FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 0-14550
NEW ENGLAND COMMUNITY BANCORP, INC.
DELAWARE 06-1116165
OLD WINDSOR MALL
P.O. BOX 130
WINDSOR, CONNECTICUT 06095
Telephone: (860) 683-4612
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 $.10 per share.
Indicate by checkmark 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 filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. /X/
At March 24, 1997, the aggregate market value of the outstanding Common Stock,
exclusive of the shares held by non-affiliates of the Registrant, was
$53,150,178.
The number of shares of the Registrant's Common Stock, $.10 par value, was
3,667,166 at March 24, 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part Into
Document Which Incorporated
-------- ------------------
The Information contained in the Registrant's
Proxy Statement (which is expected to be
filed within 120 days of fiscal year-end 1996 and
to be used in connection with the Annual
Meeting of Shareholders which is
anticipated to be held on May 20, 1997)
under the captions "Election of Directors,"
"Executive Compensation," "Security Ownership
of Directors and Executive Officers," and "Other
Information Relating to Directors and Executive
Officers." Notwithstanding the foregoing, the
information contained in the Proxy Statement
pursuant to Items 402(k) and 402(l) of
Regulation S-K is not incorporated by reference
is not to be deemed part of this report. Part III
<PAGE>
TABLE OF CONTENTS
Part I
Item 1 - Business. . . . . . . . . . . . . . . . . . . . . . . . . ..4
Item 2 - Properties. . . . . . . . . . . . . . . . . . . . . . . . .17
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . .18
Item 4 - Submission of Matters to a Vote of Security Holders . . . .18
Part II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . .19
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . .19
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . .20
Item 8 - Financial Statements and Supplementary Data . . . . . . . .30
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . .30
Part III
Item 10 -Directors and Executive Officers of the Registrant. . . . .31
Item 11 -Executive Compensation. . . . . . . . . . . . . . . . . . .31
Item 12 -Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . .31
Item 13 -Certain Relationships and Related Transactions31
Part IV
Item 14 -Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . .31
Signatures
<PAGE>
New England Community Bancorp, Inc.
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 1996
PART I
ITEM 1. BUSINESS
General.
New England Community Bancorp, Inc. ("NECB", the "Registrant" or the
"Company"), which was formally known as Olde Windsor Bancorp, Inc., is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. NECB was organized under the laws of Delaware in 1984 and directly
owns both New England Bank and Trust Company ("NEBT") and The Equity Bank
("EQBK") (together the "Subsidiaries"), both Connecticut chartered commercial
banks.
Recent Growth of NECB.
NECB has built its community banking network through both internal
growth and acquisitions. In 1985, NECB was formed by the shareholders Windsor
Bank and Trust Company ("Windsor Bank") a Connecticut-chartered bank and trust
company. NECB subsequently acquired all of the capital stock and became the
sole shareholder of Windsor Bank. In 1986, NECB acquired a second bank
subsidiary, NEBT. In 1988, the two subsidiaries were combined retaining the
NEBT name. In 1995, NECB created a second banking subsidiary when it acquired
all of the outstanding common stock of EQBK, which was founded in 1987. In
1996, the Company acquired all the outstanding common stock of Manchester State
Bank ("MSB"), which was merged with and into NEBT. Both transactions were
accounted for as purchases and, as such, prior year comparative data was not
revised to include information about either entity.
On February 20, 1997, the Company and First Bank of West Hartford
("First Bank ") signed a definitive agreement under which the Company will
acquire First Bank in a merger which is intended to be a tax free transaction
and which the Company anticipates will be accounted for as a pooling-of-
interests. Each of the outstanding shares of First Bank will be exchanged for
0.62 shares of the Company's common stock. At December 31, 1996, First Bank
had total assets of $84 million, deposits of $70 million and shareholders'
equity of $9 million. Net income for the year ended December 31, 1996 amounted
to $1.3 million.
The acquisition is conditioned upon requisite bank regulatory approvals
and the approval of shareholders of the Company and First Bank as well as other
customary conditions. It is anticipated that the acquisition will be
consummated in the third quarter of 1997.
Management of NECB is continuously exploring potential opportunities to
prudently expand NECB's earning potential through expansion of NECB's base of
earning assets within its existing market area or in proximate geographic areas
through the establishment or acquisition of other banking operations. However,
there can be no assurance that the Company will be able to acquire additional
financial institutions or, if additional financial institutions are acquired,
that these acquisitions will enhance the profitability of the Company.
Regulatory Matters -- General.
Legislation adopted in recent years has substantially increased the
scope of regulations applicable to banks and bank holding companies. Virtually
every aspect of the business of banking is subject to regulation with respect
to such matters as the amount of reserves that must be established against
various deposits, the establishment of branches, reorganizations, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable
to banks and bank holding companies set forth below do not purport to be a
complete description of such statutes and regulations and their effects upon
NECB or its Subsidiaries. Proposals to change the laws and regulations
governing the banking industry are frequently introduced in Congress, in the
state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might
have on NECB and/or its Subsidiaries are difficult to determine.
There is a variety of statutory and regulatory restrictions governing
the relations among NECB and its subsidiaries. They include:
Capital Adequacy Guidelines and Deposit Insurance.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which became law in December of 1991, required each federal banking
agency to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities. In addition, pursuant to
FDICIA, each federal banking agency has promulgated regulations, specifying the
levels at which a financial institution would be considered "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized",
or "critically undercapitalized", and to take certain mandatory and
discretionary supervisory actions based on the capital level of the
institution.
Bank holding companies must comply with the Federal Reserve Board's
("FRB") risk-based capital guidelines. Under the guidelines, risk weighted
assets are calculated by assigning assets and certain off-balance sheet items
to broad risk categories. The total dollar value of each category is then
weighted by the level of risk associated with that category. A minimum risk-
based capital to risk based assets ratio of 8.00% must be attained. At least
one half of an institution's total risk based capital must consist of Tier
1 capital, and the balance may consist of Tier 2, or supplemental, capital.
Tier 1 capital consists primarily of common shareholders' equity along with
preferred or convertible preferred stock, minus goodwill. Tier 2 capital
consists of an institution's allowance for loan losses, subject to limitation,
hybrid capital instruments and certain subordinated debt. The allowance for
loan losses which is considered Tier 2 capital is limited to l.25% of an
institution's risk-based assets. As of December 31, 1996, NECB's total
risk-based capital ratio was 13.5%. The risk-based Tier 1 ratio was 12.2% and
the leverage capital ratio was 8.5%. All ratios exceed the requirements under
these regulations.
In addition, the Federal Reserve Board has promulgated a leverage
capital standard, with which bank holding companies must comply. Bank holding
companies must maintain a minimum Tier l capital to total assets ratio of 3%.
However, institutions which are not among the most highly rated by federal
regulators must maintain a ratio 100 to 200 basis points above the 3% minimum.
As of December 31 1995, NECB had a leverage capital ratio of 8.5%.
See also "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Capital" for additional discussion.
The FDIC insures NEBT's and EQBK's deposit accounts in amounts up to
$100,000 for each insured depositor. NEBT and EQBK, as Connecticut-chartered
FDIC-insured banks, are regulated by the FDIC in many of the areas also
regulated by the Connecticut Banking Commissioner. The FDIC also conducts its
own periodic examinations of NEBT and EQBK, and each institution is required to
submit financial and other reports to the FDIC on a quarterly and annual basis,
or as otherwise required by the FDIC.
FDICIA also required that the FDIC insurance assessments move from
flat-rate premiums to a system of risk-based premium assessments, in order to
recapitalize the Bank Insurance Fund ("BIF") at a reserve ratio specified in
FDICIA. In August 1995, the FDIC, in anticipation of BIF's imminent achievement
of a required 1.25% reserve ratio, reduced the deposit insurance premium rates
paid on BIF-insured banks from a range of $.23 to $.31 per $100 of deposits to
a range of $.04 to $.31 per $100 of deposits. The new rate schedule for the
BIF was made effective June 1, 1995. The FDIC refunded to BIF-insured
institutions the excess premiums they had paid for the period beginning on June
1, 1995. On November 14, 1995, the FDIC voted to reduce annual assessments for
the semi-annual period beginning January 1, 1996 to the legal minimum of $2,000
for BIF-insured institutions, except for institutions that are not well
capitalized and are assigned to higher supervisory risk categories. Deposits
insured under the Savings Association Insurance Fund ("SAIF") range between 23
and 31 cents.
The provisions of FDICIA and the risk-based insurance assessment have
not had a material effect upon the financial position of NECB since each
subsidiary qualifies for the lowest assessment rate.
FDIC insurance of deposits may be terminated by the FDIC, after notice
and a hearing, upon a finding by the FDIC that the insured institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule,
or order of, or condition imposed by, the FDIC. A bank's failure to meet the
minimum capital and risk-based capital guidelines set forth above, would be
considered to be unsafe and unsound banking practices.
NEBT and EQBK are also subject to FRB regulations regarding the
maintenance of reserves. Under such regulations, NEBT and EQBK must maintain
reserves against their transaction accounts and non-personal time deposits.
<PAGE>
Restrictions on Dividend Payments.
The holders of NECB Common Stock are entitled to receive dividends,
when, as and if declared by the Board of Directors of NECB out of funds legally
available, subject to the preferential dividend rights of any preferred stock
that may be outstanding from time to time.
The only statutory limitation restricting the payment of dividends is
that such dividends may not be paid when NECB is insolvent. Because funds for
the payment of dividends by NECB come primarily from the earnings of NECB's
Subsidiaries, as practical matter, restrictions on the ability of NEBT and
EQBK to pay dividends act as restrictions on the amount of funds available for
the payment of dividends by NECB.
NECB is also subject to FRB policies which may, in certain
circumstances, limit its ability to pay dividends. The FRB policies require,
among other things, that a bank holding company maintain a minimum capital
base. The FRB would most likely seek to prohibit any dividend payment which
would reduce a holding company's capital below these minimum amounts.
Restrictions on Transactions Between NECB and the Subsidiary Banks.
The Banking Affiliates Act of 1982, as amended, severely restricts
loans and extensions of credit by the subsidiaries to NECB and NECB affiliates
(except affiliates which are banks). In general, such loans must be secured by
collateral having a market value ranging from 100% to 130% of the loan,
depending upon the type of collateral. Furthermore, the aggregate of all loans
from the Subsidiaries to NECB and its affiliates may not exceed 20% of that
Bank's capital stock and surplus and, singly to NECB or any affiliate, may not
exceed 10% of the Bank's capital stock and surplus. Similarly, the Banking
Affiliates Act of 1982 also restricts the Bank in the purchase of securities
issued by, the acceptance from affiliates of loan collateral consisting of
securities issued by, the purchase of assets from, and the issuance of a
guarantee or standby letter-of-credit on behalf of, NECB or any of its
affiliates.
Holding Company Supervision.
NECB is a bank holding company registered pursuant to the provisions of
the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"),
and consequently is subject to regulation and examination by the FRB. Bank
holding companies are required to file annually with the FRB a report of their
operations and they and their subsidiaries are subject to examination by the
Board of Governors of the Federal Reserve System.
The Holding Company Act also requires prior approval by the FRB before
a bank holding company (i) merges or consolidates with another bank holding
company, (ii) acquires, directly or indirectly, ownership or control of voting
shares of a bank if after such acquisition it would own or control directly or
indirectly more than five percent of the voting stock of such bank, except
where 50 percent or more is already owned, or (iii) acquires substantially all
of the assets of any bank.
The Holding Company Act further provides that the FRB shall not approve
any acquisition, reorganization or consolidation which would result in a
monopoly or which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States. Further, the FRB may not approve any other proposed
acquisition, reorganization or consolidation, the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or which in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be served.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or sale of any property or services. Subsidiary banks of a bank holding
company are subject to certain restrictions imposed by the Federal Reserve Act
on any extension of credit to the bank holding company or any of its
subsidiaries, or investments in the stock or other securities thereof, and on
the taking of such stock or securities as collateral for loans to any
borrower.
In general, the Federal Reserve Board, under its regulations and the
Bank Holding Company Act, regulates the activities of bank holding companies
and non-bank subsidiaries of banks. The regulation of the activities of banks,
including bank subsidiaries of bank holding companies, generally has been left
to the authority of the supervisory government agency, which for the Bank is
the FDIC and the Connecticut Department of Banking (the "Department").
Interstate Banking Authority.
The Riegle-Neale Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branching Act") passed by Congress and signed
into law on September 29, 1994, significantly changed interstate banking rules.
Pursuant to the Interstate Banking and Branching Act, a bank holding company is
able to acquire banks in states other than its home state beginning September
29, 1995, regardless of applicable state law.
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches, beginning June, 1997.
Under such legislation, each state has the opportunity either to "opt out" of
this provision, thereby prohibiting interstate branching in such states,
or to "opt in" at an earlier time, thereby allowing interstate branching within
that state prior to June 1, 1997. Furthermore, a state may "opt in" with
respect to de novo branching, thereby permitting a bank to open new branches in
a state in which the bank does not already have a branch. Without de novo
branching, an out-of-state bank can enter the state only by acquiring an
existing bank.
In addition, in 1995, the Connecticut General Assembly revised its
Interstate Banking Act to "opt-in" acquisitions of and mergers with Connecticut
banks and bank holding companies with banks and bank holding companies in other
states. It is likely that such legislative authority will increase the number
or the size of financial institutions competing with NEBT and EQBK for deposits
and loans in its market place, although it is impossible to predict the effect
upon competition of such legislation.
Cross Guarantee Provisions and Source of Strength Doctrine.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with (i) the default of a commonly controlled FDIC-
insured depository institution in danger of default. "Default" is defined
generally as the appointment of a conservatory or receiver and "in danger of
default" is defined generally as the existence of certain conditions, including
a failure to meet minimum capital requirements, indicative that a "default" is
likely to occur in the absence of regulatory assistance. These provisions have
commonly been referred to as FIRREA's "cross guarantee" provisions. Further,
under FIRREA the failure to meet capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal
regulatory authorities, including the termination of deposit insurance by the
FDIC.
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and
to commit resources to support each such subsidiary. This support may be
required at times when a bank holding company may not be able to provide such
support. Furthermore, in the event of a loss suffered or anticipated by the
FDIC -- either as a result of default of a bank subsidiary of the Company or
related to FDIC assistance provided to the subsidiary in danger of default --
the other bank subsidiaries of the Company may be assessed for the FDIC's loss,
subject to certain exceptions.
Connecticut Regulation.
As state-chartered banks and members of the FDIC, NEBT and EQBK are
subject to regulation both by the Department and by the FDIC. Applicable laws
and the regulations impose restrictions and requirements in many areas,
including interest rates on selected instruments, capital requirements,
maintenance of reserves, establishment of new branch offices, making of loans
and investments, consumer protection, employment practices and other matters.
Any new regulations or amendments to existing regulations may materially affect
the services offered, expenses incurred and/or income generated by the
subsidiaries.
The Department regulates NEBT's and EQBK's internal organization as
well as their deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required, among other things, to open
branch offices and to consummate merger transactions and other business
combinations. The Department conducts periodic examinations of NEBT and EQBK.
The Connecticut banking statutes also restrict the ability of NEBT and EQBK to
declare cash dividends to their sole shareholder, NECB.
Subject to certain limited exceptions, loans made to any one obligor
may not exceed 15% of a bank's capital, surplus, undivided profits and loan
reserves.
Connecticut banks and bank holding companies, with the approval of the
Connecticut Banking Commissioner, are permitted to engage in stock acquisitions
of banks and bank holding companies in other states with reciprocal
legislation. Several interstate mergers involving large Connecticut banks with
offices in NEBT's service area and banks headquartered in other states have
been completed which have resulted in increased competition for NEBT and EQBK,
respectively. In addition, under Connecticut law, the beneficial ownership of
more than 10% of any class of voting securities of a bank or bank holding
company may not be acquired by any person or groups of persons acting in
concert without the approval of the Connecticut Banking Commissioner.
<PAGE>
Other FDIC Regulation.
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates
such institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance." As of their last CRA examinations, NEBT received
a rating of "Outstanding" and EQBK received a rating of "Satisfactory".
Failure to receive at least a "Satisfactory" rating may inhibit an institution
from undertaking certain activities, including acquisitions of other financial
institutions, which require regulatory approval based, in part, on CRA
compliance considerations.
Narrative Description of Business.
NECB exists primarily to hold the stock of its Subsidiaries. During
most of 1996, NECB had two directly-owned subsidiaries -- NEBT and EQBK. In
addition, NECB, through NEBT, indirectly owned one additional subsidiary. The
historical growth of, and regulations affecting, each of NECB's direct and
indirect subsidiaries is described in Item 1(a) above, which is incorporated
herein by reference.
NECB is a legal entity separate from its subsidiaries. The stock of
NEBT and EQBK are NECB's principal assets. Dividends from NEBT and EQBK are
the primary source of income for NECB. As explained above in Item 1(a), legal
and regulatory limitations are imposed on the amount of dividends that
may be paid by the Subsidiaries to NECB.
NECB currently maintains its executive offices in Windsor, Connecticut.
At December 31, 1996, the subsidiaries operated out of 13 offices located
primarily in north central Connecticut. In November 1995, NECB purchased a
18,000 square foot building in East Hartford, Connecticut to house the
Company's data processing and other support operations.
At December 31, 1996, NECB through its subsidiaries had deposits of
$386,897,000, net loans of $283,482,000 and total assets of $433,159,000. As
of March 12, 1997, NECB ranked 20th among all banks and thrifts in Connecticut
in terms of total deposits -- reflecting pending acquisitions (source: SNL
Securities).
The strategy of NECB is to operate its Subsidiaries as community-
oriented banking institutions dedicated to providing personalized service.
NECB believes that its maintenance of professional, personalized service has
resulted in its ability to obtain and service many of the small to medium sized
desirable commercial credits in its market area. As part of its growth
strategy, NECB intends to continue to provide personalized banking services
whether expansion occurs through internal growth, de novo expansion,
reorganization or acquisition. As indicated above, the Company's profitability
and its financial condition may be significantly impacted by the continuing
implementation of its acquisition strategy and by the consummation of its
recent and/or pending acquisitions.
The Subsidiaries are full service commercial banks and offer the
services generally performed by commercial banks of similar size and character,
including checking, savings, and time deposit accounts, 24-hour telephone
banking, cash management services, safe deposit boxes, secured and unsecured
personal and commercial loans, residential and commercial real estate loans and
letters of credit. The Subsidiaries deposit accounts are competitive in the
current environment and include money market accounts and a variety of interest
and noninterest-bearing transaction accounts. NECB provides these services to
a diverse range of customers and neither institution relies on any one
depositor for a significant percentage of deposits made in their respective
institutions. Management believes that the business of each institution
will continue to be broadly based and will not depend on the business of one or
a few customers, the loss of any or all of which would materially and adversely
affect its business.
The lending policy of NECB's subsidiary banks is designed to correspond
with its mission of remaining a community-oriented bank. The loan policy sets
forth accountability for lending functions in addition to standardizing the
underwriting, credit and documentation procedures. The typical loan
customer is an individual or small business which has a deposit relationship.
NECB, through its subsidiary banks, strives to provide an appropriate mix in
its loan portfolios of commercial loans and loans to individual consumers.
The largest sector of consumer lending has traditionally been mortgage
loans secured by single family residential properties. This includes both
first and second mortgages. Second mortgages consist of equity lines of credit
and closed-end loans, such as home improvement and construction loans.
Historically, single family mortgage loans are considered to involve the least
risk to a lending institution. Applications for mortgage loans are received
primarily through the branch office network. NEBT and EQBK will lend up to 95%
of the value of the collateral. On loans in excess of 80% of the value of
collateral, borrowers are required to obtain mortgage insurance covering the
portion over 80%. Interest rates charged for mortgage loans are primarily set
according to secondary market conditions, and terms generally follow the
underwriting requirements of the FHLMC in the granting of residential mortgage
loans and sells residential mortgage loans to the agency when market conditions
permit. The sale of fixed rate mortgage loans in the secondary market provides
liquidity to make additional loans, revenues for servicing the sold loans, and
premiums and discounts to par upon the sale of such loans.
NEBT and EQBK originate a variety of other consumer loans such as
short-term demand loans, automobile and boat loans and student loans. Consumer
loans are made both on an unsecured basis and a secured basis. Interest rates
charged on consumer loans are primarily determined by competitive loan
rates offered in its lending area. The primary risk in such loans is the
borrower's ability to repay. Such loans are typically made for small amounts,
which provides for risk diversification.
The portfolio of commercial loans of NEBT and EQBK includes various
products. NEBT's target market with respect to commercial lending consists of
small businesses with annual sales up to eight million dollars. Commercial
mortgages are granted on owner occupied and investment properties up to
75% of the lesser of the cost or appraised value of the property. Short-term
business loans are made on a demand basis to finance various cash needs of
customers. Construction and land development financing is available to
qualified borrowers for development of sub-divisions or single family
residences. Financing for capital expenditures, such as equipment, is provided
on an amortizing basis for terms up to five years. NEBT and EQBK offer
revolving credit lines and commercial letters of credit primarily used
for performance bonding.
NEBT's and EQBK's deposits are insured by the FDIC and are primarily
invested in investment securities and loans to borrowers within the NEBT's and
EQBK's respective market area. A variety of loan products are available to
potential borrowers including secured and unsecured loans, inventory
financing, term loans, interim construction financing, mortgage loans and home
equity loans. NEBT is an approved Federal Home Loan Mortgage Corporation
("FHLMC") lender, thereby allowing it to make mortgage loans, sell such loans
in the secondary market and retain the servicing rights to these loans.
Both subsidiaries are members of the Federal Home Loan Bank ("FHLB")
through the Federal Home Loan Bank of Boston. The FHLB encourages and supports
residential mortgage lending by allowing member banks to borrow money long term
at favored rates based on certain lending ratios and the ownership of shares in
the FHLB.
Fee income is generated through traditional deposit related services
such as checking account charges, overdraft fees, stop payment and returned
item fees. Twelve of NEBT's eighteen automated teller machines ("ATMs"),
which also generate fee income, are located at NEBT's offices. Two ATMs
are located within the terminal areas at Bradley International Airport in
Windsor Locks, Connecticut and four are installed in retail stores throughout
its market area. The ATMs at branch locations are primarily for efficient
utilization of branch personnel resources and customer convenience, while
machines located away from NEBT premises are primarily utilized by non-
customers and provide NEBT with greater revenues than do the ATM's located at
branch locations. The servicing of mortgage loans sold to the FHLMC and the
rental of safe deposit boxes to customers also provides revenues.
NECB and its Subsidiaries had 185 full-time equivalent employees as of
December 31, 1996, compared to 115 employees at the end of 1995. Employees are
not represented by a collective bargaining unit and the relationships with
employees of the Company are considered to be good.
Competition and General Business Conditions.
The banking business in Connecticut is intensely competitive. During
the past several years the focus of the industry has shifted from improvement
in asset quality and expense reduction to growth in market share. Connecticut-
based financial institutions had been adversely affected by the economic
downturn and devaluation of real estate. Many of the banks in Connecticut and
the region had spent much of early nineties strengthening their balance sheets
in order to either position themselves for future opportunities or, in some
cases, simply to survive. While this created an attractive opportunity for
expansion for well-capitalized institutions, many banks have not maintained a
capital cushion adequate enough to pursue these opportunities. Accordingly,
the total number of competitors within the market has been decreasing.
However, NECB has come into competition with new banks as a result of the
erosion of the previous barriers to inter-state banking.
Recently adopted Federal legislation permits adequately capitalized
bank holding companies to venture across state lines to offer banking services
through bank subsidiaries to a wider geographic market. In light of this
change in the law, it will be possible for large super-regional organizations
to enter many new markets including the market served by NEBT and EQBK.
Certain of these competitors, by virtue of their size and resources, may enjoy
certain efficiencies and competitive advantages over NEBT and EQBK in the
pricing, delivery, and marketing of their products and services.
There are approximately 28 commercial banks throughout Connecticut. In
addition, large out-of-state banks compete for the business of Connecticut
residents and businesses located in NECB's primary market. A number of other
depository institutions compete for the business of individuals and commercial
enterprises in Connecticut including savings banks, savings and loan
associations, brokerage houses, financial subsidiaries of other industries and
credit unions. Other financial institutions, such as mutual funds, consumer
finance companies, factoring companies, and insurance companies, also compete
with NECB for both loans and deposits. Competition for depositors' funds and
for creditworthy loan customers is intense. Competition among financial
institutions is based upon interest rates and other credit and service charges,
the quality of services rendered, the convenience of banking facilities and in
the case of loans to larger commercial borrowers, relative lending limits. As
in the past, NECB's future earnings will be affected by changes in the
prevailing interest rates, as well as other financial market developments and
regulatory controls beyond the control of NECB's Management.
During the 1990's, the Connecticut banking industry has become more
concentrated with over 30 banks ceasing operations as a result of
reorganizations or failure. Increasingly, the industry consists of a few very
large, regional or super-regional institutions, and a number of smaller
community-based banks whose success depends upon providing customer focused,
responsive products and services.
The continued growth of super-regional institutions and the
potential for large out-of-area banking organizations to enter the local
banking market may create significant opportunities for efficiently operated,
service-oriented, community-based banking organizations. NECB is optimistic
regarding the opportunities available to prudent, well capitalized community-
based banks to serve successfully and profitably the banking needs of their
constituents.
NECB believes that to be successful, community banks must be able to
offer their customers competitive products and services of their own initiation
or through strategic alliances and contractual relationships with third
parties. While offering desired products and services is important in
attracting and maintaining customer relationships, the delivery of such
products in a convenient, friendly, professional and responsive manner is
essential to the success of a community bank. NECB's Management team and
staff continue to strive to meet the needs of customers and the community with
innovative products and friendly, responsive service at convenient locations.
Despite this competition with institutions commanding greater financial
resources, the Bank's supply of funds has imposed no substantial impediment to
its normal lending functions. While the Bank's are limited to making
commercial loans to a single borrower in an amount not to exceed fifteen
percent of its capital and has a "house limit" significantly below that level,
it has, on occasion, arranged for participation by other banks in larger loan
accommodations.
NECB operates banks which are community-oriented with a commitment to
customer service, sound community relations and professional excellence. The
target market of NEBT and EQBK consists of individual consumers and locally
based businesses. Emphasis is placed upon "relationship banking" as NECB's
banks strive to provide the majority (if not all) of their clients' borrowing
and deposit needs. NEBT's primary market area is located in north central
Connecticut. The primary market area of EQBK consists of the Towns of
Wethersfield and Rocky Hill. The area of Hartford south of Park Street forms
the secondary market of EQBK
The Subsidiaries has focused on becoming an integral part of the
communities it serves. Officers and employees are trained to meet the needs of
their customers and emphasis is placed on addressing the needs of the local
communities served.
<PAGE>
Executive Officers of the Registrant.
The following table sets forth certain information of each executive
officer of NECB who is not a director:
Name, Age and Officer of Principal Occupation
Position with NECB NECB Since During Past Five Years
Donat A. Fournier, 48 1993 Prior to employment with NECB,
Vice President and Senior Loan Officer
Mr. Fournier was Senior Executive
Vice President with Eastland Financial
Corporation in Woonsocket, Rhode Island
Anson C. Hall, 59 1993 Prior to employment with NECB,
Vice President, Chief Financial Officer
Mr. Hall owned and operated a business,
and Treasurer Bestway Management,
a management consulting firm
Statistical Disclosure Required Pursuant to Securities Exchange Act,
Industry Guide 3.
The statistical disclosures for a bank holding company required
pursuant to Industry Guide 3, not contained in Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
contained herein, are presented on the following pages of this Report on Form
10-K:
Page(s) of
Item of Guide 3
This Report
II. Investment Portfolio ................15
III. Loan Portfolio ......................16
V. Deposits ............................17
VI. Return on Equity and Assets .........17
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM II
INVESTMENT PORTFOLIO
The following table presents maturities and weighted average yields at December
31, 1996. The weighted average yields were calculated based on the cost and
effective yields to maturity of each security. The weighted average yields on
income from municipal obligations and equity securities were adjusted to a
tax-equivalent basis.
<TABLE>
<CAPTION>
(Amounts in thousands)
Available for Sale(1):
After One After Five Weighted
Within But Within But Within After No Average
One Year Five Years Ten Years Ten Years Maturity Total Yield
<S> <C> <C> <C> <C> <C> <C> <C>
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies $6,124 $46,168 $11,022 $63,314 6.74%
Mortgage-backed securities 259 2,446 1,148 $6,458 10,311 6.98%
Corporate debt securities 2,503 5,620 8,123 6.22%
Marketable equity securities $3,689 3,689
------- ------- ------- ------- ------- ------- ------
$8,886 $54,234 $12,170 $6,458 $3,689 $85,437
------- ------- ------- ------- ------- ------- ------
Weighted average yield 6.64% 6.40% 7.34% 6.99% 6.81%
------- ------- ------- ------- ------- ------- ------
Held to Maturity:
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies $3,507 $1,009 $4,516 6.91%
Debt securities issued by states
and political subdivisions
of the states 720 1,347 $774 2,841 5.00%
------- ------- ------- ------- ------- -------
$0 $4,227 $2,356 $774 $0 $7,357
Weighted average yield 6.36% 5.99% 5.14% 5.96%
------- ------- ------- ------- ------- -------
Total portfolio $8,886 $58,461 $14,526 $7,232 $3,689 $92,794
======= ======= ======= ======= ======= =======
Total weighted average yield 6.64% 6.39% 7.12% 6.88% 6.73%
======= ======= ======= ======= ======= ======= ======
</TABLE>
(1) Amounts shown at amortized cost.
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
Types of loans at the end of each reporting period.
(Amounts in thousands)
<TABLE>
<CAPTION>
At December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial and financial $55,601 $39,474 $27,033 $14,439 $19,490
Real estate
Construction 12,250 12,841 1,883 830 3,929
Residential 76,970 63,025 50,382 51,433 59,609
Commercial 114,174 80,793 40,863 38,234 38,140
Consumer 30,001 26,102 12,464 10,760 14,154
------- ------- ------- ------- -------
Loans outstanding $288,996 $222,235 $132,625 $115,696 $135,322
======= ======= ======= ======= =======
</TABLE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
The following table shows the maturity and sensitivity of the Company's loan
portfolio outstanding as of December 31, 1996.
<TABLE>
<CAPTION>
After OneOne YearYear ThroughAfter
(Amounts in thousands) or Less Five Years Five Years Total Loans
<S> <C> <C> <C> <C>
Commercial and financial $34,092 $15,083 $6,426 $55,601
Real estate
Construction 9,393 414 2,443 12,250
Residential 35,995 22,012 18,963 76,970
Commercial 57,049 48,693 8,432 114,174
Consumer 21,280 5,958 2,763 30,001
------- ------- ------- -------
Total Loans $157,809 $92,160 $39,027 $288,996
------- ------- ------- -------
Less: allowance for possible loan losses (5,514)
-------
Total loans, net $283,482
=======
</TABLE>
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM V
DEPOSITS
The following table sets forth average deposits and average rates for each of
the years indicated:
<TABLE>
<CAPTION>
(Amounts in thousands)
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 62,707 $ 39,395 $ 32,754
------- ------- -------
Regular savings deposits 76,310 2.02% 47,746 2.16% 56,819 2.02%
NOW accounts 38,370 1.25% 23,405 1.14% 23,197 1.32%
Money market deposits 5,014 1.10% 5,047 1.82% 4,396 2.73%
------- ------- -------
Total savings deposits 119,694 1.74% 76,198 1.83% 84,412 1.87%
------- ------- -------
Time deposits 153,004 5.39% 80,615 5.35% 63,619 3.74%
------- ------- -------
Total Deposits $335,405 $196,208 $180,785
======= ======= =======
</TABLE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VI
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average assets 1.14% 0.91% 0.56% 0.20% 0.18%
Return on average equity 12.28 9.61 8.34 3.26 3.08
Dividend payout ratio 22.22 22.52 6.10 0.00 0.00
Equity to assets 9.33 8.92 8.53 6.40 5.83
</TABLE>
ITEM 2. PROPERTIES
NECB is the owner of an operations center in East Hartford Connecticut
- -- located at 20 Founders Plaza, East Hartford, Connecticut. The 18,000 square
foot facility houses the data and item processing and customer service
functions and is adequate to support the foreseeable processing and support
needs of NECB.
NEBT's designated main office is located at Old Windsor Mall, Windsor,
Connecticut. In addition to the designated main office in Windsor, NEBT has
branches in Canton, East Windsor, Ellington, Enfield, Manchester (3), Somers,
Suffield and West Hartford.
During the year ended December 31, 1996, the aggregate rental expenses
paid by NECB for all its office properties was approximately $336,000. All
properties are considered to be in good condition and adequate for the purposes
for which they are used.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material adverse legal proceedings other
than ordinary routine litigation incidental to normal business to which NECB,
NEBT or EQBK is a party or to which any of their properties are subject. In
connection with the consummation of its acquisition of EQBK, certain
shareholders of EQBK gave notice of their intention to exercise their
dissenters' rights and receive cash rather than stock in NECB. The arbitration
process concluded in January 1997 with the Company making payment to the
dissenters' for the amount it had reserved for such payment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of NECB's 1996 fiscal year.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
As of December 31, 1996, there were 3,677,166 shares of NECB Common
Stock issued and outstanding which were held by approximately 3,000
shareholders of record.
NECB's Common Stock is listed Nasdaq National Market. The following
represents the high and low sale prices from each quarter during the last two
years:
1996
High Low
------- -------
1st Quarter . . . . . . . . . . . . $11 1/4 $9 3/4
2nd Quarter . . . . . . . . . . . . 13 10 1/2
3rd Quarter . . . . . . . . . . . . 13 11 1/2
4th Quarter . . . . . . . . . . . . 15 3/8 12 5/8
1995
High Low
------- -------
1st Quarter . . . . . . . . . . . . $8 1/2 $7 1/2
2nd Quarter . . . . . . . . . . . . 8 1/2 7 3/4
3rd Quarter . . . . . . . . . . . . 10 7 3/4
4th Quarter . . . . . . . . . . . . 10 1/4 9 1/4
The following table shows per share quarterly cash dividends declared
upon the common stock over the last two years:
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Q1 ............ $0.06 Q1 ............ 0.05
Q2 ............ 0.07 Q2 ............ 0.05
Q3 ............ 0.07 Q3 ............ 0.05
Q4 ............ 0.08 Q4 ............ 0.055
</TABLE>
Dividends are generally declared within 45 days prior to the payable
date, to shareholders of record l0 to 15 days after the declaration date.
Reference should be made to pages 6 of this Report on Form 10-K for a
discussion of Restrictions on Dividend Payments.
ITEM 6. SELECTED FINANCIAL DATA
Reference should be made to page 4 of this Report on Form 10-K for a
discussion of recent acquisitions which affect the comparability of the
information contained in this table.
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
Years Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Earnings:
Net interest income $18,415 $10,564 $8,577 $8,223 $8,846
Provision for loan losses 1,854 700 530 764 2,679
Noninterest income 2,378 1,692 1,616 2,115 2,350
Noninterest expense 12,701 8,591 7,895 9,337 7,272
Net income 4,262 1,980 1,103 409 373
Per share data:
Net income $1.26 $0.91 $0.82 $0.31 $0.29
Dividends declared 0.28 0.205 0.05
Balance sheet data (as of end of year):
Loans $288,996 $222,235 $132,624 $115,696 $135,322
Assets 433,159 341,561 216,690 203,184 211,727
Deposits 386,897 307,161 196,872 188,466 196,178
Shareholders' equity 40,411 30,480 18,473 13,012 12,334
Operating ratios:
Return on average assets 1.14% 0.91% 0.56% 0.20% 0.18%
Return on average equity 12.28 9.61 8.34 3.26 3.08
Net interest margin 5.34 5.28 4.80 4.60 4.80
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is Management's discussion of the financial condition and
results of operations on a consolidated basis for the three (3) years ended
December 31, 1996, of NECB. The consolidated financial statements of NECB
include the accounts of NECB and its wholly-owned subsidiaries, NEBT and EQBK
which became a subsidiary of NECB on November 30, 1995. Management's
discussion should be read in conjunction with the consolidated financial
statements and the related notes of NECB presented elsewhere herein.
Overview
NECB reported net income for 1996 of $4,262,000 or $1.26 per share.
This represents a 115% increase over the $1,980,000 earned in 1995. On an
earnings per share basis, 1996 increased 38% over the $0.91 earnings per share
for 1995. The earnings and earnings per share for 1995 represented an 80% and
11% improvement, respectively, over the $1,103,000 or $0.82 per share earned in
1994. Growth in net income and earnings per share during 1996 primarily
reflects the impact of the Company's merger with The Equity Bank and the
acquisition of Manchester State Bank (together the "acquisitions") coupled with
a strong net interest margin. Both transactions were accounted for as
purchases and, as such, prior year comparative data were not restated to
include information about either entity.
Returns on average assets for 1996, 1995 and 1994 were 1.14%, 0.91% and
0.56%, respectively, while returns on average equity were 12.28%, 9.61% and
8.34%. These widely-used performance benchmarks are illustrative of NECB's
improving performance during the last three years.
Net interest income on a fully taxable-equivalent basis totaled
$18,655,000 for 1996 compared to $10,685,000 in 1995. The net interest margin
for 1996 was 5.34% versus 5.28% in 1995. The increase in net interest income
is largely due to the acquisitions together with an improved mix of interest-
earning assets and interest-bearing liabilities.
The provision for possible loan losses was $1,854,000 in 1996 compared
to $700,000 in 1995. The increased provision recorded in 1996 is primarily
related to the growth experienced in conjunction with the acquisitions.
Noninterest income increased to $2,378,000 in 1996 from $1,692,000 in
1995. The increase is largely the result of the acquisitions, which provided
an additional $275,000 of recurring noninterest income in 1996. Other factors
which served to increase noninterest income in 1996 included a 100% increase in
the gain on sale of loans and a nonrecurring payment from the State of
Connecticut for the settlement of a class action suit brought by financial
institutions concerning the taxability of certain investments.
Noninterest expense totaled $12,701,000 in 1996, compared to $8,591,000
in 1995. The increase is primarily the result of the acquisitions, net of the
cost reductions derived from the elimination of duplicate operations.
Total loans at December 31, 1996 amounted to $288,996,000 compared to
$222,235,000 at December 31, 1995 while total deposits amounted to $386,897,000
at December 31, 1996 compared to $307,161,000 at December 31, 1995. In both
cases, the increases were largely attributable to the acquisition of Manchester
State Bank which provided $68,659,000 in loans and $84,115,000 in deposits.
Acquisition Summary
In November 1995, the Company created a second bank subsidiary when it
merged with The Equity Bank ("EQBK"). At the time of the transaction, EQBK had
approximately $116 million in assets and operated out of a single office in
Wethersfield, Connecticut. In July 1996, the Company completed its acquisition
of Manchester State Bank ("MSB") which was subsequently merged with and into
New England Bank ("NEBT"). MSB was a $91 million bank headquartered in
Manchester, Connecticut, and operated three branches in the Town of Manchester.
In an agreement dated February 20, 1997, the Company agreed to
acquire First Bank of West Hartford which will, like MSB, be merged with
and into NEBT. The agreement is subject to the approval of regulators and
the shareholders of both NECB and First Bank and is expected to close in July
1997.
Net Interest Income
Net interest income, which is the difference between interest earned on
earning assets and interest paid on deposits and borrowings, represents the
largest component of NECB's operating income. The principal earning asset of
the Company is its loan portfolio -- which is comprised of loans to finance
operations of businesses located within our market area, mortgage loans
to finance the purchase or improvement of properties used by businesses and
mortgage and personal loans to individuals. Representing a quarter of the
Company's earning assets, NECB's investment portfolio also plays an important
part in the management of the Company's balance sheet. While providing a
source of revenue, these funds are used to provide reserves and meet the
liquidity needs of the Company. Excess reserves are available to meet the
borrowing needs of the communities we serve. For the following discussion,
interest income is presented on a fully taxable-equivalent ("FTE") basis. FTE
interest income restates reported interest income on tax exempt loans and
securities as if such interest were taxed at the statutory Federal income
tax rate of 34% for all periods presented.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Amounts in thousands) 1996 1995 1994
Interest income (financial statements) $28,828 $16,300 $12,551
Tax equivalent adjustment 240 121 48
Interest expense (10,413) (5,736) (3,974)
------- ------- -------
Net interest income (fully taxable equivalent) $18,655 $10,685 $8,625
======= ======= =======
</TABLE>
In 1996, net interest income on a FTE basis was $18,655,000, a 75%
increase over the $10,685,000 reported in 1995. The $10,685,000 for 1995
represented an increase of $2,060,000 or 24% from 1994. The $7,970,000
increase in 1996 was primarily the result of the acquisitions -- which
together helped serve to increase interest-earning assets by approximately
$146,800,000 and interest-bearing liabilities by $116,900,000 in 1996.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balances/Interest Earned or Paid/Rates 1994-1996
(Amounts in thousands)
1996 1995 1994
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal funds sold $6,637 $354 5.33% $7,246 $407 5.62% $6,760 $279 4.13%
Investment securities 89,258 5,485 6.15% 50,962 3,079 6.04% 52,892 2,813 5.32%
Loans (A) 253,242 23,229 9.17% 144,138 12,935 8.97% 119,690 9,507 7.94%
------- ------ -------- ------- -------- ------
Total interest-
earning assets 349,137 29,068 8.33% 202,346 16,421 8.12% 179,342 12,599 7.03%
Allowance for loan
losses (5,360) (2,543) (2,777)
Cash & due from banks 15,417 9,466 9,542
Other assets 16,299 9,282 9,349
------- -------- --------
Total Assets $375,493 $218,551 $195,456
======= ======== ========
Liabilities:
Interest-bearing
liabilities:
Regular savings
deposits $76,310 $1,543 2.02% $47,746 $1,033 2.16% $56,819 $1,149 2.02%
NOW accounts 38,370 480 1.25% 23,405 266 1.14% 23,197 307 1.32%
Money market deposits 5,014 55 1.10% 5,047 92 1.82% 4,396 120 2.73%
------- ------ -------- ------- -------- ------
Total savings
deposits 119,694 2,078 1.74% 76,198 1,391 1.83% 84,412 1,576 1.87%
Time deposits 153,004 8,242 5.39% 80,615 4,312 5.35% 63,619 2,377 3.74%
Borrowed funds 1,583 93 5.87% 532 33 6.20% 589 21 3.57%
------- ------ -------- ------- -------- ------
Total interest-
bearing liabilities 274,281 10,413 3.80% 157,345 5,736 3.65% 148,620 3,974 2.67%
Demand deposits 62,707 39,395 32,754
Other liabilities 3,807 1,206 854
------- -------- --------
Total Liabilities 340,795 197,946 182,228
Equity 34,698 20,605 13,228
------- -------- --------
Total Liabilities &
Equity $375,493 $218,551 $195,456
======= ======== ========
Net interest income --
FTE basis $18,655 $10,685 $8,625
====== ======= ======
Net interest spread 4.53% 4.47% 4.35%
Net interest margin 5.34% 5.28% 4.81%
</TABLE>
(A) Average loans include nonaccruing loans.
The net interest margin measures the difference in yield on, and the
mix of, interest-earning assets and interest-bearing liabilities. Net interest
margin is affected by a number of factors including the volume, pricing and
maturity of earning assets and interest-bearing liabilities and interest rate
fluctuations. Changes in nonperforming assets, together with interest lost
and recovered on those assets also affect comparisons of net interest income.
Several factors served to increase the net interest margin to 5.34% in
1996 from 5.28% in 1995. Noteworthy was the effect of combining NECB's
balances with those of the acquired banks. Added to this was a general
reduction in market interest rates and changes in the mix of assets and
liabilities.
Each of the acquired banks brought with them an interest rate structure
which, when compared to the Company's existing structure, generally included
higher rates earned and paid. This had the effect of increasing the average
rates of the combined Company. Management believes that, absent the general
decrease in market rates in 1996, the effect of the acquisitions would have
been a modestly reduced net interest margin when compared to 1995.
The overall decrease in market rates is most evident in the change to
the average prime rate which occurred during 1996. The prime rate is generally
defined as the rate banks charge on loans to their most creditworthy borrowers
and other interest rates are frequently indexed to the prime rate. The prime
rate averaged 8.27% during 1996 compared to 8.50% for 1995 (source: The Wall
Street Journal).
Finally, the increase in the percentage of earning assets represented by
loans coupled with an increase in demand deposits (noninterest bearing)
helped serve to increase the net interest margin.
Insert Average Earning Asset Mix
1996 1995
---- ----
Securities 25.6% 25.2%
Loans 72.0% 70.8%
Other 2.4% 4.0%
Average interest-bearing liabilities increased to $274,281,000 in 1996,
from $157,345,000 in 1995, primarily due to the acquisitions. The interest
rates paid on these liabilities averaged 3.80% in 1996 compared to 3.65% in
1995. The 15 basis point increase in rates paid on interest-bearing
liabilities -- time deposits in particular -- reflects the generally higher
rate structure of the acquired institutions. Overall, the Company expects that
given the current interest rate environment and the competitive costs of
attracting and retaining core deposits the net interest margin will decrease
modestly during 1997.
Rate/Volume Analysis
Changes in net interest income between years is divided into two
components -- the change resulting from the change in average balances of
earning assets and interest-bearing liabilities (or "volume") and the change in
the rates earned or paid on these balances. The change in interest income and
interest expense attributable to changes in both volume and rate, which cannot
be segregated, has been allocated proportionately to the absolute values of the
changes due to volume and rate. The following table is presented on a FTE
basis.
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
Change due to Change due to
Increase Change in: Increase Change in:
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $(53) $(19) $(34) $128 $107 $21
Investment securities 2,406 97 2,309 266 372 (106)
Loans 10,294 501 9,793 3,428 1,332 2,096
------- ---- ------ ------ ------ -------
Total interest income change 12,647 579 12,068 3,822 1,811 2,011
------- ---- ------ ------ ------ -------
Interest-bearing liabilities:
Regular savings deposits 510 (103) 613 (116) 76 (192)
NOW account deposits 214 41 173 (41) (44) 3
Money market deposits (37) (37) (28) (44) 16
------- ---- ------ ------ ------ -------
Total savings deposits 687 (99) 786 (185) (12) (173)
Time deposits 3,930 58 3,872 1,935 1,195 740
Borrowed funds 60 (5) 65 12 14 (2)
------- ---- ------ ------ ------ -------
Total interest expense change 4,677 (46) 4,723 1,762 1,197 565
------- ---- ------ ------ ------ -------
Net interest income change $7,970 $625 $7,345 $2,060 $614 $1,446
======= ==== ====== ====== ====== =======
</TABLE>
As is shown above, the majority of the increase in net interest income in 1996
is attributable to changes in volume which is primarily the result of the
acquisitions.
<PAGE>
Noninterest Income
For 1996, noninterest income increased 41% from 1995 and totaled
$2,378,000 compared to $1,692,000 and $1,616,000 for 1995 and 1994,
respectively. Service charges, fees and commissions totaled $1,703,000 in 1996
compared to $1,385,000 in 1995, an increase of 23%. Included in service
charges, fees and commissions are fees on deposits, loan servicing fees and
other fees and charges. Most of the increase in this category can be
attributed to the acquisitions which together provided an additional $275,000
of recurring fee income in 1996. ATM usage fees and fee income from the
Company's debit card program (MasterMoney<trademark>) together rose 61% from
$90,000 in 1995 to $145,000 in 1996.
Gains on sales of loans increased by $192,000 and totaled $385,000 for
1996 compared to $193,000 for 1995. For 1996, the Company increased its
production of mortgages originated for sale by $11,000,000, from $23,000,000 in
1995 to $34,000,000 in 1996. The 48% increase is largely due to the Company's
expanded market area taken together with the relatively favorable interest rate
environment experienced in 1996. With fixed rate conventional mortgage rates
below 8% for most of 1996, borrowers preference for financing home purchases
with fixed rate mortgages remained strong. As part of its asset/liability
management process, NECB generally sells these mortgages in the secondary
market. Correspondingly, the related servicing income increased approximately
10% and totaled $263,000 in 1996 compared to $241,000 in 1995.
Noninterest Expense
Total noninterest expense was $12,701,000 in 1996 and $8,591,000 in
1995. The increase of $4,110,000 or 48% is primarily the result of the
acquisitions. In 1995, total noninterest expense increased $696,000 or 9% to
$8,591,000 from $7,895,000 in 1994. The largest component of the increase in
noninterest expense in 1996 resulted from the $2,557,000 increase in salaries
and employee benefits which again is primarily due to the acquisitions.
Occupancy expense and furniture and equipment rose in response to capital
outlays for technological upgrades and improvements in conjunction with the
purchase and outfitting of the Company's new Technology Center in East
Hartford. The Center, which opened in March 1996, was created to serve the
changing information and systems needs of the Company and its customers and is
staffed by professionals drawn from both subsidiary banks. Outside services
rose $319,000 in 1996 due to the integration of the acquired banks and for
other initiatives. Reflecting both the improved financial condition of the
Company and the savings derived from aggregating coverages made possible from
the acquisitions, insurance and assessments decreased $226,000 or 62% from
$363,000 in 1995 to $137,000 in 1996. Intangible asset amortization amounted
to $155,000 in 1996, as $4,592,000 of goodwill was recognized in connection
with the acquisitions.
Management maintains control over noninterest expenses by assigning
authority for expense-incurring activities to specific managers and by
providing these managers with tools for planning and monitoring the
performance of their duties. In working with senior officers, line managers
are able to anticipate and minimize the expense of the goods and
services needed to perform efficiently. This ongoing management process
coupled with the cost reductions derived from the acquisitions is illustrated
by the improvement in the Company's efficiency ratio which reached 59.99% in
1996.
Efficiency ratio
1996 1995 1994
---- ---- ----
59.99% 68.26% 74.85%
Income Taxes
In 1996, the Company recognized income tax expense of $1,976,000, an
effective tax rate of 31.68%. This compares to income tax expense of $985,000
in 1995, an effective rate of 33.19%. The decrease in the effective tax rate
is attributable to increased investment in tax-exempt securities and a
reduction in the valuation reserve for deferred tax assets.
<PAGE>
Balance Sheet Analysis
Total assets increased to $433,159,000 at December 31, 1996 compared to
$341,561,000 at December 31, 1995. The $68,659,000 in loans and $84,115,000 in
deposits the Company acquired in connection with the MSB acquisition is
primarily responsible for the increased asset size.
<TABLE>
<CAPTION>
Balance Sheet Highlights (in thousands)
1996 1995 Change
----- ----- ------
<S> <C> <C> <C>
Total Assets $433,159 $341,561 26.8%
Earning Assets 395,494 318,458 24.2%
Securities 93,315 82,129 13.6%
Loans 288,996 222,235 30.0%
Total Deposits 386,897 307,161 26.0%
Equity 40,411 30,480 32.6%
</TABLE>
NECB's securities portfolio increased $11,186,000 or 14% from
$82,129,000 at December 31, 1995 to $93,315,000 at December 31, 1996. While
the amortized cost of securities available-for-sale increased from $74,793,000
at December 31, 1995 to $85,437,000 at December 31, 1996, securities held to
maturity remained virtually unchanged and totaled $7,066,000 and $7,357,000 at
December 31, 1995 and 1996, respectively. The continued emphasis on holding
securities available-for-sale allows the Company to increase its commitment to
intermediate term loans while maintaining sufficient liquidity to meet
the continuing needs of its customers. The unrealized gain on securities
available-for-sale increased to $521,000 at December 31, 1996, from $270,000 at
December 31, 1995.
Loans
The Company's loan portfolio inherently includes credit risk. NECB
attempts to control this risk in three principal ways: i) through a thorough
analysis of applications for credit; ii) maintaining an appropriate level of
loan diversification; and iii) continuing examinations of both outstanding and
delinquent loans. NECB endeavors to identify potential problem loans early, to
take charge-offs promptly based upon realistic assessment of likely losses and
to maintain adequate reserves for possible loan losses. The Company's
portfolio is diversified by borrower, industry and product.
<TABLE>
<CAPTION>
Loan Portfolio Composition (pie chart) 1996 1995
<S> <C> <C>
Commercial and financial 19.24% 17.76%
Real estate
Construction 4.24% 5.78%
Residential 26.63% 28.36%
Commercial 39.51% 36.35%
Consumer 10.38% 11.75%
</TABLE>
Total loans increased $66,761,000 from $222,235,000 at December 31, 1995
to $288,996,000 at December, 31, 1996. This increase is largely the result of
the MSB acquisition. In addition to the acquisition, NECB added to outstanding
loans by originating new loans which exceeded repayments and payoffs by
$2,260,000 and purchasing loans of $828,000 from another lender. In a market
best characterized by moderate loan demand and highly competitive pricing, the
Company continued to target the small business market for both owner occupied
real estate and for commercial and financial loans. Through both aggressive
marketing and responsive loan officers, this effort is reflected in the change
in the Company's loan composition in 1996. It is the Company's goal to become
the preferred small business lender in its service area and thus the
percentage of commercial and financial and commercial real estate loans should
increase further in 1997.
Nonperforming Assets
Nonperforming assets are assets on which income recognition in the form
of principal and/or interest has either ceased or is limited, thereby reducing
the Company's earnings. Nonperforming assets include nonaccrual loans and
other real estate owned ("OREO"). Generally, loans are placed in nonaccrual
status when they are past due greater than ninety days or the repayment of
interest or principal is considered to be in doubt. In addition to
nonperforming assets, the asset quality of the Company can be measured by the
amount of the provision, charge-offs and several credit quality ratios
presented in the discussion concerning Provision and Allowance for Loan Losses.
<PAGE>
NECB's nonperforming assets at December 31, 1992 through 1996 are presented
below:
<TABLE>
<CAPTION>
(amounts in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C. <C>
Nonaccrual loans $5,759 $4,725 $2,975 $3,176 $3,144
Other real estate owned 2,109 728 573 1,048 5,761
------ ------ ------ ------ ------
Total nonperforming assets $7,868 $5,453 $3,548 $4,224 $8,905
====== ====== ====== ====== ======
</TABLE>
Nonperforming assets increased $2,415,000 or 44% to $7,868,000 at
December 31, 1996 from $5,453,000 at December 31, 1995. At December 31, 1996,
nonperforming assets as a percentage of total loans and other real estate owned
and as a percentage of total assets were 2.70% and 1.81%, respectively,
compared to 2.5% and 1.60% at December 31, 1995. The increase in total
nonperforming assets in the year ended December 31, 1996 primarily resulted
from the acquisitions.
OREO consists of properties acquired through foreclosure proceedings.
These properties are recorded at the lower of the carrying value of the related
loans or the estimated fair market value less estimated selling costs. Charges
to the allowance for loan losses are made to reduce the carrying amount of
loans to the fair market value of the properties less estimated selling
expenses upon reclassification as OREO. Subsequent reductions are charged to
operating income.
<TABLE>
<CAPTION>
Activity in Nonperforming Assets
(Amounts in thousands)
1996 1995
<S> <C> <C>
Balance at beginning of year $5,453 $3,548
Additions 5,341 2,443
Changes incident to acquisitions 4,945 3,393
Reductions
Payments (2,654) (1,623)
Returned to performing Status (943) (598)
Charge-offs/writedowns (3,268) (1,014)
Sales/other, net (1,006) (696)
------ ------
Balance at end of year $7,868 $5,453
====== ======
</TABLE>
At December 31, 1996, loans past due in excess of ninety days and
accruing interest amounted to $395,000 compared to $273,000 at December 31,
1995. Although these loans are not included in nonperforming assets,
Management reviews these loans when considering risk elements to determine the
overall adequacy of the loan loss reserve.
Provision and Allowance for Loan Losses
NECB's allowance for loan losses represents amounts available for future
credit losses. Management continually assesses the adequacy of their
allowances for loan losses in response to current and anticipated economic
conditions, specific problem loans, historical net charge-offs and the overall
risk profile of their loan portfolios. Management allocates specific
allowances to individual problem loans based upon its analysis of the potential
for loss perceived to exist related to such loans. In addition to the specific
allowances for individual loans, a portion of the allowance is maintained as a
general allowance. The amount of the general allowance is determined through
Management's analysis of the potential for loss inherent in those loans not
considered problem loans. Among the factors considered by Management in this
analysis are the number and type of loans, nature and amount of collateral
pledged to secure such loans and current economic conditions. Based upon these
analyses, the Company believes that its allowance for loan losses at year-end
is adequate.
The following table summarizes the activity in the allowance for
possible loan losses for the years ended December 31, 1992 through 1996. The
allowance is maintained at a level consistent with identified loss potential
and the perceived risk in the portfolio. It is not considered meaningful to
allocate the allowance according to geographic area as NECB's market
area is homogeneous and limited in size.
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans charged-off:
Commercial and financial $945 $154 $92 $216 $539
Real estate 2,063 750 892 930 2,348
Installment loans to individuals 141 74 17 80 121
------ ----- ------ ------- -------
Total charge-offs 3,149 978 1,001 1,226 3,008
------ ----- ------ ------- -------
Recoveries on loans charged-off:
Commercial and financial 66 150 51 17 4
Real estate 254 27 163 22 54
Installment loans to individuals 33 22 37 10 26
------ ----- ------ ------- -------
Total recoveries 353 199 251 49 84
------ ----- ------ ------- -------
Net loans charged-off 2,796 779 750 1,177 2,924
Provision charged to operations 1,854 700 530 764 2,679
Balance, at beginning of year 4,446 2,564 2,784 3,197 3,442
Changes incident to acquisitions 2,010 1,961
------ ----- ------ ------- -------
Balance, at end of year $5,514 $4,446 $2,564 $2,784 $3,197
====== ===== ====== ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period 1.1% 0.5% 0.6% 0.9% 2.0%
Ratio of allowance for loan losses to total loans 1.9 2.0 1.9 2.4 2.4
Ratio of allowance for loan losses to
nonperforming assets 70.1 81.5 72.3 65.9 35.9
Ratio of allowance for loan losses to
nonaccrual loans 95.7 94.1 86.2 87.7 101.7
</TABLE>
NECB's allowance for loan losses increased $1,068,000 from December 31,
1995 to $5,514,000 at December 31, 1996. The 1996 provision for loan losses
was $1,854,000 compared to $700,000 for 1995. This increase is primarily the
result of the acquisitions together with a higher level of delinquencies.
During 1996, net charge-offs increased $2,017,000 to $2,796,000 from $779,000
in 1995. Of this increase, approximately $1,200,000 was from loans acquired
from MSB. The majority of these loans had been specifically reserved by MSB in
anticipation of the need to be charged-off. The ratio of net charge-offs to
average loans increased to 1.10% in 1996 compared to .54% in 1995. The
allowance for loan losses decreased to 1.91% of total loans at December 31,
1996 from 2.00% at December 31, 1995. At December 31, 1996, the allowance as a
percentage of nonperforming assets and as a percentage of nonaccrual loans was
70.1% and 95.7%, respectively, compared to 81.5% and 94.1% at December 31,
1995.
The following table reflects the Allowance for Loan Losses as of
December 31, 1996 with allocations categorized by loan type:
<TABLE>
<CAPTION>
(Amounts in thousands) Allocation of Percentage of
Allowance for loan type to
Loans by type Loan Losses total loans
<S> <C> <C>
Commercial & Financial $849 19.3%
Real Estate:
Construction 141 4.2
Residential 1,702 26.6
Commercial 2,502 39.5
Consumer 320 10.4
------ -----
Total $5,514 100.0%
====== =====
</TABLE>
As noted, NECB's subsidiaries perform ongoing reviews of loans to
determine the required allowance for possible loan losses at any given date.
To facilitate this process, an individual loan rating system is utilized. In
the review process, the subsidiaries assess factors including the borrower's
past and current financial condition, repayment ability and liquidity, the
nature of collateral and changes in its value, current and anticipated economic
conditions and other factors deemed appropriate. These reviews are dependent
upon estimates, appraisals and judgments which can change quickly because of
changing economic conditions and Management's perception as to how these
factors affect the financial condition of debtors. The loan rating process
classifies loans according to the subsidiaries' uniform classification system.
The subsidiaries consider performing loans rated as "substandard" and
"doubtful" to be potential problem loans. "Substandard" loans are
characterized by well-defined weaknesses such as deteriorating or inadequate
collateral or impaired repayment ability. A loan is considered "doubtful" when
similar conditions exist but are more severe in nature.
At December 31, 1996, NECB considered loans totaling approximately
$15,635,000 to be potential problems compared to $14,067,000 at December 31,
1995. Included in these totals were loans totaling $9,877,000 and $9,342,000,
respectively, which were not classified as nonperforming loans because such
loans are performing according to their terms.
Deposits
Total deposits increased $79,736,000 or 26% from $307,161,000 at
December 31, 1995 to $386,897,000 at December 31, 1996. This increase is
largely attributable to the acquisition of MSB which provided $84,115,000 in
deposits. As discussed earlier, the interest rate structures of the acquired
banks were frequently at or near the top end of the rates offered throughout
their markets. This often attracted funds from depositors who only sought the
highest rates then being offered. Since the need for such funds was less
prevalent after the acquisitions (primarily due to moderate loan demand and a
strong liquidity position), much of these funds did not stay with the Company.
As a result, absent the effect of the acquisition, time deposits would have
decreased by approximately $10,000,000 from 1995. This taken together with the
Company's focus on small-business development helped shift the mix of deposits
from higher priced time deposits to noninterest-bearing demand deposits and NOW
accounts. The percentage of noninterest-bearing demand deposits to total
deposits increased to 20.4% from 19.5% at December 31, 1996 and 1995,
respectively.
Asset Liability Management
Asset liability management provides for a structured process for
prudently managing the Company's liquidity, capital and market risk.
Asset/liability management is guided by policies reviewed and approved annually
by the Company's Board of Directors. Among other things, the policy delegates
responsibility for asset-liability management to the Asset/Liability
Committee ("ALCO") within each subsidiary bank. The committees guide all the
day-to-day asset/liability management activities of the respective subsidiary.
Interest-Rate Risk
Interest-rate risk is defined as the sensitivity of the Company's income
to short and long-term changes in interest rates. The principal objective of
interest rate risk management is to control this risk within the limits and
guidelines indicated in the Company's asset/liability policy. The Company
identifies and manages its interest-rate risk through both simulation
models and gap analysis. The simulation analysis is used to both measure and
analyze the Company's net interest income sensitivity over one and two-year
time horizons. The simulation process involves the modeling of interest income
and expense from the Company's balance sheet during a specified period of time
and under a variety of interest-rate scenarios. The model is used to examine
the impact on earnings given an immediate 200 basis point rise or fall in
interest rates (a "shock") or a gradual 200 basis point rise or fall in
interest rates (a "ramp") as well as other forecasted interest change
scenarios. Each model includes assumptions as to the effect of volume changes,
prepayment rates and repricing characteristics for both contractual and
noncontractual assets and liabilities.
Gap analysis provides a point-in-time "snapshot" of the maturity and
repricing characteristics of the Company's balance sheet. The report is
prepared by allocating all assets and liabilities according to either
contractual or anticipated maturity or repricing. The Company's policy
specifies that the cumulative one-year gap should be less than 10% of total
assets. As is shown in the table below, as of December 31, 1996, the Company
was .50% liability sensitive at the cumulative one year gap.
<PAGE>
<TABLE>
<CAPTION>
Interest-Rate Gap Analysis
December 31, 1996 Cumulatively Repriced Within
Amounts in thousands, by repricing date 3 Months 4 to 12 1 to 5 After 5
or Less Months Years Years Total
<S> <C> <C> <C> <C> <C>
Cash $9,675 $21,954 $31,629
Securities 5,354 $6,783 $56,817 26,114 95,068
Loans 51,526 106,283 92,160 39,027 288,996
Loans held-for sale 1,755 1,755
Other Assets 15,711 15,711
------- ------- -------- -------- -------
Total assets 68,310 113,066 148,977 102,806 433,159
Deposits
Demand $3,940 $3,940 $70,913 $78,793
Savings 14,161 $28,323 49,565 49,565 141,614
Time 48,536 86,567 31,060 328 166,491
------- ------- -------- -------- -------
Total 66,637 114,890 84,565 120,806 386,898
Short-term borrowings 2,003 2,003
Other liabilities 3,847 3,847
Equity 40,411 40,411
Total liabilities and shareholders' equity 68,640 114,890 84,565 165,064 433,159
------- ------- -------- -------- -------
Periodic $ (330) $(1,824) $64,412 $(62,258)
------- ------- -------- --------
Cumulative gap $ (330) $(2,154) $62,258
======= ======= ========
Cumulative gap as % of total assets (0.08)% (0.50)% 14.37%
</TABLE>
Through both the modeling process and the complementary gap analysis,
Management believes that the exposure of the Company's income to either a rate
shock or gradual change in interest rates is modest.
Liquidity Risk
Management's objective for liquidity risk is to ensure the ability of
the Company and its subsidiaries to meet their obligations. These obligations
include the withdrawal of deposits on demand or at maturity, the repayment of
borrowings as they mature and the ability to fund existing and new loan
commitments. Accordingly, NECB's subsidiaries have liquidity policies
which provide flexibility to meet cash needs. The liquidity objective is
achieved through the maintenance of readily marketable investment securities as
well as a balanced flow of asset maturities, prudent pricing on loan and
deposit products and the sale of mortgage loans in the secondary market.
Liquidity at NECB is measured and monitored daily, enabling Management to
identify and respond to trends occurring in the Company's balance sheet.
In 1995 NEBT joined the Federal Home Loan Bank of Boston (FHLBB) to
further enhance its liquidity position. The FHLBB provides its member banks
with credit by accepting as collateral the member bank's mortgage assets.
Through its membership, NEBT has available a line of credit for $3,500,000 and
also has the ability to pledge up to $60,000,000 of its assets to meet its
credit needs. EQBK has available a line of credit for $2,100,000 and has the
ability to pledge up to $25,000,000 of its assets to meet its credit needs.
NECB has alternative sources of liquidity available including federal funds
purchased and repurchase agreements. Purchases of federal funds and borrowing
on repurchase agreements may be utilized to meet short-term borrowing needs.
NECB believes that its policies will enable it to maintain adequate liquidity
and to prudently commit funds to loans or investments, depending upon
underlying risk, demand and rate of return.
As shown in the Consolidated Statements of Cash Flows, NECB experienced
an increase of $7,679,000 in the amount of cash and cash equivalents at
December 31, 1996 compared to December 31, 1995. This compares to a decrease
of $4,091,000 in 1995, compared to December 31, 1994. The increase in 1996 was
largely due to the acquisition of MSB coupled with a decrease throughout the
year in interest-bearing account balances.
<PAGE>
Capital
At December 31, 1996, total shareholders' equity was $40,411,000, an
increase of $9,931,000 compared to $30,480,000 at December 31, 1995. In July
1996, in acquiring MSB, 549,300 shares of common stock were issued by NECB at a
value of $6,310,000. Also increasing capital in 1996 was the retention of
$3,310,000 in earned income, $170,000 from shares issued in conjunction with
exercise of stock options and a $141,000 increase in the unrealized holding
gain on securities available for sale. During 1995, shareholders' equity
increased $12,007,000 to $30,480,000 from $18,473,000 at December 31, 1994. In
November 1995, capital increased $9,507,000 when the Company issued 1,004,000
shares of Common stock in exchange for all of the outstanding shares of EQBK.
Following the acquisition, EQBK has been operating as a subsidiary of NECB.
The Company endeavors to maintain an optimal amount of capital upon
which an attractive return to shareholders will be realized over the short and
long run while meeting all regulatory requirements for minimum levels of
capital.
As of December 31, 1996, the Company exceeded all regulatory capital
ratios and the subsidiaries were categorized as "well capitalized." The
various capital ratios of the Company for December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
Minimum Level 1996 1995
<S> <C> <C> <C>
Total Risk-Based 8% 13.5% 13.5%
Tier 1 Risk-Based 4% 12.2% 12.3%
Leverage 4% 8.5% 11.9%
</TABLE>
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Standard is based on a financial-components approach under which an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred as a result of a transfer of financial assets, and recognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This standard is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 (except for certain provisions deferred for one year
by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125"), and must be applied prospectively. The Company does not
expect that, upon adoption, this statement will have a material effect on its
consolidated financial statements.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K,
including those contained in this Item 7 and in Item 1, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 are thus prospective. Such forward looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results express or implied by such statements.
Such factors include, but are not limited to: changes in interest rates,
regulation, competition and the local and regional economy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required by this item are filed as a separate
part of this report (see Appendix A)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NECB's Proxy Statement under the caption "Election of Directors"
contains the information required by this Item with respect to directors and
certain executive officers of NECB. Such information is incorporated herein by
reference. Certain additional information regarding executive officers of
NECB, who are not also directors, appears under Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
NECB's Proxy Statement under the caption "Executive Compensation"
contains the information required by this Item. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NECB's Proxy Statement contains under the caption "Security Ownership
of Directors and Executive Officers" the information required by this Item.
Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NECB's Proxy Statement under the caption "Other Information Relating to
Directors and Executive Officers" contains the information required by this
Item. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) (2) List of Financial Statements Financial Statement Schedules.
The consolidated financial statements and report of independent public
accounts of New England Community Bancorp, Inc. and subsidiaries are listed in
the index appearing on page 35 of this report on Form 10-K.
(a) (3) List of Exhibits
Exhibit No. Description
(3a) Amended and Restated Certificate of Incorporation of
New England Community Bancorp, Inc. was filed on
June 20, 1995 as Exhibit 3.1 to New England Community
Bancorp, Inc.'s Registration Statement on Form S-4
(No.33-93640) and is incorporated herein by reference.
(3b) Amended and Restated Bylaws of New England Community
Bancorp, Inc. was filed on March 31, 1995 as Exhibit 3.2
to New England Community Bancorp, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
are incorporated by reference.
(10a) The Employment Agreement between New England Bank
and Trust Company and David A. Lentini dated August 9,
1994 was filed as Exhibit 10.3 to Olde Windsor Bancorp,
Inc.'s, now known as New England Bancorp, Inc.'s,
Registration Statement on Form S-1 (No. 33-83622) and is
incorporated herein by reference.
(10b) The Employment Agreement by and between New England
Bank and Trust Company and David A. Lentini dated August
31, 1993 was filed as Exhibit 10.4 to Olde Windsor
Bancorp, Inc.'s, now known as New England Community
Bancorp, Inc.'s, Registration Statement on Form S-1 (No.
33-83622) and is incorporated herein by reference.
(10c) The Employment Agreement by and between New England
Bank and Trust Company and Donat A. Fournier dated August
31, 1993 was filed as Exhibit 10.5 to Olde Windsor
Bancorp, Inc.'s, now known as New England Community
Bancorp, Inc.'s, Registration Statement on Form S-1 (No.
33-83622) and are incorporated herein by reference.
(10d) The Employment Agreement by and between New England
Bank and Trust Company and Donat A. Fournier dated August
9, 1994 was filed on October 20, 1994 as Exhibit 10.6 to
New England Community Bancorp, Inc.'s Registration
Statement on Form S-1 (No. 33-83622), Amendment 1, and
is incorporated herein by reference.
(10e) The Employment Agreement by and between New England
Bank and Trust Company and Anson C. Hall dated
August 9, 1994 was filed on October 20, 1994 as Exhibit
10.7 to New England Community Bancorp, Inc.'s
Registration Statement on Form S-1 (No. 33-83622),
Amendment Number 1, and is incorporated herein by
reference.
(10f) The Employment Agreement by and between New England
Community Bancorp, Inc. and Frank A. Falvo dated December
6, 1996.
(21) List of Subsidiaries.
(27) Financial Data Schedule.
<PAGE>
(b) Reports on Form 8-K:
Form 8-K filed October 3, 1996
Item 5 Other Events
Reported that at a meeting of the Board of Directors of NECB held on
September 19, 1996, the Registrar and Transfer Company was appointed
as the Company's sole stock transfer agent, sole registrar and sole
dividend distribution agent. Registrar and Transfer Company
replaced the Company's former transfer agent (ChaseMellon
Shareholder Services) with the close of business on October 11,
1996.
<PAGE>
APPENDIX A
Index to Financial Statements:
Report of Independent Certified Public Accountants for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets at December 31, 1996 and 1995. . . . . . . . .F-2
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . .F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . F-6-21
<PAGE>
Shatswell, MacLeod & Company, P.C. [Letterhead]
83 Pine Street
West Peabody, Massachusetts 01960
To the Board of Directors
New England Community Bancorp, Inc.
Windsor, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of New England
Community Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996. 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 referred to above present
fairly, in all material respects, the consolidated financial position of New
England Community Bancorp, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
s/s Shatswell, MacLeod & Company, P.C.
SHATSWELL, MACLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 30, 1997, except for Note 13,
as to which the date is February 20, 1997
<PAGE>
New England Community Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(amounts in thousands; except per share data)
<TABLE>
<CAPTION>
December 31, 1996 1995
<S> <C> <C>
Assets:
Cash and due from banks $21,629 $14,550
Federal funds sold 9,675 9,075
------- -------
Cash and cash equivalents 31,304 23,625
Interest-bearing time deposits with other banks 3,000
Securities held-to-maturity, fair values of $7,455 and $7,189 at
December 31, 1996 and 1995, respectively 7,357 7,066
Securities available-for-sale, at fair value 85,958 75,063
Federal Home Loan Bank stock, at cost 1,753 1,176
Loans outstanding 288,996 222,235
Less: allowance for possible loan losses (5,514) (4,446)
------- -------
Net loans 283,482 217,789
Mortgages held-for-sale 1,755 788
Accrued interest receivable 3,206 2,538
Premises and equipment 9,369 6,960
Other real estate owned 2,109 728
Goodwill 4,464 402
Other assets 2,402 2,426
------- -------
Total Assets $433,159 $341,561
======= =======
Liabilities:
Deposits:
Noninterest bearing $78,792 $59,945
Interest bearing 308,105 247,216
------- -------
Total deposits 386,897 307,161
Short-term borrowings 2,003 540
Other liabilities 3,848 3,380
------- -------
Total Liabilities 392,748 311,081
------- -------
Shareholders' Equity:
Serial preferred stock, $.10 par value, 200,000 shares authorized;
no shares issued
Common stock, $.10 par value, authorized 10,000,000 shares:
December 31, 1996, 3,667,166 outstanding;
December 31, 1995, 3,084,309 outstanding 367 308
Additional paid-in capital 27,943 21,522
Retained earnings 11,802 8,492
Net unrealized gain on securities available-for-sale 299 158
------- -------
Total Shareholders' Equity 40,411 30,480
------- -------
Total Liabilities & Shareholders' Equity $433,159 $341,561
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Community Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(amounts in thousands; except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Interest income:
Loans, including fees $23,229 $12,935 $9,507
Securities:
Taxable interest 4,775 2,721 2,668
Interest exempt from federal income taxes 120 49 32
Dividends 350 188 63
Federal funds sold and other interest 354 407 281
------- --------- ---------
Total interest income 28,828 16,300 12,551
------- --------- ---------
Interest expense:
Deposits 10,320 5,703 3,953
Borrowed funds 93 33 21
------- --------- ---------
Total interest expense 10,413 5,736 3,974
------- --------- ---------
Net interest income 18,415 10,564 8,577
Provision for possible loan losses 1,854 700 530
------- --------- ---------
Net interest income after provision for possible loan losses 16,561 9,864 8,047
------- --------- ---------
Noninterest income:
Service charges, fees and commissions 1,703 1,385 1,509
Securities gains, net 20 21
Gain on sales of loans, net 385 193 45
Other 270 93 62
------- --------- ---------
Total noninterest income 2,378 1,692 1,616
------- --------- ---------
Noninterest expense:
Salaries and employee benefits 6,935 4,378 3,830
Occupancy 1,284 729 658
Furniture and equipment 979 686 682
Outside services 641 322 311
Postage and supplies 650 391 343
Insurance and assessments 137 363 639
Losses, writedowns, expenses - other real estate owned 255 225 265
Amortization of goodwill 155
Other 1,665 1,497 1,167
------- --------- ---------
Total noninterest expense 12,701 8,591 7,895
------- --------- ---------
Income before taxes 6,238 2,965 1,768
Income taxes 1,976 985 665
------- --------- ---------
NET INCOME $4,262 $1,980 $1,103
======= ========= =========
Net income per share $1.26 $0.91 $0.82
======= ========= =========
Weighted average shares of common stock outstanding 3,374,000 2,166,000 1,345,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Community Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(amounts in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Additional on Securities
Common Stock Paid-in Retained Available- Total
Shares Value Capital Earnings for-Sale Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,302 $130 $6,622 $5,994 $266 $13,012
Net income 1,103 1,103
Dividends declared -- $0.050 per share (104) (104)
Net change in unrealized gain on
securities available-for-sale (1,109) (1,109)
Common stock offering 778 78 5,493 5,571
----- ---- ------- ------- ------- -------
Balance, December 31, 1994 2,080 208 12,115 6,993 (843) 18,473
Net income 1,980 1,980
Dividends declared -- $0.205 per share (481) (481)
Shares issued pursuant to the acquisition
of The Equity Bank 1,004 100 9,407 9,507
Net change in unrealized loss on
securities available-for-sale 1,001 1,001
----- ---- ------- ------- ------- -------
Balance, December 31, 1995 3,084 308 21,522 8,492 158 30,480
Net income 4,262 4,262
Dividends declared -- $0.280 per share (952) (952)
Shares issued pursuant to the acquisition
of Manchester State Bank 549 56 6,254 6,310
Shares issued in conjunction with exercise
of stock options 34 3 167 170
Net change in unrealized gain on
securities available-for-sale 141 141
----- ---- ------- ------- ------- -------
Balance, December 31, 1996 3,667 $367 $27,943 $11,802 $299 $40,411
===== ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Community Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net income $4,262 $1,980 $1,103
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 757 508 425
Losses from sale or disposal and provisions to reduce
the carrying value of other real estate owned, net 175 169 174
Securities gains, net (20) (21)
Accretion of discounts and amortization of premiums
on bonds, net 145 108 229
Accretion, net of amortization, of purchase accounting
adjustments (191)
Amortization of goodwill 155
Provision for possible loan losses 1,854 700 530
Gain on sales of loans, net (45)
(Increase) decrease in accrued interest receivable and other
assets, net (69) 832 (891)
(Increase) decrease in mortgages held-for-sale (967) (788) 3,512
Increase (decrease) in accrued interest payable and other
liabilities, net (926) 640 (465)
------- ------- --------
Net cash provided by operating activities 5,175 4,128 4,572
------- ------- --------
Financing Activities:
Net increase (decrease) in noninterest-bearing accounts 1,881 (2,861) 14,841
Net increase (decrease) in interest-bearing accounts (6,186) 5,754 (6,435)
Increase (decrease) in short-term borrowings, net 1,463 (260)
Issuance of common stock 170 5,571
Cash equivalents acquired in the acquisitions, net 14,236 7,790
Cash dividends paid (817) (415)
------- ------- --------
Net cash provided by financing activities 10,747 10,008 13,977
------- ------- --------
Investing Activities:
Loans originated, net of principal collections (2,260) (6,694) (24,666)
Loans purchased from other lenders (828) (4,871)
Net (increase) decrease in interest-bearing time deposits 3,000 (2,802) (99)
Purchase of Federal Home Loan Bank stock (810)
Proceeds from sales of loans 456 6,063
Purchases of securities available-for-sale (49,380) (31,575) (12,955)
Proceeds from sales of securities available-for-sale 10,940 4,535 7,301
Proceeds from maturities of securities available-for-sale 30,652 18,824 14,192
Purchases of securities held-to-maturity (3,275) (3,742) (11,297)
Proceeds from maturities of securities held-to-maturity 3,005 8,556 12,099
Proceeds from sales of other real estate owned 767 969 1,131
Purchases of premises and equipment, net (1,275) (1,427) (924)
Capitalization of expenditures on other real estate owned (45) (148)
Other 17
------- ------- --------
Net cash used for investing activities (8,243) (18,227) (10,096)
------- ------- --------
Increase (decrease) in cash and cash equivalents 7,679 (4,091) 8,453
Cash and cash equivalents, beginning of year 23,625 27,716 19,263
------- ------- --------
Cash and cash equivalents, end of year $31,304 $23,625 $27,716
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 -- ORGANIZATION
New England Community Bancorp, Inc. (the "Company"), a Delaware
Corporation, is a multi-bank holding company. It operates two wholly-owned
subsidiary banks chartered by the State of Connecticut. New England Bank &
Trust Company ("New England Bank") is headquartered in Windsor, Connecticut,
and provides commercial and consumer banking services from its twelve offices
located in the towns of Canton, East Windsor, Ellington, Enfield, Manchester
(3), Somers, Suffield, West Hartford and Windsor (2), Connecticut. The Equity
Bank, acquired in November 1995, provides commercial and consumer banking
services from its office in Wethersfield, Connecticut.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles and include its
accounts and those of its subsidiaries, after elimination of significant
intercompany balances and transactions.
In preparing the consolidated financial statements, Management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from the
estimates.
Purchase Accounting
In November 1995, the Company acquired The Equity Bank. Additionally, in
July 1996, the Company completed an acquisition of Manchester State Bank. In
both transactions, the purchase method of accounting was employed and thus, the
comparative statements do not include prior operating results of either entity.
Securities, In General
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts computed on the effective interest method. Gains or
losses on sales of investment securities are computed on a specific asset
basis.
The Company classifies debt and equity securities into one of two
categories: held-to-maturity or available-for-sale. This security
classification may be modified after acquisition only under certain specified
conditions. In general, securities may be classified as held-to-maturity only
if the Company has the positive intent and ability to hold them to maturity.
All other securities must be classified as available-for-sale. With respect to
how the Company accounts for and reports these securities, refer to the
table below:
Security Classification Accounting and Reporting Treatment
Held-to-maturity These securities are measured at amortized cost on
the balance sheet. Unrealized holding gains
and losses are not included in earnings or in a
separate component of capital. They are merely
disclosed in the notes to the financial statements.
Available-for-sale These securities are carried at fair value on the
balance sheet. Unrealized holding gains and
losses are not included in earnings, but are reported
as a net amount (less expected tax) in a separate
component of capital until realized.
Loans Receivable
Loans are stated at their principal amount outstanding and are net of
unearned income on discounted loans. Interest on nondiscounted loans is
recognized on the simple interest method based upon the principal amount
outstanding except for those loans in a nonaccrual status. Loans are generally
placed in a nonaccrual status when they become past due ninety days or
whenever the ultimate collection of principal or interest is considered to be
in doubt. When the accrual of interest ceases, previously recognized and
uncollected interest is reversed against interest income. Payments received on
nonaccrual loans are first applied to the remaining principal balance and are
next applied to interest income.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as adjustments to the related
loans' yield. These amounts are being amortized over the contractual life of
the related loans. Upon sale of loans in the secondary market, the related
deferred fees or costs are recorded in income. Commitment fees based on a
percentage of a customer's unused line of credit and fees related to standby
letters of credit are recognized over the commitment period.
Allowance for Possible Loan Losses
The allowance for possible losses on loans is established through charges
against income and is maintained at a level considered adequate to provide for
probable loan losses based on management's evaluation of known and inherent
risks in the loan portfolio. When a loan or a portion of a loan is considered
uncollectible, it is charged-off against the allowance. Recoveries of loans
previously charged-off are credited to the allowance when received.
Management's evaluation of the allowance is based on a continuing review of
the loan portfolio which includes many factors, such as utilization of an
individual loan rating system to assess trends in asset quality; identification
and review of individual problem situations which may affect the borrower's
ability to repay; review of overall portfolio quality through analytical review
of current charge-offs, delinquency and nonperforming loan data; review of
regulatory authority examinations and evaluation of loans; an assessment of
current economic conditions; and changes in the size and character of the loan
portfolio. These reviews are dependent upon estimates, appraisals and
judgments which can change quickly because of changing economic conditions and
Management's perception as to how these factors affect the financial condition
of debtors.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114) which was amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosure." The Statements are effective for fiscal years beginning after
December 15, 1994. The Company adopted SFAS No. 114 and SFAS No. 118 on
January 1, 1995. These Statements apply to all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, or loans otherwise carried at fair value or the lower of cost or
fair value. Both Statements specifically exclude leases and other debt
securities from its valuation standards. These Statements require that loans
which are impaired (due to the inability to collect all contractual amounts
due) be measured and valued based upon (i) the present value of expected future
cash flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price, or (iii) the fair value of the collateral if the loan
is collateral dependent. Because the methods required by SFAS No. 114 and SFAS
No. 118 and those previously used by the Company to evaluate impaired loans,
the adoption of the Statements did not have a material impact on the Company's
financial statements. Interest income on impaired loans is generally
recognized in accordance with the Company's existing income recognition policy.
Management believes that the valuation allowance for impaired loans is
adequate.
Mortgages Held-For-Sale
Mortgages held-for-sale are carried at the lower of aggregate cost or fair
value.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights". This
Statement requires that a mortgage banking enterprise recognize as a separate
asset rights to service mortgage loans for others -- either through the
acquisition of those rights or from the sale or securitization of loans with
the servicing rights retained on those loans -- based on their relative market
value. To determine the fair value of the servicing rights created, the
Company uses (when available) market prices under comparable servicing sale
contracts, or alternatively uses a valuation model that calculates the present
value of future cash flows to determine the fair value of the servicing rights.
In using this valuation method, the Company incorporates assumptions that
market participants would use in estimating future net servicing income, which
includes estimates of the cost of servicing loans, the discount rate, ancillary
income, prepayment speeds and default rates.
The cost of mortgage servicing rights is amortized on a straight-line basis
which has substantially the same effect as amortizing the rights in proportion
to and over the period of the estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based upon the fair value of those
rights. Fair values are estimated using discounted cash flows based
upon a current market interest rate. For the purposes of measuring impairment,
the rights are stratified based primarily upon the interest rate risk
characteristics of the underlying loans. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value.
Other Real Estate Owned
Other real estate owned consists of properties acquired through, or in lieu
of, mortgage loan foreclosure proceedings. These properties are recorded at
the lower of the carrying value of the related loans or the estimated fair
market value less estimated selling costs. Charges to the allowance for loan
losses are the measure by which properties are reduced to fair market value
less estimated selling costs upon reclassification as other real estate owned.
Subsequent reductions in carrying value, as well as operating expenses, are
included in losses, writedowns, expenses -- other real estate owned.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," the
Company classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless of
whether formal foreclosure proceedings take place.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization computed by the straight-line method
for financial reporting and under accelerated methods for income tax purposes.
Asset lives for premises are from 15 to 30 years and for furniture and
equipment from 3 to 7 years while leasehold improvements are amortized
over the shorter of the estimated useful life or the life of the lease.
Intangibles
Intangible assets arising from the acquisitions under the purchase method
of accounting consist of goodwill. Goodwill is amortized on a straight-line
basis over a period of 14 years.
Income Taxes
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when the amounts related to such temporary differences are realized or settled.
The Company's policy is to continually evaluate the realizability of any
deferred tax assets resulting from the use of the asset and liability method.
Per Share Data
Earnings per share have been computed based on the weighted average number
of shares outstanding. Shares issuable upon the exercise of stock option
grants have not been included in the per share computation because they did not
have a significant dilutive effect.
Cash Flows
For the purpose of the statements of cash flows, the Company has defined
cash equivalents as those amounts included in cash and due from banks and
federal funds sold.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995 and introduces a fair value method of accounting for employee
stock options, restricted stock grants, stock appreciation rights or similar
equity instruments. In accordance with SFAS No. 123, entities can recognize
stock-based compensation expense in the basic financial statements using
either (i) the intrinsic value approach set forth in Accounting Principles
Board ("APB") Opinion No. 25 or (ii) the fair value method introduced in SFAS
No. 123. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosure of net income and, if presented, earnings per
share, as if the fair value based method of accounting in SFAS No. 123
had been applied. Management will continue to measure stock-based compensation
cost in accordance with APB Opinion No. 25 and accordingly has made the pro
forma disclosure requirements of SFAS No. 123 for 1996 and 1995.
NOTE 3 -- SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to Management's intent. The carrying amount of securities and
their approximate fair values at December 31 follow:
(amounts in thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale securities:
December 31, 1996
Marketable equity securities $3,689 $329 $16 $4,002
Debt securities issued by the U.S. Treasury
and other U.S. government agencies 63,315 417 273 63,459
Corporate debt securities 8,122 15 20 8,117
Mortgage-backed securities 10,311 109 40 10,380
-------- --------- --------- ---------
$85,437 $870 $349 $85,958
======== ========= ========= =========
December 31, 1995
Marketable equity securities $15,115 $93 $7 $15,201
Debt securities issued by the U.S. Treasury
and other U.S. government agencies 38,734 275 203 38,806
Corporate debt securities 9,688 8 28 9,668
Mortgage-backed securities 11,256 159 27 11,388
-------- --------- --------- ---------
$74,793 $535 $265 $75,063
======== ========= ========= =========
(amounts in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-maturity securities:
December 31, 1996
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $4,516 $64 $17 $4,563
Debt securities issued by states and
political
subdivisions of the states 2,841 64 13 2,892
-------- --------- --------- ---------
$7,357 $128 $30 $7,455
======== ========= ========= =========
December 31, 1995
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $5,501 $71 $12 $5,560
Debt securities issued by states and
political
subdivisions of the states 1,565 65 1 1,629
-------- --------- --------- ---------
$7,066 $136 $13 $7,189
======== ========= ========= =========
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-
sale securities were $49,000 and $29,000, respectively, in 1996; $38,000 and
$17,000, respectively, in 1995; and $63,000 and $63,000, respectively, in 1994.
<PAGE>
The scheduled maturities of securities held-to-maturity and securities
available-for-sale (other than equity securities) at December 31, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
(amounts in thousands) Amortized Amortized
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Debt securities other than mortgage-backed
securities:
Due within one year $8,627 $8,640 $ $
Due after one year through five years 51,788 51,838 4,227 4,269
Due after five years through ten years 11,022 11,098 2,356 2,406
Due after ten years 774 780
Mortgage-backed securities 10,311 10,380
-------- --------- ------- ---------
$81,748 $81,956 $7,357 $7,455
======== ========= ======= =========
</TABLE>
There were no securities of issuers whose aggregate carrying amount
exceeded 10% of shareholders' equity at December 31, 1996.
Securities having an amortized cost of $5,597,000 and $5,020,000 at
December 31, 1996 and 1995, respectively, were pledged to secure treasury, tax
and loan deposits, public deposits or securities sold under agreements to
repurchase.
NOTE 4 -- LOANS RECEIVABLE
(amounts in thousands)
Loans consisted of the following at December 31,
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial and financial $55,601 $39,474
Real estate:
Construction 12,250 12,841
Residential 76,970 63,025
Commercial 114,174 80,793
Consumer 30,001 26,102
------- -------
Loans outstanding $288,996 $222,235
======= =======
</TABLE>
The Company's loans receivable consists primarily of residential and
commercial real estate loans within its primary market area in Connecticut.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The Company's policy for collateral requires that, at the
time of origination, the amount of the loan may not exceed 80% of the
appraised value of the property. In cases where the loan exceeds this
percentage, private mortgage insurance is generally required for that portion
of the loan in excess of 80% of the appraised value of the property.
Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $4,446 $2,564 $2,784
Changes incident to acquisitions 2,010 1,961
Provision charged to operations 1,854 700 530
Recoveries 353 199 251
Charge-offs (3,149) (978) (1,001)
------ ------ ------
Balance, end of year $5,514 $4,446 $2,564
====== ====== ======
</TABLE>
<PAGE>
Restructured Loans
As of December 31, 1996, loans restructured in a troubled debt
restructuring before the effective date of SFAS No. 114 that are not impaired
based upon the terms specified by the restructuring agreement totaled $699,398.
The gross interest income that would have been recorded in the year ended
December 31, 1996, if such restructured loans had been current in accordance
with their original terms, was $44,896. The amount of interest income on such
restructured loans that was included in net income for the year ended December
31, 1996 was $12,061.
Impaired Loans
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
(amounts in thousand s) 1996 1995
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired for Credit In Impaired for Credit
Loans Losses Loans Losses
<S> <C> <C> <C> <C>
Loans for which there is a related allowance for credit losses $4,394 $669 $2,267 $634
Loans for which there is no related allowance for credit losses 840 869
------ ---- ------ ----
Totals $5,234 $669 $3,136 $634
====== ==== ====== ====
Average recorded investment in impaired loans during the
year ended December 31, $4,359 $870
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired:
Amount recognized (none of which is recognized using a
cash-basis method of accounting) $3 $1
</TABLE>
The Company considers residential real estate loans and consumer loans that
are not individually significant to be large groups of smaller balance
homogeneous loans. These loans are collectively evaluated for impairment.
Factors considered by Management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay
or an insignificant shortfall in payment does not in itself result in the
review of a loan for impairment. The Company applies SFAS No. 114 on a loan-
by-loan basis. The Company does not apply SFAS No. 114 to aggregations of
loans that have risk characteristics in common with other impaired loans.
Interest on a loan is not generally accrued when the loan becomes ninety
or more days past due. The Company may place a loan on nonaccrual status but
not classify it as impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the loan or
(ii) the loan is an individually insignificant residential mortgage loan or
consumer loan. Impaired loans are charged-off when Management believes
that the collectibility of the loan's principal is remote. Substantially all
of the Company's loans that have been identified as impaired have been measured
by the fair value of the existing collateral.
Related Parties
Loans to executive officers, directors, principal shareholders and their
associates of the Company aggregated $4,704,000 at December 31, 1996 as
compared to $6,971,000 at December 31, 1995. The following table summarizes
the related party loan activity for the year ended December 31, 1996:
(amounts in thousands)
Balance, beginning of year $6,971
Additions 1,105
Repayments 3,372
-----
Balance, end of year $4,704
=====
<PAGE>
Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of mortgage loans serviced for
others was $70,093,000 and $64,635,000 as of December 31, 1996 and 1995,
respectively.
Mortgage servicing rights of $186,000 were capitalized in 1996.
Amortization of mortgage servicing rights totaled $3,000 in 1996 which reduced
their value down to $183,000 as of December 31, 1996. No valuation allowance
for capitalized mortgage servicing rights was required in 1996.
NOTE 5 -- PREMISES AND EQUIPMENT
Components of properties and equipment in the consolidated balance sheets
at December 31, were as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
Cost: 1996 1995
<S> <C> <C>
Land $1,651 $1,035
Premises 7,602 5,877
Furniture and equipment 5,360 3,042
Leasehold improvements 1,274 646
------ ------
Total cost 15,887 10,600
Less accumulated depreciation and amortization (6,518) (3,640)
------ ------
Net book value $9,369 $6,960
====== ======
</TABLE>
Noncancelable Leases
The Company and its subsidiaries occupy certain premises and are provided
equipment under noncancelable leases that are accounted for as operating leases
and that have expiration dates through 2011. These leases are renewable for
either three or five-year terms at the Company's option. Certain of the leases
contain escalation clauses for additional rentals based upon increases
in local property taxes and inflationary measures. Rental expense under these
leases aggregated $486,000 in 1996, $197,000 in 1995 and $188,000 in 1994 and
is recorded in occupancy expenses.
The aggregate minimum rental commitments under all leases at December 31,
1996 are $2,775,000 as indicated below:
(amounts in thousands)
In year... ...the minimum commitment is...
1997 $470
1998 446
1999 399
2000 353
2001 245
and subsequent years, 862
-----
$2,775
=====
The Equity Bank leases its premises from one of its directors. The lease,
which has two five-year renewal options, expires in 1999.
<PAGE>
NOTE 6 -- DEPOSITS
The aggregate amounts of time deposit accounts (including CDs) with a
minimum denomination of $100,000 or more were $25,315,000 and $19,222,000 as of
December 31, 1996 and 1995, respectively. For all time deposits as of December
31, 1996, the aggregate amount of maturities for each of the following two
years ended December 31, and thereafter are:
(amounts in thousands)
1997 $135,104
1998 14,684
1999, and thereafter 16,374
-------
$166,162
=======
NOTE 7 -- SHORT-TERM BORROWINGS
Short-term borrowings consisted of treasury, tax and loan deposits
generally repaid within one to 120 days from the transaction date and
securities sold under agreements to repurchase. Short-term borrowings
consisted of the following as of December 31:
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Treasury, tax and loan deposits $1,871 $540
Securities sold under agreements to repurchase 132
------- -----
Total $2,003 $540
======= =====
</TABLE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
(amounts in thousands)
1996
Average balance during the year $185
Maximum month-end balance during the year 293
Average interest rate during the year 3.47%
US Treasury obligation underlying the agreements at year-end:
Carrying value and estimated fair value $498
The underlying security was under the control of the Company as of December
31, 1996.
NOTE 8 -- EMPLOYEE BENEFITS
Stock Compensation
During 1993, the Board of Directors of the Company voted to grant stock
options to two executive officers to purchase 34,000 shares of common stock at
$5.00 per share. These options were exercised in 1996. In January 1995, the
Board of Directors of the Company voted to grant stock options to three
executive officers to purchase 30,000 shares of common stock at $7.75 per share
after January 24, 1996 and prior to January 24, 1998. On January 31, 1996, the
Board of Directors formed an Executive Compensation Committee (the "Committee")
to administer the 1996 Incentive and Nonqualified Compensatory Stock Option
Plan (the "1996 Plan"), which is described below. The Committee and the 1996
Plan were approved by shareholders on May 21, 1996.
Under the 1996 Plan, the Committee may grant either Incentive Stock Options
or Non-Statutory Stock Options to key managerial employees to purchase shares
of common stock of the Company. The 1996 Plan expires on January 31, 2006.
The aggregate number of shares which may be optioned is 750,000 shares of the
Company's common stock. The option price is fixed by the Committee at the time
of the grant and may not be less than 100 percent of the fair market value of
the stock, as determined by the Committee, in good faith as of the grant date.
Each option may be first exercised in five equal annual installments
commencing from the date set forth in the Stock Option Agreement for such
options; provided, however, that no option be exercised beyond ten years after
the date of the grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes Option Pricing Model with the following weighted-average
assumptions used for grants in 1996 and 1995:
Dividend yield 2.1 percent for both years
Expected volatility 25 percent for both years
Risk-free interest rate 5.17 percent in 1996 and 7.43 percent in 1995
Expected lives 8 years for the 1996 options granted and
3 years for the 1995 options granted
A summary of the status of all the Company's stock options as of December
31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995
Weighted-Average Weighted-Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 64,000 $6.29 34,000 $5.00
Granted 140,000 10.25 30,000 7.75
Exercised (34,000) 5.00 0
Forfeited 0 0
-------- -------
Outstanding, end of year 170,000 9.81 64,000 6.29
======== =======
Options exercisable at year-end 30,000 34,000
Weighted-average fair value of options
granted during the year $3.18 $1.76
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
Number Weighted- Number
Outstanding Average Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price as of 12/31/96 Contractual Life Exercisable Price as of 12/31/96 Exercise Price
<S> <C> <C> <C> <C> <C>
$7.75 30,000 1 year $7.75 30,000 $7.75
10.25 140,000 9 years 10.25 0
------- ------
170,000 7.6 years 9.81 30,000 7.75
======= ======
</TABLE>
As indicated in Note 2, the Company applies APB Opinion No. 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
expense has been recognized for the fixed stock options granted. Had
compensation expense been determined based on the fair value at the grant dates
for awards consistent with the method of SFAS No. 123 (also discussed in
Note 2), the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net income (in thousands) As reported .................... $4,262 $1,980
Pro forma .................... 4,200 1,970
Net income per share As reported .................... $1.26 $0.91
Pro forma .................... 1.24 0.91
</TABLE>
During 1996, the Company converted its defined contribution plan into a
401(k) plan (the "Plan"). Employees over the age of 21 and with one year of
service are eligible to participate in the Plan. To encourage systematic
savings by employees, the Company matches employee contributions to the Plan on
the following basis: 100% of the first 3% of employee contributions and 50% of
the next 2%. Both employee and Company matches immediately vest in the Plan.
Additionally, funds which were previously not vested in the defined
contribution plan vested with the transfer into the Plan. Expense for both the
401(k) as well as the defined contribution plan amounted to approximately
$160,000, $227,000 and $86,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 9 -- INCOME TAXES
The components of income tax provision are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
Years ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $1,240 $706 $112
State 433 270 45
1,673 976 157
Deferred:
Federal 499 145 387
State 164 50 157
------- ----- ----
663 195 544
------- ----- ----
Change in valuation allowance (360) (186) (36)
------- ----- ----
Total income tax provision $1,976 $985 $665
======= ===== ====
</TABLE>
The following reconciles the income tax provision from the statutory rate
to the amount reported in the consolidated statements of income:
(amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (.7) (.6) (.8)
Dividends received deduction (1.4) (1.7) (.8)
Exercise of non-qualified stock options (1.3)
Alternative minimum tax (.7)
Unallowable expenses .6 .7 .4
Change in valuation allowance (5.8) (6.3) (2.0)
State tax, net of federal tax benefit 6.3 7.1 7.5
----- ---- ----
31.7% 33.2% 37.6%
===== ==== ====
</TABLE>
The major components of deferred income tax expense attributable to income
are as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Purchase accounting $8 $ $
Other real estate valuation 45 118 131
Contribution carryover 5 3
Fair value of loans available-for-sale (14)
Accrued expenses 104 (104)
Other temporary differences 43 5 43
Alternative minimum tax credit (12)
Operating loss carryover-state 4
Deferred loan fees 60 35 37
Provision for loan losses 400 97 380
Accelerated depreciation 29 9 12
Accrued interest nonperforming loans (26) 30 (40)
---- ----- ----
$663 $195 $544
</TABLE>
At December 31, the Company had gross deferred tax assets and gross
deferred tax liabilities as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Accrued interest on nonperforming loans $145 $118
Accrued deferred compensation 63 63
Accrued expenses 103
Allowance for loan losses 821 1,221
Loan origination fees 182 242
Depreciation 59 88
Other real estate owned valuation 339 384
------ ------
Gross deferred tax asset 1,609 2,219
Valuation allowance (324) (684)
------ ------
1,285 1,535
------ ------
Deferred tax liabilities:
Purchase accounting (261) (253)
Other adjustments (76) (31)
Net unrealized holding gain on available-for-sale securities (221) (112)
------ ------
Gross deferred tax liability (558) (396)
------ ------
Net deferred tax asset $727 $1,139
====== ======
</TABLE>
NOTE 10 -- CONDENSED FINANCIAL INFORMATION OF NEW ENGLAND COMMUNITY BANCORP,
INC.
The condensed balance sheets of New England Community Bancorp, Inc. (parent
company only) as of December 31, 1996 and 1995 and statements of income and
cash flows for each of the three years in the period ended December 31, 1996
follow:
(amounts in thousands)
Balance Sheets
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Assets:
Investment in bank subsidiaries, at equity in net assets $39,884 $25,855
Investments 548 4,951
Cash 284 58
Other assets 12 147
------- ------- -------
Total Assets $40,728 $31,011
======= ======= =======
Other liabilities $317 $531
Shareholders' equity 40,411 30,480
------- ------- -------
Total Liabilities & Shareholders' Equity $40,728 $31,011
======= ======= =======
Statements of Income
1996 1995 1994
Equity in undistributed net income of bank subsidiaries $3,830 $2,027 $1,097
Net interest and dividend income 591 293 16
Securities gains, net 1
Income tax benefit (expense) 177 33 (4)
Other expense (337) (373) (6)
------- ------- -------
Net income $4,262 $1,980 $1,103
======= ======= =======
</TABLE>
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net income $4,262 $1,980 $1,103
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Equity in undistributed net income of bank subsidiaries (3,830) (2,027) (1,097)
Securities gains, net (1)
Net change in other liabilities (297) 355
Net change in other assets 59 (72)
(Decrease) increase in taxes payable (70) (101) 4
------- ------- -------
Net cash provided by operating activities 123 135 10
------- ------- -------
Investing activities:
Purchases of securities (98) (235) (5,500)
Cost of acquisitions (277) (396)
Sales of securities 4,650 850
Cash paid to shareholders of Manchester State Bank (3,520)
Other (5) (3)
------- ------- -------
Net cash provided by (used for) investing activities 750 216 (5,500)
------- ------- -------
Financing activities:
Net proceeds from issuance of common stock 170 5,571
Dividends paid (817) (415)
------- ------- -------
Net cash provided by (used for) financing activities (647) (415) 5,571
------- ------- -------
Increase (decrease) in cash 226 (64) 81
Cash, beginning of year 58 122 41
------- ------- -------
Cash, end of year $284 $58 $122
======= ======= =======
</TABLE>
NOTE 11 -- FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance-sheet risk
to satisfy the financing needs of its borrowers. These financial instruments
include commitments to extend credit, standby letters of credit and financial
guarantees. The Company does not anticipate any material losses as a result of
these transactions.
Commitments to extend credit are agreements to lend to a borrower as long
as there is not a 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 commitments do not necessarily
represent future cash requirements. The Company evaluates each borrower's
creditworthiness on a case-by-case basis using the same credit policies as for
on-balance-sheet financial instruments. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on Management's credit
evaluation of the counterparty. Collateral held varies but may include real
estate, accounts receivable, inventory, property, plant and equipment and
income-producing property.
Standby letters of credit and financial guarantees are conditional
commitments issued by the Company's subsidiaries to guarantee the performance
of a borrower to a third party. The evaluations of creditworthiness,
consideration of need for collateral and credit risk involved in issuing
letters of credit are essentially the same as that involved in extending loans
to borrowers.
Of the total standby letters of credit outstanding at December 31, 1996,
$407,000 are secured by deposit accounts held with the Company's subsidiaries.
<PAGE>
Disclosures of Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of
estimated fair values of financial instruments. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that conveys or imposes the contractual right or obligation to receive or
deliver cash or another financial instrument. Fair value is defined as the
amount at which a financial instrument can be exchanged in a current exchange
between willing parties, other than in a forced sale or liquidation, and is
best evidenced by a quoted market price, if one exists.
The Company has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair value
is based on estimates using the present value of expected future cash flows and
certain other techniques. These techniques are based on certain assumptions
which are subjective and judgmental in nature. Accordingly, the results may
not be substantiated by comparison with independent market prices and, in some
cases, cannot be realized in immediate settlement of the financial instrument.
Furthermore, SFAS No. 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the fair
values disclosed should not be interpreted as the aggregate current fair market
value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Financial Instrument Methods and Assumptions
Cash and cash equivalents The carrying amounts reported in the balance sheet
for cash and due from banks and federal funds sold
approximate fair value.
Securities The fair value of securities are based on prices
obtained through brokers and independent pricing
services.
Loans The fair value of loans was estimated for groups of
similar loans based on the type of loan, interest
rate characteristics and maturity. The fair value of
performing commercial, commercial real estate,
installment loans and residential mortgage loans was
estimated by discounting expected future cash flows
using interest rates currently being offered for
loans with similar terms to borrowers of similar
credit quality. The fair value of nonaccruing loans
was estimated by determining expected future
principal cash flows, adjusted for credit risk.
Deposits The fair value of demand deposits, savings, money
market and NOW deposits and certificates of deposits
having variable interest rates approximate their
carrying value. The fair value of certificates of
deposits with fixed maturities and interest rates was
estimated by discounting expected future cash flows
utilizing interest rates currently being offered on
deposits with similar characteristics and maturities.
Short-term borrowings The carrying amounts reported for short-term
borrowings approximate fair value.
<PAGE>
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, were as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
(amounts in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $31,304 $31,304 $23,625 $23,625
Securities available-for-sale 85,958 85,958 75,063 75,063
Securities held-to-maturity 7,357 7,455 7,066 7,189
Federal Home Loan Bank stock 1,753 1,753 1,176 1,176
Loans 283,482 283,048 217,789 218,516
Accrued interest receivable 3,206 3,206 2,538 2,538
Interest-bearing time deposits with other
banks 3,000 3,000
Mortgages held-for-sale 1,755 1,755 788 788
Financial liabilities:
Deposits 386,897 388,064 307,161 308,164
Short-term borrowings 2,003 2,003 540 540
</TABLE>
The carrying amounts of financial instruments in the above table are
included in the consolidated balance sheets under the individual captions.
Off-balance-sheet liabilities:
(amounts in thousands)
1996 1995
Notional Notional
Amount Amount
------- -------
Commitments to extend credit $38,292 $44,753
Standby letters of credit and financial guarantees 1,841 1,715
There is no material difference between the notional amount and the
estimated fair value of loan commitments and unadvanced portions of loans. The
fair value of letters of credit approximates the notional value.
NOTE 12 -- DISCLOSURE FOR STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Supplemental disclosure of cash paid during the period for: 1996 1995 1994
<S> <C> <C> <C>
Income tax paid $2,052 $797 $344
Interest paid 10,812 5,678 3,974
Supplemental disclosure of noncash investing and financing activities:
Loans charged off, net of recoveries 2,796 779 750
Real estate acquired through foreclosure 1,882 796 743
Loans originated to facilitate sales of other real estate owned 183 564
Assets acquired and liabilities assumed in business combinations
were as follows:
Fair value of assets acquired, excluding cash and cash equivalents 77,063 111,242
Cash and cash equivalents acquired 14,236 7,790
------ -------
91,299 119,032
Liabilities assumed 84,989 109,525
------ -------
Value of Company common stock issued for the acquisitions 6,310 9,507
</TABLE>
<PAGE>
NOTE 13 -- ACQUISITIONS
On November 30, 1995, the Company acquired The Equity Bank by issuing
1,003,617 shares of the Company's common stock in exchange for all of the
outstanding common shares (less 69,486 shares not exchanged by dissenting
shareholders) of The Equity Bank. The value of the Company's shares of common
stock issued to effect the acquisition and the direct costs of the acquisition
was $9,507,000. On July 11, 1996, the Company acquired Manchester State Bank
by issuing 549,300 shares of the Company's common stock and paying $3,525,000
in cash for all of the outstanding common shares of Manchester State Bank.
The value of the Company's shares of common stock issued to effect the
acquisition and direct costs of the acquisition was $6,834,000.
The acquisitions were accounted for as purchases, and thus the results of
operations for both entities are only included in the consolidated financial
statements since the date of the respective transactions. Goodwill reflected
by purchase accounting amounted to $840,000 and $3,752,000 for The Equity Bank
and Manchester State Bank, respectively, and in both cases is being amortized
over fourteen (14) years. During 1996, the amount due to dissenting
shareholders of The Equity Bank was increased to $1,639,000, from $1,221,000,
and is reflected in other liabilities in the consolidated balance sheet of the
Company as of December 31, 1996. Subsequently, in January 1997, the Company
and the dissenting shareholders settled at the amount the Company had reserved.
The following summary, prepared on an unaudited pro forma basis,
approximates the consolidated results of operations as if The Equity Bank and
Manchester State Bank had been acquired as of the beginning of 1995 and 1996,
respectively, and includes purchase accounting adjustments.
<TABLE>
<CAPTION>
(amounts in thousands)
1996 1995
<S> <C> <C>
Net interest income after provision for loan losses $18,371 $18,840
Noninterest income 2,624 2,389
------- -------
Total 20,995 21,229
Noninterest expense 14,315 15,795
------- -------
Income before income taxes 6,680 5,434
Income taxes 2,172 2,123
------- -------
Pro forma net income $4,508 $3,311
======= =======
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
In an agreement dated February 20, 1997, the Company and First Bank of West
Hartford ("First Bank") agreed to consummate a business combination transaction
in which First Bank will merge with and into New England Bank. The agreement
is subject to the approval of regulators and the shareholders of both the
Company and First Bank.
NOTE 14 -- REGULATORY MATTERS
Restrictions on Dividends
The Company's principal assets are its investments in its bank
subsidiaries. As such, the Company's ability to pay dividends to its
shareholders is largely dependent on the ability of the Banks to pay dividends
to the Company. The declaration of cash dividends is dependent on a number of
factors, including regulatory limitations, and the Banks' operating results and
financial conditions. The Shareholders of the Company will be entitled to
dividends only when, and if, declared by the Company's Board of Directors out
of funds legally available therefore. The declaration of future dividends will
be subject to favorable operating results, financial conditions, tax
considerations and other factors. The Federal Deposit Insurance Corporation
regulations require banks to maintain certain capital ratios as noted below
which may otherwise restrict the ability of the Banks to pay dividends to
the Company.
<PAGE>
Minimum Capital Requirements
The Company and its subsidiary Banks 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 discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks 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. Their capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December
31, 1996, that the Company and the Banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the framework for prompt corrective action. To be categorized as well
capitalized Banks 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 Banks'
categories. The actual capital amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
To be Well
(amounts in thousands) Actual Adequacy Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Risk-Based Total Capital:
Consolidated $39,304 13.5% $23,369 >=8.0% N/A
New England Bank 27,405 13.1 16,774 8.0 $20,968 >=10.0%
The Equity Bank 11,529 13.8 6,671 8.0 8,340 10.0
Risk-Based Tier 1 Capital:
Consolidated 35,630 12.2 11,685 4.0 N/A
New England Bank 24,770 11.8 8,387 4.0 12,581 6.0
The Equity Bank 10,478 12.6 3,336 4.0 5,003 6.0
Leverage:
Consolidated 35,630 8.5 16,818 4.0 N/A
New England Bank 24,770 8.1 12,307 4.0 15,383 5.0
The Equity Bank 10,478 9.3 4,523 4.0 5,654 5.0
</TABLE>
Under Federal Reserve regulation, the Company's subsidiaries are limited as
to the amount they may lend or advance to the Company, unless such loans and
advances are collateralized by specific obligations. No advances were made to
the Company by either subsidiary at December 31, 1996 or 1995.
NOTE 15 -- RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent
with the current year's statement presentation.
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
Quarterly Summarized Financial Information (Unaudited)
<TABLE>
<CAPTION>
By Quarter 1996 1995
(Amounts in thousands,
except per share) 1 2 3 4 Year 1 2 3 4 Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $6,641 $6,337 $7,797 $8,053 $28,828 $3,685 $3,750 $3,848 $5,017 $16,300
Interest Expense 2,405 2,334 2,837 2,837 10,413 1,145 1,328 1,407 1,856 5,736
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
Net Interest Income 4,236 4,003 4,960 5,216 18,415 2,540 2,422 2,441 3,161 10,564
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
Provision for loan losses 532 502 446 374 1,854 130 150 120 300 700
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
Net interest income after
provision for loan losses 3,704 3,501 4,514 4,842 16,561 2,410 2,272 2,321 2,861 9,864
Noninterest income 440 666 624 648 2,378 346 454 470 422 1,692
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
4,144 4,167 5,138 5,490 18,939 2,756 2,726 2,791 3,283 11,556
Noninterest expense 2,787 2,780 3,516 3,618 12,701 2,075 2,002 2,001 2,513 8,591
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
Income before income taxes 1,357 1,387 1,622 1,872 6,238 681 724 790 770 2,965
Income taxes 434 444 445 653 1,976 242 256 275 212 985
------ ------ ------ ------ ------- ------ ------ ----- ------ ------
Net income $923 $943 $1,177 $1,219 $4,262 $439 $468 $515 $558 $1,980
====== ====== ====== ====== ======= ====== ====== ===== ====== ======
Earnings per share $0.30 $0.31 $0.32 $0.33 $1.26 $0.21 $0.23 $0.24 $0.23 $0.91
====== ====== ====== ====== ======= ====== ====== ===== ====== ======
<PAGE>
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 and 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, in Windsor, Connecticut
on March 27, 1997.
NEW ENGLAND COMMUNITY BANCORP, INC.
By /s/ Anson C. Hall
Anson C. Hall
Vice President, Chief Financial Officer
By /s/ David A. Lentini
David A. Lentini
President and Chief Executive Officer
<PAGE>
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 on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Dominic J. Ferraina Chairman and March 27, 1997
(Dominic J. Ferraina) Director
/s/ David A. Lentini President and March 27, 1997
(David A. Lentini) Chief Executive Officer
Director
/s/ Tadeus J. Buczkowski Director March 27, 1997
(Tadeus J. Buczkowski)
/s/ John C. Carmon Director March 27, 1997
(John C. Carmon)
/s/ Gary J. DeNino Director March 27, 1997
(Gary J. DeNino)
/s/ Frank A. Falvo Director March 27, 1997
(Frank A. Falvo)
/s/ Charles D. Gersten Director March 27, 1997
(Charles D. Gersten)
/s/ John R. Harvey Director March 27, 1997
(John R. Harvey)
/s/ Angelina J. McGillivray Director March 27, 1997
(Angelina J. McGillivray)
/s/ Edward J. Szewczyk Director March 27, 1997
(Edward J. Szewczyk)
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit # Description
Page
10-f Employment Agreement of by and between New England
Community Bancorp, Inc. and Frank A. Falvo
21 List of Subsidiaries
27 Financial Data Schedule
<PAGE>
EXHIBIT 10-f
Agreement effective August 1, 1996, by and between NEW ENGLAND COMMUNITY
BANCORP, INC., a Corporation organized and existing under the laws of the State
of Delaware with its principal office in Windsor, Connecticut (hereinafter the
"Company") and FRANK A. FALVO of Wethersfield, Connecticut (hereinafter
"Employee").
1. Employment. The Company agrees to employ Employee and Employee
agrees to be so employed, in the capacity of Executive Vice President of the
Company; and President and Chief Executive Officer of the Company's Equity Bank
subsidiary.
2. Term. New England Community Bancorp, Inc. hereby employs
Employee, and Employee hereby accepts employment with the Company, all in
accordance with the terms and conditions hereof, for a term commencing on
August 1, 1996 (the "Commencement Date"), and continuing for a period of two
years (the "Employment Period"), unless extended or sooner terminated as herein
provided.
Prior to the end of the first year of the Employment Period, and prior
to each subsequent anniversary of the Commencement Date, either party may give
the other written notice of their intention not to renew or extend the
Employment Agreement. If no such notice is given, the Employment Period will
be extended for an additional year without further action and the dates
contained herein will be automatically adjusted accordingly. If such notice is
given by either party, this Employment Agreement shall terminate one year
later, on the anniversary of the Commencement Date next following the
Commencement Date anniversary with respect to which such notice was given. In
the event that the Company is acquired, this contract would expire 12 months
after the closing date of said acquisition.
3. Time and Efforts. Employee shall diligently and conscientiously
devote his full and exclusive time and attention and best efforts in
discharging his duties as the Company's Executive Vice President. Employee
shall serve as the President and Chief Executive Officer of The Equity Bank
("Equity"), a subsidiary of the Company and upon request of the Company's
President or Board of Directors an Employer shall serve as an officer such
other subsidiaries of either the Company or Equity without additional
compensation as to which Employee may be
elected or appointed after the date hereof.
4. Compensation.
(a) Salary. The Company shall pay to Employee as
compensation for his services, an annual salary of One Hundred Fifty Thousand
Dollars ($150,000), through December 31, 1996, and thereafter, the Company
shall pay to Employee as compensation for his services an annual salary of One
Hundred Sixty-Five Thousand Dollars ($165,000) beginning January 1, 1997,
payable in equal bi-weekly installments ("Base Salary").
(b) Automobile. The Company recognizes the Employee's need
for an automobile for business purposes and therefore shall provide the
Employee with an automobile, including all related maintenance, repairs,
insurance, taxes, fuel and other similar automobile related costs.
(c) Life, Health and Disability Insurance. The Company shall provide
Employee with coverage for life insurance, health insurance, short-term
disability, accidental death and dismemberment as provided in the Company's
standard plan for the same as adopted from time to time. The Company will also
provide a supplemental long-term disability policy.
(d) Pension Plan. The Employee is eligible to participate in
the Company's 401(k)/Pension Plan and the Company shall make contributions to
such plan in Employee's behalf as provided in the terms of said plan.
(e) Salary Increase. Each December, the Chief Executive
Officer together with the Compensation Committee of the Board of the Company
will review the Employee's Base Salary and at the option of the Board of
Directors may increase the Base Salary of the Employee.
(f) Country Club. The Company shall provide Employee with a
country club membership at the Wethersfield Country Club, at a cost not to
exceed five thousand dollars per year.
(g) Incentive Bonus. The Company, at the option of the
Board of Directors and at the Board's total discretion as to amount and time of
payment, may pay Employee, an incentive bonus.
5. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
interpreted according to the laws of the State of Connecticut.
(b) Successors and Assigns. This Agreement shall not be
assignable but shall be binding upon and inure to the benefit of the parties
hereto and any successors in interest to the Company.
(c) Severability. In the event that any provision hereof
shall be declared invalid or unenforceable by any court, such invalidity shall
not affect the validity or enforceability of the remainder of this Agreement.
(d) Non-Compete. The Employee agrees that if he resigns from
the Company's employ, he will not compete within a 15 mile radius of the main
office of either the Company or Equity for a period of one year.
(e) Dismissal. The Employee agrees that no compensation
would be due him if a regulatory agency requires his dismissal or if he is
removed for cause or if he is involved in any illegal act which causes
monetary harm to the Company.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement,
effective August 1, 1996 and executed same on the date(s) set forth below.
EMPLOYEE
By /s/ Frank A. Falvo 12/6/96
-------------------------------------
Frank A. Falvo Date
NEW ENGLAND COMMUNITY BANCORP, INC.
By /s/ Dominic J. Ferraina 12/6/96
-------------------------------------
Dominic J. Ferraina Date
Its Chairman
Duly Authorize
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF NEW ENGLAND COMMUNITY BANCORP, INC.
<TABLE>
<CAPTION>
Percent
Owned By
New England
Incorporated In Community
Subsidiary The State of: Bancorp, Inc.
<S> <C> <C>
New England Bank and Trust Company Connecticut 100%
The Equity Bank Connecticut 100%
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
EXHIBIT 27.
NEW ENGLAND COMMUNITY BANCORP
FINANCIAL DATA SCHEDULE
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,629
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 93,315
<INVESTMENTS-MARKET> 93,413
<LOANS> 288,996
<ALLOWANCE> 5,514
<TOTAL-ASSETS> 433,159
<DEPOSITS> 386,897
<SHORT-TERM> 2,003
<LIABILITIES-OTHER> 3,848
<LONG-TERM> 0
0
0
<COMMON> 367
<OTHER-SE> 40,044
<TOTAL-LIABILITIES-AND-EQUITY> 40,411
<INTEREST-LOAN> 23,229
<INTEREST-INVEST> 5,245
<INTEREST-OTHER> 354
<INTEREST-TOTAL> 28,828
<INTEREST-DEPOSIT> 10,320
<INTEREST-EXPENSE> 10,413
<INTEREST-INCOME-NET> 18,415
<LOAN-LOSSES> 1,854
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 12,701
<INCOME-PRETAX> 6,238
<INCOME-PRE-EXTRAORDINARY> 6,238
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,262
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 5.34
<LOANS-NON> 5,759
<LOANS-PAST> 395
<LOANS-TROUBLED> 699
<LOANS-PROBLEM> 15,635
<ALLOWANCE-OPEN> 4,446
<CHARGE-OFFS> 3,149
<RECOVERIES> 353
<ALLOWANCE-CLOSE> 5,514
<ALLOWANCE-DOMESTIC> 5,514
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
