------------------------------------------------------------------------------------
2,490 (880) 1,610 2,298 267 2,565
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits 280 (246) 34 669 220 889
FHLB advances and capital leases 919 (53) 866 305 32 337
- ------------------------------------------------------------------------------------------------------------------------------------
1,199 (299) 900 974 252 1,226
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $1,291 $(581) $ 710 $1,324 $ 15 $1,339
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
SECURITIES
The principal categories of the securities portfolio, including both
available for sale and held to maturity, are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
Dollars in thousands 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency $ 75,506 64.7% $38,186 45.5%
Municipal 21,493 18.4 17,385 20.7
Mortgage-backed 15,563 13.3 26,674 31.7
Corporate 2,148 1.9 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 114,710 98.3 82,245 97.9
FHLB stock 1,980 1.7 1,760 2.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities $116,690 100.0% $84,005 100.0%
==================================================================================================================================
</TABLE>
At December 31, 1998, 91.8 percent of the securities portfolio was invested
in fixed rate securities, 6.5 percent in adjustable rate securities and 1.7
percent in FHLB stock. Fixed rate securities include US Treasury and agency
obligations, mortgage-backed securities ("MBS"), Connecticut municipal
obligations and corporate securities. 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 predetermined 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, 1998, securities totaling $76.33 million, or 65.4 percent,
were classified as available for sale and securities totaling $40.36 million
were classified as held to maturity. Included in stockholders' equity at
December 31, 1998 is an adjustment of $0.68 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, 1998, the maximum amount which the Company could
lend to one borrower (and related entities) was $4.76 million ($7.94 million for
loans fully secured by readily marketable collateral). At December 31, 1998, the
Company had no loans that exceeded either limit.
The Company uses its funds primarily for lending. Total loans increased by
$6.04 million, or 2.7 percent, from December 31, 1997 to December 31, 1998.
The principal categories of the loan portfolio are as follows:
LOANS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
Dollars in thousands 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized by one to four family residential properties $143,760 62.5% $139,787 62.4%
Collateralized by five or more family residential properties 530 0.2 549 0.2
Commercial properties 48,091 20.9 48,532 21.7
Construction and development 13,443 5.9 7,299 3.3
Commercial and industrial 16,107 7.0 17,818 8.0
Installment and education 7,137 3.1 8,994 4.0
Cash reserve and credit cards 877 0.4 930 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $229,945 100.0% $223,909 100.0%
===================================================================================================================================
</TABLE>
16
<PAGE>
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 fixed rate residential mortgage loans in May
1994, has had success building its mortgage servicing portfolio, which grew
$58.1 million in 1998 and now totals more than $79 million at December 31, 1998.
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. Beginning in 1999, management
intends to emphasize in its portfolio variable rate loans bearing interest at a
rate adjusted within five years from the origination date. This is a change from
the previous strategy to retain three-year ARM's and reflects implementation of
a strategy to invest in adjustable rate or shorter-duration assets to manage
interest rate risk and to retain more loans in portfolio.
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 five 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 five years from the origination date and to
sell other jumbos through private parties.
In order to meet its 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.
17
<PAGE>
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. 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 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 1999.
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.
Management is also aware of the need to provide appropriate ancillary
services to expand its commercial loan base. Corporate cash management via
remote personal computers, domestic and international 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 1998, nonperforming assets decreased $0.72 million, or 21.2 percent,
to $2.69 million at December 31, 1998, 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.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
NONPERFORMING REAL ESTATE NONPERFORMING % OF
Dollars in thousands LOANS OWNED ASSETS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Collateralized by residential properties $1,644 -- $1,644 61.0%
Collateralized by commercial properties 957 -- 957 35.5
Commercial, industrial and all other 93 -- 93 3.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets on December 31, 1998 $2,694 -- $2,694 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998.
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 above. 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 $0.21
million from 1997 to 1998. NMBT actively markets all real estate owned and in
1998 sold $0.24 million of real estate owned from which net gains of $0.06
million were realized. At December 31, 1998, real estate owned was $0.03 million
with a valuation allowance of $0.03 million.
18
<PAGE>
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, 1998, liquid assets totaled $106.03 million, or
27.9 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, 1998, 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, 1998, NMBT had approximately $95.00 million in loan
commitments outstanding. It is expected deposits, loan repayments, FHLB advances
and maturing investments will fund these future loans.
DEPOSITS AND BORROWINGS
For the year ended December 31, 1998, total deposits increased $26.03
million, or 9.1 percent, while FHLB borrowings increased $14.53 million, or 62.8
percent. During 1998, the deposit mix shifted to checking and savings. These
changes in mix are due in part to the reduced interest rate differential between
certificates of deposit and savings accounts, which have caused savers to ignore
certificates to maintain liquidity. 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.
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 69.3 percent of total
deposits at December 31, 1998.
CAPITAL MANAGEMENT
STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
At December 31, 1998, the Company had $28.69 million in stockholders' equity,
compared with $25.33 million at December 31, 1997. The growth in stockholders'
equity from the end of 1997 was due to the following: receipt of $0.76 million
in proceeds from the exercise of stock options; a $0.30 million positive
adjustment for net unrealized gains on securities available for sale; and the
retention of $3.22 million in net earnings, less cash dividends of $0.92
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, 1998, 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.
[GRAPHIC OMITTED]
REGULATORY CAPITAL
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
NMBT REGULATORY
Dollars in thousands CORP NMBT MINIMUM
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital ratio 12.87% 12.52% 4.00%
Total capital ratio 14.13% 13.78% 8.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage ratio 7.40% 7.19% 3.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital $ 27,647 $ 26,871
Total risk-based capital $ 30,351 $ 29,573
Total risk-adjusted assets $214,786 $214,685
</TABLE>
19
<PAGE>
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 of 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, 1998, the Company paid cash dividends of
$0.92 million, or $0.35 per share, which represents 28.7 percent of 1998 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
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999. SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management anticipates that, due
to its limited use (currently none) of derivative instruments, the adoption of
SFAS 133 will not have a significant effect on results of operations or
financial position.
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.
YEAR 2000 READINESS
BACKGROUND
The Company's overall goal is to be "Year 2000 Ready," which means that
critical systems, devices, applications or business relationships have been
evaluated and are expected to be suitable for continued use into and beyond the
Year 2000. In the event the aforementioned are not suitable for continued use or
malfunction, contingency plans will be in place.
The Company began addressing Year 2000 in 1996 by establishing a Year 2000
committee to identify, monitor and document Year 2000 activities and report
those findings to the Board of Directors. Senior management and the Board of
Directors receive regular updates on the status of the Company's Year 2000 Plan.
The Company is using a multi-phase approach to Year 2000 which includes
inventory, assessment, remediation, testing and contingency planning. The
inventory and assessment phases were completed in 1997. As a part of the
assessment process, remediation strategies were identified and estimates of
remediation costs were developed. The Company has utilized both internal and
external resources to remediate and test for Year 2000 readiness. The majority
of the Company's systems requiring remediation have been modified or replaced.
The Company plans to test the remaining systems by March 31, 1999.
The Company initiated formal communications with government agencies,
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.
While this information will be used to mitigate these risks, there can be no
assurance that any third-party systems will be Year 2000 compliant on a timely
basis or that noncompliance will not have an adverse material impact on the
Company.
COSTS
The Company currently plans to complete Year 2000 remediation by June 30,
1999. The total remaining cost of the Year 2000 Issue is estimated at less than
$50,000. To date, the Company has incurred costs of $40,000 which have been
expensed as incurred. The costs of the project and the date on which the Company
plans to complete Year 2000 modifications are based on management's best
estimates, which were derived utilizing
20
<PAGE>
numerous assumptions of future events including the continued availability of
certain resources, third parties' Year 2000 readiness and other factors.
RISK ASSESSMENT
At this time, the Company believes that completed and planned modifications
of its internal systems and equipment will allow it to be Year 2000 compliant in
a timely manner. There can be no assurance, however, that the Company's internal
systems or equipment, or those of third parties on which the Company relies,
will be Year 2000 compliant in a timely manner or that the Company's or third
parties' contingency plans will mitigate the effects of any noncompliance. The
failure of the systems or equipment of the Company or third parties (which the
Company believes is the most likely worst case scenario) could result in the
reduction or suspension of the Company's operations and could have a material
adverse effect on the Company's business or consolidated financial statements.
CONTINGENCY PLANNING
The Company is revising its existing contingency plans to address internal
and external issues specific to Year 2000 to the extent practicable. These
contingency plan revisions are expected to be completed by September 30, 1999.
The plans, which are intended to enable the Company to continue to operate to
the extent that it can do so prudently, include performing certain processes
manually; repairing or obtaining replacement systems; changing suppliers; and
reducing or suspending operations. The Company believes, however, that due to
the widespread nature of the potential Year 2000 Issue, the contingency planning
process is an ongoing one which will require further modifications as the
Company obtains additional information regarding (1) the Company's internal
systems and equipment during the remediation and testing phases of its Year 2000
project and (2) the status of third party Year 2000 readiness.
FORWARD-LOOKING STATEMENTS
The preceding "Year 2000 Readiness" discussion contains various
forward-looking statements which represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness" discussion, the
word "believes," "expects" and "estimates" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include,
without limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 project as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
Company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are limited to, the availability of qualified personnel and other
information technology resources; the ability to replace embedded computer chips
in affected systems or equipment; and the actions of government agencies or
other third parties with respect to Year 2000 issues.
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. The Company cautions that these forward-looking statements are
subject to numerous assumptions, risks and uncertainties, 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 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 duty to update them to reflect new, changing or unanticipated events
or circumstances.
21
<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 an 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 pretax 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.
22
<PAGE>
FINANCIAL STATEMENTS
[GRAPHIC OMITTED]
23
<PAGE>
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 control 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 consolidated financial statements. Management believes that all
representations made to the independent auditor 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 auditor, the independent
auditors and management to review the work of each to ensure that they are
properly discharging their responsibilities. The internal auditor and the
independent auditors have free access to the Audit Committee, without management
present, to discuss the results of their audit work and the quality of financial
reporting.
/s/ Michael D. Carrigan /s/ Jay C. Lent
Michael D. Carrigan Jay C. Lent
President and Chief Executive Officer Executive Vice President,
Secretary and Chief Financial Officer
- --------------------------------------------------------------------------------
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, 1998 and 1997, and the
related consolidated statements of operations, cash flows, changes in
stockholders' equity and comprehensive income for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 21, 1999
24
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
Dollars in thousands, except share data
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 13,934 $ 18,737
Interest-bearing deposits 13,730 4,025
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 27,664 22,762
- ------------------------------------------------------------------------------------------------------------------------------------
Securities:
Available for sale, at fair value (amortized cost of $75,302 in 1998
and $47,556 in 1997) 76,326 48,129
Held to maturity, at amortized cost (fair value of $40,769 in 1998
and $36,240 in 1997) 40,364 35,876
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 116,690 84,005
- ------------------------------------------------------------------------------------------------------------------------------------
Loans 229,945 223,909
Less allowance for loan losses 3,839 3,537
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net 226,106 220,372
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate owned, net -- 212
Premises, equipment and capital leases, net 3,546 3,706
Excess of cost over fair value of net assets acquired, net 271 506
Accrued interest and other assets 6,204 5,003
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $380,481 $336,566
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing checking $ 44,414 $ 36,999
Interest-bearing checking 99,216 88,501
Savings 72,334 60,782
Time deposits under $100 77,662 81,902
Time deposits $100 or more 17,997 17,411
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 311,623 285,595
- ------------------------------------------------------------------------------------------------------------------------------------
Advances from Federal Home Loan Bank of Boston (FHLB) 37,672 23,145
Accrued interest and other liabilities 2,498 2,496
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 351,793 311,236
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $0.01 par value
Shares authorized: 8,000,000
Shares outstanding: 1998-- 2,663,358; 1997-- 2,614,858 27 26
Additional paid-in capital 18,143 17,378
Retained earnings 9,842 7,548
Accumulated other comprehensive income, net of tax 676 378
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,688 25,330
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $380,481 $336,566
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $17,952 $17,791 $16,534
U.S. Treasury and agency securities 4,832 3,918 3,272
Municipal securities 849 591 282
Corporate securities 11 -- --
Dividends on FHLB stock 118 108 99
Interest-bearing deposits 428 301 113
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 24,190 22,709 20,300
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing checking 1,536 1,383 1,140
Savings 1,524 1,490 1,602
Time deposits under $100 4,152 4,390 3,888
Time deposits $100 or more 966 881 625
FHLB advances and capital leases 1,942 1,076 739
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 10,120 9,220 7,994
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 14,070 13,489 12,306
Provision for loan losses 371 582 390
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan losses 13,699 12,907 11,916
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 1,011 1,034 965
Other service charges, commissions and fees 381 379 349
Loan servicing fees 106 42 23
Gain on sale of securities 51 -- --
Net gains from loans sold 983 339 178
Other income 186 197 125
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,718 1,991 1,640
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Compensation, payroll taxes and benefits 6,061 5,381 5,037
Occupancy 1,048 961 917
Furniture and equipment 823 875 953
Data processing 383 268 246
Stationery, printing and supplies 452 409 438
Marketing, advertising and investor relations 410 381 402
Legal and professional fees 314 264 412
Other general and administrative expense 1,504 1,302 1,425
- ------------------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense 10,995 9,841 9,830
Operations of real estate owned 52 34 320
Amortization of intangible assets 235 235 235
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 11,282 10,110 10,385
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,135 4,788 3,171
Provision for income taxes 1,918 1,890 379
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,217 $ 2,898 $ 2,792
====================================================================================================================================
Basic earnings per share $1.22 $1.12 $1.09
Diluted earnings per share $1.15 $1.05 $1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends per share $0.35 $0.21 $0.17
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 3,217 $ 2,898 $ 2,792
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 821 880 982
Provision for loan losses 371 582 390
Provision for losses from real estate owned -- 26 314
Net amortization of securities 218 152 100
Deferred income taxes 347 (46) (267)
Realized securities gains, net (51) -- --
Gains from loans sold, net (983) (339) (178)
Realized gains from real estate owned sales, net (42) (133) (135)
Loans originated for sale (89,718) (26,169) (14,859)
Proceeds from loans sold, net 87,038 25,928 14,652
Increase in interest receivable (455) (498) (331)
Increase in other assets (484) (37) (134)
Increase in interest payable 12 56 82
Increase (decrease) in other liabilities (101) 216 282
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 190 3,516 3,690
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of held to maturity (HTM) securities (22,056) (7,996) (28,242)
Purchases of available for sale (AFS) securities (45,463) (24,818) (9,671)
Proceeds from maturities of AFS securities 15,535 5,449 2,924
Proceeds from maturities of HTM securities 17,433 7,539 11,182
Proceeds from sales of AFS securities 2,370 -- --
Purchases of FHLB stock (220) (218) --
Net loan originations (3,107) (12,129) (13,764)
Net purchases of premises and equipment (426) (703) (484)
Proceeds from sales of real estate owned 267 534 460
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (35,667) (32,342) (37,595)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in advances from FHLB 14,527 8,581 14,564
Net increase (decrease) in time deposits (3,654) 7,586 11,004
Net increase in checking and savings deposits 29,682 11,848 8,090
Cash dividends (923) (545) (436)
Net proceeds from exercise of stock options 766 180 145
Other (19) (52) (54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,379 27,598 33,313
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,902 (1,228) (592)
Cash and cash equivalents, beginning of year 22,762 23,990 24,582
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 27,664 $ 22,762 $ 23,990
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING YEAR
Interest to depositors and creditors $ 10,108 $ 9,164 $ 7,912
Income taxes 1,828 1,474 957
NON-CASH TRANSFERS
Transfer of loans to real estate owned 25 575 581
Net change in unrealized gains on AFS securities 298 232 (100)
Financed portion of sales of real estate owned 12 433 761
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
In thousands
<TABLE>
<CAPTION>
Accumulated
Other Additional
Retained Comprehensive Common Paid-in Shares
Total Earnings Income Stock Capital Outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1996 $20,157 $2,839 $246 $26 $17,046 2,563
Net income 2,792 2,792
Comprehensive income (100) (100)
Cash dividends (436) (436)
Proceeds from exercise
of stock options 145 145 24
Other 7 7 1
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 22,565 5,195 146 26 17,198 2,588
Net income 2,898 2,898
Comprehensive income 232 232
Cash dividends (545) (545)
Proceeds from exercise
of stock options 180 180 27
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 25,330 7,548 378 26 17,378 2,615
Net income 3,217 3,217
Comprehensive income 298 298
Cash dividends (923) (923)
Proceeds from exercise
of stock options 766 1 765 48
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 $28,688 $9,842 $676 $27 $18,143 2,663
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
In thousands
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $3,217 $2,898 $2,792
Other comprehensive income, net of tax:
Unrealized net gains (losses) on securities:
Unrealized net holding gains
(losses) arising during period $332 $232 $(100)
Less: reclassification adjustment
for gains included in net income (34) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 298 232 (100)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $3,515 $3,130 $2,692
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NMBT CORP (the "Company") is the bank holding company for NMBT, a
state-chartered commercial bank. The Bank is a Connecticut chartered and Federal
Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered
in New Milford, Connecticut. The Bank's principal business consists of
attracting deposits from the public and using such deposits, with other funds,
to make various types of loans and investments. The Bank conducts its business
through 10 offices located in Litchfield, Fairfield and New Haven counties. 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 1998 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 extinguishment liabilities occurring after December 31,
1996, except for certain provisions deferred by SFAS 127, Deferral of the
Effective Date of Certain Provisions of SFAS 125. The Company adopted the
deferral provisions effective January 1, 1997. The adoption of these standards
did not have a material effect on the Company's financial condition or results
of operations.
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,
in other comprehensive income. 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 outstanding principal 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 value
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Decreases in the
carrying value, if any, are reported in earnings as a reduction of net gains
from loans sold. Realized gains and losses on sales of mortgage loans are
reported in earnings in the period the sale occurs.
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
29
<PAGE>
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.
The Company measures impaired loans 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.
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.
REAL ESTATE OWNED
Real estate acquired through foreclosure 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 but not in excess of fair value.
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 ordinarily 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 effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is enacted.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company paid a premium for the net assets acquired in the 1994 purchase
transaction of Candlewood Bank and Trust Company. The premium is being amortized
on a straight-line basis over seven years. Accumulated amortization of the
excess cost over fair value of net assets acquired was $1,096,520 as of December
31, 1998. 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
SFAS 128, Earnings Per Share, establishes standards for computing and
presenting earnings per share. 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.
Basic earnings per share is 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, 1998 were as
follows:
In thousands 1998 1997 1996
- ---------------------------------------------------------------
Basic 2,643 2,596 2,568
Effect of dilutive stock options 156 156 116
- ---------------------------------------------------------------
Diluted 2,799 2,752 2,684
- ---------------------------------------------------------------
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.
30
<PAGE>
MORTGAGE SERVICING RIGHTS
The Company's mortgage servicing portfolio totaled $79.0 million, $20.9
million and $12.2 million for the benefit of third-party investors (primarily
Federal National Mortgage Association) at December 31, 1998, 1997 and 1996,
respectively. The Company records the sale of loans in which servicing is
retained on the basis of the proceeds received with normal servicing rights
retained. The Company recognizes an asset for the right to service mortgage
loans for others, however those servicing rights are acquired. The Company
assesses its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. No impairment of servicing assets was experienced in
1998, 1997 or 1996. Prior to 1996, the Company did not record a servicing asset.
The Company recognized servicing assets for originated mortgages and the related
amortization as follows:
In thousands 1998 1997 1996
- -----------------------------------------------------------------
Mortgage servicing rights,
beginning balance $ 176,255 $ 69,636 $ --
Mortgage servicing rights recorded 877,286 130,649 76,954
Amortization of mortgage
servicing rights (115,391) (24,030) (7,318)
- -----------------------------------------------------------------
Mortgage servicing rights,
ending balance $ 938,150 $176,255 $69,636
- -----------------------------------------------------------------
STATEMENTS 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.
STATEMENTS OF COMPREHENSIVE INCOME
SFAS 130, Reporting Comprehensive Income, became effective as of January 1,
1998. 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." Comprehensive income is reported in the accompanying statements of
comprehensive income.
SEGMENT INFORMATION
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, became effective as of January 1, 1998. SFAS 131 establishes
standards for 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. The Company has one operating segment, "Community Banking." All of
the Company's activities are interrelated, and each activity is dependent and
based on how each of the activities of the Company support the other. For
example, commercial lending is dependent upon the ability of the banks to fund
themselves with retail deposits and other borrowings. This situation is also
similar for personal and residential mortgage lending. Accordingly, all
significant operating decisions are based upon analysis of the Company as one
operating segment or unit.
General information required by SFAS 131 is disclosed in the consolidated
financial statements and accompanying notes. The Company operates only in the
U.S. domestic market. For 1998, there is no customer that accounted for more
than 10% of the Company's revenue.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivative instruments are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
hedge transaction and, if it is, the type of hedge transaction. Management
anticipates that, due to its limited use of derivative instruments, the adoption
of SFAS 133 will not have a significant effect on results of operations or
financial position.
<PAGE>
2. SECURITIES
The aggregate amortized cost and estimated fair values of securities
available for sale at December 31, 1998 and 1997 are as follows:
December 31, 1998
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency $50,204 $ 434 $140 $50,498
Municipal 20,797 698 2 21,493
Mortgage-backed 1,236 19 -- 1,255
Corporate 1,085 15 -- 1,100
- --------------------------------------------------------------------------------
Total debt securities 73,322 1,166 142 74,346
FHLBStock 1,980 -- -- 1,980
- --------------------------------------------------------------------------------
Total securities
available for sale $75,302 $1,166 $142 $76,326
- --------------------------------------------------------------------------------
</TABLE>
December 31, 1997
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency $24,615 $ 99 $19 $24,695
Municipal 16,968 418 1 17,385
Mortgage-backed 4,213 80 4 4,289
- --------------------------------------------------------------------------------
Total debt securities 45,796 597 24 46,369
FHLBStock 1,760 -- -- 1,760
- --------------------------------------------------------------------------------
Total securities
available for sale $47,556 $597 $24 $48,129
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The aggregate amortized cost and estimated fair values of securities held to
maturity at December 31, 1998 and 1997 are as follows:
December 31, 1998
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency $25,008 $250 $24 $25,234
Mortgage-backed 14,308 207 17 14,498
Corporate 1,048 -- 11 1,037
- --------------------------------------------------------------------------------
Total securities
held to maturity $40,364 $457 $52 $40,769
- --------------------------------------------------------------------------------
</TABLE>
December 31, 1997
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency $13,492 $ 96 $33 $13,555
Mortgage-backed 22,384 310 9 22,685
- --------------------------------------------------------------------------------
Total securities
held to maturity $35,876 $406 $42 $36,240
- --------------------------------------------------------------------------------
</TABLE>
The aggregate amortized cost and estimated fair values of debt securities
available for sale at December 31, 1998, 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, 1998
<TABLE>
<CAPTION>
Amortized Fair
Dollars in thousands Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 8,009 $ 8,062
Due after one year through five years 18,869 19,052
Due after five years through ten years 44,123 44,877
Due after ten years 1,085 1,100
- --------------------------------------------------------------------------------
72,086 73,091
Mortgage-backed 1,236 1,255
- --------------------------------------------------------------------------------
Total debt securities available for sale $73,322 $74,346
- --------------------------------------------------------------------------------
</TABLE>
The aggregate amortized cost and estimated fair values of debt securities
held to maturity at December 31, 1998, 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, 1998
<TABLE>
<CAPTION>
Amortized Fair
Dollars in thousands Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 2,000 $ 2,000
Due after one year through five years -- --
Due after five years through ten years 24,056 24,273
Due after ten years -- --
- --------------------------------------------------------------------------------
26,056 26,273
Mortgage-backed 14,308 14,496
- --------------------------------------------------------------------------------
Total debt securities held to maturity $40,364 $40,769
- --------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of debt securities were, in thousands, $2,370 in 1998.
Gross gains, in thousands, of $51 were realized on these sales.
Securities with a carrying value of $3.0 million were pledged as collateral
for public deposits as of December 31, 1998. 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, 1998
and 1997, the Company was in compliance with the FHLB stock requirement.
<PAGE>
3. LOANS AND ALLOWANCE FOR
LOAN LOSSES
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Loans:
Collateralized by one to four
family residential properties $143,760 $139,787
Collateralized by five or more
family residential properties 530 549
Commercial properties 48,091 48,532
Construction and development 13,443 7,299
Commercial and industrial 16,107 17,818
Installment and education 7,137 8,994
Cash reserve and credit cards 877 930
- ----------------------------------------------------------------
Total loans 229,945 223,909
Less allowance for loan losses 3,839 3,537
- ----------------------------------------------------------------
Loans, net $226,106 $220,372
- ----------------------------------------------------------------
</TABLE>
Included in total loans are net deferred loan origination costs of $0.64
million and $0.41 million as of December 31, 1998 and 1997, respectively.
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans at December 31:
With valuation allowance $2,819 $3,588 $3,598
With no valuation allowance -- -- --
Valuation allowance 323 378 490
Income recorded on impaired loans
during the portion of the year
that they were impaired 74 24 75
Income recorded on impaired loans
recognized on the cash basis 6 -- 4
Average investment in impaired loans 2,951 3,728 3,953
- ----------------------------------------------------------------
</TABLE>
32
<PAGE>
Nonaccrual loans at December 31, 1998, 1997 and 1996, and related interest
income data are summarized as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $2,694 $3,208 $4,025
Nonaccrual loans
considered impaired $2,050 $2,215 $2,812
- ----------------------------------------------------------------
Interest income in accordance
with original terms $ 277 $ 325 $ 309
Interest income recorded 56 33 30
- ----------------------------------------------------------------
Reduction in interest income $ 221 $ 292 $ 279
- ----------------------------------------------------------------
</TABLE>
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
$2.35 million at December 31, 1998 and 1997, respectively. During 1998, new or
renewed loans totalling $1.56 million were granted, and payments of $1.41
million were received.
The Company's loans consist primarily of residential and commercial real
estate loans located principally in western Connecticut. The Company offers a
broad range of loan and credit facilities to borrowers in its service area,
including residential mortgage loans, commercial real estate loans, construction
loans, working capital loans, and a variety of consumer loans, including home
equity lines of credit, and installment and collateral loans. All residential
and commercial mortgage loans are collateralized by first or second mortgages on
real estate. The ability and willingness of borrowers to satisfy their loan
obligations is dependent in large part upon the status of the regional economy
and regional real estate market. Accordingly, the ultimate collectability of a
substantial portion of the loan portfolio and the recovery of a substantial
portion of real estate acquired is susceptible to changes in market conditions.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Allowance for loan losses at
beginning of year $3,537 $3,212 $3,553
Provision for loan losses
charged against income 371 582 390
Transfer to liability for estimated
losses from off-balance sheet
credit instruments (110) (20) (200)
Loan losses, net of recoveries 41 (237) (531)
- ---------------------------------------------------------------
Allowance for loan
losses at end of year $3,839 $3,537 $3,212
- ---------------------------------------------------------------
</TABLE>
4. REAL ESTATE OWNED
Real estate acquired through foreclosure is stated net of a valuation
allowance. Real estate owned properties consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
One-to-four family residential $ 26 $ 182
Commercial -- 90
- ---------------------------------------------------------------
Total real estate owned $ 26 272
Less: valuation allowance 26 60
- ---------------------------------------------------------------
Real estate owned, net $ -- $ 212
- ---------------------------------------------------------------
Changes in the Valuation Allowance
Valuation allowance at beginning of year $ 60 $ 420
Provision for real estate owned losses
charged against income -- 26
Real estate owned losses (34) (386)
- ---------------------------------------------------------------
Valuation allowance at end of year $ 26 $ 60
- ---------------------------------------------------------------
</TABLE>
<PAGE>
5. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Owned Capital
December 31, 1998 Property Leases Total
- ---------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Premises and improvements $3,928 $401 $4,329
Equipment and furniture 5,050 -- 5,050
- ---------------------------------------------------------------
8,978 401 9,379
Less accumulated depreciation
and amortization 5,432 401 5,833
- ---------------------------------------------------------------
Premises, equipment and
capital leases, net $3,546 $ -- $3,546
- ---------------------------------------------------------------
Owned Capital
December 31, 1997 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
- ---------------------------------------------------------------
</TABLE>
33
<PAGE>
6. ADVANCES FROM FHLB
<TABLE>
<CAPTION>
December 31,
---------------
Maturity Date Rate 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
January 30, 1998 5.69% $ -- $ 3,100
February 20, 1998 5.64 -- 5,575
October 1, 1998 5.87 -- 3,000
February 5, 1999 5.19 2,000 --
May 6, 1999 5.81 2,000 --
September 30, 1999 4.98 5,000 --
November 1, 1999 6.05 1,138 2,310
November 1, 1999 6.36 1,192 2,414
June 11, 2001 7.03 550 550
June 19, 2001 6.65 2,234 3,000
December 31, 2002 6.25 1,611 1,650
January 15, 2003 5.88 855 --
August 14, 2003 6.02 472 --
March 19, 2007 6.95 878 953
February 13, 2008 5.96 1,888 --
February 24, 2008 5.25 10,000 --
February 26, 2008 6.08 756 --
March 18, 2008 6.46 552 593
May 8, 2008 5.52 3,000 --
May 28, 2008 6.25 744 --
August 21, 2008 6.18 447 --
October 9, 2008 5.41 695 --
October 22, 2008 5.50 878 --
October 29, 2008 5.68 782 --
- --------------------------------------------------------------------------------
$37,672 $23,145
- --------------------------------------------------------------------------------
</TABLE>
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.
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 at the date of grant. 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 at the date of grant.
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:
<TABLE>
<CAPTION>
Shares Exercise Weighted
Underlying Price Per Average Price Maturity
Outstanding Options Options Share Range Per Share Range
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of January 1, 1996 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
Granted 100,000 $19.437 $ 19.437 2008
Cancelled or expired --
Exercised (48,500) $5.875-$12.75 $ 6.651 1999-2004
- --------------------------------------------------------------------------------
As of December 31, 1998 350,100 $5.875-$19.437 $ 10.481 1999-2008
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Effective January 1, 1996, the Company adopted SFAS 123, Accounting for
Stock-Based Compensation. As permitted by SFAS 123, the Company has chosen to
apply APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and
related interpretations in accounting for its Plans. Accordingly, no
compensation expense has been recognized for options granted under its Plans.
Had compensation cost for the Plans been determined based on the fair value at
the grant dates for awards under the Plans consistent with the method of SFAS
123, net income and diluted earnings per share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
Earnings per
Year Ended December 31, Net incomeshare, diluted
- --------------------------------------------------------------------------------
Dollars in thousands, except per share data
1998
<S> <C> <C>
As reported $3,217 $1.15
Pro forma 2,778 0.99
1997
As reported 2,898 1.05
Pro forma 2,808 1.02
1996
As reported 2,792 1.04
Pro forma 2,759 1.03
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with dividends, with the following
weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.80% 1.60% 1.60%
Expected volatility 25.13% 27.80% 30.10%
Risk-free interest rate 5.27% 5.75% 7.00%
Expected lives, years 10.00 7.80 8.67
Fair value of options granted
during year $7.00 $4.48 $4.97
</TABLE>
34
<PAGE>
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,
1998, that both the Company and NMBT meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, NMBT was categorized as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized NMBT must 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 Purpose Action Provision
------ ---------------- ----------------
Dollars in thousands AmountRatio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED
AS OF DECEMBER 31, 1998:
<S> <C> <C> <C> <C> <C>
Total Risk-Based $30,351 14.1%$17,183 LESS THAN GREATER THAN 8.0%
Tier 1 Risk-Based 27,647 12.9% 8,591 LESS THAN GREATER THAN 4.0%
Tier 1 Leverage 27,647 7.4%14,945 LESS THAN GREATER THAN 4.0%
- ----------------------------------------------------------------------------------------------------------------
NMBT Only
AS OF DECEMBER 31, 1998:
Total Risk-Based $29,573 13.8%$17,175 LESS THAN GREATER THAN 8.0% $21,468 LESS THAN GREATER THAN 10.0%
Tier 1 Risk-Based 26,871 12.5% 8,587 LESS THAN GREATER THAN 4.0% 12,881 LESS THAN GREATER THAN 6.0%
Tier 1 Leverage 26,871 7.2%14,944 LESS THAN GREATER THAN 4.0% 18,680 LESS THAN GREATER THAN 5.0%
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED
As of December 31, 1997:
Total Risk-Based $26,948 13.5%$16,026 LESS THAN GREATER THAN 8.0%
Tier 1 Risk-Based 24,428 12.2% 8,013 LESS THAN GREATER THAN 4.0%
Tier 1 Leverage 24,428 7.4%13,276 LESS THAN GREATER THAN 4.0%
- ----------------------------------------------------------------------------------------------------------------
NMBT Only
As of December 31, 1997:
Total Risk-Based $26,876 13.4%$16,026 LESS THAN GREATER THAN 8.0% $20,032 LESS THAN GREATER THAN 10.0%
Tier 1 Risk-Based 24,357 12.2% 8,013 LESS THAN GREATER THAN 4.0% 12,019 LESS THAN GREATER THAN 6.0%
Tier 1 Leverage 24,357 7.3%13,276 LESS THAN GREATER THAN 4.0% 16,595 LESS THAN GREATER THAN 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. 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.
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:
<PAGE>
RECONCILIATION OF THE PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Dollars in thousands
Federal income tax provision
<S> <C> <C> <C>
at statutory rate $1,746 $1,628 $1,078
Increase (decrease) in income
taxes resulting from:
State income taxes, net of
federal tax effect 346 426 142
Changes in valuation allowance
and other deferred tax
adjustments -- -- (701)
Other (174) (164) (140)
- --------------------------------------------------------------------------------
Actual provision for income taxes $1,918 $1,890 $ 379
- --------------------------------------------------------------------------------
COMPONENTS OF THE PROVISION FOR INCOME TAXES
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Dollars in thousands Current income tax expense:
Federal $1,047 $1,291 $ 431
State 524 645 215
- --------------------------------------------------------------------------------
1,571 1,936 646
Deferred income tax benefit 347 (46) (267)
- --------------------------------------------------------------------------------
Total provision for income taxes $1,918 $1,890 $ 379
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets
<S> <C> <C>
Allowance for loan losses $1,052 $ 997
Deferred compensation 464 485
Capital loss carryforward 105 105
Deferred loan fees (235) (130)
Real estate owned 10 24
Other (337) (48)
- --------------------------------------------------------------------------------
Total deferred tax assets 1,059 1,433
- --------------------------------------------------------------------------------
Deferred tax liabilities
Securities (354) (227)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (354) (227)
- --------------------------------------------------------------------------------
Valuation allowance (105) (105)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 600 $1,101
- --------------------------------------------------------------------------------
</TABLE>
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. At
December 31, 1998 and 1997, 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 Thrift 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 $0.25 million, $0.24 million and $0.23 million in
1998, 1997 and 1996, 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, 1998
was $0.88 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.
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 1998 pursuant
to this Plan totaled $0.25 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 additional 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 1998.
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 were as follows:
December 31,
- -------------------------------------------------------------------
Dollars in thousands 1998 1997
- -------------------------------------------------------------------
Financial Instrument Whose Contract
Amounts Represent Credit Risk
Commitments to extend credit $91,679 $56,459
Letters of credit 3,317 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
36
<PAGE>
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 (86%) 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 operating lease
agreements. Rent expense for operating leases was, in thousands, $406, $304 and
$253 for the years ended December 31, 1998, 1997 and 1996, respectively.
The future minimum lease payments by year, and in the aggregate, under
noncancelable operating leases consisted of the following at December 31, 1998:
Operating
Dollars in thousands Leases
- ------------------------------------------------------------------
Years Ended December 31:
1999 $ 377
2000 296
2001 310
2002 265
2003 241
2004 and thereafter 1,033
- ------------------------------------------------------------------
Total future minimum lease payments $2,522
- ------------------------------------------------------------------
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 $2.0 million and $6.7 million at
December 31, 1998 and 1997, respectively. These reserve balances averaged $5.9
million and $6.2 million in 1998 and 1997, respectively.
EMPLOYMENT CONTRACTS
NMBT has employment agreements with certain executive officers. The
agreements provide for an initial term of one year expiring on December 31,
1998, 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 two times the 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).
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.
37
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
Contract Estimated Contract Estimated
Dollars in thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------
Off-Balance Sheet
Financial Instruments:
Commitments to
<S> <C> <C> <C> <C>
extend credit $91,679$ 1,340 $56,460 $663
Letters of credit 3,317 66 2,587 52
</TABLE>
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Dollars in thousands Value Fair Value Value Fair Value
- -----------------------------------------------------------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 13,934 $ 13,934 $ 18,737 $ 18,737
Interest-bearing deposits 13,730 13,730 4,025 4,025
Securities available for sale 76,326 76,326 48,129 48,129
Securities held to maturity 40,364 40,769 35,876 36,240
Loans, net 226,106 226,489 220,372 219,854
Accrued interest receivable 2,875 2,875 2,421 2,421
Financial Liabilities:
Noninterest-bearing
checking $ 44,414 $ 44,414 $ 36,999 $ 36,999
Interest-bearing
checking 99,216 99,216 88,501 88,501
Savings 72,334 72,334 60,782 60,782
Time deposits 95,659 94,913 99,313 98,954
Accrued interest payable 403 403 392 392
FHLB advances 37,672 37,502 23,145 23,145
</TABLE>
13. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The unconsolidated statements of condition of NMBT Corp at December 31, 1998
and 1997, and its statements of operations and cash flows for the period from
inception (November 25, 1997) to December 31, 1997, and for the year ended
December 31, 1998 are as follows:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
Dollars in thousands 1998 1997
- -----------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 830 $ 71
Investment in NMBT 27,912 25,259
- -----------------------------------------------------------------
Total assets $28,742 $25,330
- -----------------------------------------------------------------
Liabilities and Stockholders' Equity
Accrued expenses $ 54 $ --
Stockholders' equity 28,688 25,330
- -----------------------------------------------------------------
Total liabilities and stockholders' equity $28,742 $25,330
- -----------------------------------------------------------------
</TABLE>
STATEMENTS OF OPERATION
<TABLE>
<CAPTION>
For the
Period from
Nov. 25, 1997
Year Endedto Dec. 31,
Dollars in thousands Dec. 31, 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Dividends from NMBT $1,041 $--
Other Income 11 --
Operating expense 190 --
- ---------------------------------------------------------------------
Income before equity in undistributed
earnings of NMBT 862 --
Equity in undistributed earnings of NMBT 2,355 398
- ---------------------------------------------------------------------
Net income $3,217 $398
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from
Nov. 25, 1997
Year Ended to Dec. 31,
Dollars in thousands Dec. 31, 1998 1997
- ---------------------------------------------------------------------
Operating Activities
<S> <C> <C>
Net Income $ 3,217 $ 398
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of NMBT (2,355) (398)
Increase in accrued expenses 54 --
- ---------------------------------------------------------------------
Net cash provided by operating activities 916 --
- ---------------------------------------------------------------------
Financing Activities
Dividends paid (923) --
Proceeds from exercise of stock options 766 71
- --------------------------------------------------------------------
Net cash provided by financing activities (157) 71
- --------------------------------------------------------------------
Increase in cash and cash equivalents 759 71
Cash and cash equivalents, beginning of period 71 --
- --------------------------------------------------------------------
Cash and cash equivalents, end of year $ 830 $ 71
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Dollars in thousands, except per share data First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
Interest and dividend income $ 5,829 $ 6,019 $ 6,243 $ 6,099
Interest expense 2,435 2,543 2,590 2,552
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 3,394 3,476 3,653 3,547
Provision for loan losses 141 125 75 30
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income 568 639 756 755
Noninterest expense 2,711 2,732 2,953 2,886
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,110 1,258 1,381 1,386
Net income 696 786 850 885
- ------------------------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic earnings per share (1) $ 0.26 $ 0.30 $ 0.32 $ 0.34
Diluted earnings per share (1) $ 0.25 $ 0.28 $ 0.30 $ 0.32
Cash dividends per share $0.080 $0.090 $0.090 $0.090
High bid price $20.375 $20.375 $20.000 $19.063
Low bid price $17.125 $18.000 $18.750 $14.750
- ------------------------------------------------------------------------------------------------------------------------------------
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 and dividend 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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
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
COMMON STOCK LISTING
NMBT CORP's common stock is traded on the National Association of Securities
Dealers (NASDAQ) SmallCap Market under the symbol NMBT.
STOCK TRANSFER AGENT
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.
39
<PAGE>
<TABLE>
<CAPTION>
OFFICERS
NMBT CORP
- --------------------------------------------------------------------------------
<S> <C> <C>
MICHAEL CARRIGAN Jay Lent Deborah Fish
President and Chief Executive Officer Chief Financial Officer and Secretary Treasurer
NMBT
MICHAEL CARRIGAN NANCY DOLAN ERIC ERDTMANN
President and Chief Executive Officer Vice President - Business Development Assistant Vice President -
Commercial Lending
JAY LENT DONNA DOWNS
Executive Vice President, Vice President - Consumer Lending LINDA SMITH
Chief Financial Officer and Secretary Assistant Vice President - Operations
MARY KAY DUUS
PETER MAHER Vice President - Loan Administration ROSEMARY BRADSHAW
Executive Vice President and Consumer Loan Officer and Underwriter
Chief Lending Officer JAMES MATTHIESSEN
Vice President - Data Processing LINDA HALL
DEBORAH FISH Loan Servicing Officer
Vice President and Treasurer JOSEPH MORRISSEY
Vice President - Commercial Lending ROSEMARY PLUE
DON MALLOZZI Executive Assistant
Senior Vice President - Consumer Lending LINDA REYES
Vice President - Commercial Lending DANA SMITH
STEVEN BREINER Data Processing
Vice President - Commercial Lending ALFRED SCHLEMMER, JR.
Vice President - Commercial Lending CAROL SPOONER
ROBERTA BUDDLE Banking Officer
Vice President - Human Resources ANTHONY AMBROGIO
Assistant Vice President - Internal Audit JANET WITTMANN
NANCY DOHL Assistant Treasurer
Vice President - Sales & Production NANCY BENTLEY
Assistant Vice President - Lending
<CAPTION>
BRANCH OFFICERS
NMBT
- --------------------------------------------------------------------------------
<S> <C> <C>
MICHELLE SCOTT SHARON MAYNARD FLORINDA PEREIRA
Vice President - Branch Operations Assistant Vice President and Manager - Danbury Towers Office
Manager - Park Lane Office
NANCY ACHEN LORETTA VALLELY
Assistant Vice President and GLYNIS POWANDA Manager - Bridgewater Office
Manager - Main Office Assistant Vice President and
Manager - Southbury Office Martha McMahon
ANN GOLLSNEIDER Floating Manager
Assistant Vice President and LINDA WAGNER
Manager - South Seven Office Assistant Vice President and CYNTHIA FORBES
Manager - Germantown Office Assistant Manager - Main Office
SUZANNE LEE
Assistant Vice President and BONNIE HAWTHORNE RENEE LYNNE STORTI
Manager - Mill Plain Office Manager - Kent Office Branch Operations
CANDICE O'CONNELL
Manager - Candlewood Office
</TABLE>
40
<PAGE>
BOARD OF DIRECTORS
[GRAPHIC OMITTED]
Standing (left to right): Kevin Dumas, Walter Southworth, Harry Taylor, Jr.,
Robert Martin, Louis Funk, Jr., Arthur Weinshank Seated (left to right):
Lawrence Greenhaus, Ruth Henderson, Michael Carrigan, Terry Pellegrini
<TABLE>
<CAPTION>
ADVISORY BOARD RETIRED DIRECTORS
<S> <C> <C>
Frank Benham Ambrose McGill Norman Flayderman
Jack Deep Edward Mohr Victor Lautier
Alan Dretel Gerald Nahley Henry Perlowsky
M. Adela Eads Thomas Pilla Frederick Planz
James Faure Mark Prince Jack Straub
William Francis Richard Pugh Edward Tierney
Richard Gabriel John Rountos
Suzanne Gallup Albert Salame
Maurice Goldstein Thomas Sheehy
Covington Hardee Thomas Sides
Kevin Hart Terrence Smith
Sanford Kaufman Robert Stebbins
John Kawulicz John Stetson
George Kilberg Dolph Traymon
Robert Kornhaas James Winter
Vincent Lucas
</TABLE>
EXHIBIT 21
SUBSIDIARY OF REGISTRANT
NMBT (formerly The New Milford Bank & Trust Company) is the
wholly owned subsidiary of the Registrant.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1998 UNAUDITED STATEMENT OF CONDITION, STATEMENT OF
OPERATION AND STATEMENT OF CASH FLOWS, AND NOTES THERETO, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 13,934
<INT-BEARING-DEPOSITS> 13,730
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,326
<INVESTMENTS-CARRYING> 40,364
<INVESTMENTS-MARKET> 40,769
<LOANS> 229,945
<ALLOWANCE> 3,839
<TOTAL-ASSETS> 380,481
<DEPOSITS> 311,623
<SHORT-TERM> 11,330
<LIABILITIES-OTHER> 2,498
<LONG-TERM> 26,342
27
0
<COMMON> 0
<OTHER-SE> 28,661
<TOTAL-LIABILITIES-AND-EQUITY> 380,481
<INTEREST-LOAN> 17,952
<INTEREST-INVEST> 5,810
<INTEREST-OTHER> 428
<INTEREST-TOTAL> 24,190
<INTEREST-DEPOSIT> 8,178
<INTEREST-EXPENSE> 10,120
<INTEREST-INCOME-NET> 14,070
<LOAN-LOSSES> 371
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 11,282
<INCOME-PRETAX> 5,135
<INCOME-PRE-EXTRAORDINARY> 3,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,217
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 7.35
<LOANS-NON> 2,694
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,537
<CHARGE-OFFS> 247
<RECOVERIES> 288
<ALLOWANCE-CLOSE> 3,839
<ALLOWANCE-DOMESTIC> 3,839
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
