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, 1998
/ / 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) 610-3600
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, 1999, the aggregate market value of the shares outstanding of
Common Stock held by non-affiliates of the Registrant, was $129,143,646 The
number of shares outstanding of the Registrant's Common Stock, $.10 par value,
was 7,031,054 at March 24, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
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Part Into
DOCUMENT WHICH INCORPORATED
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The information contained in the Registrant's definitive proxy statement (which
is expected to be filed within 120 days of fiscal year-end 1998 and to be used
in connection with the Annual Meeting of Shareholders which is anticipated to be
held on April 20, 1999) 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 definitive proxy
statement pursuant to Items 402(k) and 402(l) of Regulation S-K is not
incorporated by reference and is not to be deemed part of this report. Part III
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TABLE OF CONTENTS
Part I
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Item 1 Business.....................................................................................
Item 2 Properties...................................................................................
Item 3 Legal Proceedings............................................................................
Item 4 Submission of Matters to a Vote of Security Holders..........................................
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters..................................................................
Item 6 Selected Financial Data......................................................................
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................
Item 7A Quantitative and Qualitative Disclosure about Market Risk....................................
Item 8 Financial Statements and Supplementary Data..................................................
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................
Part III
Item 10 Directors and Executive Officers of the Registrant...........................................
Item 11 Executive Compensation.......................................................................
Item 12 Security Ownership of Certain Beneficial Owners
and Management...............................................................................
Item 13 Certain Relationships and Related Transactions...............................................
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..........................................................................
Signatures
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New England Community Bancorp, Inc.
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 1998
PART I
ITEM 1. BUSINESS
General
New England Community Bancorp, Inc. ("NECB" or the "Company"), is a
multi-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 New England Bank & Trust Company ("NEBT"), The Equity Bank
("EQBK") and Community Bank ("CMBK") (collectively the "Subsidiaries"), each
Connecticut chartered commercial banks. NECB also owns Olde Port Bank and Trust
("OPBT"), a New Hampshire chartered commercial bank.
Recent Growth of NECB
NECB has built its community banking network through both internal
growth and acquisitions. In 1985, NECB was formed by 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 July, 1996 and August, 1997,
respectively, the Company acquired all the outstanding common stock of
Manchester State Bank ("MSB") and First Bank of West Hartford ("FBWH"), both of
which were merged with and into NEBT. On December 31, 1997, NECB acquired CMBK.
The acquisitions of EQBK, MSB and CMBK were accounted for as purchases
and, as such, prior year comparative data was not revised to include information
for these entities. Conversely, the acquisition of FBWH was accounted for as a
"pooling of interests" and therefore all comparative prior periods have been
restated as if the acquisition had been in effect for all periods presented.
In the third quarter 1998, NECB completed the acquisition of OPBT and
Bank of South Windsor ("BSW") of South Windsor, Connecticut. OPBT operates as
NECB's fourth community bank, and BSW was merged with NEBT. The acquisitions of
OPBT and BSW were accounted for as a "pooling of interests" and therefore all
comparative prior periods have been restated as if the acquisitions had been in
effect for all periods presented.
Management of NECB is continuously exploring various opportunities to
prudently expand NECB's earning potential through expansion of its base of
earning assets by the establishment or acquisition of banking and non-banking
operations. However, there can be no assurance that the Company will be able to
acquire such business enterprises or, if additional acquisitions are undertaken,
that these acquisitions will enhance the profitability of the Company.
Regulation and Supervision
As Connecticut-chartered commercial banks, the deposits of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), the
Subsidiaries are subject to extensive regulation and supervision by the
Connecticut Banking Commissioner or the New Hampshire Banking Commissioner and
the FDIC. The Company also is subject to certain regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and the
Connecticut Banking Commissioner. This governmental regulation is intended
primarily to protect depositors and the FDIC's Bank Insurance Fund, not
stockholders.
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Connecticut Regulation
The Connecticut Banking Commissioner regulates the Subsidiaries'
internal organization as well as their deposit, lending and investment
activities. The approval of the Connecticut Banking Commissioner is required,
among other things, for the establishment of branch offices and business
combination transactions. The Connecticut Banking Commissioner conducts periodic
examinations of the Subsidiaries. Many of the areas regulated by the Connecticut
Banking Commissioner are subject to similar regulation by the FDIC.
Connecticut banking laws grant banks broad lending authority - subject
to certain limited exceptions. Total secured and unsecured loans made to any one
obligor pursuant to this statutory authority may not exceed 15% of the
Subsidiary's respective capital, surplus, undivided profits and loss reserves.
The Subsidiaries are prohibited by Connecticut banking law from paying
dividends except from their net profits, which are defined as the remainder of
all earnings from current operations. The total of all dividends declared by
each of the respective Subsidiaries in any calendar year may not, unless
specifically approved by the Connecticut Banking Commissioner, exceed the total
of its net profits for that year combined with its retained net profits of the
preceding two years. These dividend limitations can affect the amount of
dividends payable to stockholders of the Company because dividends received by
the Company from the Subsidiaries are the primary source of funds for the
Company.
Under Connecticut banking law, no person may acquire the beneficial
ownership of more than 10% of any class of voting securities of a bank chartered
by the State of Connecticut or having its principal office in Connecticut or a
bank holding company thereof, or after obtaining 10%, increase its ownership to
25% or more, without the prior notification of and lack of disapproval by the
Connecticut Banking Commissioner.
Any state-chartered bank meeting statutory requirements may, with the
approval of the Connecticut Banking Commissioner, establish and operate branches
in any town or towns within the state.
The Connecticut Interstate Banking Act permits Connecticut banks to
engage in stock acquisitions of, and mergers with, depository institutions in
other states with reciprocal legislation. All of the other New England states,
and a majority of the other states, have enacted reciprocal legislation. Federal
interstate banking legislation extended this interstate bank holding company
acquisition authority nationwide as of September 1995. Several interstate
mergers and acquisitions involving Connecticut bank holding companies or banks
with offices in the Subsidiaries' service areas and bank holding companies or
banks headquartered in other states have been completed.
New Hampshire Regulation
As a New Hampshire state-chartered trust company, Olde Port is subject
to supervision, regulation and examination by the New Hampshire Bank
Commissioner. This regulation includes, among other things, various reporting
requirements and regulations relating to loans, deposits, investments, services,
and permissible activities.
The establishment of branches and certain bank combination transactions
are subject to prior approval by the New Hampshire Board of Trust Company
Incorporation ("NHBTCI"). New Hampshire law generally prohibits direct or
indirect acquisitions of banks or bank branches in New Hampshire if, after
giving effect to any such transaction, the acquiring entity and its affiliates
would control more than 20% of the total banking deposits in New Hampshire. This
restriction may be waived by the NNBTCI in certain circumstances.
Olde Port is prohibited under New Hampshire law from declaring dividends
except from earnings remaining after deductions for expenses, losses and certain
nonperforming loans. Dividends may also be restricted based on considerations of
safety and soundness.
FDIC Regulation
The Subsidiaries' deposit accounts are insured by the Bank Insurance
Fund of the FDIC to a maximum of $100,000 for each insured depositor. As with
all state-chartered FDIC-insured banks, the Subsidiaries are subject to
extensive supervision and examination by the FDIC and also are subject to FDIC
regulations regarding many aspects of their business, including types of deposit
instruments offered and permissible methods for acquisition of funds.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was adopted. It 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 risk of
non-traditional activities. Pursuant to FDICIA, in September 1992, the FDIC
implemented a system of risk-related deposit insurance assessments. Initially
under the new system, beginning January 1, 1993, insurance premiums for all
banks varied between .23% and .31% of total deposits, depending upon the capital
level and supervisory rating of the institution. On May 31, 1995, when the
desired Bank Insurance Fund ("BIF") reserve ratio of 1.25% was achieved by the
FDIC, a new risk-based assessment rate schedule of .04% to .31% of total
deposits was established commencing on June 1, 1995. The FDIC evaluates the
adequacy of the assessment schedule and may adjust the schedule every six
months, as the FDIC deems necessary to maintain the BIF reserve ratio at the
designated level. Effective January 1, 1996, the schedule was further revised
resulting in assessment rates ranging from .000% to .270% of total deposits,
subject to the statutory requirement that all institutions pay at least $2,000
annually for FDIC insurance.
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As a result of the Deposit Insurance Act of 1996, a new Financing
Corporation ("FICO") Payment Computation was established. Beginning January 1,
1997, and for the three following years, BIF-assessable deposits are being
charged 20% of the rate imposed on Savings Association Insurance Fund-assessable
deposits. The FICO BIF annual rate for 1998 was 5.07%.
The risk-based insurance assessment has not had a material effect on
the financial position of the Company. Both NEBT and EQBK qualify for the lowest
assessment rate.
FDIC risk-based capital requirements became fully effective at the end
of 1992. Under these requirements, all FDIC-insured banks are required to
maintain minimum levels of "capital" based upon an institution's total
"risk-weighted assets." For purposes of these requirements, "capital" is
comprised of both Tier 1 capital and Tier 2 capital. Tier 1 capital consists
primarily of common stock and limited amounts of perpetual preferred stock. Tier
2 capital consists of the allowance for loan losses (subject to certain
limitations), certain preferred stock, subordinated debt and convertible
securities. In determining total capital, the amount of Tier 2 capital may not
exceed the amount of Tier 1 capital. A bank's total "risk-weighted assets" are
determined by assigning the bank's assets and off-balance sheet items (e.g.,
letters of credit) to one of four risk categories based upon their relative
credit risk. Under the regulations, the greater the risk associated with an
asset, the greater the amount of such asset that will be subject to the capital
requirements. All FDIC-insured banks are required to maintain minimum ratios of
Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
At December 31, 1998, NEBT's Tier 1 and total risk-based capital ratios were
11.4% and 12.7%, respectively, compared to 11.3% and 12.6% at December 31, 1997.
EQBK's Tier 1 and total risk-based capital ratios were 12.1% and 13.3%,
respectively, at December 31, 1998 compared to 11.1% and 12.4% at December 31,
1997. At December 31, 1998, CMBK's Tier 1 and total risk-based capital ratios
were 14.9% and 16.2%, respectively, compared to 9.1% and 10.4% at December 31,
1997. At December 31, 1998, OPBT's Tier 1 and total risk-based capital ratios
were 13.0% and 14.2%, respectively, compared to 14.0% and 15.3% at December 31,
1997. Management believes that the Subsidiaries will remain in full compliance
with applicable capital requirements.
A leverage ratio requirement adopted by the FDIC became effective in
1991. Under this requirement, all FDIC-insured institutions are required to
maintain a ratio of common equity, excluding intangible assets, to total assets
of at least 3.0% for the most highly rated institutions and 4.0% to 5.0% for
most institutions. As of December 31, 1998, NEBT's leverage capital ratio was
7.5%, compared to 8.0% as of December 31, 1997; EQBK's leverage capital ratio as
of that date was 10.1%, compared to 8.8% as of December 31, 1997. As of December
31, 1998, CMBK's leverage capital ratio was 8.0%, compared to 6.1% as of
December 31, 1997. As of December 31, 1998, OPBT's leverage capital ratio was
9.4%, compared to 10.0% as of December 31, 1997.
In addition, FDICIA categorizes banks based on five separate capital
levels and triggers certain mandatory and discretionary federal banking agency
responses for institutions that fall below certain capital levels. These
categories range from "well capitalized" for the most highly capitalized
institutions to "critically undercapitalized" for the least capitalized
institutions. A bank is categorized as "well capitalized" if it maintains a
leverage capital ratio of at least 5%, a total capital ratio of at least 10%, a
Tier 1 risk-based capital ratio of at least 6%, and is not subject to a capital
order or directive. Based on their regulatory capital ratios at December 31,
1998, the Subsidiaries were well capitalized as defined in federal banking
agency regulations.
FDICIA also restricts the ability of FDIC-insured state banks, such as
the Subsidiaries, to acquire and retain equity investments. Generally, state
banks may hold equity securities only to the extent permitted for national
banks. However, FDICIA also permits certain state banks to acquire or retain
equity investments in an amount up to 100% of Tier 1 capital in either (1)
common or preferred stock listed on a national securities exchange, or (2)
shares of a registered investment company. NEBT has been granted this exception.
Pursuant to FDICIA, in December 1993, the FDIC issued a final rule
concerning activities of FDIC-insured state banks. Under the final rule, an
insured state bank must obtain the FDIC's prior consent before directly, or
indirectly through a majority-owned subsidiary, engaging "as principal" in any
activity that is not permissible for a national bank unless one of the
exceptions contained in the regulation applies. The final rule sets out
application procedures for requesting FDIC's consent; provides a phase-out
period for activities which are not approved by the FDIC; and sets out
conditions that may be imposed at the FDIC's discretion when approving
applications. The final rule has not had a material impact on the business of
the Company or its Subsidiaries.
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Pursuant to FDICIA, in June 1996, the federal bank regulatory agencies
issued final rules establishing standards for safety and soundness at
FDIC-insured institutions and their holding companies. These rules became
effective in August 1996. These standards formalize in regulation the
fundamental standards used by the federal bank regulatory agencies to assess the
operational and managerial qualities of an institution. The rules establish
operational, managerial, asset quality and earnings standards for FDIC-insured
banks and their holding companies and standards that prohibit as an unsafe and
unsound practice the payment of compensation that is excessive or could lead to
material financial loss to such institutions. These standards are designed to
identify potential safety and soundness concerns and ensure that action is taken
to address those concerns before they pose a risk to the deposit insurance
funds. The Company and its Subsidiaries are in compliance with these standards.
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" or
"Substantial Noncompliance." As of their last CRA examination, each of the
Subsidiaries 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.
FDIC insurance of deposits may be terminated by the FDIC, after notice
and 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 conditions imposed by, the FDIC. Neither the Company nor the
Subsidiaries is aware of any practice, condition or violation that might lead to
termination of deposit insurance.
Federal Reserve Board Regulation
Under the regulations of the Federal Reserve Board, depository
institutions such as the Subsidiaries are required to maintain reserves against
their transaction accounts. These regulations generally require the maintenance
of reserves of 3.0% against transaction accounts of $52.0 million or less and
10.0% of the amount of such accounts in excess of such amount. These amounts and
percentages are subject to adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a
registered bank holding company. The Federal Bank Holding Company Act of 1956,
as amended (the "BHCA"), under which the Company registered, limits the types of
companies which the Company may acquire or organize and the activities in which
they may engage. In general, a bank holding company and its subsidiaries are
prohibited from engaging in or acquiring control of any company engaged in
non-banking activities unless such activities are so closely related to banking
or managing or controlling banks as to be a proper incident thereto. The Company
has not determined if it might seek to engage in these or other permissible
non-banking activities.
The Federal Reserve Board has established capital adequacy guidelines
for bank holding companies that are similar to the FDIC's capital requirements
described above. As of December 31, 1998, the Company's Tier 1 and total
risk-based capital ratios were 12.1% and 13.3%, respectively, and the Company's
leverage capital ratio was 8.3%, compared to 11.3%, 12.5% and 8.6%,
respectively, as of December 31, 1997. All ratios exceed the requirements under
these regulations.
Under the BHCA, a bank holding company such as NECB is required to
obtain the prior approval of the Federal Reserve Board to acquire, with certain
exceptions, more than 5% of the outstanding voting stock of any bank or bank
holding company, to acquire all or substantially all of the assets of a bank or
to merge or consolidate with another bank holding company.
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As described previously, the Connecticut Interstate Banking Act and
recent federal legislation specifically permit Connecticut bank holding
companies and banks to acquire or be acquired by banks or bank holding companies
in other states with reciprocal merger and acquisition laws. As of September
1995, federal interstate banking legislation extended this interstate bank
holding company acquisition authority nationwide. Federal antitrust laws place
limitations on the acquisition of banks and other businesses.
Under the BHCA, the Company, the Subsidiaries, and any other
subsidiaries are prohibited from engaging in certain reciprocal arrangements in
connection with any extension of credit or provision of any property or
services. The Subsidiaries are subject to certain restrictions imposed by the
Federal Reserve Act on making any investments in the stock or other securities
of the Company or any of their subsidiaries, and the taking of such stock or
securities as collateral for loans to any borrower.
Each of the Subsidiaries is also subject to certain restrictions
imposed by the Federal Reserve Act on the amount of loans it can make to the
Company or other affiliates. Such loans must be collateralized as provided by
the Federal Reserve Act. The total amount of such loans may not exceed 20% of
the capital stock and surplus of the Subsidiary. Loans from a Subsidiary to NECB
or an affiliate singly may not exceed 10% of the capital stock and surplus of
the Subsidiary. Since the formation of the Company, there have been no loans
made by the Subsidiaries to the Company.
The Company is required under the BHCA to file reports of operations
annually with the Federal Reserve Board. In addition, the Company and the
Subsidiaries are subject to examination by the Federal Reserve Board. The
Company, as a bank holding company, is registered with the Connecticut Banking
Commissioner under the Connecticut Bank Holding Company and Bank Acquisition
Act.
Effect of Governmental Policy
Banking is a business that depends in large measure on interest rate
differentials. One of the most significant factors affecting the Company's and
the Subsidiaries' earnings is the difference between (1) the interest rates paid
by the Subsidiaries on their deposits and their other borrowings and (2) the
interest rates received by the Subsidiaries on loans extended to their customers
and securities held in the Subsidiaries' investment portfolios. The value and
yields of their assets and the rates paid on their liabilities are sensitive to
changes in prevailing market rates of interest. Thus, the earnings and growth of
the Company and its Subsidiaries will be influenced by general economic
conditions, the monetary and fiscal policies of the federal government and
policies of regulatory agencies, particularly the Federal Reserve Board. The
nature and impact of any future changes in monetary policies cannot be
predicted.
The present bank regulatory climate is undergoing significant change,
both as it affects the banking industry itself and as it affects competition
between banks and non-banking financial institutions. There has been significant
change in the regulation of and operations by savings associations, in the bank
merger and acquisition area, in the products and services banks can offer, and
in the non-banking activities in which bank holding companies can engage. In
part as a result of these changes, banks are competing actively with other types
of depository institutions and with non-bank financial institutions, such as
money market funds, brokerage firms, insurance companies and other financial
services enterprises. It is not possible at this time to assess what impact
these changes in the regulatory climate ultimately will have on the Company and
its Subsidiaries.
Moreover, certain legislative and regulatory proposals that could
affect the Company, the Subsidiaries and the banking business in general are
pending, or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies. These proposals
include measures that may alter further the structure, regulation and
competitive relationship of financial institutions, and that may subject the
Company and/or the Subsidiaries to increased regulation, disclosure and
reporting requirements. In addition, the various banking regulatory agencies
frequently propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether or not and in what form any
legislation or regulations will be enacted or the extent to which the business
of the Company and/or its Subsidiaries will be affected thereby.
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Description of Business
The Company exists primarily to hold the stock of its Subsidiaries. In
addition, NECB, through NEBT, indirectly owns one additional subsidiary. The
historical growth of, and regulations affecting, each of NECB's direct and
indirect subsidiaries are described above in this Item 1.
NECB is a legal entity separate from its Subsidiaries. The stock of the
Subsidiaries is NECB's principal asset and the dividends from these entities
represent the primary source of its income. As explained above in this Item 1,
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, 1998, the Subsidiaries operated out of 21 offices located
primarily in north central Connecticut and two offices in New Hampshire. In
November 1995, NECB purchased an 18,000 square foot building in East Hartford,
Connecticut to house the Company's data processing and other support operations.
At December 31, 1998, NECB, through its Subsidiaries, had gross loans
of $515,980,000, deposits of $664,078,000 and total assets of $803,887,000.
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. The Company's profitability and its financial
condition may be significantly impacted by the continuing implementation of its
acquisition strategy and by the completion, and subsequent integration, of its
recent and/or pending acquisitions. See "Recent Growth of NECB" above.
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. The Subsidiaries provide these
services to a diverse range of customers and do not rely 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
broad-based and will not depend on the business of one or a few customers, the
loss of any or all of which could 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. 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 Federal Home Loan Mortgage Corporation ("FHLMC") in the
granting of residential mortgage loans. During 1998, approximately 85% of
residential mortgage loans were sold to the FHLMC as well as other outlets. The
sale of fixed rate mortgage loans in the secondary market provides liquidity to
make additional loans, revenues for servicing the sold loans (when servicing is
retained), and premiums and discounts to par upon the sale of such loans.
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The Subsidiaries originate a variety of consumer loans such as
short-term demand loans, automobile and student loans. The vast majority of
consumer loans are made on a secured basis. Interest rates charged on consumer
loans are primarily determined by competitive loan rates offered in their
lending areas. 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 portfolios of commercial loans of the Subsidiaries include various
products. The Subsidiaries' target market, with respect to commercial lending,
consists of businesses with annual sales up to ten 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 or more. The Subsidiaries offer revolving credit lines
and commercial letters of credit primarily used for performance bonding. NEBT is
also a preferred lender of Small Business Administration ("SBA") loans.
The Subsidiaries' deposits are insured by the FDIC and are primarily
invested in investment securities and loans to borrowers within the
Subsidiaries' respective market area. Each of the Subsidiaries is a member 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. NECB maintains automated teller machines ("ATMs"), which also generate fee
income. While the majority of the ATMs are located at the Subsidiaries' offices,
several machines are located offsite including two at Bradley International
Airport in Windsor Locks, Connecticut and four others in a local grocery chain.
The ATMs at branch locations are primarily for efficient utilization of branch
personnel resources and customer convenience, while machines located off-premise
are primarily utilized by non-customers and provide the Subsidiaries with
greater revenues than do the ATMs located at branch locations. NECB also offers
a corporate on-line cash management product, called ACCESS, which is a fee-based
service. The servicing of loans sold on the secondary market and the rental of
safe deposit boxes to customers also provide fee revenues.
NECB and its Subsidiaries had 305 full-time equivalent employees as of
December 31, 1998, compared to 250 employees at the end of 1997. Management
considers the relationships with employees of the Company to be good.
Competition and General Business Conditions.
The banking business in Connecticut remains intensely competitive.
After shifting its focus in the mid-1990's from improving asset quality and
expense reduction efforts, the industry is now concentrating on growth. As
widely reported, 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 the early 1990's
strengthening their balance sheets in order to either position themselves for
future opportunities or, in some cases, simply to survive. The combination of
bank failures and regulatory takeovers together with mergers and acquisitions
has served to greatly reduce the number of competitors within NECB's market
area. In conjunction with the erosion of the barriers to interstate banking,
many Connecticut-based institutions were acquired by institutions based outside
of Connecticut. As a result, NECB has come into competition with new and larger
banks.
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, it is now possible
for large super-regional organizations to enter many new markets including the
market served by the Subsidiaries. Many of these competitors, by virtue of their
size and resources, may enjoy certain efficiencies and competitive advantages
over NECB in the pricing, delivery, and marketing of their products and
services.
10
<PAGE>
There are approximately 26 commercial banks headquartered in
Connecticut. In addition, large out-of-state banks compete for the business of
Connecticut residents and businesses located in the Subsidiaries' primary
markets. 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 the Subsidiaries for both loans and deposits. Competition for
depositors' funds and for creditworthy loan customers is intense. A number of
larger banks are increasing their efforts to serve smaller commercial borrowers.
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 competition, other
financial market developments and regulatory controls beyond the control of
NECB's Management.
Beginning in the late 1980's and continuing to this day, the
Connecticut banking industry has become more concentrated with over 31 banks
ceasing operations as a result of reorganizations or failure. Increasingly, the
industry consists of a few very large, regional, super-regional and national
institutions, and a number of smaller community-based banks whose success
depends upon providing customer-focused products and services.
The continued growth of large institutions and the potential for large
out-of-area banking organizations to enter the local banking market may increase
opportunities for efficiently operated, service-oriented, community-based
banking organizations to serve customers which large organizations do not serve
well or which do not want to bank with such institutions.
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 competition with institutions commanding greater financial
resources, the Subsidiaries' supply of funds has imposed no substantial
impediment to their normal lending functions. While the Subsidiaries are limited
to making commercial loans to a single borrower in an amount not to exceed
fifteen percent of their capital and have a "house limit" significantly below
that level, they have, 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 the Subsidiaries 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, Connecticut. The area of Hartford south of Park
Street forms the secondary market of EQBK. The market area for CMBK is Bristol,
Connecticut and its surrounding communities. The market area for OPBT is
Portsmouth, New Hampshire and its surrounding communities.
The Subsidiaries' focus remains on being an integral part of the
communities they serve. 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.
11
<PAGE>
Statistical Disclosure Required Pursuant to Securities Exchange Act of 1934,
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...........................16
III. Loan Portfolio.................................17
V. Deposits.......................................18
VI. Return on Equity and Assets....................18
12
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM II
INVESTMENT PORTFOLIO
The following table presents the book value of investments as of the
end of each reported period:
(Amounts in thousands)
Available for Sale:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Debt securities issued by the
U.S. Treasury and other U.S.
<S> <C> <C> <C>
government agencies...................... $102,937 $ 98,060 $101,519
Mortgage-backed securities.................. 33,398 34,293 17,050
Corporate debt securities................... 10,727 10,927 10,648
Asset-backed securities..................... 1,019 527 114
Municipal securities........................ 13,417 7,126 3,119
Marketable equity securities................ 30,369 11,268 4,002
-------- -------- --------
Total $191,867 $162,201 $136,452
======== ======== ========
Held to Maturity:
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies...................... $ 1,899 $ 8,798 $ 14,430
Debt securities issued by states and political
subdivisions of the states............... 2,839 2,841 2,841
Mortgage-backed securities.................. 672 2,461 788
Other debt securities....................... 265 215 175
---------- --------- ---------
Total $ 5,675 $ 14,315 $ 18,234
========== ========= =========
Total investment securities $197,542 $176,516 $154,686
======== ======== ========
</TABLE>
The following table presents maturities and weighted average yields at
December 31, 1998. 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 were adjusted to a tax-equivalent basis.
(Amounts in thousands)
Available for Sale(1) (2):
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies...... $ 9,254 6.32% $31,271 6.24% $60,002 6.58% $ 1,502 7.16% $102,029 6.55%
Municipal securities........ 250 5.82 2,485 7.53 3,387 7.11 7,064 7.34 13,186 7.30%
Mortgage-backed securities.. 394 6.71 4,441 6.51 1,491 7.17 26,624 6.82 32,950 6.82%
Corporate debt securities... 1,858 7.18 8,752 6.34 10,610 6.37%
Asset-backed securities..... 500 6.45 134 9.01 352 8.58 986 8.21%
------- ------- ------- ------- -------
$11,756 6.52% $47,449 7.45% $65,014 6.82% $35,542 7.51% $159,761 7.25%
======= ======= ======= ======= ========
</TABLE>
13
<PAGE>
Held to Maturity:
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities issued by
the U.S. Treasury and
other U.S. government
agencies $ 900 6.70% $ 999 7.54% $ 1,899 7.49%
Debt securities issued by
states and political
subdivisions of the states $ 1,254 7.54% 1,387 7.21 $ 198 9.20% 2,839 7.58%
Mortgage-backed securities 442 6.48 230 6.57 672 6.55%
Other debt securities 150 7.83 115 6.97 265 7.31%
------- ------- ------- ------- --------
$ 900 6.70% $ 1,846 7.25% $ 2,501 7.31% $ 428 7.54% $ 5,675 7.34%
------- ------- ------- ------- --------
Total portfolio $12,656 6.53% $49,295 7.44% $67,515 6.84% $35,970 7.51% $165,436 7.26%
======= ======= ======= ======= ========
(1) Amounts shown at amortized cost.
(2) Does not include marketable equity securities with an amortized cost basis of $29,826,000.
</TABLE>
14
<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, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and financial................ $146,962 $126,686 $108,421 $ 84,219 $ 73,682
Real estate:
Construction......................... 23,862 23,914 14,969 15,761 3,109
Residential.......................... 123,446 160,057 129,488 114,431 107,537
Commercial........................... 176,139 180,347 159,748 124,205 83,593
Consumer................................ 45,571 47,178 46,978 44,975 32,374
-------- -------- -------- -------- --------
Loans outstanding.................... $515,980 $538,182 $459,604 $383,591 $300,295
======== ======== ======== ======== ========
</TABLE>
The following table shows the maturity and sensitivity of the Company's
loan portfolio outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
After One
One Year Year Through After
(AMOUNTS IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL LOANS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and financial..........................
Real estate:
Construction.................................
Residential..................................
Commercial...................................
Consumer..........................................
Total Loans.......................................
Allowance for possible loan losses.............
Total loans, net..................................
</TABLE>
Of those loans due after one year or $_______________, approximately
$_____________ have predetermined interest rates and $______________ have
floating or adjustable interest rates.
15
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM V
DEPOSITS
<TABLE>
<CAPTION>
The following table sets forth average deposits and average rates for each of the years indicated:
(Amounts in thousands)
1998 1997 1996
---- ---- ----
Average Average Average
BALANCE RATE BALANCE RATE BALANCE RATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits......................... $147,118 $121,408 $103,013
Regular savings deposits................ 153,861 2.25% 136,771 2.35% 132,604 2.20%
NOW accounts............................ 72,020 1.30 74,973 1.42 65,765 1.35
Money markets........................... 2,403 2.41 13,986 2.23 14,582 2.26
-------- -------- --------
Total savings deposits............... 375,402 1.18 347,138 1.32 315,964 1.31
Time deposits........................... 283,042 5.46 254,624 5.24 240,283 5.40
-------- -------- --------
Total Deposits................. $658,444 3.02 $601,762 2.98 $556,247 3.08
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the time remaining until maturity for time deposits in amounts of $100,000 and more:
<S> <C>
3 months or less $20,072
3 to 6 months 11,175
6 to 12 months 10,476
> 12 months 7,976
---------
Total $49,699
</TABLE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VI
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets.................... 0.95% 0.93% 1.10% 1.06% 0.36%
Return on average equity.................... 10.38 9.91 12.50 13.15 5.46
Equity to assets............................ 9.12 8.47 8.99 8.39 7.23
</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 176 Broad Street, Windsor,
Connecticut. In addition to the designated main office, NEBT has additional
branches in Windsor, East Hartford, East Windsor, Ellington, Enfield, Manchester
(2), Somers, Suffield, South Windsor, West Hartford, East Hartford and Vernon.
Of these offices, 4 are leased and 7 are owned properties. The Enfield office
has a ground lease only. EQBK operates out of a single leased office in
Wethersfield, Connecticut and CMBK operates two offices, in Bristol and
Plymouth, Connecticut. The Bristol office is owned while the Plymouth facility
is leased. Olde Port Bank and Trust operates its main office in Portsmouth and a
branch office in Hampton, New Hampshire.
During the year ended December 31, 1998 the aggregate rental expenses
paid by NECB for all its office properties was approximately $1,533,000. All
properties are considered to be in good condition and adequate for the purposes
for which they are used.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no pending material adverse legal proceedings other than
ordinary routine litigation incidental to normal business to which NECB and its
Subsidiaries are a party to or which any of their properties are subject.
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 1998 fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
As of December 31, 1998, there were 7,031,054 shares of NECB Common
Stock issued and outstanding which were held by approximately 5,200 shareholders
of record.
NECB's Common Stock is listed on the Nasdaq National Market. The
following represents the high and low sale prices from each quarter during the
last two years:
1998
----
HIGH LOW
---- ---
1st Quarter......................... $26.875 $23.375
2nd Quarter......................... 26.00 21.625
3rd Quarter......................... 24.25 17.00
4th Quarter......................... 21.00 13.938
1997*
-----
HIGH LOW
---- ---
1st Quarter......................... $16.71 $13.52
2nd Quarter......................... 15.91 13.64
3rd Quarter......................... 22.50 15.33
4th Quarter......................... 23.41 19.03
*Adjusted for 10% stock dividend paid on January 16, 1998 to shareholders of
record December 31, 1997.
The following table shows per share quarterly cash dividends NECB
declared upon the Common Stock over the last two years:
1998 1997
---- ----
Q1......................... $0.09 Q1............................ $0.07
Q2......................... 0.10 Q2............................ 0.08
Q3......................... 0.10 Q3............................ 0.08
Q4......................... 0.10 Q4............................ 0.09
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 page 5 of this Report on Form 10-K for a
discussion of Restrictions on Dividend Payments.
17
<PAGE>
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.
(amounts in thousands; except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Interest income $59,784 $54,212 $47,982 $34,600 $28,755
Interest expense 22,608 19,504 17,457 12,380 9,110
Net interest income 37,176 34,708 30,525 22,220 19,645
Provision for loan losses 1,303 1,636 2,687 2,125 3,291
Noninterest income 9,190 5,459 4,824 3,646 3,182
Noninterest expense 32,359 27,870 22,709 18,679 17,533
Income tax expense 5,150 4,162 3,111 254 481
Net income 7,554 6,499 6,842 4,808 1,522
Per Share Data:
Net income per share - basic $1.07 $0.93 $1.06 $0.97 $0.39
Net income per share - diluted 1.05 0.92 1.06 0.97 0.39
Dividends declared 0.39 0.326 0.255 0.186 0.045
Balance Sheet Data (as of end of year):
Loans $515,980 $538,182 $459,604 $383,591 $300,295
Allowance for loan losses 10,092 12,081 9,355 9,199 7,944
Goodwill 4,847 5,238 4,464 402 0
Assets 803,887 806,888 692,628 584,378 446,288
Deposits 664,078 694,946 615,148 529,602 408,497
Shareholders' equity 73,350 68,341 62,263 49,017 32,274
Nonperforming assets 6,976 13,034 11,814 11,971 13,282
Operating Ratios:
Return on average assets 0.95% 0.93% 1.10% 1.06% 0.36%
Return on average equity 10.38 9.91 12.50 13.15 5.46
Net interest margin 5.19 5.36 5.32 5.30 5.03
Total equity to total assets 9.12 8.47 8.99 8.39 7.23
Tangible equity to total assets 8.52 7.82 8.34 8.32 7.23
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
New England Community Bancorp, Inc. ("NECB" or the "Company") reported
net income for 1998 of $7,554, or $1.05 per share - diluted, compared to $6,499,
or $0.92 reported in 1997. Return on assets ("ROA") and return on equity ("ROE")
were .95% and 10.38%, respectively, for 1998 compared to .93% and 9.91%,
respectively, in 1997. During 1998 the Company acquired Olde Port Bank and Trust
("OPBT") and Bank of South Windsor ("BSW"). Expenses related to these
acquisitions totaled $2,627,000 (tax effected), or $0.37 per share - diluted.
Net operating income, which excludes the impact of these charges, amounted to
$10,181,000 or $1.41 per share - diluted. This represents an increase of
$1,933,000 or 23% over net operating income for 1997. On an earnings per share
basis (using net operating income), 1998 increased 21% over the $1.17 earnings
per share - diluted for 1997. ROA and ROE were 1.45% and 15.81%, respectively in
1998, excluding the acquisition-related charges. The acquisitions of OPBT and
BSW were accounted for as "pooling of interests" and as such all comparative
prior periods have been restated as if the acquisitions had been in effect for
all periods presented. [Please see Acquisition Summary below and Footnote 2 to
the consolidated financial statements for information concerning the Company's
merger and acquisitions.]
Net interest income on a fully taxable-equivalent ("FTE") basis totaled
$37,742,000 for 1998 compared to $34,941,000 in 1997. The net interest margin
for 1998 was 5.19% versus 5.36% in 1997. The increase in net interest income is
due to growth in average earning assets. Much of this growth resulted from the
1998 acquisitions while the decrease in net interest margin resulted primarily
from an increase in the cost of interest-bearing liabilities.
The provision for loan losses was $1,303,000 compared to $1,636,000 in
1997. The decrease is largely due to an improvement in asset quality and the
decrease in loans outstanding during 1998.
Noninterest income increased to $9,190,000 in 1998 from $5,459,000 in
1997. The 68% improvement resulted from the combined effect of the $1,289,000
increase in securities gains and increased mortgage banking revenues of
$2,296,000.
Noninterest expense totaled $32,359,000 in 1998 compared to $27,870,000
in 1997. The increase primarily resulted from the acquisitions, net of cost
reductions derived from the elimination of duplicate operations and other
expense reduction initiatives undertaken by the Company. Illustrative of these
initiatives particularly, NECB's efficiency ratio - excluding the effect of the
restructure charge--equaled 60.05% for 1998 compared to 61.76% for 1997. By
comparison, the efficiency ratio in 1996 was 62.2%.
Total loans at December 31, 1998 amounted to $515,980,000 compared to
$538,182,000 at December 31, 1997 while total deposits amounted to $664,078,000
at December 31, 1998 compared to $694,946,000 at December 31, 1997. Early in
1998 NECB completed a bulk sale of approximately $13,000,000 in nonperforming
and underperforming loans. These loans were accumulated primarily through
previous three acquisitions. Throughout much of 1998 declining long term
interest rates caused a marked increase in mortgage loan refinancings as
homeowners sought to lower interest expense. NECB saw a decrease in mortgages
during this period of $38,000,000 due primarily to the practice of selling newly
originated fixed rate mortgages in the secondary market. Another core product,
commercial loans increased $20,000,000 during 1998.
Shareholders' equity increased $5,009,000 from $68,341,000 at December
31, 1997 to $73,350,000 at year-end 1998. Reflecting the acquisitions, the ratio
of equity to assets increased to 9.12% at December 31, 1998 compared to 8.47% a
year earlier.
19
<PAGE>
ACQUISITION SUMMARY
In November 1995, NECB created a second banking subsidiary when it
acquired The Equity Bank ("EQBK"). In July, 1996 and August, 1997, respectively,
the Company acquired all the outstanding common stock of MSB and FBWH, both of
which were merged with and into NEBT. On December 31, 1997, NECB acquired CMBK,
establishing a third banking subsidiary. With the exception of the FBWH
acquisition, each of the transactions were accounted for as purchases and, as
such, prior year comparative data was not revised to include information for
these entities. In 1998 NECB acquired all the outstanding common stock of OPBT
and BSW. OPBT became a fourth banking subsidiary and BSW was merged with and
into NEBT. As previously noted, the acquisitions of FBWH, OPBT and BSW were
accounted for as a "pooling of interests" and therefore all comparative prior
periods have been restated as if the acquisitions had been in effect for all
periods presented.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which is defined as 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 assets of the Company are the loan portfolios of its subsidiary banks -
which are primarily 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 loans and personal
loans to individuals. Representing approximately one-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. These funds are used to provide
reserves and meet the liquidity needs of the Company while providing a source of
revenue. 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 applicable State and Federal income tax rates for all periods
presented.
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income (financial statements) $59,784 $54,212 $47,982
Tax equivalent adjustment 566 233 246
Interest expense (22,608) (19,504) (17,457)
-------- -------- --------
Net interest income - FTE $37,742 $34,941 $30,771
======= ======= =======
</TABLE>
In 1998, net interest income increased $2,801,000 or 8.02% over 1997.
The increase in 1998 is largely due to growth in earning assets which increased
a substantial $75,294,000 or 11.55% compared to the 1997 average. The
acquisition of Community Bank added approximately $62,000,000 to the average
while internal growth provided the remainder.
20
<PAGE>
Net Interest Margin and Interest Rate Spread
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
Years Ended December 31, 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 and other $ 8,476 $ 391 4.61% $ 12,295 $ 677 5.51% $ 14,984 $ 805 5.37%
Investment securities 185,929 12,229 6.58 167,814 11,030 6.57 146,431 9,109 6.22
Loans (A) 532,946 47,730 8.96 471,948 42,738 9.06 417,141 38,314 9.18
----------------------------------------------------------------------------------------
Total interest-earning assets 727,351 60,350 8.30 652,057 54,445 8.35 578,556 48,228 8.34
Allowance for loan losses (10,494) (9,888) (8,491)
Cash & due from banks 35,911 27,614 23,582
Other assets 39,580 29,719 28,370
-------- -------- --------
Total assets $792,348 $699,502 $622,017
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Regular savings deposits $153,861 $ 3,457 2.25% $136,771 $ 3,210 2.35% $132,604 $ 2,913 2.20%
NOW accounts 72,020 933 1.30 74,973 1,061 1.42 65,765 891 1.35
Money market 2,403 58 2.41 13,986 312 2.23 14,582 330 2.26
----------------------------------------------------------------------------------------
Total savings deposits 228,284 4,448 1.95 225,730 4,583 2.03 212,951 4,134 1.94
Time deposits 283,042 15,445 5.46 254,624 13,345 5.24 240,283 12,987 5.40
Short-term borrowings 32,050 1,400 4.37 14,609 790 5.41 2,962 169 5.71
Long-term debt 21,256 1,315 6.19 13,336 786 5.89 2,662 167 6.27
----------------------------------------------------------------------------------------
Total interest-bearing liabilities 564,632 22,608 4.00 508,299 19,504 3.84 458,858 17,457 3.80
Demand deposits 147,118 121,408 103,013
Other liabilities 7,849 4,201 5,389
-------- -------- --------
Total liabilities 719,599 633,908 567,260
Equity 72,749 65,594 54,757
-------- -------- --------
Total liabilities & equity $792,348 $699,502 $622,017
======== ======== ========
Net interest income $37,742 $34,941 $30,771
======= ======= =======
Net interest spread 4.30% 4.51% 4.54%
Net interest margin 5.19% 5.36% 5.32%
</TABLE>
(A) Average loans include nonaccruing loans and loans held-for-sale.
21
<PAGE>
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.
The net interest margin for 1998 decreased to 5.19% compared to 5.36% in
1997, (primarily from an improved mix of earning assets) which were funded by a
greater percentage of interest-free liabilities. Investment securities
represented 25.6% of average earning assets in 1998 compared to 25.7% in 1997
while characteristically higher-yielding loans represented 73.3% and 72.4% of
average earning assets in 1998 and 1997, respectively.
22
<PAGE>
Average Earning Asset Mix - Insert Pie Chart
The average interest-bearing liabilities increased to $564,632,000 in 1998,
from $508,299,000 in 1997, primarily due to increases in regular savings and
time deposits. The interest rates paid on these liabilities increased 16 basis
points and averaged 4.00% in 1998 compared to 3.84% in 1997. Average total
savings deposits increased $2,554,000 in 1998. Reflecting an increasingly
competitive market for core deposits the interest rate paid on these deposits
fell 8 basis points in 1998 to 1.95% from 2.03% in 1997. More than offsetting
this decrease was an increase in the cost of time deposits.
1998 1997
-------- --------
Securities $185,929 $167,814
Loans 532,946 471,948
Other 8,476 12,295
NECB continued to expand its use of alternative funding sources in 1998
principally through repurchase agreements (for its commercial customers) and
Federal Home Loan Bank of Boston ("FHLBB") borrowings. Short-term borrowings
increased in 1998 and averaged $32,050,000, compared to $14,609,000 in 1997, as
repurchase agreements were used to meet NECB's funding requirements. In addition
to providing a source of funds, repurchase agreements allow NECB's commercial
deposit customers to earn interest on excess cash balances. The rate paid on
short-term liabilities decreased from 1997 and equaled 4.37%. As noted, during
1998 NECB increased its long-term debt with advances from the FHLB. NECB's
borrowings were fixed rate and had maturities ranging from 1999 to 2010. The
average rate paid for these liabilities increased modestly in 1998 and equaled
6.19% in 1998 compared to 5.89% in 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 interest
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.
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997
--------------------------------- -----------------------------------
Change due to Change due to
Increase Change in: Increase Change in:
Years Ended December 31, (Decrease) Rate Volume (Decrease) Rate Volume
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (286) $ (98) $ (188) $ (128) $ 21 $ (149)
Investment securities 1,199 8 1,191 1,921 537 1,384
Loans 4,992 (295) 5,287 4,424 (531) 4,955
------ ----- ------ ------ ---- ------
Total interest income change 5,905 (385) 6,290 6,217 27 6,190
------ ----- ------ ------ ---- ------
Interest-bearing liabilities:
Regular savings deposits 247 (128) 375 297 203 94
NOW account deposits (128) (87) (41) 170 41 129
Money market deposits (254) 28 (282) (18) (5) (13)
------ ----- ------ ------ ---- ------
Total savings deposits (135) (187) 52 449 239 210
Time deposits 2,100 566 1,534 358 (369) 727
Short-term borrowings 610 (117) 727 621 (8) 629
Long-term debt 529 41 488 619 (9) 628
------ ----- ------ ------ ---- ------
Total interest expense change 3,104 303 2,801 2,047 (147) 2,194
------ ----- ------ ------ ---- ------
Net interest income change $2,801 $(688) $3,489 $4,170 $174 $3,996
====== ===== ====== ====== ==== ======
</TABLE>
23
<PAGE>
As is shown above, the increase in net interest income in both 1998 and
1997 is primarily attributable to changes in volume much of which is the result
of acquisitions. Growth in average loans, though both acquisition and internal
growth, represented the single largest source of new revenues in each of the
past two years. The growth in earning assets has been supported by a relatively
stable cost of funds in each of the past two years. Rate related costs actually
declined $147,000 or 1.0% in 1997 and rose $303,000 or 1.5% in 1998.
Noninterest Income
NECB's income from noninterest revenue activities increased 68.3% in 1998
and represented 13.32% of net revenues compared to 9.15% in 1997. This increase
in fee-based revenue follows industry trends of the past several years for
shifting dependence away from interest sources of income. Through the expansion
of existing business lines and the introduction of new products and services,
NECB's objective is to increase the percentage of income derived from
noninterest income sources to at least 20% of total net revenue within the next
two years.
For 1998 noninterest income increased 68.3% from 1997 and totaled
$9,190,000 compared to $5,459,000 and $4,824,000 for 1997 and 1996,
respectively. The largest component of this increase resulted from growth in
mortgage banking revenues. NECB formed New England Community Mortgage Corp. in
1998. This new unit rapidly built on the success of the banking subsidiaries'
mortgage departments by focusing on a service valued by many consumers. This new
unit concentrated upon supporting the needs of home buyers throughout our market
and in several new communities. This market focus resulting in NECM being ranked
17th in mortgage production for all of 1998 even though it did not commence
operation until June. Gains realized from the sale of securities rose sharply in
1998 largely as the result of an $898,000 gain from the sales of investment
assets by the parent company. Service fees grew by approximately 10% in 1998 on
the acquisition of Community Bank and increase volume of commercial service
sales.
NECB realized net gains from the sale of securities of $1,664,000 in 1998.
This compares to significantly smaller amounts recorded in both 1997 and 1996.
As a matter of practice, in conjunction with the purchase of common stock, NECB
establishes a target price objective for the issue. In addition, through regular
reviews of holdings, NECB evaluates each stock and determines whether to sell or
continue to hold the stock. It is the sale of those issues which reached their
target prices during 1998 which provided approximately $1,515,000 in gains in
1998. The likelihood of profitability of any such gains in the future cannot be
predicted.
Mortgage originations reached an all time high for NECB during 1998. Aided
by the formation of NECM and the subsequent expansion into several new
communities within Connecticut, originations reached $160,000,000 in 1998. Of
this total 83% were provided to finance the purchase of new and existing homes.
In the fourth quarter NECM established a sales office in Portsmouth, New
Hampshire. Management expects that NECM will continue its two pronged marketing
strategy over the next several years. By expanding its ability to service
markets currently served by our banking subsidiaries and concurrently entering
new market areas where we do not currently have a presence.
Mortgage Originations--Insert Bar Graph
(amounts in thousands)
1998 1997 1996
---- ---- ----
$180,000 $65,000 $40,000
24
<PAGE>
Noninterest Expense
Noninterest expense was $32,359,000 in 1998 compared to $27,870,000 in
1997. Included in these amounts were non-recurring acquisition related expenses
of $3,593,000 in 1998 and $2,197,000 in 1997. Excluding these charges,
noninterest expenses amounted to $28,766,000 in 1998 and increased by $3,093,000
or 12.0% over the $25,673,000 reported in 1997. Much of the increase in 1998 is
due to our acquisition of Community Bank of Bristol, Connecticut. The use of
purchase accounting for this acquisition increased expenses in categories such
as salary and benefit expense, occupancy, equipment and outside services.
Community's expenses (net of cost savings achieved in the acquisition) increased
expenses throughout all of 1998. This "step-up" in expense aggregated to
$2,011,000 in 1998.
Salaries and benefits -the largest component of the noninterest expense -
totaled $15,645,000 in 1998 compared to $13,325,000 in 1997. The increase is
primarily due to the acquisitions along with other salary and benefit increases.
During 1998 NECB completed a sale of non-performing and under-performing loans
which resulted in a net expense of $715,000. Equipment expense totaled
$1,972,000 in 1998 which is $110,000 or 6.2% higher than 1997. Other expenses
increased by $337,000 and totaled $3,867,000 compared to $3,530,000 in 1997.
Other expenses include items such as marketing, business development, corporate
contributions, community service and other general and administrative expenses.
Income Taxes
In 1998, the Company recognized income tax expense of $5,150,000, an
effective tax rate of 40.5%. This compares to income tax expense of $4,162,000
in 1997, an effective rate of 39.1%.
BALANCE SHEET ANALYSIS
Total assets decreased to $803,887,000 at December 31, 1998 compared to
$806,888,000 at December 31, 1997. This modest change in total assets reflects
the attitude and accomplishment of NECB in focusing upon earnings growth rather
than a specific growth target for total assets. During 1998 the overall size of
the company, as measured by total assets, remained essentially unchanged. Quite
a bit of change, occurred within the balance sheet, however. During the year
residential mortgage loans decreased $37,000,000 as accelerated prepayments
followed an abrupt decline in long term interest rates. Meanwhile our commercial
lending group continued to expand with a net increase of $20,000,000. Other
changes, including the sale of problem loans early in the year, amounted to a
reduction of $6,000,000. Higher cost time deposits were allowed to run off and
were replaced by borrowed funds and earned equity.
Balance Sheet Highlights (amounts in thousands)
December 31, 1998 1997 Change
--------- --------- --------
Total Assets $ 803,887 $ 806,888 $ (3,001)
Earning Assets 740,383 740,116 267
Securities 203,117 182,276 20,841
Loans 515,980 538,182 (22,202)
Total Deposits 664,078 694,946 (30,868)
Borrowed Funds 62,127 38,581 (23,546)
Equity 73,350 68,341 5,009
NECB's securities portfolio increased $20,841,000 or 11.4% from
$182,276,000 at December 31, 1997 to $202,423,000 at December 31, 1998. At
year-end the amortized cost of securities available-for-sale and securities
held-to-maturity totaled $189,587,000 and $5,675,000, respectively. Management's
strategy for investment securities is to maintain a very high quality portfolio
with short and intermediate maturities. Investment securities classified as
available-for-sale provide an additional source of liquidity to meet the needs
of NECB and its customers. The net unrealized gain on securities
available-for-sale decreased slightly to $2,280,000 at December 31, 1998
compared to $2,288,000 at December 31, 1997.
25
<PAGE>
Loans
At December 31, 1998, NECB's loan portfolio stood at $515,980,000 compared
to $538,182,000 a year earlier. Despite the intense competition in the
marketplace, NECB was able to add significantly to its commercial loans
outstanding in 1998. As the preferred small business lender in its service area
together with NECB's expansion into the Bristol market and a strengthening
economy, commercial loans outstanding should continue to increase. Most borowers
able to do so, have completed refinancing their residential mortgages.
(amounts in thousands)
Loan Portfolio Composition 1998 1997
---- ----
Commercial and financial $146,962 $126,686
Real estate:
Construction 23,862 23,914
Residential 123,446 160,057
Commercial 176,139 180,347
Consumer 45,571 47,178
-------- ---------
$515,980 $538,182
======== =========
A certain degree of credit risk is inherent in the Company's loan
portfolio. Credit risk is managed through the Company's credit function, which
is designed to insure adherence to a high level of credit standards. NECB's
credit function provides a system of checks and balances for NECB's
credit-related activities by establishing and monitoring all credit-related
policies and practices within NECB and insuring their uniform application. These
activities are designed to provide (i) for a thorough analysis of applications
for credit; (ii) continuous examinations of both outstanding and delinquent
loans; and, (iii) an appropriate level of loan diversification. 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. In addition to being diversified by borrower, as shown
in the table below, the Company's portfolio is diversified by industry and
product.
Nonperforming Assets
Nonperforming assets ("NPAs") 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. Maintaining a low level of NPAs is important to
the ongoing success of NECB. The Company's comprehensive credit review and
approval process is critical to the ability to minimize NPAs on a long-term
basis. In addition to the negative impact on net interest income and credit
losses, NPAs also increase operating expenses due to the costs associated with
collection efforts.
NPAs 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. 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, if needed, are charged to
operating income. In addition to NPAs, 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.
26
<PAGE>
NECB's NPAs at December 31, 1993 through 1998 are presented below:
(amounts in thousands)
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Nonaccrual loans $ 5,340 $ 9,838 $ 8,156 $ 8,837 $ 9,357
Other real estate owned 1,636 3,196 3,658 3,134 3,925
-----------------------------------------------
Total nonperforming assets $ 6,976 $13,034 $11,814 $11,971 $13,282
===============================================
NPAs decreased $6,058,000 or 46.5% to $6,976,000 at December 31, 1998 from
$13,034,000 at December 31, 1997. At December 31, 1998 nonaccrual loans as a
percentage of total loans and nonperforming assets as a percentage of total
assets were 1.03% and .87%, respectively, compared to 1.83% and 1.62% at
December 31, 1997. The decrease in total NPAs in the year ended December 31,
1998 primarily resulted from the bulk sale of problem loans early in 1998 and
the overall improvement in quality of the current portfolio.
Activity in NPAs
(amounts in thousands)
1998 1997
---- ----
Balance at beginning of year $13,034 11,814
Additions 9,464 6,622
Changes incident to acquisitions 4,209
Reductions:
Payments 5,367 2,046
Returned to performing status 328 713
Charge-offs/writedowns 4,999 2,203
Sales/other, net 4,828 4,649
Balance at end of year $ 6,976 $13,034
At December 31, 1998 loans past due in excess of ninety days and accruing
interest amounted to $977,000 compared to $1,060,000 at December 31, 1997.
Although these loans are not included in NPAs, 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. The allowance for
loan losses is not a precise amount but is derived from judgments based on the
above factors.
27
<PAGE>
The following table summarizes the activity in the allowance for possible
loan losses for the years ended December 31, 1994 through 1998. 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.
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans charged-off:
Commercial and financial $ 2,302 $ 729 $ 1,279 $ 871 $ 625
Real estate 1,723 972 3,573 2,270 1,884
Installment loans to individuals 173 130 406 178 178
------- ------- ------- ------- -------
Total charge-offs 4,198 1,831 5,258 3,319 2,687
------- ------- ------- ------- -------
Recoveries on loans charged-off:
Commercial and financial 596 389 294 397 180
Real estate 247 360 342 56 212
Installment loans to individuals 63 64 81 35 38
------- ------- ------- ------- -------
Total recoveries 906 813 717 488 430
------- ------- ------- ------- -------
Net loans charged-off 3,292 1,018 4,541 2,831 2,257
------- ------- ------- ------- -------
Provision charged to operations 1,303 1,636 2,687 2,125 3,291
Changes incident to acquisitions 0 2,108 2,010 1,961
Balance, at beginning of year 12,081 9,355 9,199 7,944 6,910
------- ------- ------- ------- -------
Balance, at end of year $10,092 $12,081 $ 9,355 $ 9,199 $ 7,944
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.62% 0.22% 1.09% 0.91% 0.78%
Ratio of allowance for loan losses to total loans 1.96 2.24 2.04 2.40 2.65
Ratio of allowance for loan losses to nonaccrual loans 188.99 122.80 114.70 104.10 84.90
</TABLE>
NECB's allowance for loan losses decreased $1,989,000 from December 31, 1997 to
$10,092,000 at December 31, 1998. The provision for loan losses in 1998 was
$1,303,000 compared to $1,636,000 for 1997. Reflecting the increase in
charge-offs, the ratio of net charge-offs to average loans increased to .62% in
1998 compared to .22% in 1997. While the allowance for loan losses decreased to
1.96% of total loans at December 31, 1998 from 2.24% at December 31, 1997,
management expects this ratio to decrease to approximately 1.90% in 1999.
28
<PAGE>
The following table reflects the Allowance for Loan Losses as of December
31, 1998 with allocations categorized by loan type:
(Amounts in thousands) Allocation of Percentage of
Allowance for loan type to
Loans by type Loan Losses total loans
- --------------------------------------------------------------------------------
Commercial & Financial 3,004 28%
Real estate:
Construction 412 5
Residential 1,698 24
Commercial 4,910 37
Consumer 168 9
------ ---
Total 10,192 100%
====== ===
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, 1998, NECB considered loans outstanding of $16,081 to be
potential problems compared to $15,359 at December 31, 1997. Included in these
totals were loans totaling $5,340 and $6,064, respectively, which were not
classified as nonperforming because such loans are performing according to their
terms.
Deposits
Total deposits decreased $30,868,000 or 4.4% from $694,946,000 at December
31, 1997 to $664,078,000 at December 31, 1998. This decrease is largely
attributable to the outflow of maturing time deposits, principally of acquired
companies, bearing above market interst rates. As discussed earlier, by
utilizing FHLB as an alternative source of funding interest earning assets, NECB
decreased its reliance upon retail deposits - particularly CD's - as a funding
source. This, taken together with a declining interest rate environment, served
to reduce rates paid on CD's by more than 20-basis points in 1998 compared to
1997. The continuing use of this strategy had a significant effect upon renewing
CD's of acquired companies. The interest rate structure of CMBK was very near
the top end of the rates offered throughout its market. This tactic had
attracted funds from depositors who only sought the highest rates then being
offered. While time deposits remain an important source of funds, much of this
money did not stay with the Company. Through its commercial focus, NECB
continues to target small businesses as a source of growth. This focus shifted
the mix of deposits from the higher priced time deposits to noninterest-bearing
demand deposits and NOW accounts. The percentage of noninterest-bearing demand
deposits to total deposits increased to 24.2% from 22.0% at December 31, 1998
and 1997, respectively.
29
<PAGE>
Interest-Rate Risk
The asset/liability management process at NECB provides for a structured
process for ensuring that the risk to earnings from changes in interest rates is
prudently managed. The goal of the asset/liability management process is to
manage the balance sheet to provide maximum level of earnings while maintaining
a high quality balance sheet and acceptable levels of interest-rate and
liquidity risk. Sensitivity of earnings to interest rate changes occur when
yields on assets change differently from the interest costs on liabilities. To
mitigate this interest-rate risk, the structure of the balance sheet is managed
so that movements of interest rates on assets and liabilities are highly
correlated and produce an adequate level of earnings--even in periods of
volatile interest rates.
Key to NECB's management of interest-rate risk are the following
measurement techniques: (i) interest rate sensitivity "gap" analysis; (ii) "rate
shock" to measure earnings volatility due to immediate increase or decrease in
market rates of up to 200-basis points; and (iii) simulations of net interest
income under alternative balance sheet and interest rate scenarios. To further
improve the Company's ability to manage interest-rate risk, NECB uses computer
modeling software for its measuring and monitoring process. Using computer
modeling, NECB is able to measure the sensitivity of earnings to interest rate
changes. NECB's Subsidiaries measure the impact assuming the continuation of
current balance sheet trends along with a rate shock. NECB also uses the model
to measure its earnings sensitivity relative to management's most likely
interest rate scenario. In conjunction with the installation of the modeling
software, the Company refined its internal parameters for monitoring gap
analysis and the 200-basis point rate shock as well as the assumptions as to the
effect of volume changes, prepayment rates and repricing characteristics for
both contractual and noncontractual assets and liabilities. These guidelines
serve as benchmarks for determining actions to balance the current position
against the Subsidiaries' strategic goals. The results of the simulations are
reported to the respective subsidiary asset/liability committee ("ALCO").
Gap analysis provides a point-in-time "snapshot" of the maturity and
repricing characteristics of the Company's balance sheet. The report, which
follows, is prepared by allocating all assets and liabilities into time horizons
based upon either their contractual or anticipated maturity or repricing. For
floating rate instruments, the entire balance is placed at the next date on
which their rates could be reset and for fixed rate instruments the balances are
placed in time horizon according to their principal repayment schedule. In
addition to prepayment assumptions for mortgage-related instruments, management
also applies assumptions to noncontractual deposits--such as demand deposits and
savings accounts. The interest sensitivity gap is determined by subtracting the
amount of liabilities from the amount of assets that reprice in a particular
time interval. A liability sensitive position results when more liabilities than
assets reprice or mature within a given time period. Under this scenario, as
interest rates fall, increased net interest revenue will be generated.
Conversely, an asset sensitive position results when more assets than
liabilities reprice with a given period. In such an instance, net interest
revenue would benefit from an increasing interest rate environment. The impact
of creating a liability or asset sensitive position depends on the magnitude of
the actual change in interest rates relative to the behavior of borrowers and
depositors. NECB'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, 1998, the Company was 12.00% liability sensitive at the cumulative one year
gap, slightly over NECB's policy limits.
30
<PAGE>
<TABLE>
<CAPTION>
Interest-Rate Gap Analysis
December 31, 1998 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 and cash equivalents $ 13,516 $ 717 $ $ 38,611 $ 52,844
Securities 6,000 14,926 46,510 135,681 203,117
Loans 106,467 121,269 197,043 91,201 515,980
Loans held-for sale 7,721 7,721
Other assets 24,225 24,225
--------- --------- --------- --------- ---------
Total assets $ 133,704 $ 136,912 $ 243,553 $ 289,718 $ 803,887
========= ========= ========= ========= =========
Deposits:
Demand $ 16,088 $ 32,175 $ 48,263 $ 64,350 $ 160,876
Savings 24,491 48,982 85,718 85,719 244,910
Time 71,904 128,560 57,828 258,292
--------- --------- --------- --------- ---------
Total deposits 112,483 209,717 191,809 150,069 664,078
Borrowings 36,848 7,700 11,671 5,908 62,127
Other liabilities 4,332 4,332
Equity 73,350 73,350
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity $ 149,331 $ 217,417 $ 203,480 $ 233,659 $ 803,887
========= ========= ========= ========= =========
Periodic $ (15,627) $ (80,505) $ 40,073 $ 56,059
Cumulative gap $ (15,627) $ (96,132) $ (56,059)
Cumulative gap as % of total assets (1.94)% (11.96)% (6.97)%
</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 cash flow obligations and to
capitalize on business opportunities on a timely and cost effective basis. These
cash flow 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.
All of NECB's subsidiary banks are members of the Federal Home Loan Bank of
Boston (FHLBB) making them eligible for both short term lines of credit and long
term borrowing facilities. The FHLBB provides its member banks with credit by
accepting as collateral the member bank's mortgage assets. The aggregate credit
available to the subsidiaries consists of $9,225,000 short-term and $153,891,000
in long term. At December 31, 1998, usage of these facilities amounted to
$27,279,000 providing $135,837,000 available for future use. 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's cash and cash
equivalents at December 31, 1998 decreased from December 31, 1997 totaling
$52,844,000 and $61,030,000, respectively. The decrease in 1998 was largely due
to a decrease in federal funds sold in 1998.
31
<PAGE>
Capital
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, the investing public, regulators
and its shareholders. A strong capital position helps NECB withstand unforeseen
adverse developments and take advantage of profitable investment opportunities
when they arise. One such opportunity was the acquisition of CMBK, which was an
all cash transaction, and enabled NECB to leverage its balance sheet to improve
its earnings capacity. At December 31, 1998, total shareholders' equity was
$73,350,000, an increase of $5,009,000 compared to $68,341,000 at December 31,
1997. The bulk of the increase came from the retention of earnings which, net of
dividends paid, amounted to $5,021,000. During 1997, shareholders' equity
increased $6,078,000 to $68,341,000 from $62,263,000 at December 31, 1996. The
increase resulted primarily from retention of earnings.
As noted above, 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, 1998, the Company exceeded all regulatory capital ratios
and the Subsidiaries were categorized as "well capitalized." The leverage ratio
is computed using the quarterly average assets and, based upon the December 31,
1997 acquisition date of CMBK, their assets are not included in the leverage
ratio for 1997. The various capital ratios of the Company for December 31, 1998
and 1997 were:
1998 1997
---- ----
Total risk-based capital (10% to be well capitalized) ...... 13.3% 12.5%
Tier 1 risk-based capital (6% to be well capitalized) ...... 12.1 11.3
Leverage ratio (5% to be well capitalized) ................. 8.3 8.6
Total equity to assets ..................................... 9.1 8.5
Tangible equity to assets .................................. 8.5 7.8
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS 133 requires an entity to measure
all derivatives at fair value and to recognize them in the balance sheet as an
asset or liability, depending on the entity" rights or obligations under the
applicable derivative contract. NECB will designate each derivative as belonging
to one of several possible categories, based on the intended use of the
derivative. The recognition of changes in fair value of a derivative that affect
the income statement will depend on the intended use of the derivative. If the
derivative does not qualify as a hedging instrument, the gain or loss on the
derivative will be recognized currently in earnings. If the derivative qualifies
for special hedge accounting, the gain or loss on the derivative will either (1)
be recognized in income along with an offsetting adjustment to the basis of the
item being hedged or (2) be deferred in other comprehensive income and
reclassified to earnings in the same period or periods during which the hedged
transaction affects earnings. SFAS 133 will be effective for NECB no later than
the quarter ending March 31, 2000. SFAS 133 may not be applied retroactively to
financial statements of prior periods. SFAS 133 is not expected to have a
material impact on NECB's consolidated results of operations, financial position
or cash flows.
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.
The Year 2000 Problem
NECB, like all institutions that utilize computer technology, continues to
deal with the challenges associated with the possibility that many existing
computer systems may not function properly when processing time-sensitive data
beyond the year 1999 (referred to as the Y2K Problem). The Year 2000 Problem
is the result of computer programs using two
32
<PAGE>
digits rather than four in date fields that define the year. Any computer
programs used by NECB that have time-sensitive software may recognize a date
field using "00" as the year 1900 rather than the year 2000. If not modified or
replaced, these programs could cause system failures or miscalculations, which
could adversely affect NECB's ability to process customer transactions or
provide customer service.
NECB recognizes several risks which could have adverse impact upon the
safety and soundness of banks generally, and NECB subsidiaries in particular. Of
primary concern is the ability of NECB companies to adequately perform their
duties in meeting the needs of their customers. Additionally there is a risk
that some of its borrowing customers may experience difficulty in dealing with
the problem, such that repayment of outstanding loans could be jeopardized. To a
somewhat lesser degree customers maintaining deposit accounts with the bank may
experience difficulty in their record keeping systems. To combat these exposures
NECB formed a Y2K committee consisting of 23 senior middle-managers. This Y2K
committee, using ample resources made available, designs, implements and
validates the tests necessary to ensure NECB preparedness to cope with the
Problem.
Costs associated with implementing procedures and modifying existing system
applications have been and will continue to be expensed as incurred. NECB does
not expect incremental costs associated with any modifications for Year 2000
compliance to be material.
1996 Comparison
The pattern of acquisitions throughout the past three years has resulted in
significant changes to the NECB's performance when compared to prior periods.
Shown here, NECB reported net income for 1996 of $6,842,000, or $1.06 per share
- - diluted. The ROA and ROE for 1996 were 1.10% and 12.50%, respectively. These
performance ratios reflect the pooling of BSW and OPBT.
Net interest income on an FTE basis in 1996 amounted to $30,771,000. The
net interest margin in 1996 was a strong 5.32%. The yield on interest-earning
assets in 1996 was 8.34% while the cost of interest-bearing liabilities was
3.80%.
The provision for loan losses amounted to $2,687,000. Net charge-offs
amounted to $4,541,000 in 1996, up from $2,831,000 a year earlier, while NPAs
totaled $11,814,000.
Noninterest income totaled $4,824,000. Noninterest income was positively
impacted by increases in service charges and mortgage banking revenues. During
1996, NECB originated more than $50,000,000 in residential mortgage loans. In
1996, noninterest expenses amounted to $22,709,000. There were no specific
provisions for the costs related to the purchase of Manchester State bank in
July 1996 which was accounted for as a purchase. Expenses incurred prior to the
date of acquisition were not included in the 1996 financial statements of NECB.
33
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The main components of market risk for NECB are interest rate risk,
liquidity risk, equity price risk and credit risk. The discussion of interest
rate risk, liquidity risk and credit risk appear in Part II. Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K on pages 29, 31 and 27, respectively. Such
information is incorporated herein by reference.
With regard to equity price risk, the fair value of NECB's common stock
portfolio is expected to fluctuate in a manner similar to price movements in the
S&P 500 index (a broad market index). For example, a 10% decline in the S&P 500
would be expected to reduce the fair value of NECB's year-end 1998 portfolio by
approximately 10%, or $1 million. Based on the portfolio's net unrealized gain
of $543 thousand at December 31, 1998, a 10% decline in fair value of would
reduce the net unrealized gain to an unrealized loss of approximately $457
thousand.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NECB's Proxy Statement under the caption "The NECB Board 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 "Compensation of Executive
Officers" 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 "NECB Stock Owned by
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 and Schedules.
The consolidated financial statements and report of independent public
accountants of New England Community Bancorp, Inc. and Subsidiaries are listed
in the index appearing on page 34 of this report on Form 10-K.
34
<PAGE>
(a)(3) List of Exhibits
Exhibit No. Description
- ----------- -----------
(3)(i) 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.
(3)(ii) Bylaws of New England Community Bancorp, Inc.
(10)(a) 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.
(10)(b) 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.
(10)(c) 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.
(10)(d) 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.
(10)(e) 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.
(10)(f) The Employment Agreement by and between New England Community
Bancorp, Inc. and Frank A. Falvo dated December 6, 1996 was filed
on March 31, 1997 as Exhibit 10(f) to New England Community
Bancorp, Inc.'s Annual Report filed on Form 10-K and is
incorporated herein by reference.
(10)(g) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and David A. Lentini dated October 16,
1997 and is incorporated herein by reference.
(10)(h) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Donat A. Fournier dated October 16,
1997 and is incorporated herein by reference.
(10)(i) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Anson C. Hall dated October 16, 1997
and is incorporated herein by reference.
(10)(j) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Frank A. Falvo dated October 16,
1997 and is incorporated herein by reference.
35
<PAGE>
(21) List of Subsidiaries.
27.1 Financial Data Schedule--Fiscal Year End 1998
27.2 Restated Financial Data Schedule--Fiscal Year Ends 1997
APPENDIX A Index to Financial Statements:
Report of Independent Certified Public Accountants for the Years Ended
December 31, 1998, 1997 and 1996...................................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997................... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996...................................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996..................... F-4, F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996................................ F-6
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996..................... F-7-F-27
36
<PAGE>
Financial Highlights
(amounts in thousands; except per share data)
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Earnings:
Net interest income $ 37,176 $ 34,708 $ 30,525
Provision for loan losses 1,303 1,636 2,687
Noninterest income 9,190 5,459 4,824
Noninterest expense 32,359 27,870 22,709
Income tax expense 5,150 4,162 3,111
Net income 7,554 6,499 6,842
Per share data:
Net income per share - basic $ 1.07 $ 0.93 $ 1.06
Net income per share - diluted 1.05 0.92 1.06
Dividends declared 0.39 0.326 0.255
Balance sheet data (as of end of year):
Loans, net $505,888 $526,101 $450,249
Assets 803,887 806,888 692,628
Deposits 664,078 694,946 615,148
Shareholders' equity 73,350 68,341 62,263
Operating ratios:
Return on average assets 0.95% 0.93% 1.10%
Return on average equity 10.38 9.91 12.50
Net interest margin 5.19 5.36 5.32
37
<PAGE>
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 30, 1999.
NEW ENGLAND COMMUNITY BANCORP, INC.
By s/s Anson C. Hall
---------------------------------------------
Anson C. Hall
Vice President, Chief Financial Officer
By s/s David A. Lentini
---------------------------------------------
David A. Lentini
Chairman, President and Chief Executive Officer
38
<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:
Signature Title Date
- --------------------------------------------------------------------------------
s/s David A. Lentini Chairman, President and March 30, 1999
- ----------------------------- Chief Executive Officer
(David A. Lentini)
s/s John C. Carmon Director March 30, 1999
- -----------------------------
(John C. Carmon)
s/s James A. Cotter, Jr. Director March 30, 1999
- -----------------------------
(James A. Cotter, Jr.)
s/s Gary J. DeNino Director March 30, 1999
- -----------------------------
(Gary J. DeNino)
s/s Frank A. Falvo Director March 30, 1999
- -----------------------------
(Frank A. Falvo)
s/s Dominic J. Ferraina Director March 30, 1999
- -----------------------------
(Dominic J. Ferraina)
s/s P. Anthony Giorgio Director March 30, 1999
- -----------------------------
(P. Anthony Giorgio)
s/s John R. Harvey Director March 30, 1999
- -----------------------------
(John R. Harvey)
s/s Solomon Kerensky Director March 30, 1999
- -----------------------------
(Solomon Kerensky)
s/s Angelina J. McGillivray Director March 30, 1999
- -----------------------------
(Angelina J. McGillivray)
s/s J. Brian Smith Director March 30, 1999
- -----------------------------
(J. Brian Smith)
39
<PAGE>
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, 1998 and 1997 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,
1998. The consolidated financial statements give retroactive effect to the
mergers of the Company with First National Bank of West Hartford (FBWH) on
August 7, 1997, Olde Port Bank & Trust (OPBT) on July 10, 1998 and Bank of South
Windsor (BSW) on August 14, 1998 which have been accounted for using the pooling
of interests method described in the notes to the consolidated financial
statements. 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 did not audit the 1996
financial statements of FBWH which statements reflect net income of 17.9% of the
related consolidated net income for the year ended December 31, 1996. We did not
audit the 1997 and 1996 financial statements of BSW which statements reflect
total assets of 19.2% and net income of 15.0% of the related consolidated
financial statements as of December 31, 1997 and for the two years then ended.
These statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
FBWH and BSW, is based solely on the reports of the other auditors. We
previously audited and reported on the financial statements of OPBT for the
years ended December 31, 1997 and 1996.
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, based on our audits and the reports of other auditors, 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 29, 1999
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash and due from banks $ 39,279 $ 44,338
Short-term investments 12,080 7,858
Interest bearing deposits with banks 109
Federal funds sold 1,485 8,725
-------- ---------
Cash and cash equivalents 52,844 61,030
Interest bearing time deposits 694 879
Securities held-to-maturity, fair values of $5,831 and $14,433 at
December 31, 1998 and 1997, respectively 5,675 14,315
Securities available-for-sale, at fair value 191,867 162,201
Federal Home Loan Bank stock, at cost 4,881 4,881
Loans outstanding 515,980 538,182
Less: allowance for loan losses (10,092) (12,081)
-------- ---------
Net loans 505,888 526,101
Loans held-for-sale 7,721 2,966
Accrued interest receivable 5,635 5,480
Premises and equipment 13,932 13,301
Other real estate owned 1,636 3,196
Goodwill 4,847 5,238
Other assets 8,267 7,300
-------- --------
Total Assets $803,887 $806,888
======== ========
LIABILITIES:
Deposits:
Noninterest bearing $160,876 $152,951
Interest bearing 503,202 541,995
-------- --------
Total deposits 664,078 694,946
Short-term borrowings 34,848 16,272
Long-term debt 27,279 22,309
Other liabilities 4,332 5,020
-------- --------
Total Liabilities 730,537 738,547
-------- --------
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, 1998, 7,031,054 issued and outstanding;
December 31, 1997, 7,017,332 issued and outstanding 703 702
Additional paid-in capital 61,268 61,308
Retained earnings 9,995 4,974
Accumulated other comprehensive income 1,384 1,357
-------- --------
Total Shareholders' Equity 73,350 68,341
-------- --------
Total Liabilities & Shareholders' Equity $803,887 $806,888
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans, including fees $47,730 $42,738 $38,315
Securities:
Taxable interest 10,336 10,231 8,308
Interest exempt from federal income taxes 531 256 135
Dividends 796 310 420
Federal funds sold and other interest 391 677 804
-------- ---------- ----------
Total interest income 59,784 54,212 47,982
-------- -------- --------
INTEREST EXPENSE:
Deposits 19,893 17,928 17,121
Borrowed funds 2,715 1,576 336
-------- --------- ----------
Total interest expense 22,608 19,504 17,457
-------- -------- --------
Net interest income 37,176 34,708 30,525
Provision for loan losses 1,303 1,636 2,687
-------- --------- ---------
Net interest income after provision for loan losses 35,873 33,072 27,838
-------- -------- --------
NONINTEREST INCOME:
Service charges, fees and commissions 4,069 3,638 2,973
Securities gains, net 1,664 375 23
Mortgage banking revenues 3,179 883 1,077
Other 278 563 751
-------- ---------- ----------
Total noninterest income 9,190 5,459 4,824
-------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits 15,645 13,325 11,511
Occupancy 2,773 2,870 2,610
Furniture and equipment 1,972 1,862 1,613
Outside services 1,827 1,952 1,971
Postage and supplies 1,135 1,046 1,093
Insurance and assessments 414 319 316
Losses, writedowns, expenses - other real estate owned 27 455 582
Amortization of goodwill 391 314 155
Loss on sale of portfolio loans 715
Acquisition expenses 3,593 2,197
Other 3,867 3,530 2,858
--------- -------- ---------
Total noninterest expense 32,359 27,870 22,709
-------- -------- --------
Income before taxes 12,704 10,661 9,953
Income tax expense 5,150 4,162 3,111
-------- -------- ---------
Net income $ 7,554 $ 6,499 $ 6,842
======== ======== ========
Net income per share--Basic $ 1.07 $ .93 $ 1.06
Net income per share--Diluted $ 1.05 $ .92 $ 1.06
</TABLE>
3
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
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive Total
(Amounts in thousands) SHARES VALUE CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------------- ------------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995, as restated 5,709 $571 $41,787 $ 6,490 $ 169 $49,017
Comprehensive income:
Net income 6,842
Net change in unrealized gain on securities
available-for-sale, net of tax effect of $14 (168)
Comprehensive income 6,674
Dividends declared ($0.255 per share) (952) (952)
Cash dividends declared ($0.218 per share)
by pooled companies prior to acquisition (241) (241)
Common stock retired in connection with
acquisition of First Bank of West Hartford (2) (22) (22)
Common stock issued in connection with:
Acquistion of Manchester State Bank 549 56 6,254 6,310
Employee benefit plans 37 3 184 187
Common stock warrants 193 19 1,224 1,243
Stock issued by pooled company prior to acquisition 7 1 46 47
-------- ------ ----------- ------------ ---------- -----------
Balance, December 31, 1996 6,493 650 49,473 12,139 1 62,263
Comprehensive income:
Net income 6,499
Net change in unrealized gain on securities
available-for-sale, net of tax effect of $856 1,356
Comprehensive income 7,855
Dividends declared ($0.326 per share) (1,471) (1,471)
Cash dividends declared ($0.235 per share)
by pooled companies prior to acquisition (287) (287)
Common stock retired in connection with
acquisition of Bank of South Windsor (64) (6) (1,010) (1,016)
Common stock issued in connection with
employee benefit plans 91 9 797 806
Stock dividend 469 47 11,831 (11,906) (28)
Stock issued by pooled company prior to acquisition 5 65 65
Exercise of stock options by pooled
company prior to acquisition 23 2 152 154
------- ------ ----------------------- ---------- ----------
Balance, December 31, 1997 7,017 702 61,308 4,974 1,357 68,341
Comprehensive income:
Net income 7,554
Net change in unrealized gain on securities
available-for-sale, net of tax effect 27
Comprehensive income 7,581
Dividends declared $0.39 per share (2,388) (2,388)
Cash dividends declared ($0.11 per share)
by pooled company prior to acquisition (145) (145)
Exercise of stock options by pooled company prior
to acquisition 310 310
Settlement of stock options (4) (648) (652)
Common stock issued in connection with
employee benefit plans 14 5 298 303
------- ------- ----------------------- ---------- ----------
Balance, December 31, 1998 7,031 $703 $61,268 $ 9,995 $1,384 $73,350
===== ==== ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(continued)
(Amounts in thousands)
Reclassification disclosure for the year ended December 31, 1998:
Net unrealized gains on available-for-sale securities $1,656
Less reclassification adjustment for realized gains in net income (1,664)
Other comprehensive loss before income tax effect (8)
Income tax benefit 35
-------
Total other comprehensive income, net of tax 27
=======
Accumulated other comprehensive income as of December 31, 1998, 1997 and 1996
consists of net unrealized holding gains on available-for-sale securities, net
of taxes.
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,554 $ 6,499 $ 6,842
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 1,342 1,422 1,405
Losses from sale or disposal and provisions to reduce
the carrying value of other real estate owned, net 86 172 438
Loss on sale of portfolio loans 715
Securities gains, net (1,664) (375) (23)
Gain on sales of premises and equipment (333) (97)
Accretion of discounts and amortization of premiums
on bonds, net 205 74 173
Net (accretion) amortization of purchase accounting adjustments 72 (213) (191)
Amortization of goodwill 391 314 155
Issuance of stock to directors 66 47
Provision for possible loan losses 1,303 1,636 2,687
(Increase) decrease in accrued interest receivable and other assets, net (1,122) (299) 313
Increase in loans held-for-sale (4,755) (1,035) (72)
Decrease in accrued interest payable and other liabilities, net (863) (1,222) (675)
---------- -------- ----------
Net cash provided by operating activities 3,264 6,706 11,002
--------- -------- --------
FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposit accounts 7,925 15,820 5,465
Net decrease in interest-bearing deposit accounts (38,751) (4,743) (3,961)
Net increase in short-term borrowings 18,576 12,478 2,026
Advances received on long-term debt 8,000 20,989 7,000
Payments made on long-term debt (3,015) (5,631) (49)
Issuance of common stock 613 386 1,431
Settlement of stock options (652)
Cash and cash equivalents acquired in the purchase acquisitions, net 7,888 14,236
Cash dividends paid (2,323) (1,594) (1,055)
--------- --------- ---------
Net cash provided by (used in) financing activities (9,627) 45,593 25,093
--------- -------- --------
INVESTING ACTIVITIES:
Loans originated, net of principal collections 6,670 (26,442) (15,295)
Loans purchased from other lenders (828)
Net increase in interest-bearing time deposits 185 397 2,899
Purchases of Federal Home Loan Bank stock (1,004) (702)
Proceeds from sales of loans 10,157 38 456
Purchases of securities available-for-sale (102,552) (91,389) (85,717)
Proceeds from sales of securities available-for-sale 23,100 48,025 26,556
Proceeds from maturities of securities available-for-sale 53,736 22,641 36,088
Purchases of securities held-to-maturity (674) (1,026) (5,110)
Proceeds from maturities and repayments of securities held-to-maturity 6,815 4,923 6,830
Proceeds from sales of other real estate owned 2,854 3,051 3,271
Purchases of premises and equipment (2,012) (1,157) (1,826)
Proceeds from sales of premises and equipment 486 236
Capitalization of expenditures on other real estate owned (102) (61) (45)
---------- ----------- -----------
Net cash used in investing activities (1,823) (41,518) (33,187)
--------- -------- --------
Increase (decrease) in cash and cash equivalents (8,186) 10,781 2,908
Cash and cash equivalents, beginning of year 61,030 50,249 47,341
-------- -------- --------
Cash and cash equivalents, end of year $52,844 $61,030 $50,249
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
New England Community Bancorp, Inc. (the "Company") or ("NECB"), a Delaware
Corporation, is a multi-bank holding company. Three of its wholly-owned
subsidiary banks are chartered by the state of Connecticut and one is chartered
by the state of New Hampshire. New England Bank & Trust Company ("NEBT") is
headquartered in Windsor, Connecticut, and provides commercial and consumer
banking services from its thirteen offices located in the towns of Vernon, East
Windsor, South Windsor, Ellington, Enfield, Manchester (2), Somers, Suffield,
West Hartford, East Hartford and Windsor (2), Connecticut. The Equity Bank
("EQBK") provides commercial and consumer banking services from its office in
Wethersfield, Connecticut. Community Bank ("CMBK"), provides similar services
from its two offices located in Bristol and Plymouth, Connecticut. Olde Port
Bank and Trust ("OPBT") provides similar services from its two offices located
in Portsmouth and Hampton, New Hampshire. New England Community Mortgage Corp.
("Mortgage Corp.") which was formed in 1998, is a wholly-owned subsidiary of
NEBT. The Mortgage Corp. specializes in the financing of home purchases from its
three offices located in Middlebury and Manchester, Connecticut and Portsmouth,
New Hampshire.
BASIS OF PRESENTATION
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.
ACQUISITIONS
On July 10, 1998, OPBT was acquired by NECB. On August 14, 1998, Bank of South
Windsor ("BSW") was acquired by NECB and merged with and into NEBT. These
transactions were accounted for as pooling of interests and, accordingly, the
financial information for all prior periods has been restated to present the
combined financial information as though the Company, OPBT and BSW had been
operated as a combined entity for all periods presented.
On August 7, 1997, First Bank of West Hartford ("FBWH") was acquired by NECB and
merged with and into NEBT. The transaction was accounted for as a pooling of
interests and, accordingly, the financial information for all prior periods
presented have been restated to present the combined financial information as
though the Company and FBWH had operated as a combined entity for all periods
presented.
On December 31, 1997, Community Savings Bank was acquired by NECB and renamed
Community Bank. The acquisition was accounted for using the purchase method of
accounting. As such, the comparative statements do not include prior operating
results of Community Bank.
A summary of financial information relating to the above transactions is
presented in Note 2.
SECURITIES
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.
7
<PAGE>
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 LOAN LOSSES
The allowance for 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.
8
<PAGE>
The Company applies Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS No. 114) 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. SFAS No. 114 requires 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.
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.
LOANS HELD-FOR-SALE
Loans held-for-sale are carried at the lower of aggregate cost or fair value.
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights". On January 1, 1997, the Company adopted SFAS No. 125
which supersedes SFAS No. 122. Under SFAS No. 125, the distinction between
"normal" and "excess" servicing is eliminated. SFAS No. 125 distinguishes only
between the benefits of servicing, the amounts that will be received only if the
servicing work is performed to the satisfaction of the loans' owner and other
amounts retained after the sale of the loans. Such other amounts are accounted
for like interest-only strips and are subsequently measured like investments in
debt securities classified as available-for-sale or trading. These Statements
require that the Company recognize, as a separate asset, rights to service 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 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 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
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 and expenses of other real estate owned.
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.
9
<PAGE>
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 no more than 15 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.
EARNINGS PER SHARE
In the year ended December 31, 1997, the Company adopted SFAS No. 128 "Earnings
per Share" ("EPS"). The Statement simplifies the standards for computing
earnings per share. It replaces the presentation of "Primary EPS" with "Basic
EPS" which excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS, if applicable, reflects the potential dilution that
could occur if securities or other contracts of issue common stock (e.g., stock
options granted to employees) were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. In accordance with SFAS No. 128, EPS data for the year ending December
31, 1996 has been restated. The adoption of the Statement had no material effect
on the Company's financial statements. EPS for 1996 was restated to reflect the
December 1997 ten percent stock dividend.
CASH FLOWS
For the purpose of the statements of cash flows, the Company has defined cash
and cash equivalents as cash, due from banks, short-term investments and federal
funds sold.
STOCK-BASED COMPENSATION
Prior to 1996, the Company recognized stock-based compensation expense in the
basic financial statements using the "intrinsic value" approach as set forth in
Accounting Principles Board ("APB") Opinion No. 25. As of January 1, 1996, the
Company had the option, under SFAS No 123 of changing its accounting method for
stock-based compensation from the APB No. 25 method to the "fair value" method
introduced in SFAS No. 123. The Company elected to continue using the APB No. 25
method. 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. The Company has made the pro forma disclosures required by SFAS No.
123.
10
<PAGE>
NOTE 2 - ACQUISITIONS
As described in Note 1, on July 10, 1998 NECB acquired OPBT. Under the terms of
the acquisition, approximately 586,000 shares of NECB common stock were
exchanged for all OPBT common stock owned at an exchange ratio of 8.6674 shares
of NECB for each share of OPBT. Net income for OPBT reported prior to merger was
as follows:
<TABLE>
<CAPTION>
Six Months
Ending
(Amounts in Thousands) June 30, 1998 1997 1996
------------- ------- -------
Olde Port Bank and Trust: (Unaudited)
<S> <C> <C> <C>
Net interest income after provision for loan losses $1,055 $2,058 $1,864
Noninterest income 153 247 266
-------- -------- --------
Total 1,208 2,305 2,130
Noninterest expense 862 1,355 1,241
-------- ------- -------
Income before income taxes 346 950 889
Income taxes 170 307 318
-------- -------- --------
Net income $ 176 $ 643 $ 571
======= ======= =======
</TABLE>
As described in Note 1, on August 14, 1998 NECB acquired BSW. Under the terms of
the acquisition, approximately 1,270,000 shares of NECB common stock were
exchanged for all BSW common stock owned at an exchange rate of 1.3539 shares of
NECB for each share of BSW. Net income for BSW reported prior to merger was as
follows:
<TABLE>
<CAPTION>
Six Months
Ending
(amounts in thousands) JUNE 30, 1998 1997 1996
--------------- ------- -------
Bank of South Windsor: (unaudited)
<S> <C> <C> <C>
Net interest income after provision for loan losses $3,587 $6,810 $5,639
Noninterest income 409 1,133 1,142
-------- ------- -------
Total 3,996 7,943 6,781
Noninterest expense 2,972 5,984 5,504
------- ------- -------
Income before income taxes 1,024 1,959 1,277
Income taxes 364 738 494
-------- -------- --------
Net income $ 660 $1,221 $ 783
======= ====== =======
</TABLE>
As described in Note 1, the acquisition of FBWH was completed on August 7, 1997.
Under the terms of the acquisition, approximately 995,000 shares of NECB common
stock were exchanged for all of the outstanding common shares of FBWH at an
exchange ratio of 0.62 shares of NECB for each share of FBWH. Net income for
FBWH reported prior to merger was as follows:
<TABLE>
<CAPTION>
Six Months
Ending
(amounts in thousands) JUNE 30, 1997 1996
--------------- -------
First Bank of West Hartford: (unaudited)
<S> <C> <C>
Net interest income after provision for loan losses $2,106 $3,775
Noninterest income 539 1,038
-------- -------
Total 2,645 4,813
Noninterest expense 1,642 3,263
------- -------
Income before income taxes 1,003 1,550
Income taxes 384 324
-------- --------
Net income $ 619 $1,226
======= ======
</TABLE>
The financial information for NECB, OPBT, BSW and FBWH has been restated to
present the combined financial condition and results of operations of all
companies as if the acquisitions had been in effect for all periods presented.
11
<PAGE>
On December 31, 1997, NECB acquired CMBK. Under the terms of the acquisition,
NECB paid $5.30 in cash for each of the outstanding common shares of CMBK. As
described in Note 1, the acquisition was accounted for as a purchase. In
purchase accounting, consolidated income includes income of the acquired entity
from the date of acquisition. Since the date of acquisition was December 31,
1997, the results of operations for CMBK are not included in the consolidated
financial statements for the year ended December 31, 1997. Goodwill reflected by
purchase accounting amounted to $1,089,000 and is being amortized over fourteen
(14) years.
On November 30, 1995, the Company acquired EQBK 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 EQBK. The
dissenting shareholders and the Company settled in full in 1997. On July 11,
1996, NECB acquired Manchester State Bank ("MSB") 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 MSB. Both of these 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 EQBK and MSB acquisitions, respectively, and in
both cases is being amortized over fifteen (15) years.
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, 1998
Marketable equity securities.................. $ 29,826 $ 866 $323 $ 30,369
Debt securities issued by the U.S. Treasury
and other U.S. government agencies......... 102,029 1,017 109 102,937
Debt securities issued by state and political
subdivision of the states................... 13,186 260 29 13,417
Corporate debt securities..................... 10,610 147 30 10,727
Asset-backed securities....................... 986 33 1,019
Mortgage-backed securities.................... 32,950 499 51 33,398
-------- ------ ---- --------
$189,587 $2,822 $542 $191,867
======== ====== ==== ========
December 31, 1997
Marketable equity securities.................. $ 10,198 $1,306 $236 $ 11,268
Debt securities issued by the U.S. Treasury
and other U.S. government agencies.......... 97,319 818 77 98,060
Debt securities issued by the state and political
subdivisions of the state................... 7,060 76 10 7,126
Corporate debt securities..................... 10,873 89 35 10,927
Asset-backed securities....................... 527 527
Mortgage-backed securities.................... 33,936 391 34 34,293
-------- ------ ---- --------
$159,913 $2,680 $392 $162,201
======== ====== ==== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
HELD-TO-MATURITY SECURITIES:
December 31, 1998
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury
and other U.S. government agencies........... $ 1,899 $ 15 $ $ 1,914
Debt securities issued by states and political
subdivisions of the states................... 2,839 130 2,969
Mortgage-backed securities...................... 672 6 678
Other debt securities........................... 265 5 270
---------- ------- ------- ----------
$ 5,675 $ 156 $ $ 5,831
========== ======= ======= ==========
December 31, 1997
Debt securities issued by the U.S. Treasury
and other U.S. government agencies........... $ 8,798 $ 46 $ 33 $ 8,811
Debt securities issued by states and political
subdivisions of the states................... 2,841 103 2,944
Mortgage-backed securities...................... 2,461 4 6 2,459
Other debt securities........................... 215 4 219
--------- ------- ----- ---------
$ 14,315 $ 157 $ 39 $ 14,433
========= ======= ===== =========
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $1,716,000 and $52,000, respectively, in 1998; $622,000 and
$237,000, respectively, in 1997; and $102,000 and $79,000, respectively, in
1996.
The scheduled maturities of securities held-to-maturity and securities
available-for-sale (other than equity securities) at December 31, 1998 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 and
asset-backed securities:
Due within one year............................... $ 11,362 $ 11,420 $ 900 $ 906
Due after one year through five years............. 42,508 43,123 1,404 1,451
Due after five years through ten years............ 63,389 63,846 2,501 2,577
Due after ten years............................... 8,566 8,692 198 219
Mortgage-backed securities........................... 32,950 33,398 672 678
Asset-backed securities.............................. 986 1,019
--------- --------- ------ ------
$ 159,761 $ 161,498 $5,675 $5,831
========= ========= ====== ======
</TABLE>
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of shareholders' equity at December 31, 1998.
Securities having a carrying amount of $49,835,000 at December 31, 1998 were
assigned to secure treasury, tax and loan deposits, public deposits or
securities sold under agreements to repurchase.
<PAGE>
NOTE 4 - LOANS RECEIVABLE
(amounts in thousands)
Loans consisted of the following at December 31,
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial and financial............................................... $146,962 $126,686
Real estate:
Construction....................................................... 23,862 23,914
Residential........................................................ 123,446 160,057
Commercial......................................................... 176,139 180,347
Consumer............................................................... 45,571 47,178
-------- --------
Loans outstanding...................................................... $515,980 $538,182
======== ========
</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 LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Balance, beginning of year............................ $12,081 $ 9,355 $9,199
Changes incident to purchase acquisitions............. 2,108 2,010
Provision charged to operations....................... 1,303 1,636 2,687
Recoveries............................................ 906 813 717
Charge-offs........................................... (4,198) (1,831) (5,258)
------- ------- ------
Balance, end of year.................................. $10,092 $12,081 $9,355
======= ======= ======
</TABLE>
RESTRUCTURED LOANS
Loans restructured in a troubled debt restructuring before January 1, 1995, the
effective date of SFAS No. 114 that are not impaired based on the terms
specified by the restructuring agreement, are as follows as of December 31:
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997
---- ----
<S> <C> <C>
Aggregate recorded investment................................................ $0 $834
Grossinterest income that would have been recorded in the year if the loans had
been current in accordance with their original terms
and had been outstanding throughout the year or since origination....... 0 58
Interest income on the loans included in net income for the year............. 0 37
As of December 31, 1997, the Company had no commitments to lend additional funds
to the debtors in the above restructured loans.
Loans whose terms were modified are not included above, if subsequent to
restructuring, their effective interest rates were equal to or greater than the
rate that the Company was willing to accept for a new loan with comparable risk.
</TABLE>
<PAGE>
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 thousands) 1998 1997
-------------------------- --------------------------
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.... $3,025 $728 $7,342 $1,951
Loans for which there is no related allowance for credit losses... 231 1,043
------ ---- ------ ------
Totals......................................................... $3,256 $728 $8,385 $1,951
====== ==== ====== ======
Average recorded investment in impaired loans during the
year ended December 31,........................................ $3,543 $7,346
====== ======
Related amount of interest income recognized during the time, in the year ended
December 31, that the loans were impaired:
Total recognized............................................... $ 10 $ 160
====== ======
Amount recognized using a cash-basis method of accounting...... $ 5 $ 9
====== ======
</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 the Company's executive officers, directors, principal shareholders and
their associates aggregated $3,866,000 at December 31, 1998. The following table
summarizes the related party loan activity for the year ended December 31, 1998
(Note: beginning balance does not include executive officers or directors who
are not affiliated with the Company at year-end):
(amounts in thousands)
Balance, beginning of year.................................... $4,590
Additions..................................................... 606
Repayments.................................................... (1,330)
-------
Balance, end of year.......................................... $3,866
======
LOAN SERVICING
Loans serviced for others are not included in the accompanying balance sheets.
The unpaid principal balances of loans serviced for others were $126,943,000 and
$98,868,000 as of December 31, 1998 and 1997, respectively.
<PAGE>
Activity in the Company's loan servicing asset for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997 1996
------- ---- ----
<S> <C> <C> <C>
Balance, beginning of year............................ $ 423 $183 $
Servicing assets capitalized.......................... 815 259 186
Amortization.......................................... (56) (19) (3)
------ ---- -----
Balance, end of year.................................. $1,182 $423 $183
====== ==== ====
</TABLE>
The above year end balances of the loan servicing asset approximate their fair
values.
No valuation allowance for capitalized servicing rights was required in 1998 or
1997.
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: 1998 1997
--------- ---------
<S> <C> <C>
Land...................................................... $ 2,427 $ 2,101
Premises.................................................. 10,893 10,444
Furniture and equipment................................... 8,960 9,593
Leasehold improvements.................................... 3,616 3,054
------- -------
Total cost............................................. 25,896 25,192
Less accumulated depreciation and amortization................ (11,964) (11,891)
------- -------
Net book value............................................ $13,932 $13,301
======= =======
</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 $1,533,000 in 1998, $1,383,000 in 1997 and $1,146,000 in 1996 and is
recorded in occupancy expenses.
The minimum rental commitments required under operating leases at December 31,
1998 are as follows:
(amounts in thousands)
1999.............................. $1,275
2000.............................. 1,227
2001.............................. 1,183
2002.............................. 1,019
2003.............................. 916
Years thereafter.................. 3,635
------
$9,255
======
<PAGE>
NOTE 6 - DEPOSITS
The aggregate amounts of time deposit accounts (including CDs) with a minimum
denomination of $100,000 or more were $49,699,000 and $40,518,000 as of December
31, 1998 and 1997, respectively. For all time deposits as of December 31, 1998,
the aggregate amount of maturities for each of the following five years ended
December 31, and thereafter are:
(amounts in thousands)
1999......................... $206,847
2000......................... 36,016
2001......................... 7,490
2002......................... 5,217
2003......................... 2,711
Years thereafter............. 11
--------
$258,292
========
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:
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Treasury, tax and loan deposits............................... $ 4,188 $ 8,018
Securities sold under agreements to repurchase................ 30,660 8,254
------- -------
Total...................................................... $34,848 $16,272
======= =======
</TABLE>
Securities sold under agreements to repurchase consist of funds borrowed from
customers on a short-term basis secured by portions of the Bank's investment
portfolio. The securities which were sold have been accounted for not as sales
but as borrowings. The securities consisted of debt securities issued by the
U.S. Treasury and other U.S. government corporations and agencies. The
securities were held in safekeeping by a broker, under the control of the Bank.
The purchasers have agreed to sell to the Bank substantially identical
securities at the maturity of the agreements. The agreements mature generally
within three months from date of issue.
NOTE 8 - LONG-TERM DEBT
Notes payable to the Federal Home Loan Bank are collateralized by Federal Home
Loan Bank stock and first mortgage real estate loans. All of the notes are fixed
rate and have a weighted average interest rate of 6.15%. The following is a
schedule of maturities:
(amounts in thousands)
1999......................... $ 6,353
2000......................... 5,194
2001......................... 3,738
2002......................... 5,040
2003......................... 4,131
Years thereafter............. 2,768
Add: Unamortized premium 55
-------
$27,279
=======
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS
STOCK COMPENSATION
As indicated in Note 1, the Company applies APB Opinion 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
cost has been recognized for its fixed stock options granted. Had compensation
cost been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Net income (In thousands) As reported $7,554 $6,499 $6,842
Pro forma 7,312 6,367 6,779
Earnings per common share As reported $1.07 $0.93 $1.06
Pro forma 1.04 0.91 1.05
Earnings per common share, assuming dilution As reported $1.05 $0.92 $1.06
Pro forma 1.01 0.90 1.05
</TABLE>
During 1993, the Board of Directors of the Company granted stock options to two
executive officers to purchase 37,400 shares of common stock at $4.55 per share.
These options were all exercised in 1996. In January 1995, the Board of
Directors of the Company voted to grant stock options to three executive
officers to purchase 33,000 shares of common stock at $7.05 per share after
January 24, 1996 and prior to January 24, 1998. These options were all exercised
in 1997. On January 31, 1996 the Board of Directors formed the Executive
Compensation Committee (Committee) to administer the 1996 Incentive and
Nonqualified Compensatory Stock Option Plan (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 825,000 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% 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 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 may be exercised ten years after the date of grant.
Under the 1997 Non-Officer Directors' Stock Option Plan (1997 Plan), the
Executive Compensation Committee may grant stock options to non-officer members
of the Board who are not otherwise employees of the Company. Unless sooner
terminated, the 1997 Plan expires in August of 2007. The aggregate number of
shares that may be optioned is 330,000. The option price is fixed by the
Committee at the time of the grant and may not be less than 100% 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 exercised in five equal annual installments
commencing from the date set forth in the Stock Option Agreement for such
option; and shall remain in effect in accordance with their terms. Each
individual who was a Participant on the effective date was automatically granted
on the effective date an option to purchase 11,000 shares and future grants
shall be made only upon approval of the shareholders.
In 1990, the Bank of South Windsor established a Non-Qualified Stock Option Plan
and reserved 127,600 shares of BSW common stock for issuance under this plan to
employees and directors of BSW. Under the 1990 Plan the option price was equal
to the fair value of BSW's common stock on the date the options are granted.
Once granted, options under the Plan are exercisable and expire ten years from
the grant date. In 1998, the Company adopted the BSW 1990 Plan and all
outstanding options as of the date that NECB acquired BSW were converted to an
equivalent number of stock options to purchase NECB stock at exercise prices
based on the conversion factor in the purchase of BSW.
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the grants in 1996 and 1997: Dividend yield of 2.1 percent;
expected volatility of 25 percent; risk-free interest rates of 5.89 percent in
1997 and 5.17 percent in 1996; and expected lives of 8 years.
A summary of the status of all of the Company's stock options as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- --------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 662,863 $12.59 366,137 $ 7.80 242,767 $6.39
Granted 352,810 16.73 160,770 9.16
Exercised (51,786) 8.41 (56,084) 6.91 (37,400) 4.55
Forfeited (12,100) 17.27
Settled upon acquisition (16,476) 10.02
Settled in cash (26,284) 6.72
------- ------- -------
Outstanding, end of year 556,217 $13.25 662,863 $12.59 366,137 $7.80
======= ======= =======
Options exercisable at year-end 222,697 182,172 205,896
Weighted-average fair value of
options granted during the year N/A $5.66 $2.89
</TABLE>
The following table summarizes information about fixed stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
EXERCISE PRICES AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$5.54 6,769 7.2 years $5.54 6,769 $5.54
6.72 96,798 1.4 years 6.72 96,798 6.72
9.32 143,000 7.1 years 9.32 57,200 9.32
17.27 309,650 8.7 years 17.27 61,930 17.27
------- -------
$13.25 556,217 7.0 years 13.25 222,697 10.29
======= =======
</TABLE>
The information in the above tables about options granted in 1997 is a
restatement of information previously reported. The information previously
reported did not include 66,000 options granted in 1997 and approved by the
Board of Directors at an exercise price of $17.27. These grants were under the
1997 Plan, which became effective upon approval by the shareholders in 1998.
DEFINED CONTRIBUTION PLAN
During 1997, 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 $263,000, $254,000
and $211,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
NOTE 10 - EARNINGS PER SHARE ("EPS")
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the net income:
(amounts in thousands; except per share data)
<TABLE>
<CAPTION>
Income Shares Per-Share
(NUMERATOR) (DENOMINATOR) AMOUNT
Year ended December 31, 1998
Basic EPS
<S> <C> <C> <C>
Net income and income available to common stockholders $7,554 7,042 $1.07
Effect of dilutive stock options 162
------ -----
Diluted EPS
Income available to common shareholders and assumed conversions $7,554 7,204 $1.05
====== =====
Year ended December 31, 1997
Basic EPS
Net income and income available to common shareholders $6,499 6,972 $0.93
Effect of dilutive stock options 97
------ -----
Diluted EPS
Income available to common shareholders and assumed conversions $6,499 7,069 $0.92
====== =====
Year ended December 31, 1996 - as restated
Basic EPS
Net income and income available to common shareholders $6,842 6,465 $1.06
Effect of dilutive stock options 20
------ -----
Diluted EPS
Income available to common shareholders and assumed conversions $6,842 6,485 $1.06
====== =====
</TABLE>
NOTE 11 - INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
The components of income tax expense (benefit) are as follows:
(amounts in thousands)
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $2,835 $3,268 $1,642
State 846 1,083 523
------- ------- ------
3,681 4,351 2,165
------- ------- ------
Deferred:
Federal 1,527 285 1,056
State 378 39 285
------- ------- ------
1,905 324 1,341
------- ------- ------
Change in valuation allowance (104) (380) (395)
Benefit of operating loss carryforward (332) (133)
-------- ------- ------
Total income tax expense $5,150 $ 4,162 $3,111
====== ======= ======
</TABLE>
<PAGE>
The following reconciles the income tax provision from the statutory rate to the
amount reported in the consolidated statements of income:
<TABLE>
<CAPTION>
(amounts in thousands)
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (1.4) (.8) (.5)
Dividends received deduction (.8) (.4) (.9)
Unallowable goodwill amortization and other reorganization expense, net 2.7 2.2
Other adjustments (.1) 6.4
Unallowable expenses .4 .2 .4
Change in valuation allowance (.8) (1.4) (8.2)
Benefit of operating loss carryforward (.4)
State tax, net of federal tax benefit 6.4 5.8
---- ---- ----
40.5% 39.1% 31.2%
==== ==== ====
</TABLE>
At December 31, the Company had gross deferred tax assets and gross deferred tax
liabilities as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued interest on nonperforming loans $ 84 $ 135
Accrued deferred compensation 56 60
Allowance for loan losses 1,415 2,002
Loan origination fees 123 187
Depreciation 16 91
Other real estate owned valuation 145 206
Purchase accounting 106 108
Transaction costs 386
Capital loss carryforward 58
Operating loss carryforward 641 918
------ ------
Gross deferred tax assets 2,586 4,151
Valuation allowance (104)
------ ------
2,586 4,047
------ ------
Deferred tax liabilities:
Mortgage servicing rights (479) (173)
Other adjustments (131) (23)
Discounts on loans (8) (51)
Prepaid expenses (11) (42)
Net unrealized gain on securities available-for-sale (896) (931)
------ ------
Gross deferred tax liabilities (1,525) (1,220)
------ ------
Net deferred tax assets $1,061 $2,827
====== ======
</TABLE>
Deferred tax assets at December 31, 1998 have not been reduced by a valuation
allowance because management believes that it is more likely than not that the
full amount of deferred tax assets will be realized.
As of December 31, 1998 the Company had Federal operating loss carryovers of
$2,396,000 with expiration dates from the years 2007 to 2011 and alternative
minimum tax credit carryovers of $40,000 with no expiration date.
<PAGE>
NOTE 12 - 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, 1998 and 1997 and statements of income and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998 follow:
<TABLE>
<CAPTION>
(amounts in thousands)
BALANCE SHEETS 1998 1997
--------- ---------
<S> <C> <C> <C>
Assets:
Cash $ 106 $ 334
Short-term investments 735
------- -------
Cash and cash equivalents 841 334
Investments 1,013
Investment in bank subsidiaries 72,350 67,729
Other assets 1,028 1,274
------- -------
Total Assets $74,219 $70,350
======= =======
Other liabilities $ 869 $ 2,009
Shareholders' equity 73,350 68,341
------- --------
Total Liabilities & Shareholders' Equity $74,219 $70,350
======= =======
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME 1998 1997 1996
------- ------- -------
Equity in (distributed) undistributed net income of bank subsidiaries $ 3,789 $ (338) $6,169
Net interest and dividend income 3,570 7,641 832
Investment securities gains, net 898
Other income 7
Other expense 566 1,342 336
Income tax (benefit) expense 144 (538) (177)
------- ------ ------
Net income 7,554 6,499 6,842
------- ------ ------
Other comprehensive income, net of tax
Unrealized holding gains (losses) on available-for-sale securities,
Parent Company only (379) 251 89
Unrealized holding gains (losses) on available-for-sale securities,
Subsidiaries 406 1,105 (257)
------- ------ ------
Total other comprehensive income, net of tax 27 1,356 (168)
------- ------ ------
Comprehensive income $ 7,581 $7,855 $6,674
======= ====== ======
(amounts in thousands)
STATEMENTS OF CASH FLOWS 1998 1997 1996
------- ------- -------
Operating activities:
Net income $ 7,554 $6,499 $6,842
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in distributed (undistributed) net income of bank subsidiaries (3,789) 338 (6,169)
Securities gains, net (898) (1)
Net increase (decrease) in other liabilities (1,102) 955 (301)
Net (increase) decrease in other assets 229 (192) 60
Decrease in taxes payable (324) (368) (70)
------- ------ ------
Net cash provided by operating activities 1,670 7,232 361
------- ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investing activities: 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Purchases of securities (179) (98)
Proceeds from retirement of stock of acquired banks 22 110
Cost of acquisitions (277)
Proceeds from sales of securities 1,277 4,650
Cash paid to shareholders of acquired banks (4,832) (3,520)
Investments in acquired banks (100) (919)
Other (5)
------ ------ ------
Net cash provided by (used in) investing activities 1,199 (5,820) 750
------ ------ ------
Financing activities:
Net proceeds from issuance of common stock 613 232 170
Settlement of stock options (652)
Dividends paid (2,323) (1,594) (1,055)
------ ------ ------
Net cash used in financing activities (2,362) (1,362) (885)
------ ------ ------
Increase in cash and cash equivalents 507 50 226
Cash and cash equivalents, beginning of year 334 284 58
------ ------ -------
Cash and cash eqivalents, end of year $ 841 $ 334 $ 284
====== ====== =======
</TABLE>
NOTE 13 - 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, 1998,
$575,000 are secured by deposit accounts held with the Company's subsidiaries.
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.
<PAGE>
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, short-term investments and federal
funds sold approximate fair value.
Interest bearing time deposits The carrying amounts for interest bearing time
deposits 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.
Loans held-for-sale The carrying amounts for loans held-for-sale
fair value. approximate
Accrued interest receivable The carrying amount of accrued interest receivable
approximates its fair value.
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 of federal funds purchased,
borrowings under repurchase agreements and other
short-term borrowings maturing within 90 days
approximate fair values. Fair values of other
short-term borrowings are estimated using
discounted cash flow analyses based on the
Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt The fair values of the Company's long-term
debt are estimated using discounted cash flow
analyses based on the Company's current
incremental borrowing rates for similar types of
borrowing arrangements.
<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>
1998 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
(amounts in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- ----------
Financial assets:
Cash and cash equivalents $ 52,844 $52,844 $ 61,030 $ 61,030
Interest bearing time deposits 694 694 879 879
Securities available-for-sale 191,867 191,867 162,201 162,201
Securities held-to-maturity 5,675 5,831 14,315 14,433
Federal Home Loan Bank stock 4,881 4,881 4,881 4,881
Loans 505,888 514,700 526,101 529,402
Loans held-for-sale 7,721 7,721 2,966 2,966
Accrued interest receivable 13,932 13,932 13,301 13,301
Financial liabilities:
Deposits 664,078 665,420 694,946 695,914
Short-term borrowings 34,848 34,848 16,272 16,272
Long-term debt 27,279 27,620 22,309 22,298
</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)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Notional Notional
Amount Amount
------ ------
Commitments to extend credit $111,398 $74,595
Standby letters of credit and financial guarantees 4,491 4,623
</TABLE>
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.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments".
<PAGE>
NOTE 14 - DISCLOSURE FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
Supplemental disclosure of cash paid during the period for: 1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Income tax paid $ 4,119 $ 3,300 $ 2,222
Interest paid 22,568 19,386 17,849
Supplemental disclosure of noncash investing and financing activities:
Loans charged off, net of recoveries 3,292 1,018 4,541
Real estate acquired through foreclosure 1,682 2,524 3,738
Loans originated to facilitate sales of other real estate owned 404 1,154 1,071
Investments transferred from held-to-maturity to available-for-sale securities 2,493
Assets acquired and liabilities assumed in purchase business combinations were
as follows:
Fair value of assets acquired, excluding cash and cash equivalents 62,422 77,063
Cash and cash equivalents acquired 7,888 14,236
-------- --------
70,310 91,299
Liabilities assumed 64,309 84,989
-------- --------
Value of acquired entities $ 6,001 $ 6,310
======== ========
</TABLE>
NOTE 15 - 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.
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,
1998, that the Company and the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, 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.
<PAGE>
The actual capital amounts and ratios are also presented in the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(dollar amounts in thousands) Actual Adequacy Purposes Action Provisions:
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C>
Consolidated $73,980 13.3% $44,418 > 8.0% N/A N/A
-
NEBT 48,838 12.7 30,829 8.0 $38,536 >10.0%
-
EQBK 12,781 13.3 7,682 8.0 9,602 10.0
CMBK 5,720 16.2 2,823 8.0 3,530 10.0
OPBT 5,656 14.2 3,178 8.0 3,973 10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 67,001 12.1 22,209 4.0 N/A N/A
NEBT 44,000 11.4 15,415 4.0 23,122 6.0
EQBK 11,573 12.1 3,841 4.0 5,761 6.0
CMBK 5,271 14.9 1,412 4.0 2,117 6.0
OPBT 5,157 13.0 1,589 4.0 2,384 6.0
Tier 1 Capital (to Average Assets):
Consolidated 67,001 8.3 32,303 4.0 N/A N/A
NEBT 44,000 7.5 23,361 4.0 29,202 5.0
EQBK 11,573 10.1 4,592 4.0 5,740 5.0
CMBK 5,271 8.0 2,650 4.0 3,313 5.0
OPBT 5,157 9.4 2,185 4.0 2,731 5.0
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Consolidated $68,573 12.5% $43,862 > 8.0% N/A N/A
--
NEBT 35,664 12.6 22,727 8.0 $28,409 >10.0%
-
EQBK 11,253 12.4 7,275 8.0 9,094 10.0
CMBK 4,841 10.4 3,720 8.0 4,651 10.0
BSW 11,898 11.9 7,987 8.0 9,983 10.0
OPBT 5,094 15.3 2,669 8.0 3,336 10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 61,746 11.3 21,931 4.0 N/A N/A
NEBT 32,091 11.3 11,364 4.0 17,046 6.0
EQBK 10,107 11.1 3,638 4.0 5,456 6.0
CMBK 4,241 9.1 1,860 4.0 2,790 6.0
BSW 10,639 10.7 3,993 4.0 5,990 6.0
OPBT 4,674 14.0 1,335 4.0 2,002 6.0
Tier 1 Capital (to Average Assets):
Consolidated 61,746 8.6 28,567 4.0 N/A N/A
NEBT 32,091 8.0 15,980 4.0 19,975 5.0
EQBK 10,107 8.8 4,612 4.0 5,765 5.0
CMBK 4,241 6.1 2,778 4.0 3,472 5.0
BSW 10,639 6.9 6,175 4.0 7,719 5.0
OPBT 4,674 10.0 1,869 4.0 2,336 5.0
</TABLE>
<PAGE>
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
outstanding to the Company by any subsidiary at December 31, 1998 or 1997.
NOTE 16 - LITIGATION
CMBK is the defendant in a breach of employment contract suit. The Plaintiff is
seeking monetary damages. The case is in discovery and is scheduled for trial in
March 1999. Management and legal counsel are unable to evaluate the outcome at
the present time.
NECB is party to various other legal proceedings normally incident to the kind
of business conducted. Management believes that no material liability will
result from such proceedings.
NOTE 17 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
<PAGE>
EXHIBIT INDEX
Exhibit # Description Page
- --------- ----------- ----
21 List of Subsidiaries
27.1 Financial Data Schedule--Fiscal Year End 1998
27.2 Restated Financial Data Schedule--Fiscal Year Ends 1997
40
SUBSIDIARIES OF NEW ENGLAND COMMUNITY BANCORP, INC.
Percent
Owned By
New England
Incorporated In Community
Subsidiary the State of: Bancorp, Inc.
- ---------- ------------- -------------
New England Bank and Trust Company Connecticut 100%
The Equity Bank Connecticut 100%
Community Bank Connecticut 100%
Olde Port Bank and Trust New Hampshire 100%
New England Community Mortgage Corp. Connecticut 100%
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 39279
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1485
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 191867
<INVESTMENTS-CARRYING> 22636
<INVESTMENTS-MARKET> 22792
<LOANS> 515980
<ALLOWANCE> 10092
<TOTAL-ASSETS> 803887
<DEPOSITS> 664078
<SHORT-TERM> 34848
<LIABILITIES-OTHER> 4332
<LONG-TERM> 27279
0
0
<COMMON> 703
<OTHER-SE> 72647
<TOTAL-LIABILITIES-AND-EQUITY> 803887
<INTEREST-LOAN> 47730
<INTEREST-INVEST> 11663
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 59784
<INTEREST-DEPOSIT> 19893
<INTEREST-EXPENSE> 22608
<INTEREST-INCOME-NET> 37176
<LOAN-LOSSES> 1303
<SECURITIES-GAINS> 1664
<EXPENSE-OTHER> 32359
<INCOME-PRETAX> 12704
<INCOME-PRE-EXTRAORDINARY> 7554
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7554
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 5.11
<LOANS-NON> 5340
<LOANS-PAST> 977
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16081
<ALLOWANCE-OPEN> 12081
<CHARGE-OFFS> 4198
<RECOVERIES> 906
<ALLOWANCE-CLOSE> 10192
<ALLOWANCE-DOMESTIC> 10192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<RESTATED>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 44338
<INT-BEARING-DEPOSITS> 109
<FED-FUNDS-SOLD> 8725
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162201
<INVESTMENTS-CARRYING> 27921
<INVESTMENTS-MARKET> 28039
<LOANS> 538182
<ALLOWANCE> 12081
<TOTAL-ASSETS> 806888
<DEPOSITS> 694946
<SHORT-TERM> 16272
<LIABILITIES-OTHER> 5020
<LONG-TERM> 22309
0
0
<COMMON> 702
<OTHER-SE> 67639
<TOTAL-LIABILITIES-AND-EQUITY> 68341
<INTEREST-LOAN> 42738
<INTEREST-INVEST> 10797
<INTEREST-OTHER> 677
<INTEREST-TOTAL> 54212
<INTEREST-DEPOSIT> 17928
<INTEREST-EXPENSE> 19504
<INTEREST-INCOME-NET> 34708
<LOAN-LOSSES> 1636
<SECURITIES-GAINS> 375
<EXPENSE-OTHER> 27870
<INCOME-PRETAX> 10661
<INCOME-PRE-EXTRAORDINARY> 10661
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6499
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 5.32
<LOANS-NON> 9838
<LOANS-PAST> 1060
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15359
<ALLOWANCE-OPEN> 9355
<CHARGE-OFFS> 1931
<RECOVERIES> 813
<ALLOWANCE-CLOSE> 12081
<ALLOWANCE-DOMESTIC> 12081
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
