SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main Street, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the average bid and asked prices of such stock, as of
September 4, 1997, is $51,054,636. The number of shares of Common Stock
outstanding as of September 4, 1997, is 3,835,090.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated September 22, 1997
for the 1997 Annual Meeting of Shareholders are incorporated by reference into
Part III (Items 10, 11, 12 and 13).
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . 11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . 68
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . 69
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 69
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 69
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 69
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 70
PART I
Item 1. BUSINESS
The Company and the Bank
NewMil Bancorp, Inc., (the "Company"), a Delaware corporation, is the
registered bank holding company for New Milford Savings Bank ("the
Bank"), a wholly-owned subsidiary. The Company's activity is currently
limited to the holding of the Bank's outstanding capital stock and the
Bank is the Company's only subsidiary and its primary investment. The
net income of the Company is presently derived from the business of the
Bank. Future establishment or acquisition of subsidiaries by the
Company is possible. Nevertheless, it is expected that the Bank will
account for most of the Company's net income in the foreseeable future.
The Bank is a Connecticut chartered and Federal Deposit Insurance
Corporation (the "FDIC") insured savings bank headquartered in New
Milford, Connecticut.
Banking Services
The Bank's principal business consists of attracting deposits from the
public and using such deposits, with other funds, to make various types
of loans and investments. The Bank offers both consumer and commercial
deposit accounts, including checking accounts, interest bearing "NOW"
accounts, money market accounts, certificates of deposit, savings
accounts and Individual Retirement Accounts. The Bank offers 24-Hour
banking through automated teller machines in eight branches.
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank offers a broad range of mortgage and commercial loans to the
companies and small businesses of its service area including lines of
credit, term loans, Small Business Administration lending, commercial
real estate mortgages, and construction and development mortgages. In
addition, the Bank offers services including money orders, travelers'
checks and safe deposit boxes. Although empowered, the Bank is not
currently offering trust services.
Market Area
The Bank conducts its business through 14 offices located in Litchfield,
Fairfield and New Haven Counties. The Bank's service area, which has a
population of approximately 200,000, enjoys a balance of manufacturing,
trade, and service employment and is home to a number of Fortune 500
companies. Although the Bank's primary market area is Litchfield and
northern Fairfield counties, the Bank does have depositors and borrowers
that live outside of these areas.
Connecticut adopted legislation in 1990 which effectively provided for
full interstate banking effective immediately. Accordingly, out-of-
state banking institutions have been allowed since 1990 to acquire
Connecticut banks so long as the home state of the acquiring institution
would allow ("reciprocity") a Connecticut institution to acquire a bank
in that state. A federal law adopted in 1994 enables out-of-state
banking institutions to make acquisitions in Connecticut regardless of
reciprocity. The same federal (the "Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994") law permits interstate mergers of
banking institutions as of June 1, 1997, unless a state elects to
prohibit such mergers, or elects to allow such mergers sooner. The
federal legislation also allows states to elect to authorize in that
state "de novo" branching of out of state institutions. Connecticut
adopted legislation that permits interstate mergers and "de novo"
branching, provided that the target institution of a merger proposal is
at least five years old and that no transaction will result in a
concentration in any one institution of more than 30% of the state's
total deposits. Although a number of out of state institutions have
begun operations in Connecticut in recent years, the impact of expected
further competition under the new interstate banking laws cannot be
determined at this time. The Company may consider expansion within or
outside of New England provided appropriate opportunities and conditions
exist.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
For a table and discussion of the average balances, interest rates and
interest differential of the Company for the years 1997, 1996 and 1995,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" on pages 16 through 18.
For a table and discussion of an analysis of the effect on net interest
income of volume and rate changes on the Company for 1997 over 1996 and
1996 over 1995, see "Management's Discussion and Analysis of Financial
condition and Results of Operations - Results of Operations" on pages 16
through 18. In this analysis, the change due to volume was calculated
as the change in average balance multiplied by the prior year's weighted
average rate, the change in rate was calculated as the change in average
rate multiplied by the prior year's average balance, and the change in
rate/volume was calculated as the change in average rate multiplied by
the change in average balance. Principal amounts of non-accruing loans
have been included in the average loan balances used to determine the
rate earned on loans. Interest income on non-accruing loans is included
in income only to the extent that cash payments have been received.
Securities
For information concerning securities portfolio activities see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the captions "Results of Operations" on pages 16
and 18, "Financial Condition" on pages 30 through 32 and "Note 2 -
Securities" on pages 49 through 51.
Lending Activities
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank also offers a broad range of mortgage and commercial loans to
the companies and small businesses of its service area including lines
of credit, term loans, Small Business Administration ("SBA") lending,
commercial real estate mortgages, and construction and development
mortgages.
One-to-Four Family Residential Mortgage Loans: The Bank offers a
variety of adjustable rate loans, including a one-year adjustable rate
loan and several adjustable rate loans that have fixed rates for an
initial period ranging from 3 to 10 years and adjust thereafter. The
Bank offers amortization periods of up to 30 years. The Bank's
adjustable rate loans generally have a limit on the maximum rate change
per interest rate adjustment of 2% to 3%, and have limits on the total
interest rate adjustments during the life of a loan ranging from 4.0% to
6.0%, depending on the initial rate and type of loan. The Bank's
adjustable rate loans include loans whose interest rate adjustments are
based on U.S. Treasury constant maturity indices and other indices.
The Bank's initial rates on adjustable rate mortgage loans are offered
at levels which are intended to be competitive within the Bank's service
area and which are frequently at a discount from fully indiced
contractual rates. The Bank charges origination fees ranging from no
fee to several percent, depending on the initial rate and type of loan.
Adjustable rate mortgage loans allow the Bank to maintain a degree of
rate sensitivity, though the extent of this sensitivity is limited by
the repricing intervals and caps contained in each loan type.
The Bank also offers a variety of fixed rate mortgage loans, most of
which are sold by the Bank either at the time of registration or after
closing. The Bank maintains an active secondary market distribution
capability, which allows the Bank to sell mortgages either on a service-
released or service-retained basis, enhancing fee income. The Bank's
residential mortgage loans are underwritten based on the borrower's
income in accordance with secondary market or investor standards. In
evaluating a potential residential mortgage borrower, the Bank considers
a number of factors, including the creditworthiness of the borrower, the
capacity of the borrower to repay the loan, an appraisal of the property
to be mortgaged and a review of the loan to value ratio.
Collateral and Installment Loans: The Bank makes collateral and
installment loans, including home equity lines of credit, home equity
loans, automobile and other personal loans. While the Bank offers fixed
rates on its consumer loans and home equity loans, its home equity lines
of credit are generally offered at or a spread over the prime rate.
Home equity loans and lines of credit have risks similar to those
associated with residential mortgages discussed above.
Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also
makes loans collateralized by mortgages on commercial and multi-family
residential properties. Commercial and multi-family loans are
originated on an adjustable rate basis, generally with a daily repricing
frequency and with the interest adjustment tied to the Prime rate.
Loans may also be structured with fixed rate terms ranging from 1 to 5
years.
Loans collateralized by commercial properties, including multi-family
residential properties, can involve greater credit risks than one- to
four-family residential mortgage loans. The commercial real estate
business is cyclical and subject to downturns, over-building,
fluctuations in market value and local economic conditions. Typically,
such loans are substantially larger than one- to four-family residential
mortgage loans. Because repayment is often dependent on the cash flow
of a successfully operated or managed property, repayment of such loans
may be more susceptible to adverse conditions in the real estate market
or the economy generally than is the case with residential mortgages.
Construction Loans: The Bank also makes construction loans to
individuals and professional builders for the purpose of constructing 1-
to-4 family residential properties, either as a primary residence or for
investment or resale.
Commercial and Industrial Loans: The Bank offers unsecured commercial
business loans, generally adjustable-rate loans with the adjustment of
interest based on the Prime Rate plus a spread. The Bank believes it
has been conservative in its underwriting standards for this market with
the goal of obtaining quality loans for the portfolio. The Bank also
offers SBA and other Government guaranteed loans. The Bank's loan
products are targeted for, and tailored to the needs of, the local
business and professional community in the Bank's market area.
For further information on the composition and quality of the loan
portfolio see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the captions "Asset Quality
and Portfolio Risk" and "Financial Condition" on pages 25 through 28.
For information on the reduction in interest income associated with non-
accrual loans as of June 30, 1997 see "Note 4 - Non-Performing Assets"
on pages 53. For discussion of the Bank's policy for placing loans on
non-accrual status refer to "Note 1 - Summary of Significant Accounting
Policies - Loans" on page 44 and 45. For information concerning loan
portfolio composition and concentrations see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the
caption "Financial Condition" on page 26 through 32.
Summary of Loan Loss Experience
For a discussion of the factors considered by management in determining
the provision for loan losses, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption
"Results of Operations - Provision and Allowance for Loan Losses" on
pages 19 and 20.
Deposits
For a table on the average balances and rates on deposits, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 16 through 18.
Certificate of deposits with balances of $100,000 and greater amounted
to $12,898,000 and $8,458,000 at June 30, 1997 and 1996, respectively.
The Bank generally attracts deposits from its market area and uses those
deposits to fund lending and investment activities. The Bank's deposit
base has no brokered deposits. Management does not feel that there will
be a need to utilize brokered deposits for the foreseeable future.
Return on Equity and Assets
For selected statistical information required by this item see "Selected
Financial Data" on pages 13 and 14.
Short-term Borrowings
For the information required by this item see "Note 6 - Short Term
Borrowed Funds" on page 54.
Competition
The Bank faces strong competition in attracting and retaining deposits
and in making mortgage and other loans. Its most direct competition for
deposits has historically come from other savings banks, commercial
banks and savings and loan associations located in its market area.
Although the Bank expects this continuing competition to have an effect
upon the cost of funds, it does not anticipate any substantial adverse
effect on maintaining the current deposit base. The Bank is competitive
within its market area in the various deposit products it offers to
depositors. Due to this fact, management feels they have the ability to
maintain the deposit base. The Bank does not rely upon any individual,
group or entity for a significant portion of its deposits.
The Bank's competition for real estate loans comes primarily from
mortgage banking companies, savings banks, savings and loan
associations, commercial banks, insurance companies, and other
institutional lenders. The Bank competes for loan originations
primarily through the interest rates and loan fees it charges and the
efficiency and quality of services it offers borrowers, real estate
brokers and builders. Factors which affect competition include, among
others, the general availability of funds and credit, general and local
economic conditions, current interest rate levels and volatility in the
mortgage markets.
Congress passed legislation in 1994 providing for a phase-in of full
interstate branching. Connecticut law has since 1990 provided for full
interstate banking and has recently adopted legislation allowing
interstate branching, subject to certain limitations. The Company and
the Bank believe that their competitive positions as community-based and
focussed institutions will not be materially adversely affected by the
recent federal and state expansion of full interstate banking and
branching powers.
Economic Conditions and Government Policies
The profitability of the Company is affected by general economic
conditions and governmental policies. Similar to all of New England,
Connecticut experienced a severe recession in 1989 and the early 1990's.
Although some economic stabilization has occurred, Connecticut as a
whole continues to be negatively affected by corporate downsizing,
defense reductions, and corporate consolidations. Real estate values,
particularly commercial real estate values, declined substantially and
have not recovered completely. During the past five fiscal years the
Company has worked to reduce non-performing assets, resulting from these
conditions, and has improved the credit quality of its loan portfolio.
However, should the general economic recovery stall, or reverse, the
Company's operations could be negatively impacted by adverse economic
conditions.
The Bank is regulated by the FDIC and the Connecticut Banking
Department. New Federal and State legislation and regulations are
adopted from time to time which have and may continue to have profound
affects on the Bank's operations. Federal legislation and regulations
in recent years has focused on capitalization, bank expansion (both
geographically and in terms of permissible business), safety and
soundness, interest rate risk and deposit insurance, and in providing
federal regulators with additional enforcement powers to address
perceived problems with banking institutions and individuals closely
associated with them. Banks which are weakly capitalized or which have
safety and soundness problems are likely to pay deposit insurance rates
which are higher (in some cases substantially) than healthier banks.
The recent legislation and regulations generally enhance the need for
banking institutions to be competitive, but are not anticipated to have
a significant negative impact on the Bank.
The Federal Reserve System regulates the national supply of bank credit
in order to influence general economic conditions. These policies have
a significant influence on overall growth and distribution of loans,
investments and deposits, and affect the interest rates charged on loans
or paid for time and savings deposits.
Fluctuations in interest rates, which may result from government fiscal
policies and the monetary policies of the Federal Reserve System, have
a strong impact on the income to be derived from loans and investments,
as well as cost of deposits. While the Company and its subsidiary
strive to anticipate changes and adjust their strategies for such
changes, the level of earnings can be materially affected by economic
circumstances beyond their control.
Supervision and Regulation
Federal Bank Holding Company Regulation: The Company is registered
under, and is subject to, the Bank Holding Company Act of 1956, as
amended. This Act limits the types of companies which the Company may
acquire or organize and the activities in which it or they may engage.
In general, the Company and its subsidiary are prohibited from engaging
in or acquiring direct or indirect control of any corporation engaged in
non-banking activities unless such activities are so closely related to
banking as to be a proper incident thereto. In addition, the Company
must obtain the prior approval of the Board of Governors of the Federal
Reserve System to acquire control of any bank; to acquire, with certain
exceptions, more that 5 percent of the outstanding voting stock of any
other corporation; or, to merge or consolidate with another bank holding
company. As a result of such laws and regulation, the Company is
restricted as to the types of business activities it may conduct and its
subsidiary, the Bank, is subject to limitations on, among others, the
types of loans and the amount of loans it may make to any one borrower.
The Company is also required by the Board of Governors of the Federal
Reserve System to maintain cash reserves against its deposits. After
exhausting all other sources of funds, the Company may request to borrow
from the Federal Reserve. Bank holding companies registered with the
FRB are, among other things, restricted from making direct investments
in real estate. Both the Company and the Bank are subject to extensive
supervision and regulation, which focus on, among other things, the
protection of depositors' funds.
The Company is also subject to the Securities and Exchange Commission
regulations which require that the Company provide its shareholders and
the investing public with annual, quarterly and periodic information
about the Company, its financial condition and material events affecting
its operations and requires an audit, by an independent accounting firm,
be performed at the end of the fiscal year.
Connecticut Savings Bank and FDIC Regulation: The Bank is a state
chartered savings bank organized under the Banking Law of the State of
Connecticut. Deposits are insured by the FDIC and FDIC insurance
premiums are assessed on the Bank's deposit base on a semi-annual basis
at variable rates dependent upon the Bank's capital rating and other
safety and soundness considerations. The Bank is subject to regulation,
examination and supervision by the Banking Department and the FDIC.
Both the Banking Department and the FDIC issue regulations and require
the filing of reports describing the activities and financial condition
of the banks under their jurisdiction. Each agency conducts periodic
examinations to test safety, soundness and compliance with various
regulatory requirements and generally supervises the operations of such
banks.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the FRB and the FDIC. For information on
these capital requirements and the Company and the Bank's capital ratios
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources" on pages 35 and 36. Such
information is incorporated herein by reference and made a part hereof.
Employees
The Bank, which had 124 full-time and 19 part-time employees at June 30,
1997, conducts its banking operations through 14 offices, all in
Litchfield, Fairfield and New Haven Counties. On July 18, 1997 the Bank
opened its fourteenth office in Southbury, Connecticut. Management
considers the Bank's relationship with its employees to be good. The
Bank's employees are not represented by any collective bargaining
groups.
Subsidiaries
The Bank is the only subsidiary of the Company and accounts for 100% of
the Company's income for the current fiscal year. At June 30, 1997, the
Bank had two wholly-owned subsidiaries, Asset Recovery Management
Company and New Mil Asset Company, both formed to hold and develop
certain foreclosed real estate.
Item 2. PROPERTIES
In addition to its main office, located at 19 Main Street, New Milford,
Connecticut, the Bank conducts its business through 14 branches located
in Litchfield, Fairfield and New Haven Counties. The Bank owns its main
office and seven of its branches.
The following table sets forth certain information regarding New Milford
Savings Bank's branch offices, as of June 30, 1997.
<TABLE>
<CAPTION>
Lease
Owned expir-
Date or ation
Branch office Location opened leased date
(a)
<S> <C> <C> <C> <C>
Kent 50 North Main St., Kent, CT 1960 Owned ---
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 1999
Brookfield Route 7, Brookfield, CT 1964 Leased 2000
Sherman Routes 37 & 39, Sherman, CT 1976 Leased 1997
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ---
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ---
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ---
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ---
Morris Route 109 & 63, Morris, CT 1981 Owned ---
Sharon Route 41, Sharon, CT 1971 Leased 1997
Canaan Main St. & Granite Avenue,
Canaan, CT 1982 Owned ---
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ---
Winsted Stop & Shop Supermarket
Route 44, Winsted, CT 1996 Leased 1999
Southbury Grand Union Supermarket
(Opened July 1997) 775 Main Street South,
Southbury, CT 1997 Leased 2003
</TABLE>
(a) The information concerning the Bank's lease payments see Note 12 on
pages 61 and 62.
(b) The Bank owns an additional building on this site which is leased
at an annual rent of $5,028.
(c) Main Office.
(d) The Bank owns an additional building on this site which is leased
at an annual rent of $16,000.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
the Bank or any of their properties, other than ordinary routine
litigation incidental to the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote of
the shareholders of the Company.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For the information required by this item see Quarterly Financial Data
(unaudited)" on pages 66 and 67. For a discussion of the Company's
dividend policy and restrictions on dividends see "Management Discussion
and Analysis of Financial Condition and Results of Operations" under the
caption "Dividend Restrictions" on pages 35 and 36.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the consolidated financial and other data
of the Company at the dates and for the periods indicated. This data
has been derived from the audited consolidated financial statements of
the Company.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
At or for the years ended June 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Income
Interest and
dividend income $22,851 $21,837 $20,283 $17,450 $16,978
Interest expense 10,916 10,438 9,602 8,473 8,466
Net interest income 11,935 11,399 10,681 8,977 8,512
Provision for loan
losses 400 400 400 208 450
Non-interest income
Securities (losses)
gains, net (9) 27 226 404 2,453
Losses on interest
rate swaps, net - - - - (804)
Gains on loans, net 181 10 28 99 101
Service fees and other 1,347 1,218 1,167 1,033 760
Non-interest expense 8,566 8,465 9,352 8,694 9,222
Income before
income taxes 4,488 3,789 2,350 1,611 1,350
Income tax expense
(benefit) 1,886 1,547 (3,874) (720) 23
Net income 2,602 2,242 6,224 2,331 1,327
Financial Condition
Total assets $323,061 $309,363 $308,671 $315,159 $287,986
Loans, net 166,141 150,558 150,442 141,775 143,697
Allowance for loan
losses 5,452 4,866 5,372 5,246 5,331
Securities 119,368 125,583 127,194 153,746 120,709
Deposits 275,392 259,267 252,420 236,182 228,090
Borrowings 13,000 14,776 20,499 51,850 28,000
Shareholders' equity 31,719 31,892 32,721 25,094 29,005
Non-performing assets 3,585 6,480 8,885 13,685 14,771
Per Share Data
Earnings, fully diluted $0.61 $0.50 $1.37 $0.52 $0.30
Cash dividends 0.23 0.17 0.06 - -
Book value 8.27 7.84 7.29 5.59 6.47
Statistical Data
Net interest margin 3.98% 4.01% 3.70% 3.10% 3.52%
Efficiency ratio 63.67 66.90 77.28 82.70 83.67
Effective tax rate 42.02 40.83 (164.85) (44.69) 1.70
Return on average assets 0.84 0.75 2.08 0.76 0.51
Return on average
shareholders' equity 8.02 6.71 23.75 8.16 4.95
Dividend payout ratio 37.70 34.00 4.38 - -
Allowance for loan
losses to total loans 3.18 3.13 3.45 3.57 3.58
Non-performing assets
to total assets 1.11 2.09 2.88 4.34 5.13
Tier 1 leverage capital 10.25 10.39 10.58 8.94 10.19
Total risk-based capital 19.85 20.98 21.36 21.90 22.39
Average shareholders'
equity to average
assets 10.44 11.22 8.74 9.30 10.28
Weighted average equivalent
shares outstanding,
fully diluted 4,236 4,505 4,544 4,511 4,488
Shares outstanding
at June 30 (excluding
Treasury stock) 3,834 4,070 4,491 4,486 4,484
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
NewMil Bancorp, Inc. (the "Company"), a Delaware corporation, is a bank
holding company for New Milford Savings Bank (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the
"FDIC") insured savings bank headquartered in New Milford, Connecticut.
The principal business of the Company consists of the business of the
Bank. The Bank is engaged in customary banking activities, including
general deposit taking and lending activities, and conducts its business
from fourteen offices in Litchfield, Fairfield and New Haven Counties.
The Company and the Bank were formed in 1987 and 1858, respectively.
OVERVIEW
The Company earned net income of $2,602,000, or $0.61 per share, for the
year ended June 30, 1997, compared with net income of $2,242,000, or
$0.50 per share, for fiscal year 1996. Net income grew 16.1% in 1997,
reflecting significantly improved core earnings, driven by higher net
interest income and non-interest income, and relatively stable operating
expenses. Earnings per share increased 22.0%, reflecting both the
growth in net income and share repurchase activity.
Over the past four years the Company has achieved a steady improvement
in core earnings. This is attributed to a continuing strategy which
includes refining both the mix and the quality of the Company's earning
assets, controlling operating expenses, and reducing non-performing
assets. With a loan to deposit ratio of only 60% at June 30, 1997, the
Company has ample capacity to continue to grow its loan portfolio.
During 1997 the Company achieved modest loan growth while reducing the
investment portfolio. Net loans increased by 10.4% to $166.1 million at
June 30, 1997 while non-performing assets declined 44.7% to $3.6
million, or 1.11% of assets. Deposits grew 6.2% to $275.4 million, and
investments decreased by 4.9% to $119.4 million. Book value per share
increased 5.5% to $8.27 at June 30, 1997, after cash dividends of $0.23,
representing a 37.7% payout ratio. In addition, during 1997 the Company
repurchased 236,300 shares, or 5.8%, of its outstanding shares of common
stock. At June 30, 1997 the Company's tier 1 leverage and total risk-
based capital ratios were 10.25% and 19.85%, respectively, and the
Company was "well capitalized" as defined by the Federal Reserve Board.
The following discussion and analysis of the Company's consolidated
results of operations should be read in conjunction with the
Consolidated Financial Statements and footnotes.
RESULTS OF OPERATIONS
Comparison Between 1997 and 1996
Analysis of Net Interest and Dividend Income
Net interest income grew $536,000, or 4.7%, to $11,935,000 in 1997.
This resulted from growth of $15.6 million, or 5.5%, in average earning
assets, driven by loan growth, up $10.7 million, or 7.0%. The net
interest margin decreased slightly by 3 basis points, to 3.98% from
4.01%, as a result of a slight decrease in yield on earning assets. The
following table sets forth the components of the Company's net interest
income and yields on average interest-earning assets and interest-
bearing funds for each of the past three years.
<TABLE>
<CAPTION>
Year ended June 30, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans (a) $163,715 $14,601 8.92%
Mortgage backed securities 16,856 1,065 6.32
Other securities (b) 118,948 7,185 6.04
Total earning assets 299,519 22,851 7.63
Other assets 11,409
Total assets $310,928
NOW accounts $24,414 363 1.49
Money market accounts 61,258 1,857 3.03
Savings & other 38,458 1,026 2.67
Certificates of deposit 129,010 6,953 5.39
Total interest-bearing deposits 253,140 10,199 4.03
Borrowings 13,059 717 5.49
Total interest-bearing funds 266,199 10,916 4.10
Demand deposits 10,826
Other liabilities 1,452
Shareholders' equity 32,451
Total liabilities and
shareholders' equity $310,928
Net interest income $11,935
Spread on interest-bearing funds 3.53
Net interest margin (c) 3.98
Year ended June 30, 1996 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $153,024 $13,919 9.10%
Mortgage backed securities 21,752 1,323 6.08
Other securities (b) 109,165 6,595 6.04
Total earning assets 283,941 21,837 7.69
Other assets 13,756
Total assets $297,697
NOW accounts $23,032 343 1.49
Money market accounts 61,011 1,852 3.04
Savings & other 39,676 1,041 2.62
Certificates of deposit 122,118 6,744 5.52
Total interest-bearing deposits 245,837 9,980 4.06
Borrowings 7,973 458 5.74
Total interest-bearing funds 253,810 10,438 4.11
Demand deposits 8,964
Other liabilities 1,515
Shareholders' equity 33,408
Total liabilities and
shareholders' equity $297,697
Net interest income $11,399
Spread on interest-bearing funds 3.58
Net interest margin (c) 4.01
Year ended June 30, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans (a) $145,726 $11,967 8.21%
Mortgage backed securities 32,229 1,739 5.40
Other securities (b) 110,788 6,577 5.94
Total earning assets 288,743 20,283 7.03
Other assets 11,154
Total assets $299,897
NOW accounts $22,258 327 1.47
Money market accounts 73,562 2,035 2.77
Savings & other 44,456 1,166 2.62
Certificates of deposit 95,891 4,526 4.72
Total interest-bearing deposits 236,167 8,054 3.41
Borrowings 28,881 1,548 5.36
Total interest-bearing funds 265,048 9,602 3.62
Demand deposits 7,262
Other liabilities 1,385
Shareholders' equity 26,202
Total liabilities and
shareholders' equity $299,897
Net interest income $10,681
Spread on interest-bearing funds 3.41
Net interest margin (c) 3.70
</TABLE>
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds
sold.
(c) Net interest income divided by average interest-earning assets.
<TABLE>
<CAPTION>
Years ended June 30, 1997 versus 1996
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 972 $ (271) $ (19) $ 682
Mortgage backed securities (297) 51 (12) (258)
Other securities 591 (1) - 590
Total 1,266 (221) (31) 1,014
Interest-bearing liabilities:
Deposits 296 (75) (2) 219
Borrowings 292 (20) (13) 259
Total 588 (95) (15) 478
Net change to interest income $ 678 $ (126) $ (16) $ 536
Years ended June 30, 1996 versus 1995
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
Interest-earning assets:
Loans $ 599 $1,288 $ 65 $1,952
Mortgage backed securities (565) 235 (77) (407)
Other securities (96) 107 (2) 9
Total (62) 1,630 (14) 1,554
Interest-bearing liabilities:
Deposits 777 972 177 1,926
Borrowings (1,121) 110 (79) (1,090)
Total (344) 1,082 98 836
Net change to interest income $ 282 $ 548 $(112) $ 718
</TABLE>
Net interest and dividend income represents the difference between
interest and dividends earned on loans and securities and interest paid
on deposits and borrowings. The level of net interest income is a
function of volume, rates and mix of both earning assets and
interest-bearing liabilities. Net interest income can be adversely
affected by changes in interest rate levels as determined by the
Company's "gap" position, measured by the differences between the volume
of assets and liabilities that are subject to repricing within different
future time periods.
Interest Income
Total interest and dividend income increased $1,014,000, or 4.6%, to
$22.9 million in 1997. Loan income increased $682,000, or 4.9%, as a
result of higher volume offset by slightly lower overall yield. Average
loans grew $10.7 million, or 7.0%, to $163.7 million in 1997 as compared
with 1996. The decrease in the average loan yield resulted primarily
from downward portfolio repricing on residential adjustable rate
mortgages due to lower interest rates, which also affected new loan
rates. Interest and dividends from securities and federal funds
increased $332,000, or 4.2%, in 1997 as a result of higher overall
volume coupled with a marginally higher yield. Mortgage backed security
prepayments have continued to decline which reduces the amortization
expense, thereby increasing the yield on the mortgage backed security
portfolio. While average securities declined $4.9 million, or 3.7%,
average federal funds balances increased $8.7 million. The change in
average yield resulted from changes in portfolio mix and market interest
rates on securities purchased.
Interest Expense
Interest expense increased $478,000, or 4.6%, to $10.9 million in 1997
primarily as a result of deposit growth and higher average borrowings,
offset in part by slightly lower cost of funds which decreased 1 basis
point. Deposit expense increased $219,000, or 2.2%, as a result of an
increase of $7.3 million, or 3.0%, in average interest-bearing deposits
offset by a 3 basis point decrease in the average cost of interest-
bearing deposits (to 4.03% from 4.06%). Deposit growth was concentrated
in certificates of deposit, NOW and demand deposit accounts, while
savings accounts declined slightly. Interest expense on borrowings
increased $259,000 as a result of an increase in average borrowings, up
$5.1 million, or 63.8%, offset by a lower cost of borrowings, down 25
basis points to 5.49% in 1997 from 5.74% in 1996. The Company's
borrowings are short term and rates generally follow the one-month LIBOR
index, which declined during the year.
Provision and Allowance for Loan Losses
The Company provided $400,000 for loan losses in 1997, unchanged from
1996. Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $4,866 $5,372 $5,246
Provision for losses 400 400 400
Charge-offs (124) (919) (295)
Recoveries 310 13 21
Balance, end of year $5,452 $4,866 $5,372
Ratio of allowance for loan losses:
to non-performing loans 175.3% 114.3% 74.5%
to total gross loans 3.2 3.1 3.4
Loan loss provision to average loans 0.2 0.3 0.3
Net (recoveries) charge-offs
to average loans (0.1) 0.6 0.2
</TABLE>
The Company remains well reserved both against total loans and non-
performing loans. During 1997 non-performing loans decreased $1.1
million, or 26.9%, as a result of which, the reserve coverage to non-
performing loans increased to 175.3%. Past due performing loans
(accruing loans 30-89 days past due) have remained relatively stable
throughout fiscal year 1997, and at June 30, 1997 were 1.1% of gross
loans. Loan charge-offs were modest in 1997, while a large loan loss
recovery, of approximately $300,000, on a real estate loan previously
written down in February 1993 further strengthened the reserve. For a
discussion on loan quality see "Asset Quality and Portfolio Risk".
The Bank determines its allowance and provisions for loan losses based
upon a detailed evaluation of the loan portfolio through a process which
considers numerous factors, including estimated credit losses based upon
internal and external portfolio reviews, delinquency levels and trends,
estimates of the current value of underlying collateral, concentrations,
portfolio volume and mix, changes in lending policy, historical loan
loss experience, current economic conditions and examinations performed
by regulatory authorities. Determining the level of the allowance at
any given period is difficult, particularly during deteriorating or
uncertain economic periods. Management must make estimates using
assumptions and information which is often subjective and changing
rapidly. The review of the loan portfolio is a continuing event in the
light of a changing economy and the dynamics of the banking and
regulatory environment. In management's judgement the allowance for
loan losses at June 30, 1997, is adequate. Should the economic climate
deteriorate, borrowers could experience difficulty and the level of non-
performing loans, charge-offs and delinquencies could rise and require
increased provisions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies could require the
Company to recognize additions to the allowance based on their
judgements of information available to them at the time of their
examination. The Bank was examined by the State of Connecticut,
Department of Banking, in March 1997 and no additions to the allowance
were requested as a result of this examination.
Non-Interest Income
Non-interest income increased $264,000, or 21.0%, to $1,519,000 in 1997.
The principal categories of non-interest income are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 Change
(in thousands)
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $ 975 $ 830 $145 17.5%
Gains on loans, net 181 10 171 1,710.0
Loan servicing 111 123 (12) (9.8)
Securities (losses)
gains, net (9) 27 (36) (133.3)
Other 261 265 (4) (1.5)
Total non-interest income $1,519 $1,255 $ 264 21.0%
</TABLE>
The increase in service charges on deposit accounts in 1997 reflects
increased transaction volume, resulting from growth in demand deposit
and NOW accounts and increased debit card transactions volume. In late
1996 the Company restructured its residential mortgage lending
department with the objective of increasing fee income from pre-arranged
service-released lending activities. Gains on loans resulted from
residential mortgage loan sales in 1997 and 1996 of $10.6 million and
$882,000, respectively. These gains are recognized on loans that are
sold at the time they are originated, therefore the Company has no
interest rate risk and there are no loans that are held-for-sale. The
decrease in loan servicing fees in 1997 resulted from a decrease in the
mortgage servicing portfolio, which at June 30, 1997 totaled $28.8
million, down from $31.2 million at June 30, 1996. The net securities
losses and gains in 1997 and 1996 were realized on sales of available-
for-sale securities of $23.3 million and $21.6 million, respectively.
Other fee income, principally safe deposit box fees and other
miscellaneous income, decreased slightly in 1997 as compared with 1996.
Operating Expenses
Operating expenses increased $101,000, or 1.2%, in 1997 primarily as a
result of additional salaries and benefits associated with increased
staffing in lending and retail banking, and higher pension and health
benefits costs. These increases were offset in part by a significant
reduction in professional, collection and OREO expense. The principal
categories of operating expenses are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 Change
(in thousands)
<S> <C> <C> <C> <C>
Salaries $3,909 $3,422 $487 14.2%
Employee benefits 1,076 854 222 26.0
Occupancy 840 773 67 8.7
Equipment 683 584 99 17.0
Professional, collection
and OREO expense 132 940 (808) (86.0)
Insurance 78 123 (45) (36.6)
Postage and telecommunications 348 284 64 22.5
Marketing 209 234 (25) (10.7)
Service bureau 198 157 41 26.1
Other operating 1,093 1,094 (1) (0.1)
Total operating expenses $8,566 $8,465 $ 101 1.2%
</TABLE>
The increase in salaries in 1997 was due primarily to changes in
staffing levels in lending and retail banking, and annual salary
increases. In late 1996 the Company restructured the residential
mortgage lending department and opened a supermarket branch in Winsted,
Connecticut. Employee benefits expense increased as a result of
additional health, taxes and other benefits related to the increased
staffing levels, and additional pension expense. The increase in
occupancy expense is related to the additional branch in Winsted,
Connecticut. Equipment expense increased in 1997 primarily as a result
of increased maintenance expense for computer systems. Professional,
collection and OREO expense includes expenditures related to audit,
accounting, legal, appraisal, property tax, insurance, other workout
related expenses, together with gains and losses on OREO sales and the
provision for OREO losses. The decrease in 1997 results from OREO gains
of $567,000, a negative provision to the OREO reserve of $300,000 and a
reduction in collections and OREO expense, offset by increased
professional fees. The negative provision was a result of OREO that had
been reserved for and now has been sold without utilizing the reserve.
For a discussion of non-performing assets see "Asset Quality and
Portfolio Risk". The decrease in insurance expense resulted from
decreased insurance premiums on the Company's Directors and Officers
policy and the Blanket Bond policy as a result of the Company's strong
financial position, offset by an increase in FDIC insurance premiums.
All other operating expenses, including marketing, shareholder
relations, office expense and other, increased $79,000 or 4.5% in 1997.
This increase is attributed principally to increased lending activity,
the additional branch location, various deposit and loan marketing
promotions and other changes in operating activities.
During 1997 the Company's efficiency ratio, being the ratio between
operating expense and net interest and dividend income plus non-interest
income, improved to 63.7%, compared with 66.9% in 1996. The change
resulted from increasing net interest and non-interest income, at a rate
greater than increases in operating expenses.
Income Taxes
Net income for 1997 included an income tax provision of $1,886,000, an
effective tax rate of 42%, as compared with an income tax provision of
$1,547,000, an effective tax rate of 41%, for 1996. For further
information on income taxes see Note 7 of Notes to Consolidated
Financial Statements.
Comparison between 1996 and 1995
Overview
The Company earned net income of $2,242,000, or $0.50 per share, for the
year ended June 30, 1996, compared with net income of $6,224,000, or
$1.37 per share, for fiscal year 1995. Net income before income taxes
grew 61% in 1996 to $3,789,000, up from $2,350,000 in 1995. The growth
in pre-tax earnings reflects significantly improved core earnings driven
by an increased net interest margin (4.01% for 1996 versus 3.70% for
1995) and decreased operating expenses, principally collection expenses
and FDIC insurance premiums. The Company returned to a fully-taxable
reporting basis in 1996 following the recognition of substantially all
of its deferred tax asset at June 30, 1995. Net income for 1996
included an income tax provision of $1,547,00, or 41%, as compared to a
tax benefit of 3,874,000 for the prior year.
Analysis of Net Interest Income
Net interest income grew $718,000, or 6.7%, to $11,399,000 in 1996
compared with 1995. This increase resulted from a 31 basis point
increase in net interest margin, to 4.01% from 3.70%, while total
average earning assets decreased $4,802,000, or 1.7%. The improvement
in net interest margin was driven by changes in asset mix, the reduction
in non-performing assets, and the benefit from higher interest rates on
earning assets which repriced upwards more than deposit liabilities.
The change in asset mix was achieved through both loan growth and
refinements in loan mix, offset by a reduction in securities.
Interest Income
Total interest and dividend income increased $1,554,000, or 7.7%, to
$21.8 million in 1996. Loan income increased $1,952,000, or 16.3%, as
a result of changes in loan mix, higher volume and higher yields. The
increase in the average loan yield resulted primarily from upward
portfolio repricing due to higher interest rates, which affected new
loan rates, the repricing of floating rate loans, and, to a lesser
extent, increased originations of Prime based commercial loans. Average
loans grew $7.3 million, or 5.0%, to $153.0 million in 1996. Interest
and dividends from securities and federal funds decreased $398,000, or
4.8%, in 1996 as a result of a lower volume despite a higher yield.
Average securities declined $12.1 million, or 8.5%, to $130.9 million in
1996 as a result of sales and principal payments. Average yield
increased primarily as a result of the upward repricing of floating rate
securities. Securities purchases were limited and the portfolio was
downsized to fund loan growth and repay borrowings.
Interest Expense
Interest expense increased $836,000, or 8.7%, to $10.4 million in 1996
primarily as a result of higher costs on deposits and borrowings, offset
in part by lower borrowings. Deposit expense increased $1,926,000, or
23.9%, as a result of a 65 basis point increase in the average cost of
interest-bearing deposits and an increase of $9.7 million, or 4.1%, in
average interest-bearing deposits. The increase in deposit costs
resulted from higher interest rates and a change in deposit mix
resulting from transfers from money market and savings accounts into
certificates of deposit. The change in deposit mix was caused by an
increased yield differential between money market accounts and
certificates of deposit. Deposit growth was concentrated in
certificates of deposit, NOW and demand deposit accounts. Interest
expense on borrowings decreased $1,090,000 as a result of a decrease in
average borrowings, down $20.9 million, or 72.4%, offset by higher
borrowing rates.
Non-Interest Income
Non-interest income decreased $166,000, or 11.7%, to $1,255,000 in 1996
from 1995. The principal categories of non-interest income are as
follows:
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995 Change
(in thousands)
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $ 830 $ 779 $ 51 6.5%
Securities gains, net 27 226 (199) (88.1)
Gains on loans, net 10 28 (18) (64.3)
Loan servicing 123 126 (3) (2.4)
Other 265 262 3 1.1
Total non-interest income $1,255 $1,421 $(166) (11.7)%
</TABLE>
The increase in service charges on deposit accounts in 1996 resulted
from increased ATM usage and higher transaction volume. The net
securities gains in 1996 and 1995 were realized on sales of available-
for-sale securities of $21.6 million and $20.7 million, respectively.
Gains on loans resulted from loan sales in 1996 and 1995 of $882,000 and
$703,000, respectively. Other fee income included principally safe
deposit box fees and other miscellaneous income.
Operating Expenses
The principal categories of operating expenses are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995 Change
(in thousands)
<S> <C> <C> <C> <C>
Salaries $3,422 $3,295 $ 127 3.9%
Employee benefits 854 841 13 1.6
Occupancy 773 731 42 5.7
Equipment 584 543 41 7.6
Professional, collections
and OREO expense 940 1,711 (771) (45.1)
Postage and telecommunications 284 306 (22) (7.2)
Marketing 234 236 (2) (0.9)
Service bureau 157 156 1 0.6
Insurance 123 695 (572) (82.3)
Other operating 1,094 838 256 30.5
Total operating expenses $8,465 $9,352 $(887) (9.5)%
</TABLE>
The increase in salaries in 1996 was due primarily to changes in
staffing levels and annual salary increases. Benefits expense increased
slightly as a result of higher taxes offset by lower health benefits
expense. The increase in occupancy expense was due principally to
higher utility expense and building maintenance as a result of the
harsher winter of 1995-1996. Equipment expense increased in 1996
primarily as a result of increased depreciation expense from equipment
purchases. The decrease in professional, collection and OREO expense in
1996 resulted from continuing reductions in non-performing assets,
offset in part by increased professional services primarily increased
legal services, consulting fees related to the opening of the Winsted
supermarket branch, and other corporate matters. The decrease in
insurance expense resulted from the virtual elimination of the Company's
FDIC insurance assessment. All other operating expenses, including
marketing, shareholder relations, office and other, increased $255,000
or 20.7% in 1996, attributed principally to increased lending activity,
various deposit and loan marketing promotions and other changes in
operating activities.
Income Taxes
The Company returned to a fully-taxable reporting basis on July 1, 1995
following the recognition of substantially all of its deferred tax asset
at June 30, 1995. Net income for 1996 included an income tax provision
of $1,547,000, or 41%, as compared with an income tax benefit of
$3,874,000 for 1995. In 1995 the Company recognized 100% of its
remaining available Federal income tax benefits (expiring 2007),
excluding any capital loss carryforwards, together with that portion of
its remaining available State income tax benefits (expiring 1997) which
the Company expects to utilize, and other book/tax temporary
differences. In 1995, the Company also recognized an additional
deferred tax benefit reflected by a $1,678,000 adjustment to
shareholders' equity to record the tax effect of unrealized securities
gains and losses reported in shareholders' equity.
ASSET QUALITY AND PORTFOLIO RISK
Non-performing assets
During 1997 non-performing assets decreased $2.9 million, or 44.7%, to
$3.6 million at June 30, 1997, due principally to sales of OREO, loan
payments and loans returned to an accruing status, offset by loans
placed on non-accrual, an increase in accruing loans past due 90 days or
more and capital improvements to OREO. The following table summarizes
changes in non-performing assets during the periods presented.
<TABLE>
<CAPTION>
Years ended June 30, (in thousands) 1997 1996
<S> <C> <C>
Balance, beginning of year $ 6,480 $ 8,885
Loans placed on non-accrual status 1,649 2,728
Change in accruing loans past
due 90 or more days, net 616 132
Change in accruing loans
restructured, net (7) 281
Payments to improve OREO 150 723
Loan payments (1,407) (713)
Loans returned to accrual status (1,334) (332)
Loan charge-offs (117) (918)
OREO recovery (provision) 300 (262)
Gross proceeds from OREO sales (3,312) (4,432)
Gains on OREO sales, net 567 388
Balance, end of year $ 3,585 $ 6,480
Percent of total assets 1.11% 2.09%
</TABLE>
The following table details the composition of non-performing assets as
of the periods presented.
<TABLE>
<CAPTION>
Non-Performing Assets Accruing Total
(dollars in thousands) loans Other non-
Non- past due Restruc- Real perform-
accrual 90 or tured Estate ing
loans more days loans Owned assets
<S> <C> <C> <C> <C> <C>
June 30, 1997
Real estate:
Residential $ 492 $466 $ - $ 251 $1,209
Commercial 285 317 274 36 912
Land and land
development 1,270 - - 324 1,594
Installment and
Other 7 - - - 7
Valuation reserve - - - (137) (137)
Totals $2,054 $783 $274 $ 474 $3,585
June 30, 1996
Real estate:
Residential $1,974 $166 $ - $ 984 $3,124
Commercial 335 - 281 899 1,515
Land and land
development 1,500 - - 815 2,315
Valuation reserve - - - (474) (474)
Totals $3,809 $166 $281 $2,224 $6,480
</TABLE>
Accruing loans past due 90 days or more, as of June 30, 1997, are
comprised of seven credits, that include residential mortgage loans and
one commercial loan that is SBA guaranteed. All loans are in the
process of collection and the collection of accrued interest is
probable.
The Company pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
the Company generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. The Company actively markets
all OREO and in 1997 sold $3.3 million of OREO from which net gains of
$567,000 were realized. During 1997 the Company recorded a $300,000
negative provision and charged-off $36,000 against the OREO valuation
reserve. At June 30, 1997 the reserve totaled $137,000, or 22.4% of
OREO. Any decline in the real estate market could adversely affect the
market values of the Company's OREO which could require reductions in
the carrying values of properties.
Had non-accrual loans as of June 30, 1997 and 1996, been current in
accordance with their original terms, gross interest income of $228,000
and $385,000 would have been recorded in net income for 1997 and 1996,
respectively. The amount of interest on these loans that was included
in income was $44,000 and $96,000 in 1997 and 1996, respectively.
FINANCIAL CONDITION
During 1997 total assets grew $13.7 million, or 4.4%, to $323.1 million
at June 30, 1997. This increase resulted from net loan growth of $15.6
million, offset in part by a decrease in OREO of $1.8 million while
total securities and fed funds remained unchanged. Total deposits grew
$16.1 million, while borrowings declined by $1.8 million.
Loans
The principal categories of the loan portfolio are as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996
<S> <C> <C> <C> <C>
Real estate mortgages
One-four family residential $ 90,885 52.9% $ 89,159 57.3%
Five or more family residential 4,812 2.8 3,262 2.1
Commercial 31,850 18.6 30,408 19.6
Land and land development 8,334 4.9 9,472 6.1
Commercial and industrial 12,424 7.2 6,130 3.9
Home equity lines of credit 20,274 11.8 14,474 9.3
Installment and other 3,122 1.8 2,658 1.7
Total loans, gross $171,701 100.0 $155,563 100.0
</TABLE>
The following table sets forth information on the composition of the
Bank's loan portfolio by loan type as of June 30 for the past five years
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Real Estate Mortgages:
Residential
1-4 family $ 90,885 $ 89,159 $ 98,766 $ 95,176 $ 89,077
5-more family 4,812 3,262 3,171 3,199 7,934
Commercial 31,850 30,408 29,068 23,801 25,519
Land 8,334 9,472 12,067 15,403 17,452
Home equity credit 20,274 14,474 7,785 7,367 6,672
Total mortgage
loans 156,155 146,775 150,857 144,946 146,654
Commercial and
industrial 12,424 6,130 3,201 708 -
Installment 1,140 502 284 256 692
Collateral and other 1,982 2,156 1,903 1,497 1,782
Total loans, gross 171,701 155,563 156,245 147,407 149,128
Deferred loan
origination (fees)
costs, net (108) (139) (431) (386) (100)
Allowance for loan
losses (5,452) (4,866) (5,372) (5,246) (5,331)
Total loans, net $166,141 $150,558 $150,442 $141,775 $143,697
</TABLE>
The following tables reflect the loan portfolio maturity distribution as
of June 30, 1997 (in thousands); non-accrual loans have been presented
in the after 5 years category:
<TABLE>
<CAPTION>
Within After
Within 1-5 5
1 year years years Total
<S> <C> <C> <C> <C>
Real Estate Mortgages:
Residential
1-4 family $ 3,908 $ 8,396 $78,581 $ 90,885
5-more family 483 589 3,740 4,812
Commercial 5,446 11,506 14,898 31,850
Land 1,571 1,596 5,167 8,334
Home equity credit lines 2,355 1,667 16,252 20,274
Commercial and industrial 2,767 4,154 5,503 12,424
Installment 426 645 69 1,140
Collateral and other 1,982 - - 1,982
Total loans, gross $18,938 $28,553 $124,210 $171,701
</TABLE>
The following table shows as of June 30, 1997 the amount of loans due
after one year that have fixed interest rates and variable or adjustable
interest rates (in thousands):
<TABLE>
<CAPTION>
Fixed Adjustable
interest interest
rates rates
<S> <C> <C>
Real Estate Mortgages:
1-4 family residential $12,036 $ 74,941
5-more family residential 155 4,174
Commercial 1,546 24,858
Land 48 6,715
Home equity credit lines - 17,919
Commercial and industrial 1,431 8,226
Installment 714 -
Collateral and other - -
Total loans, gross $15,930 $136,833
</TABLE>
The following table sets forth non-performing loans as of June 30, for
the last five years (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accruing loans $2,054 $3,809 $7,175 $8,325 $11,336
Accruing loans past due
90 days or more 783 166 34 379 329
Accruing restructured
loans 274 281 - - -
Total non-performing
loans $3,111 $4,256 $7,209 $8,704 $11,665
The following table sets forth changes in the allowance for loan losses
and other selected statistics for the five fiscal years ended June 30
(dollars in thousands):
1997 1996 1995 1994 1993
Balance at beginning of
period $4,866 $5,372 $5,246 $5,331 $5,753
Provision for loan losses 400 400 400 208 450
Charge-offs:
Real estate mortgages 90 884 294 294 835
Commercial and industrial 23 30 - - -
Consumer loans 11 5 1 14 44
Total charge-offs 124 919 295 308 879
Recoveries:
Real estate mortgages 308 10 20 4 1
Commercial and industrial - - - - -
Consumer loans 2 3 1 11 6
Total recoveries 310 13 21 15 7
Net (recoveries)
charge-offs (186) 906 274 293 872
Balance at end of period $5,452 $4,866 $5,372 $5,246 $5,331
Ratio of net (recoveries)
charge-offs to average
loans outstanding (0.11)% 0.59% 0.19% 0.21% 0.64%
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses among the broad categories of the loan portfolio and the
percentage of loans in each category to total loans at June 30, for the
past three years. Although the allowance has been allocated among loan
categories for purposes of the table, it is important to recognize that
the allowance is applicable to the entire portfolio. Furthermore,
charge-offs in the future may not necessarily occur in these amounts or
proportions.
<TABLE>
<CAPTION>
1997 1996
Allowance Loans(a) Allowance Loans(a)
<S> <C> <C> <C> <C>
Real Estate Mortgages
1-4 family residential $1,131 52.94% $1,258 57.31%
5-more family residential 906 2.80 290 2.10
Commercial 1,669 18.55 1,942 19.55
Land 683 4.85 512 6.09
Home equity credit lines 205 11.81 147 9.30
Total mortgage loans 4,594 90.95 4,149 94.35
Commercial and industrial 184 7.24 139 3.94
Installment 34 0.66 12 0.32
Collateral 0 1.15 0 1.39
Unallocated 640 - 566 -
Total allowance $5,452 100.00 $4,866 100.00
1995
Allowance Loans(a)
Real Estate Mortgages
1-4 family residential $1,466 64.26%
5-more family residential 725 2.06
Commercial 1,865 18.91
Land 781 6.20
Home equity credit lines 83 5.06
Total mortgage loans 4,920 96.49
Commercial and industrial 71 2.08
Installment 6 0.18
Other 0 1.25
Unallocated 375 -
Total allowance $5,372 100.00
</TABLE>
(a) Percent of loans in each category to total loans.
During 1997 total loan originations and advances were $57.6 million, up
25.2% over 1996, while repayments were $41.3 million. In addition to
portfolio loans, during 1997 residential mortgage loans totaling $10.6
million were originated and sold in the secondary market.
Since its formation in 1994, the Commercial Lending department has
specialized on lending to small and mid-size companies and professional
practices. The Company provides short- and long-term financing,
construction loans, commercial mortgages and property improvement loans.
The Company works extensively with several government-assisted lending
programs. The Residential Mortgage Department, in addition to
traditional portfolio lending, has established a secondary market
distribution capability, which provides the flexibility to sell a
variety of mortgage products on a service-released basis. The Company
offers one of the most comprehensive residential mortgage product lines
of any institution in northwest Connecticut. The Company also offers
home equity loans and lines of credit and has run several successful
promotions over the past two years.
Securities
The composition, maturity distribution and weighted average yields of
securities available-for-sale at June 30 were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Carrying Market
Value Value Yield
<S> <C> <C> <C>
June 30, 1997(a)
U.S. Treasury and Government
U.S Treasury Obligation
Within 1 year $ 6,013 $ 6,013 6.06%
After 1 but within 5 years 18,285 18,285 6.13
Agency Obligations
After 1 but within 5 years 7,499 7,499 6.26
After 5 but within 10 years 964 964 6.17
Mortgage backed securities 6,514 6,514 6.75
Collateralized mortgage obligations 8,727 8,727 5.89
Federal Home Loan Bank Stock 1,547 1,547 6.21
Total Securities Available-for-sale $49,549 $49,549 6.31
June 30, 1996(a)
U.S. Treasury and Government
U.S Treasury Obligation
After 1 but within 5 years $16,201 $16,201 6.21%
Agency Obligations
After 1 but within 5 years 1,739 1,739 6.58
After 5 but within 10 years 938 938 6.15
Mortgage backed securities 7,771 7,771 7.01
Collateralized mortgage obligations 21,975 21,975 5.36
Federal Home Loan Bank Stock 1,547 1,547 6.00
Total Securities Available-for-sale $50,171 $50,171 5.96
June 30, 1995
U.S. Treasury and Government
Agency Obligations
After 1 but within 5 years $1,018 $1,018 8.01%
Mortgage backed securities 4,149 4,149 8.88
Collateralized mortgage obligations 388 388 7.70
Federal Home Loan Bank Stock 1,547 1,547 6.21
Total Securities Available-for-sale $7,102 $7,102 8.11
The composition, maturity distribution and weighted average yields of
securities held-to-maturity at June 30 were as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1997
Mortgage backed securities $ 8,615 $ 8,606 6.49%
Collateralized mortgage obligations 61,204 59,722 5.97
Total Securities Held-to-maturity $ 69,819 $ 68,328 6.03
June 30, 1996(a)
Mortgage backed securities $ 10,981 $ 10,758 6.32%
Collateralized mortgage obligations 64,431 62,606 6.24
Total Securities Held-to-maturity $ 75,412 $ 73,364 6.25
June 30, 1995(b)
U.S. Treasury and Government
Agency Obligations
After 5 but within 10 years $ 915 $ 983 6.13%
Mortgage backed securities 20,245 20,158 6.37
Collateralized mortgage obligations 98,932 98,807 6.53
Total Securities Held-to-maturity $120,092 $119,948 5.38
</TABLE>
(a) During fiscal 1996 the Company transferred securities with a fair
value of $39,507,000 from held-to-maturity to available-for-sale.
This transfer was in conformity with the Special Report issued by
the Financial Accounting Standards Board, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities".
(b) During fiscal 1995 the Company transferred securities with a fair
value of $92,231,000 from available-for-sale to held-to-maturity
pursuant to a change in investment strategy.
The principal categories of the securities portfolio are as follows
(including both available-for-sale and held-to-maturity):
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 24,297 20.3% $ 16,201 12.9%
U.S. Government Agency notes 8,463 7.1 2,677 2.2
Collateralized mortgage obligations 78,546 65.8 86,406 68.8
Mortgage backed securities 6,515 5.5 18,752 14.9
Federal Home Loan Bank stock 1,547 1.3 1,547 1.2
Total securities $119,368 100.0 $125,583 100.0
</TABLE>
At June 30, 1997, 64.6% of the portfolio was invested in fixed rate
securities, principally U.S. Treasury and Government Agency notes, CMOs
and MBSs. The fixed rate portfolio had a consensus weighted average
duration and life of 2.1 years and 2.5 years, respectively. Fixed rate
CMOs and MBSs are generally in securities with relatively stable cash
flows. The Company actively monitors the prepayment of its CMOs and
MBSs. At June 30, 1997, 34.1% of the portfolio was invested in floating
rate CMOs and MBSs, which generally reprice monthly based on pre-
determined spreads to various underlying indices, subject to life-time
caps and floors. The floating rate portfolio had a consensus weighted
average duration and life of 0.1 years and 13.2 years, respectively.
The floating rate securities are tied to several indices including the
Eleventh District Cost of Funds index ("EDCOFI"), one-month LIBOR and
Treasury indices. All floating rate securities are match funded with
core deposits. The remaining 1.3% of the portfolio was represented by
Federal Home Loan Bank stock.
At June 30, 1997, securities totaling $69.8 million, or 58.5%, were
classified as held-to-maturity and securities totaling $49.6 million, or
41.5%, were classified as available-for-sale. Included in shareholders'
equity at June 30, 1997 is an adjustment of $1,170,000, net of taxes,
relating to securities transferred from available-for-sale to held-to-
maturity, representing net unrealized losses at the time of transfer
adjusted for subsequent principal amortization, net of taxes.
Substantially all of the Company's CMO and MBS securities were purchased
in 1993 and early 1994. Subsequent movements in interest rates and
market conditions have resulted in a decline in fair market value. At
June 30, 1997 net unrealized losses for all available-for-sale and held-
to-maturity securities, being the difference between current fair market
value and amortized cost, totaled $4.0 million. No credit losses are
anticipated and all unrealized gains and losses are expected to reverse
as securities approach maturity. Short-term fluctuations in fair market
value caused by movements in interest rates and market conditions will
not necessarily adversely impact future earnings.
Deposits and borrowings
The following table shows the scheduled maturities of certificates of
deposit with balances in excess of $100,000 as of June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
Less Within Within Over
than 3 3 - 6 6 - 12 one
months months months year Total
<S> <C> <C> <C> <C> <C>
Certificates of deposit
over $100,000 $3,404 $2,964 $4,347 $2,183 $12,898
</TABLE>
During 1997 total deposits increased $16.1 million, or 6.2%, while
borrowings decreased $1.8 million, or 12.0%. All categories of deposits
increased during 1997. Certificates of deposit increased $14.1 million,
or 11.6%, demand deposits increased $1.6 million, or 15.1%, Savings,
Money market and NOW accounts increased $390,000, or 0.3%. In May 1996
the Company opened its first in-store supermarket branch in Winsted,
Connecticut. In July 1997, the Company opened its second in-store
supermarket branch in Southbury, Connecticut. The Company now has 14
branch offices located in Fairfield, Litchfield and New Haven Counties.
LIQUIDITY
The Company manages its liquidity position to ensure that there is
sufficient funding availability at all times to meet both anticipated
and unanticipated deposit withdrawals, new loan originations, securities
purchases and other operating cash outflows. The primary sources of
liquidity for the Company are principal payments and maturities of
securities and loans, short term borrowings through repurchase
agreements and Federal Home Loan Bank advances, net deposit growth and
funds provided by operations. Liquidity can also be provided through
sales of loans and available-for-sale securities.
Operating activities in 1997 provided net cash flows of $3.3 million,
down from $4.9 million in 1996. During 1997 investing activities used
net cash of $7.5 million principally from security purchases and net
loan advances offset in part by securities sales, principal repayments
and maturities, and sales of OREO. Financing activities provided net
cash of $11.2 million, principally from increased deposits, offset in
part by a net decrease in borrowings, dividends paid to shareholders and
treasury stock purchases. Funds provided by operating and financing
activities were utilized to fund investing activities and to increase
cash and cash equivalents by $7.0 million.
During 1996, operating activities provided net cash flows of $4.9
million, up from $3.3 million in 1995 as a result of improved core
earnings. During 1996 investing activities provided net cash of $1.0
million principally from securities sales, principal repayments and
maturities, and sales of OREO, offset in part by net loan advances and
securities purchases. Funds provided by investing and operating
activities, together with a $6.9 million net increase in deposits, were
used to reduce short term borrowings by $5.7 million, pay dividends to
shareholders, purchase $3.2 million of treasury stock and increase cash
and cash equivalents by $3.3 million.
At June 30, 1997, the Company's liquidity ratio, as represented by cash,
short-term available-for-sale securities, marketable assets, the ability
to borrow against held-to-maturity securities and loans through unused
FHLB and other short term borrowing capacity, of approximately $200.9
million, to net deposits and short term unsecured liabilities, was
69.7%, well in excess of the Company's minimum guideline of 15%. At
June 30, 1997, the Company had outstanding commitments to fund new loan
originations of $5.0 million, construction mortgage commitments of
$759,000 and unused lines of credit of $17.7 million. These commitments
will be met in the normal course of business. The Company believes that
its liquidity sources will continue to provide funding sufficient to
support operating activities, loan originations and commitments, and
deposit withdrawals.
INTEREST RATE SENSITIVITY
The Company monitors its interest rate risk exposure on a quarterly
basis using both traditional gap analysis, to identify short- medium-
and long-term interest rate risk positions, and simulation analysis, to
measure the amount of short-term earnings at risk under rising and
falling interest rate scenarios.
The following table sets forth the Company's interest rate sensitivity
position, or gap position, at June 30, 1997, measured in terms of the
volume of interest rate sensitive assets and liabilities that are
subject to repricing in future time periods. For the purposes of this
analysis, money market deposits have been presented in the within 1
month category and savings and NOW deposits have been presented in the
2-to-3 months category, although the interest rate elasticity of money
market, savings and NOW deposits cannot be tied to any one time
category. Non-accrual loans and overdrafts have been presented in the
non-interest-bearing category. Significant variations may exist in the
degree of interest rate sensitivity between individual asset and
liability types within the repricing periods presented due to
differences in their repricing elasticity relative to changes in the
general level of interest rates.
<TABLE>
<CAPTION>
June 30, 1997 Within Within Non-
(in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities $ 39,329 $13,933 $48,194 $20,394 $ - $121,850
Federal funds sold 17,460 - - - - 17,460
Loans 89,942 38,469 26,955 13,116 3,111 171,593
Other assets - - - - 12,158 12,158
Total assets 146,731 52,402 75,149 33,510 15,269 $323,061
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - - - 12,369 12,369
NOW accounts 25,830 - - - - 25,830
Money market 61,075 - - - - 61,075
Savings and other 40,614 - - - - 40,614
Certificates of
deposit 63,329 45,029 27,104 42 - 135,504
Securities sold
under repurchase
agreements 5,000 - - - - 5,000
Federal Home Loan
Bank advances 8,000 - - - - 8,000
Other liabilities - - - - 2,950 2,950
Stockholders'
equity - - - - 31,719 31,719
Total sources
of funds 203,848 45,029 27,104 42 47,038 $323,061
Cumulative
interest-rate
sensitivity
gap $(57,117) $(49,744) $(1,699) $31,769 $ -
Percent of
total assets (17.7)% (15.4)% (0.5)% 9.8% -
</TABLE>
The Company maintains a relatively balanced position for managing
interest rate risk and, at June 30, 1997, its one year cumulative gap
was -$49.7 million, or 15.4% of assets. A liability sensitive gap
implies that the Company's net interest margin could be adversely
affected by a sudden increase in interest rates.
The Company structures its loan and securities portfolios to provide for
portfolio repricing consistent with its interest rate risk objectives,
and to ensure that earnings at risk to short term interest rate
fluctuations will not exceed +/-15%. A significant factor in
determining the Company's ability to maintain its net interest margin in
a changing interest rate environment is its ability to manage its core
deposit rates. Essentially all of the Company's deposit base is
composed of local retail deposit accounts which tend to be somewhat less
sensitive to moderate interest fluctuations than other funding sources
and, therefore, provide a reasonably stable and cost-effective source of
funds. Based on the Company's asset/liability mix at June 30, 1997,
management's simulation analysis of the effects of changing interest
rates on net income over a twelve month forecast horizon projects that
a gradual 100 basis point increase or decrease in market interest rates
over the forecast horizon would result in a net income fluctuation of
less then +/- 5%.
CAPITAL RESOURCES
During 1997 shareholders' equity decreased $173,000, or 0.5%, to $31.7
million, while book value per share increased 5.5% to $8.27 at June 30,
1997. The decrease in shareholders' equity resulted from treasury stock
purchases of $2,137,000 and cash dividends of $918,000 ($0.23 per share,
a 38% payout ratio), offset by earnings of $2,602,000 ($0.61 per share),
a $277,000 decrease in the adjustment to shareholders equity for net
unrealized holding losses on securities, net of taxes, and $3,000 from
the exercise of stock options.
In July 1996 the Company announced its intention to repurchase up to 10%
of its outstanding common stock in the open market and unsolicited
negotiated transactions, including block purchases. As of June 30, 1997
the Company had repurchased 236,300 shares of its outstanding common
stock, representing 58.1% of the planned repurchases, for total
consideration of $2,137,000.
Shareholders' equity at June 30, 1997 included an adjustment, net of
taxes, for unrealized holding losses of $1,170,000 on securities
transferred from available-for-sale to held-to-maturity and net
unrealized holding losses of $319,000 on securities available-for-sale.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At June 30, 1997 the Company's leverage capital ratio was
10.25% and its tier I and total risk-based capital ratios were 18.57%
and 19.85%, respectively. At June 30, 1997 the Bank's leverage capital
ratio was 10.02% and its tier I and total risk-based capital ratios were
18.62% and 19.89%, respectively. The Company and the Bank are
categorized as "well capitalized". A well capitalized institution,
which is the highest capital category for an institution as defined by
the Prompt Corrective Action regulations issued by the FDIC and the FRB,
is one which maintains a total risk-based ratio of 10% or above, a tier
I risk-based ratio of 6% or above and a leverage ratio of 5% or above,
and is not subject to any written order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a
specific capital level.
Dividend Restrictions
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain restrictions
on the payment of dividends by the Bank to the Company. Under
Connecticut law a bank is prohibited from declaring a cash dividend on
its common stock except from its net earnings for the current year and
retained net profits for the preceding two years. Consequently, the
maximum amount of dividends payable by the Bank to the Company for the
year ended June 30, 1997 is $3,438,000. In some instances, further
restrictions on dividends may be imposed on the Company by the FRB.
In October 1994 the Company resumed dividend payments with the payment
of a $0.02 quarterly cash dividend, following a four year lapse. In
October 1995 and 1996 the Company increased its quarterly cash dividend
to $0.05 and $0.06, respectively. For 1997 total dividends of $0.23 per
share were declared.
The Company believes that the payment of cash dividends to its
shareholders is appropriate, provided that such payment considers the
Company's capital needs, asset quality, and overall financial condition
and does not adversely affect the financial stability of the Company or
the Bank. The continued payment of cash dividends by the Company will
be dependent on the Company's future core earnings, financial condition
and capital needs, regulatory restrictions, and other factors deemed
relevant by the Board of Directors of the Company.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" (SFAS 128). SFAS 128 provides accounting and reporting standards
for the calculation of earnings per share intended to simplify the
computation by replacing the presentation of primary earnings per share
with the presentation of basic earnings per share. The Company will be
required to adopt SFAS 128 in the quarter ending December 31, 1997. Had
earnings per share for the twelve months ended June 30, 1997 been
computed in accordance with SFAS 128 basic and diluted earnings per
share would have been $0.65 and $0.61 respectively, and $0.56 and $0.50,
respectively, for June 30, 1996.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in terms of
historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest
rates have a more significant impact on a financial institution's
performance than the effect of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Notwithstanding this,
inflation can directly affect the value of loan collateral, in
particular real estate. Sharp decreases in real estate prices have, in
past years, resulted in significant loan losses and losses on real
estate acquired. Inflation, or disinflation, could significantly affect
the Company's earnings in future periods.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEWMIL BANCORP, INC.
REPORT OF COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
of NewMil Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
NewMil Bancorp, Inc. and Subsidiary (the "Company") as of June 30,
1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of NewMil Bancorp, Inc. and Subsidiary as of
June 30, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
July 17, 1997
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,168 $ 6,630
Federal funds sold 17,460 10,960
Securities
Available-for-sale at market 49,549 50,171
Held-to-maturity at amortized
cost (fair value: $68,328 and $73,364) 69,819 75,412
Loans (net of allowance for loan losses:
$5,452 and $4,866) 166,141 150,558
Other real estate owned (net of valuation
reserve: $137 and $474) 474 2,224
Bank premises and equipment, net 6,042 6,219
Accrued income 2,024 1,874
Deferred tax asset, net 3,456 4,612
Other assets 928 703
Total Assets $323,061 $309,363
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 12,369 $ 10,750
NOW accounts 25,830 25,653
Money market 61,075 60,945
Savings and other 40,614 40,531
Certificates of deposit 135,504 121,388
Total deposits 275,392 259,267
Securities sold under repurchase agreements 5,000 14,776
FHLB advances 8,000 -
Accrued interest and other liabilities 2,950 3,428
Total Liabilities 291,342 277,471
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,988,138 and 5,987,388 2,994 2,994
Paid-in capital 44,192 44,189
Retained earnings 7,097 5,413
Net unrealized holding losses on
securities available-for-sale, net of taxes (319) (511)
Net unrealized holding losses on
securities transferred to held-to-
maturity, net of taxes (1,170) (1,255)
Treasury stock, at cost: 2,153,798 and
1,917,498 shares (21,075) (18,938)
Total Shareholders' Equity 31,719 31,892
Total Liabilities and Shareholders' Equity $323,061 $309,363
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Years ended June 30,
1997 1996 1995
Interest and dividend income
Interest and fees on loans $14,601 $13,919 $11,967
Interest and dividends on securities 7,531 7,655 8,247
Interest on federal funds sold 719 263 69
Total interest and dividend income 22,851 21,837 20,283
Interest expense
Deposits 10,199 9,980 8,054
Borrowed funds 717 458 1,548
Total interest expense 10,916 10,438 9,602
Net interest and dividend income 11,935 11,399 10,681
Provision for loan losses 400 400 400
Net interest and dividend income
after provision for loan losses 11,535 10,999 10,281
Non-interest income
Service charges on deposit accounts 975 830 779
Gains on mortgage loans, net 181 10 28
Loan servicing fees 111 123 126
Securities (losses) gains, net (9) 27 226
Other 261 265 262
Total non-interest income 1,519 1,255 1,421
Non-interest expense
Salaries 3,909 3,422 3,295
Employee benefits 1,076 854 841
Occupancy 840 773 731
Equipment 683 584 543
Professional, collections
and OREO 132 940 1,711
Marketing 209 234 236
Insurance 78 123 695
Other 1,639 1,535 1,300
Total non-interest expense 8,566 8,465 9,352
Income before income taxes 4,488 3,789 2,350
Income tax provision (benefit) 1,886 1,547 (3,874)
Net income $ 2,602 $ 2,242 $ 6,224
Earnings per share - fully diluted $0.61 $0.50 $1.37
Dividends per share $0.23 $0.17 $0.06
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Net un-
realized
Retained gains
earnings (losses) on Total
(accumu- Trea- securit- share-
Common Stock Paid-in lated sury ies net holders'
Shares Amount capital deficit) stock of taxes equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 30, 1994 5,965,888 $2,983 $44,182 $(2,040) $(15,868)$(4,163) $25,094
Net income for
year - - - 6,224 - - 6,224
Cash dividends
declared - - - (269) - - (269)
Proceeds from
issuance of
Treasury Stock - - (37) - 64 - 27
Change in net
unrealized
gains (losses)
on securities - - - - - (33) (33)
Deferred taxes on
net unrealized
(gains) losses
on securities - - - - - 1,678 1,678
Balances at
June 30, 1995 5,965,888 2,983 44,145 3,915 (15,804) (2,518) 32,721
Net income for
year - - - 2,242 - - 2,242
Proceeds from
exercise of
stock options 21,500 11 76 - - - 87
Cash dividends
declared - - - (744) - - (744)
Acquisition
of treasury
stock - - - - (3,206) - (3,206)
Proceeds from
issuance of
Treasury Stock - - (32) - 72 - 40
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - - - 752 752
Balances at
June 30, 1996 5,987,388 2,994 44,189 5,413 (18,938) (1,766) 31,892
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY - continued
(dollars in thousands)
Net un-
realized
Retained gains
earnings (losses) on Total
(accumu- Trea- securit- share-
Common Stock Paid-in lated sury ies net holders'
Shares Amount capital deficit) stock of taxes equity
Net income for
year - - - 2,602 - - 2,602
Proceeds from
exercise of
stock options 750 - 3 - - - 3
Cash dividends
declared - - - (918) - - (918)
Acquisition
of treasury
stock - - - - (2,137) - (2,137)
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - - - 277 277
Balances at
June 30, 1997 5,988,138 $2,994 $44,192 $ 7,097 $(21,075) $(1,489) $31,719
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities
Net income $ 2,602 $ 2,242 $6,224
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 400 400 400
Provision for losses on
real estate acquired - 212 621
Provision for depreciation and
amortization 587 563 522
Decrease (increase) in deferred
income tax asset 972 1,284 (5,597)
Amortization and accretion of securities
premiums and discounts, net 58 304 539
Securities losses (gains), net 9 (27) (226)
Loans originated for sale (9,420) (875) (703)
Proceeds from loans sales, net 9,601 885 731
Realized gains on loan sales, net (181) (10) (28)
Realized gains on sales of OREO, net (567) (388) (409)
Decrease in mortgage loans
held for sale - - 130
(Increase) decrease in accrued income (150) 45 (31)
(Decrease) increase in accrued interest
and other liabilities (405) 351 989
(Increase) decrease in other
assets, net (226) (75) 88
Net cash provided by
operating activities 3,280 4,911 3,250
Investing Activities
Proceeds from sales of securities
available-for-sale 22,903 20,625 6,684
Proceeds from maturities and principal
repayments of securities 5,721 4,225 6,051
Purchases of securities
available-for-sale (25,691) (27,914) (5,413)
Proceeds from sales of mortgage backed
securities available-for-sale 348 942 15,710
Principal collected on mortgage backed
securities 3,327 4,710 4,852
Loan advances, net of repayments (15,216) (3,215) (8,156)
Purchases of loans - - (819)
Proceeds from sale of OREO 2,001 2,999 4,319
Payments to improve OREO (450) (673) (1,320)
Net purchases of Bank premises
and equipment (410) (657) (253)
Net cash (used) provided by
investing activities (7,467) 1,042 21,655
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Years ended June 30,
1997 1996 1995
Financing Activities
Net increase in deposits 16,053 6,893 16,247
Net repayments of
repurchase agreements (9,776) (723) (36,351)
Net proceeds from (repayments of)
FHLB advances 8,000 (5,000) 5,000
Treasury stock purchased (2,137) (3,207) -
Net proceeds from Treasury Stock reissued - 40 27
Cash dividends paid (918) (744) (269)
Proceeds from exercise of stock options 3 87 -
Net cash provided (used) by
financing activities 11,225 (2,654) (15,346)
Increase in cash and
cash equivalents 7,038 3,299 9,559
Cash and federal funds sold, beginning
of year 17,590 14,291 4,732
Cash and federal funds sold, end of year $24,628 $17,590 $14,291
Cash paid during year
Interest to depositors $10,271 $ 9,933 $ 8,046
Interest on borrowings and
interest rate swaps 693 463 1,633
Income taxes 965 277 72
Non-cash transfers
From securities held-to-maturity to
securities available-for-sale - 39,507 -
From securities available-for-sale
to securities held-to-maturity - - 92,231
From loans to other real estate acquired 545 4,132 853
Financed portion of OREO sales 1,311 1,433 2,560
</TABLE>
NewMil Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewMil Bancorp, Inc. (the "Company") is the bank holding company for New
Milford Savings Bank (the "Bank"), a State chartered savings bank. The
accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The following
is a summary of significant accounting policies:
Principles of Consolidation
The consolidated financial statements include those of the Company and
its subsidiary after elimination of all intercompany accounts and
transactions. Certain reclassifications have been made to prior years'
amounts to conform with the 1997 financial presentation.
Basis of Financial Statement Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the statement of condition, and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of OREO in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and valuation of OREO,
management obtains independent appraisals for significant properties.
The Company's loans are generally collateralized by real estate located
principally in Connecticut, which has experienced a decline in the
market value of real property in the recent past. In addition,
substantially all of the OREO is located in those same markets.
Accordingly, the ultimate collectability of a substantial portion of the
Company's loan portfolio and OREO through foreclosure is particularly
susceptible to changes in market conditions.
While management uses available information to recognize losses on loans
and OREO, future additions to the allowance or write-downs of OREO may
be necessary based on changes in economic conditions, particularly in
Connecticut. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and valuation of OREO. Such agencies may
require the Company to recognize additions to the allowance or write-
downs based on their judgements of information available to them at the
time of their examination.
Effective July 1, 1996 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of. The
adoption of this standard did not have any effect on the Company's
financial condition or its results of operations.
Effective July 1, 1996 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for
Mortgage Servicing Rights". SFAS 122 amends SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities". It requires that the Company
recognize an asset for rights to service mortgage loans for others,
however those servicing rights are acquired. It also requires the
Company to assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The amount of loans
sold with servicing retained was minimal for the year ended June 30,
1997, therefore, the adoption of this standard did not have a material
effect on the Company's financial condition or its results of
operations.
Effective January 1, 1997 the Company adopted the provisions of
Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Serving of Financial Assets and
Extinguishment of Liabilities". SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishing of liabilities occurring after December 31, 1996, on a
prospective basis. The adoption of this standard did not have a
material effect on the Company's financial condition or its results of
operations.
Securities
Securities that may be sold as part of the Company's asset/liability or
liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at their fair
market value. Unrealized holding gains and losses on such securities
are reported net of related taxes, if applicable, as a separate
component of shareholders' equity. Securities that the Company has the
ability and positive intent to hold to maturity are classified as held-
to-maturity and carried at amortized cost. Realized gains and losses on
the sales of all securities are reported in earnings and computed using
the specific identification cost basis. Securities that the Company has
transferred from available-for-sale to held-to-maturity are carried at
the fair value at the time of transfer, adjusted for subsequent
amortization or accretion and net of applicable taxes.
Loans
Loans are reported at their principal outstanding balance net of charge-
offs, deferred loan origination fees and costs, and unamortized premiums
or discounts on purchased loans. Loan origination and commitment fees
and certain direct origination costs are deferred and recognized over
the life of the related loan as an adjustment of yield, or taken into
income when the related loan is sold.
Mortgage loans held-for-sale are valued at the lower of cost or market
as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis.
Changes in the carrying value are reported in earnings as gains and
losses on mortgage loans. Realized gains and losses on sales of
mortgage loans are reported in earnings when the proceeds are received
from investors.
The accrual of interest on loans is generally discontinued when
principal or interest is past due by 90 days or more, or earlier when,
in the opinion of management, full collection of principal or interest
is unlikely unless such loans are well collateralized and in the process
of collection. When a loan is placed on non-accrual status, interest
previously accrued but not collected is charged against current income.
Income on such loans is then recognized only to the extent that cash is
received and future collection of principal is probable.
Loans are restored to accrual status when principal and interest
payments are brought current and future payments are reasonably assured,
following a sustained period of repayment performance by the borrower in
accordance with the loan's contractual terms.
Troubled debt restructurings ("TDR") are renegotiated loans for which
concessions, such as the reduction of interest rates, deferral of
interest or principal payments, or partial forgiveness of principal and
interest, have been granted due to a deterioration in a borrower's
financial condition. Interest to be paid on a deferred or contingent
basis is reported in earnings only as collected.
Allowance for Loan Losses
The Company periodically reviews the allowance for loan losses in order
to maintain the allowance at a level sufficient to absorb probable
credit losses. The Company's review is based upon a detailed evaluation
of the loan portfolio through a process which considers numerous
factors, including estimated credit losses based upon internal and
external portfolio reviews, delinquency levels and trends, estimates of
the current value of underlying collateral, concentrations, portfolio
volume and mix, changes in lending policy, historical loan loss
experience, current economic conditions and examinations performed by
regulatory authorities. The allowance for loan losses is increased
through charges to earnings in the form of a provision for loan losses.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance. While the
Bank uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in regional
economic conditions and related factors.
Effective July 1, 1996 the Company adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure",
which requires the Company to evaluate the collectability of both
contractual interest and contractual principal of all loans when
assessing the need for a loss accrual. When a loan is impaired, the
Company measures impairment based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral, less estimated selling costs, if the
loan is collateral dependent and foreclosure is probable. The Company
recognizes an impairment by creating a valuation allowance. A loan is
impaired when, based on current information, it is probable that the
Company will be unable to collect all amounts due according to the
contractual terms of the loan.
As permitted by the FASB statement, smaller-balance homogeneous loans
consisting of residential mortgages and consumer loans are evaluated for
collectability by the Company based on historical loss experience rather
than on an individual loan-by-loan basis. Impaired loans are primarily
commercial mortgages, secured by real estate.
The adoption of SFAS 114 and 118 resulted in no additional provision for
loan losses. Prior to the adoption of SFAS 114, loans for which
foreclosure was probable were accounted for as in-substance foreclosed
and classified as real estate acquired. Under SFAS 114 such loans are
accounted for as loans. Consistent with the Company's adoption of SFAS
114, loans previously classified as in-substance foreclosed but for
which the Company had not taken possession of the collateral have been
reclassified to loans. This reclassification did not impact the
Company's financial condition or results of operations. All prior
period data has been reclassified to conform to current period
classifications.
Other Real Estate Owned
Real estate acquired through foreclosure, forgiveness of debt and in
lieu of debt, are stated at the lower of cost (principally loan amount)
or fair value minus estimated selling expenses. When a loan is
reclassified as real estate acquired any excess of the loan balance over
its fair value less estimated selling costs is charged against the
allowance for loan losses. Costs relating to the subsequent development
or improvement of a property are capitalized, to the extent realizable.
Holding costs and any subsequent provisions to reduce the carrying value
of a property to fair value minus estimated selling expenses are charged
to earnings and classified as real estate acquired expense. Fair value
is determined by current appraisal for collateral dependent loans.
Income Taxes
Deferred income taxes are provided for differences arising in the timing
of income and expenses for financial reporting and for income tax
purposes using the asset/liability method of accounting for income
taxes. Deferred income taxes and tax benefits are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The Company provides deferred taxes for the
estimated future tax effects attributable to temporary differences and
carryforwards when realization is assured beyond a reasonable doubt.
Bank Premises and Equipment
Bank premises, furniture and equipment are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line basis over the shorter
of the estimated useful lives of the improvements or the term of the
related leases.
Statement of Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, cash and
cash equivalents include cash and due from banks, interest-bearing
deposits at other financial institutions and overnight federal funds
sold.
Computation of Earnings per Share
Earnings per share is computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding
during the period, which, during 1997, 1996 and 1995 were 4,236,190,
4,505,575 and 4,543,782, respectively. The computation does not give
effect to shares issuable upon exercise of stock options where the
effect of that inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 provides
accounting and reporting standards for the calculation of earnings per
share intended to simplify the computation by replacing presentation of
primary earnings per share with the presentation of basic earnings per
share. The Company will be required to adopt SFAS 128 in the quarter
ending December 31, 1997. Had earnings per share for the twelve months
ended June 30, 1997 been computed in accordance with SFAS 128, basic and
diluted earnings per share would have been $0.65 and $0.61,
respectively, and $0.56 and $0.50, respectively, for June 30, 1996.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 "Disclosure of Information about Capital Structure"
(SFAS 129). SFAS 129 establishes standards for the disclosure of
information about an entity's capital structure and is effective for
financial statements issued for periods ending after December 15, 1997.
The adoption of this pronouncement is expected to have no impact on the
financial statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and display of comprehensive income,
which is defined as the change in equity of a business enterprise during
a period from nonowner sources. SFAS 130 is effective for years
beginning after December 15, 1997 and requires reclassification of
financial statements for all prior years presented. The adoption of
SFAS 130 is expected to impact the presentation of financial information
only.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 requires public companies to
report financial and descriptive information about operating segments in
their financial statements and requires selected information about
operating segments to be reported in interim financial reports issued to
shareholders. Operating segment financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and allocation of resources. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997 and
requires presentation of comparative information for prior periods
presented. The adoption of SFAS 131 is expected to have no impact on
the financial statements of the Company.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value) were as
follows:
<TABLE>
<CAPTION>
Estimated Gross un- Gross un- Amort-
(dollars in thousands) fair realized realized ized
value gains losses cost
<S> <C> <C> <C> <C>
June 30, 1997
U.S. Treasury and
Government Agencies
Within 1 year $ 6,013 $ 24 $ - $ 5,989
After 1 within 5 years 25,784 85 4 25,703
After 5 and within 10 years 964 - 36 1,000
Mortgage backed securities 6,514 94 27 6,447
Collateralized mortgage
obligations 8,727 - 667 9,394
Total debt securities 48,002 203 734 48,533
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $49,549 $203 $734 $50,080
June 30, 1996
U.S. Treasury and Government Agencies
After 1 within 5 years $17,940 $ 22 $ 2 $17,920
After 5 and within 10 years 938 - 63 1,001
Mortgage backed securities 7,772 127 134 7,779
Collateralized mortgage
obligations 21,974 - 802 22,776
Total debt securities 48,624 149 1,001 49,476
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $50,171 $149 $1,001 $51,023
</TABLE>
During 1996 the Company transferred securities with fair value of
$39,507,000 and an amortized cost of $40,530,000 from held-to-maturity
to available-for-sale. This transfer was made in conformity with the
Special Report issued by the Financial Accounting Standards Board, "A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". This transfer was made as
a result of a change in the Company's investment strategy.
During 1995 securities with a fair value of $92,231,000 were transferred
from available-for-sale to held-to-maturity pursuant to a change in the
Company's investment strategy. These securities were a part of the
Company's core portfolio which the Company has the ability and positive
intent to hold to maturity. Included in shareholders' equity at June
30, 1997 and 1996 are unrealized holding losses, net of taxes, of
$1,170,000 and $1,255,000, respectively, on such securities,
representing unrealized holding losses at the date of transfer adjusted
for subsequent amortization and taxation.
Securities classified held-to-maturity (carried at amortized cost) were
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
<S> <C> <C> <C> <C>
June 30, 1997
Mortgage backed securities $ 8,615 $ - $ 9 $ 8,606
Collateralized mortgage
obligations 61,204 207 1,689 59,722
Total securities
held-to-maturity $69,819 $207 $1,698 $68,328
(dollars in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
June 30, 1996
Mortgage backed securities $10,980 $ - $ 222 $10,758
Collateralized mortgage
obligations 64,432 6 1,832 62,606
Total securities
held-to-maturity $75,412 $ 6 $2,054 $73,364
</TABLE>
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
Cash proceeds and realized gains and losses from sales of securities
were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
<S> <C> <C> <C>
Year ended June 30, 1997
US Treasury securities
Available-for-sale $10,222 $ 2 $ 1
Mortgage backed securities
Available-for-sale 348 17 -
Collateralized mortgage obligations
Available-for-sale 12,681 3 30
Total $23,251 $ 22 $ 31
Year ended June 30, 1996
Mortgage backed securities
Available-for-sale $ 942 $ 4 $ -
Collateralized mortgage obligations
Available-for-sale 10,551 11 62
Mutual fund, trading 10,064 64 -
Marketable equity securities
Available-for-sale 10 10 -
Total $21,567 $ 89 $ 62
Year ended June 30, 1995
Mortgage backed securities
Available-for-sale $15,710 $ - $490
Collateralized mortgage obligations
Available-for-sale 2,910 - -
Other bonds and notes
Available-for-sale 696 696 -
Marketable equity securities
Available-for-sale 1,400 110 80
Total $20,716 $796 $570
</TABLE>
At June 30, 1997 securities with a carrying value aggregating
approximately $8,570,000 were pledged as collateral against public funds
and repurchase agreements (Note 6).
NOTE 3 - LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996
<S> <C> <C>
Real estate mortgages
One-four family residential $ 90,885 $ 89,159
Five or more family residential 4,812 3,262
Commercial 31,850 30,408
Land loans 8,334 9,472
Commercial and industrial 12,424 6,130
Home equity lines of credit 20,274 14,474
Installment and other 3,122 2,658
Total loans, gross 171,701 155,563
Deferred loan origination fees, net (108) (139)
Allowance for loan losses (5,452) (4,866)
Total loans, net $166,141 $150,558
Impaired loans at June 30 (in thousands)
With valuation allowance $2,136 $2,688
With no valuation allowance 3,369 3,900
Total impaired loans 5,505 6,588
Valuation allowance 861 813
Commitments to lend additional
amounts to impaired borrowers - -
Average impaired loans 6,658 8,244
Amount of impaired loans based on:
Discounted cash flows - -
Collateral values 5,505 6,588
</TABLE>
The Company's loans consist primarily of residential and commercial real
estate loans located principally in north western and northern
Connecticut, the Company's service area. The Company offers a broad
range of loan and credit facilities to borrowers in its service area,
including residential mortgage loans, commercial real estate loans,
construction loans, working capital loans, and a variety of consumer
loans, including home equity lines of credit, and installment and
collateral loans. All residential and commercial mortgage loans are
collateralized by first or second mortgages on real estate. The ability
and willingness of borrowers to satisfy their loan obligations is
dependent in large part upon the status of the regional economy and
regional real estate market. Accordingly, the ultimate collectability
of a substantial portion of the Bank's loan portfolio and the recovery
of a substantial portion of real estate acquired is susceptible to
changes in market conditions.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $4,866 $5,372 $5,246
Provision for losses 400 400 400
Charge-offs (124) (919) (295)
Recoveries 310 13 21
Balance at end of year $5,452 $4,866 $5,372
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996
<S> <C> <C>
Non-accrual loans $2,054 $3,809
Accruing loans past due
90 days or more 783 166
Accruing troubled debt
restructured loans 274 281
Total non-performing loans 3,111 4,256
Real estate acquired in
settlement of loans 611 2,698
Valuation reserve (137) (474)
Total other real estate owned, net 474 2,224
Total non-performing assets $3,585 $ 6,480
</TABLE>
The reductions in interest income associated with non-accrual loans were
as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996 1995
<S> <C> <C> <C>
Income in accordance with
original terms $228 $385 $417
Income recognized 44 96 116
Reduction in interest income $184 $289 $301
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of Bank premises and equipment were as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1997 1996
<S> <C> <C>
Land $ 1,140 $ 1,140
Buildings and improvements 6,113 5,533
Equipment 2,825 3,772
Leasehold improvements 557 489
Total cost 10,635 10,934
Accumulated depreciation
and amortization (4,593) (4,715)
Bank premises and equipment, net $ 6,042 $ 6,219
</TABLE>
NOTE 6 - SHORT TERM BORROWED FUNDS
The Company's short term borrowed funds include Federal Home Loan Bank
advances and short term repurchase agreements with major brokerage firms
that are primary dealers in government securities. The following is an
analysis of short term borrowed funds:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
<S> <C> <C>
Federal Home Loan Bank advances
Borrowings at June 30
maturing 30 days or less $8,000 $ -
Average borrowings during year 6,345 160
Maximum month-end borrowings 8,000 -
Accrued interest expense at June 30 20 -
Weighted average rate at June 30 5.57% - %
Weighted average rate during year 5.52% 6.93%
Securities sold under repurchase agreements
Borrowings at June 30
maturing 30 days or less $5,000 $14,776
Average borrowings during year 6,713 7,813
Maximum month-end borrowings 14,776 14,861
Accrued interest expense at June 30 21 17
Weighted average rate at June 30 5.64% 5.41%
Weighted average rate during year 5.47% 5.73%
Amount at risk by broker
Morgan Stanley $ - $7,667
Salomon Bros 2,629 -
Average maturity by broker
Morgan Stanley - 13 days
Salomon Bros 7 days -
Collateral at June 30
Mortgage-backed securities,
collateralized mortgage
obligations and US Treasury
obligations:
Carrying amount $7,606 $17,749
Market value 7,585 17,619
Accrued interest income 44 149
</TABLE>
At June 30, 1997 the Company had a pre-approved line of credit with the
Federal Home Loan Bank of Boston of $6,303,000. Under this agreement
the Company is required to maintain qualified collateral, as defined in
the Federal Home Loan Bank of Boston's Statement of Credit Policy, free
and clear of liens, pledges and encumbrances, as collateral for the
advances and the pre-approved line of credit. The Company maintains
qualified collateral sufficient to support Federal Home Loan Bank
advances well in excess of the pre-approved line of credit at June 30,
1997. Securities sold under repurchase agreements are generally issued
on a 14-day or 30-day basis.
NOTE 7 - INCOME TAXES
The Company provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when realization
is more likely than not. The components of the income tax provision
(benefit) were as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended June 30, 1997 1996 1995
<S> <C> <C> <C>
Current provision (benefit)
Federal $896 $223 $ 799
State (26) 40 264
Benefit from net operating
loss carry forwards
Federal - - (777)
State - - (241)
Total 870 263 45
Deferred provision (benefit)
Federal 641 949 (2,952)
State 375 335 (967)
Total 1,016 1,284 (3,919)
Income tax provision (benefit) $1,886 $1,547 $(3,874)
The following is a reconciliation of the expected federal statutory tax
to the income tax provision (benefit):
Year ended June 30, 1997 1996 1995
Income tax at statutory
federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 5.1 6.5 0.6
Benefit of net operating loss
carryforwards - - (32.5)
Change in valuation reserve - - (166.7)
Dividends excluded - - (0.7)
Other 2.9 0.3 0.4
Effective income tax rates 42.0 40.8 (164.9)
</TABLE>
The components of the Company's net deferred tax asset were as follows:
<TABLE>
<CAPTION>
(in thousands)
June 30, 1997 Federal State
<S> <C> <C>
Deferred tax assets
SFAS 115 Securities available-for-sale $ 734 $ 258
Capital loss carryforwards 668 201
Bad debt expense, book 1,659 573
Losses on real estate acquired 76 26
Accrued pension expense 184 64
Deferred income 23 8
Other 282 97
Tax credits 566 -
Total deferred tax assets 4,192 1,227
Deferred tax liabilities
Bad debt expense, tax 840 290
Deferred income 8 1
Total deferred tax liabilities 848 291
Net deferred tax asset 3,344 936
Valuation reserve (623) (201)
Net deferred tax asset $2,721 $ 735
June 30, 1996 Federal State
Deferred tax assets
Net operating loss carryforwards $ 843 $ 1,227
SFAS 115 Securities available-for-sale 882 295
Capital loss carryforwards 1,622 519
Bad debt expense, book 1,472 535
Losses on real estate acquired 210 76
Accrued pension expense 161 59
Deferred income 47 17
Other 190 99
Tax credits 445 -
Total deferred tax assets 5,872 2,827
Deferred tax liabilities
Bad debt expense, tax 778 283
Deferred income 7 3
Total deferred tax liabilities 785 286
Net deferred tax asset 5,087 2,541
Valuation reserve (1,622) (1,394)
Net deferred tax asset $ 3,465 $ 1,147
The allocation of deferred tax expense involving items charged to
current year income and items charged directly to shareholders' equity
for the years ended June 30, are as follows:
(in thousands)
June 30, 1997 Federal State
Deferred tax expense allocated to:
Shareholders' equity $ 148 $ 37
Income 641 375
Total deferred tax expense $ 789 $ 412
June 30, 1996 Federal State
Deferred tax expense allocated to:
Shareholders' equity $ 377 $ 124
Income 949 335
Total deferred tax expense $1,326 $ 459
</TABLE>
The Company will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not. At June 30,
1997, the Company recorded a valuation reserve of $623,000 and $201,000
against federal and state deferred tax assets, respectively,
representing capital loss carryforwards which the Company does not
expect to utilize.
NOTE 8 - RETIREMENT PLANS
The Company has a non-contributory defined benefit pension plan (the
"Pension Plan") covering all eligible employees. The benefits are
primarily based on compensation and length of service. The Company's
policy is to contribute the actuarially computed normal cost, plus an
amount to fund liability for past service cost over 40 years.
Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the
future. On September 1, 1993 the Company suspended benefit accruals
under the Pension Plan for all employees and, as of a result of which,
recognized a pension curtailment gain of $177,713 as a reduction of net
pension expense in 1994. Pension Plan assets consist principally of
cash, money market funds, bonds and equity securities. The components
of net pension expense are as follows:
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest cost on projected
benefit obligation $ 295 $ 289 $ 280
Actual return on plan assets (703) (264) (81)
Net amortization and deferral 344 - (187)
Net pension (income) expense $ (64) $ 25 $ 12
The funded status of the Pension Plan at March 31 was as follows:
March 31, (in thousands) 1997 1996
Actuarial present value of benefit
obligations:
Vested benefit obligation $(5,332) $(4,998)
Accumulated benefit obligation $(5,337) $(5,024)
Projected benefit obligation $(5,337) $(5,024)
Plan assets at fair value 6,145 5,642
Plan assets in excess of
projected benefit obligation 808 618
Unrecognized net Gain (1,089) (962)
Accrued pension cost included
in other liabilities $ (281) $ (344)
</TABLE>
The weighted average discount rates used to measure the actuarial
present value of the projected benefit obligation were 6.0% in 1997,
6.0% in 1996 and 6.0% in 1995. The expected long-term rate of return on
Pension Plan assets were 6.0% in 1997, 6.0% in 1996 and 6.0% in 1995.
The Company made no contributions to the Pension Plan in 1997, 1996 or
1995. The Company also maintains a supplemental pension plan to provide
retirement benefits to certain key employees who are not included in the
pension plan.
The Company has a 401(k) Savings Retirement Plan covering all eligible
employees. Participants may contribute up to 15% of their compensation,
subject to a maximum of $9,240 per year in 1997. The Company
contributes amounts equal to 50% of annual employee contributions up to
6% of participants' compensation. Employees are fully vested in the
Company's contributions after five years of service. The Company
contributed $61,972, $56,196 and $50,817 to the Plan in 1997, 1996 and
1995, respectively. This plan allows for the Company to make non-
contributory profit sharing contributions, there were no profit sharing
contributions made for 1997, 1996 and 1995.
Effective July 1, 1993 the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other than Pensions," (SFAS
106), which requires the Company to accrue its obligation for post-
retirement benefits other than pensions over the service lives of its
employees rather than on a cash basis.
The Company provides post-retirement health benefits for current
retirees and eligible employees. Post-retirement life insurance
benefits are provided for employees that were eligible for retirement as
of October 1, 1993 and current retirees. The cost of post-retirement
health care benefits is shared by the Company and the retiree, and
benefits are based on deductible and coinsurance provisions. The post-
retirement life insurance benefits are non-contributory, and benefits
are based on a percentage of the base pay at retirement. Effective
October 1, 1993 the Company suspended certain post-retirement benefits
and introduced a co-pay provision for new employees hired on or after
October 1, 1993. Prior to the adoption of SFAS 106, the cost of these
benefits for retired employees was expensed as paid. In adopting SFAS
106 the Company chose to amortize the transition obligation for past
service cost of approximately $300,000 over 20 years rather than
recognize it immediately as a cumulative effect of an accounting change.
The adoption of SFAS 106 increased 1997, 1996 and 1995 employee benefit
expense by approximately $60,000 for each of the three years, being the
actuarially computed normal cost, plus the amortization of the liability
for past service cost over 20 years. The Company does not advance-fund
its post-retirement health care and life insurance benefit plan.
NOTE 9 - SHAREHOLDERS' EQUITY
Capital Requirements
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the Federal Deposit Insurance Corporation (the "FDIC"). The Company's
and the Bank's regulatory capital ratios were as follows:
<TABLE>
<CAPTION>
NewMil New Milford
June 30, 1997 Bancorp, Inc. Savings Bank
<S> <C> <C>
Leverage ratio 10.25% 10.02%
Tier 1 risk-based ratio 18.57 18.62
Total risk-based ratio 19.85 19.89
</TABLE>
The Company and the Bank are categorized as "well capitalized". A well
capitalized institution, as defined by the Prompt Corrective Action
rules issued by the FDIC and the FRB, is one which maintains a total
risk-based ratio of 10% or above, a Tier 1 risk-based ratio of 6% or
above and a leverage ratio of 5% or above. In addition to meeting these
numerical thresholds, well capitalized institutions may not be subject
to any written order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital
level.
Restrictions on Subsidiary's Dividends and Payments
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain restrictions
on the payment of dividends and other payments by the Bank to the
Company. Under Connecticut law the Bank is prohibited from declaring a
cash dividend on its common stock except from its net earnings for the
current year and retained net profits for the preceding two years.
Consequently, the maximum amount of dividends payable by the Bank to the
Company for the year ended June 30, 1997 is $3,438,000. In some
instances, further restrictions on dividends may be imposed on the
Company by the FRB.
NOTE 10 - RELATED PARTY TRANSACTIONS
In the normal course of business the Bank has granted loans to executive
officers, directors, principal shareholders and associates of the
foregoing persons considered to be related parties. Changes in loans to
related parties are as follows:
<TABLE>
<CAPTION>
Principal
(in thousands) Officers/ share-
directors holders Total
<S> <C> <C> <C>
Year ended June 30, 1997
Balance, beginning of year $ 212 $ - $ 212
Advances 610 - 610
Repayments (239) - (239)
Change in related party
status (Note 1) - -
Balance, end of year $ 583 $ - $ 583
Year ended June 30, 1996
Balance, beginning of year $ 269 $2,500 $2,769
Advances 90 - 90
Repayments (147) - (147)
Change in related party
status (Note 1) - (2,500) (2,500)
Balance, end of year $ 212 $ - $ 212
</TABLE>
Note 1 - Adjustment to exclude loans outstanding to persons who are no
longer considered related parties.
NOTE 11 - STOCK OPTIONS
The Company's 1986 Stock Option and Incentive Plan (the "1986 Plan")
authorizes the granting of both incentive and non-incentive options and
stock appreciation rights (SARS) to officers and other key employees by
the Salary and Benefits Committee of the Board. The 1986 Plan provides
for the granting of options to purchase shares of Common Stock for terms
of up to 10 years at an exercise price not less than 85% of the fair
market value of the Company's stock on the date of the grant. Changes
in outstanding stock option and SARS were as follows:
<TABLE>
<CAPTION>
Options Options
without with Average Maturity Price
SARS SARS Total price range range
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994 222,570 10,000 232,570 $4.383 1996-2004 $3.00-12.06
Granted 25,000 - 25,000 4.285 2003-2004 4.00- 4.57
Lapsed (7,750) (100) (7,850) 6.253 1996-2004 3.00-12.06
June 30, 1995 239,820 9,900 249,720 4.295 1996-2004 3.00-12.06
Granted 154,500 - 154,500 6.433 2005-2006 6.00- 7.13
Exercised (21,500) - (21,500) 4.052 2002-2005 3.00- 6.00
Lapsed (2,200) (1,900) (4,100) 7.676 1996-2003 3.00-12.06
June 30, 1996 370,620 8,000 378,620 4.968 1996-2006 3.00-12.06
Granted - - -
Exercised (750) - (750) 3.833 2002-2003 3.00-4.25
Lapsed (334) (8,000) (8,334) 10.945 1996-2000 7.38-11.09
June 30, 1997 369,536 - 369,536 4.835 1999-2006 3.00-12.06
</TABLE>
All stock options outstanding as of June 30, 1997 were exercisable.
As of June 30, 1997 options to purchase 21,464 shares of Common Stock
were available to be granted under the 1986 Stock Option and Incentive
Plan.
The Company's 1992 Stock Option Plan for Outside Directors (the "1992
Plan") provides for automatic grants of options to non-employee
directors who were participants on the effective date of the plan and
were reelected as non-employee directors. At the annual meeting in 1995
the plan was amended so that all non-employee directors would be granted
2,000 options at June 30th of each subsequent year. The 1992 Plan
provides for the granting of options to purchase shares of Common Stock
for terms of up to 10 years at an exercise price of not less than the
fair market value of the Company's stock on the date of the grant.
Changes in outstanding stock options were as follows:
<TABLE>
<CAPTION>
Average Price
Options Price Maturity Range
<S> <C> <C> <C> <C>
June 30, 1994 62,000 $3.089 2002-2003 $3.00-5.75
Granted 4,000 5.000 2004 5.00
Lapsed - - - -
June 30, 1995 66,000 3.205 2002-2004 3.00-5.75
Granted 18,000 6.813 2005-2006 6.50-7.13
Lapsed - - - -
June 30, 1996 84,000 4.000 2002-2006 3.00-7.13
Granted 12,000 11.188 2007 11.19
Lapsed - - - -
June 30, 1997 96,000 4.898 2002-2007 3.00-11.19
</TABLE>
All stock options outstanding as of June 30, 1997 were exercisable.
As of June 30, 1997 options to purchase 34,000 shares of Common Stock
were available to be granted under the 1992 Stock Option Plan for
Outside Directors.
Effective July 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(SFAS 123). As permitted by SFAS 123 the Company has chosen to apply
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related interpretations in accounting for its Plans. Had
compensation cost for the Company's Plans been determined based on the
fair value at the grant dates for awards under the Plans consistent with
the method of SFAS 123, the Company's net income and fully diluted
earnings per share would have been reduced to the proforma amounts
indicated below.
<TABLE>
<CAPTION>
Net income Earnings per share,
(in thousands) fully diluted
<S> <C> <C>
Year ended June 30, 1997
As reported $2,602 $0.61
Pro forma 2,567 0.61
Year ended June 30, 1996
As reported 2,242 0.50
Pro forma 1,977 0.44
Year ended June 30, 1995
As reported 6,224 1.37
Pro forma 6,182 1.35
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Roll-Geske Model for pricing American call options with
dividends. The following weighted-average assumptions used for grants
in 1997, 1996 and 1995, respectively: dividend yield of 1.61%, 2.79% and
3.56%; expected volatility of 30.0%, 35.0% and 50.0%; risk free interest
rate of 6.49%, 6.60% and 7.46%, and expected term of options of ten
years.
The following table summarizes information about the Company's Employee
and Director Stock Option Plans, as of June 30, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Price and Exerciseable Life Price
<S> <C> <C> <C>
$ 3.00 - $ 5.99 275,200 6.1 $ 3.71
6.00 - 8.99 178,086 7.4 6.54
9.00 - 12.06 12,250 5.8 11.21
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments and
contingent liabilities outstanding pertaining to the purchase and sale
of securities and the granting of loans and lines of credit which are
not reflected in the accompanying financial statements. At June 30,
1997 the Company had commitments under outstanding construction
mortgages of $759,000, unused lines of credit of $17,670,000 and
outstanding commitments to fund loans of $5,022,000. At June 30, 1996
the Company had commitments under outstanding construction mortgages of
$33,000, unused lines of credit of $13,293,000 and outstanding
commitments to fund loans of $6,314,000. The Company does not
anticipate any material losses as a result of these transactions. Since
many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company's exposure to credit loss in the event of
non-performance by the other party to the commitment is represented by
the contractual amount of the instrument. The exposure to credit loss
is limited by evaluating the customer's credit worthiness on a case-by-
case basis and by obtaining collateral if deemed necessary. Collateral
held generally includes residential and commercial properties. The
Company generally requires an initial loan to value ratio of no greater
than 80% when real estate collateralizes a loan commitment.
The Company leases facilities under operating leases which expire at
various dates through 2002. The leases have varying renewal options,
generally require a fixed annual rent, and provide that real estate
taxes, insurance, and maintenance are to be paid by the Company. Rent
expense totaled $167,041, $129,820 and $128,413 for 1997, 1996 and 1995,
<PAGE>
respectively. Future minimum lease payments at June 30, 1997 are as
follows:
1998 $203,875
1999 201,167
2000 137,837
2001 131,129
2002 131,129
$805,137
NOTE 13 - ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the Company to
disclose fair value information for certain of its financial
instruments, including loans, securities, deposits, borrowings, interest
rate swaps and other such instruments. Quoted market prices are not
available for a significant portion of the Company's financial
instruments and, as a result, the fair values presented may not be
indicative of net realizable or liquidation values. Fair values are
estimates derived using present value or other valuation techniques and
are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics, and other factors.
In addition, fair value estimates are based on market conditions and
information about the financial instrument at a specific point in time.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Such items include mortgage
servicing, core deposit intangibles and other customer relationships,
premises and equipment, foreclosed real estate and income taxes. In
addition, the tax ramifications relating to the realization of the
unrealized gains and losses may have a significant effect on fair value
estimates and have not been considered in the estimates.
The following is a summary of the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments pursuant
to SFAS 107.
Cash, cash equivalents and other: The fair value of cash and due from
banks, deposits with banks, federal funds sold, accrued interest
receivable, securities sold under repurchase agreements and accrued
interest payable, is considered to approximate the book value due to
their short-term nature and negligible credit losses.
Securities: Securities classified as available-for-sale are carried at
fair value. Fair value for securities held-for-sale was determined by
secondary market and independent broker quotations.
Loans: Fair values for residential mortgage and consumer installment
loans were estimated by discounting cash flows, adjusted for
prepayments. The discount rates used for residential mortgages were
secondary market yields for residential mortgage loans, net of servicing
and adjusted for risk. The discount rates used for consumer installment
loans were current rates offered by the Company. Fair values for
commercial loans were estimated by assessing credit risk and interest
rate risk. Such loans were valued by discounting estimated future cash
flows at a rate that incorporates both interest and credit risk.
Deposit liabilities: The fair value for demand, savings and certain
money market deposits is equal to the amount payable on demand at the
balance sheet date which is equal to the carrying value. The fair value
of certificates of deposit was estimated by discounting cash flows using
rates currently offered by the Company for deposits of similar remaining
maturities.
Off-balance sheet: The fair value of interest rate swap contracts was
estimated by discounting cash flows using prevailing market rates.
The fair value information of the Company's financial instruments
required to be valued by SFAS 107 are as follows:
<TABLE>
<CAPTION>
June 30, 1997 1996
(dollars in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 7,168 $ 7,168 $ 6,630 $ 6,630
Federal funds sold 17,460 17,460 10,960 10,960
Securities available for sale 49,549 49,549 50,171 50,171
Securities held to maturity 69,819 68,328 75,412 73,364
Loans 171,701 169,989 155,563 153,841
Allowance for loan losses (5,452) - (4,866) -
Deferred loan origination
fees, net (108) - (139) -
Loans, net 166,141 169,989 150,558 153,841
Accrued interest receivable 2,024 2,024 1,874 1,874
Financial Liabilities
Deposits
Demand (non-interest bearing) $ 12,369 $ 12,369 $ 10,750 $ 10,750
NOW accounts 25,830 25,830 25,653 25,653
Money market 61,075 61,075 60,945 60,945
Savings and other 40,614 40,614 40,531 40,531
Certificates of deposit 135,504 136,392 121,388 121,414
Total deposits 275,392 276,280 259,267 259,293
Securities sold under
repurchase agreements 5,000 5,000 14,776 14,776
FHLB advances 8,000 8,000 - -
Accrued interest payable 92 92 140 140
</TABLE>
NOTE 14 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL
INFORMATION
The unconsolidated balance sheets of NewMil Bancorp, Inc. at June 30,
and its statements of income and cash flows for each of the years ended
June 30, are presented as follows:
<TABLE>
<CAPTION>
Balance Sheets June 30, June 30,
(in thousands) 1997 1996
<S> <C> <C>
Assets
Due from bank $ 692 $ 957
Investment in New Milford Savings Bank 30,977 30,853
Other assets 86 84
Total Assets $31,755 $31,894
Liabilities and Shareholders' Equity
Liabilities $ 36 $ 2
Shareholders' equity 31,719 31,892
Total Liabilities and
Shareholders' Equity $31,755 $31,894
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Years ended June 30,
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest income $ - $ 36 $ 334
Dividends from subsidiary 2,919 3,743 -
Expenses 166 172 178
Income before taxes and
undistributed net income
of subsidiary 2,753 3,607 156
Income tax benefit - (81) -
Income before equity in
undistributed net income
of subsidiary 2,753 3,688 156
Equity in undistributed
(equity distributed in excess of)
net income of subsidiary (151) (1,446) 6,068
Net income $2,602 $2,242 $6,224
Parent Company Only Financial Information continued:
Statements of Cash Flows Years ended June 30,
(in thousands) 1997 1996 1995
Net income $ 2,602 $ 2,242 $ 6,224
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed (equity
distributed in excess of)
net income of subsidiary 151 1,446 (6,068)
Other 34 (89) (22)
Net cash provided by operating
activities 2,787 3,599 134
Investing Activities:
Net decrease in note receivable
from subsidiary - 1,100 100
Net cash provided by investing
activities - 1,100 100
Financing Activities:
Cash dividends declared (918) (744) (269)
Proceeds from Treasury Stock issued - 40 27
Treasury stock purchased (2,137) (3,207) -
Proceeds from exercise of stock options 3 87 -
Net cash used by financing activities (3,052) (3,824) (242)
(Decrease) increase in cash and
cash equivalents (265) 875 (8)
Cash and cash equivalents,
beginning of year 957 82 90
Cash and cash equivalents, end of year $ 692 $ 957 $ 82
</TABLE>
QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 1997 and 1996 is as follows (in thousands
except ratios and per share amounts):
<TABLE>
<CAPTION>
Year ended June 30, 1997
June 30, Mar 31, Dec 31, Sept 30,
Statement of Income
<S> <C> <C> <C> <C>
Interest and dividend
income $5,789 $5,788 $5,656 $5,621
Interest expense 2,818 2,731 2,696 2,671
Net interest income 2,968 3,057 2,960 2,950
Provision for loan losses 100 100 100 100
Non-interest income:
Securities gains (losses), net 1 - (5) (5)
Gains on loans, net 52 55 48 26
Service fees and other 357 319 340 331
Non-interest expense 2,109 2,167 2,131 2,159
Income before income taxes 1,169 1,164 1,112 1,043
Income tax provision 492 489 467 438
Net income 677 675 645 605
Financial Condition
Total assets $323,061 $317,013 $311,863 $306,171
Loans, net 166,141 163,876 158,545 155,794
Allowance for loan losses 5,452 5,084 5,022 4,931
Securities 119,368 122,766 117,254 119,064
Deposits 275,392 268,916 263,854 258,179
Borrowings 13,000 13,071 13,071 13,071
Shareholders' equity 31,719 31,593 32,739 32,172
Non-performing assets 3,585 4,131 5,084 5,683
Per Share Data
Earnings, fully diluted $0.17 $0.16 $0.15 $0.14
Cash dividends 0.06 0.06 0.06 0.05
Book value 8.27 8.13 8.10 7.96
Market price: (a)
High 11.750 9.750 9.750 7.500
Low 8.875 8.750 7.000 6.750
Statistical Data
Net interest margin 3.87% 4.08% 3.99% 4.01%
Efficiency ratio 62.43 63.16 63.75 65.38
Return on average assets 0.85 0.87 0.84 0.79
Return on average
shareholders' equity 8.50 8.26 7.84 7.49
Weighted average equivalent
shares outstanding,
fully diluted 4,100 4,196 4,271 4,208
Quarterly Financial Data (unaudited) continued:
Year ended June 30, 1996
June 30, Mar 31, Dec 31, Sept 30,
Statement of Income
Interest and dividend
income $5,557 $5,315 $5,464 $5,501
Interest expense 2,560 2,571 2,647 2,660
Net interest income 2,997 2,744 2,817 2,841
Provision for loan losses 100 100 100 100
Non-interest income
Securities gains (losses), net - 72 (55) 10
Gains on loans, net 5 - - 5
Service fees and other 313 298 311 296
Non-interest expense 2,180 2,007 2,089 2,189
Income before income taxes 1,035 1,007 884 863
Income tax provision 430 394 365 358
Net income 605 613 519 505
Financial Condition
Total assets $309,363 $291,578 $304,574 $303,259
Loans, net 150,558 146,739 147,378 149,077
Allowance for loan losses 4,866 5,200 5,133 5,242
Securities 125,583 110,455 118,989 124,827
Deposits 259,267 257,241 256,552 250,287
Borrowings 14,776 - 10,979 17,126
Shareholders' equity 31,892 32,459 34,381 33,209
Non-performing assets 6,480 8,403 8,093 8,322
Per Share Data
Earnings, fully diluted $0.14 $0.14 $0.11 $0.11
Cash dividends 0.05 0.05 0.05 0.02
Book value 7.84 7.77 7.65 7.39
Market price: (a)
High 7.750 7.750 7.500 7.000
Low 6.500 6.375 6.000 5.750
Statistical Data
Net interest margin 4.21% 3.91% 3.97% 3.96%
Efficiency ratio 65.76 64.45 67.98 69.45
Return on average assets 0.78 0.83 0.70 0.67
Return on average
shareholders' equity 7.59 7.20 6.25 6.08
Weighted average equivalent
shares outstanding,
fully diluted 4,257 4,488 4,601 4,586
</TABLE>
NewMil Bancorp, Inc.'s Common Stock, par value $.50 per share ("Common
Stock") trades on the Nasdaq National Market tier of The Nasdaq Stock
Market under the symbol: NMSB. As of September 4, 1997, there were
1,713 shareholders of record of the Company's Common Stock.
(a) The above market prices reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent
actual transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures
between the Company and its independent accountants for which a Form 8-K
was required to be filed during the two most recent fiscal years or for
the period from June 30, 1997 to the date hereof.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears on pages 6 through 7 of
the Company's Proxy Statement dated September 22, 1997 for the 1997
Annual Meeting of Shareholders, under the captions "Nominees for
Election for a Three Year Term" and "Directors Continuing in Office".
Such information is incorporated herein by reference and made a part
hereof.
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 8 and 9 of the
Company's Proxy Statement dated September 22, 1997 for the 1997 Annual
Meeting of Shareholders, under the caption "Executive Compensation".
Such information is incorporated herein by reference and made a part
hereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item appears on pages 6 through 7 of
the Company's Proxy Statement dated September 22, 1997 for the 1997
Annual Meeting of Shareholders, under the caption "Nominees for Election
for a Three Year Term" and "Directors Continuing in Office". Such
information is incorporated herein by reference and made a part hereof.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 13 of the
Company's Proxy Statement dated September 22, 1997 for the 1997 Annual
Meeting of Shareholders, under the caption "Transactions with Management
and Others". Such information is incorporated herein by reference and
made a part hereof.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as exhibits to this report and
appear on the pages indicated.
Financial Statements
None.
(b) Reports on Form 8-K
None.
(c) Exhibits
The following documents are filed as Exhibit to this Form 10-K, as
required by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (No. 33-10693) filed on December 9,
1986)
3.1.1 Amendment to Certificate of Incorporation of the Company
increasing authorized shares of common stock from
6,000,000 to 20,000,000 (incorporated by reference to the
Registrant's 1994 Proxy Statement dated September 23,
1994, page A-1).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4 (No. 33-10693) filed on December 9, 1986)
4.1 Instruments Defining Rights of Security Holders (Included
in Exhibits 3.1 and 3.2)
10.1 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-4 (No.
33-10693) filed on December 9, 1986)
10.2 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan Incentive Stock Option Agreement and Non-
Qualified Stock Option Agreement (incorporated by
reference to the Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan For Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the
Registrant's 1992 Proxy Statement dated
September 22, 1992, pages 17 through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and
American Stock Transfer and Trust Company as Rights Agent
dated as of July 19, 1994 concerning NewMil Bancorp's
shareholder rights plan of same date (incorporated by
reference to the Registrant's 1994 Form 10-K).
10.6 The NewMil Bancorp, Inc. Amended and Restated 1986 Stock
Option and Incentive Plan (incorporated by reference to
the Registrant's 1995 Proxy Statement dated September 20,
1995, pages A-1 to A-11).
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994 (incorporated by reference to the Registrant's 1995
Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's
shareholders (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.9 Change in control agreements between New Milford Savings
Bank and management (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.10 The Amended and Restated 1992 Stock Option Plan for
Outside Directors of NewMil Bancorp, Inc. (incorporated
by reference to the Registrant's 1995 Proxy Statement
dated September 20, 1995, pages B-1 to B-4).
10.11 The consulting agreement between New Milford Savings Bank
and Anthony J. Nania.
11.1 Statement regarding Computation of Net Income Per Common
Share.
18.3 Consent of Coopers & Lybrand.
20.1 Proxy Statement dated September 22, 1997 for the Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
21.1 Subsidiaries of the Registrant.
(d) Financial Statement Schedules
No financial statement schedules are required to be filed as
Exhibits pursuant to Item 14(d).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEWMIL BANCORP, INC.
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 20, 1997
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated, on the
dates indicated below.
/s/ Willis H. Barton, Jr.
Willis H. Barton, Jr.
Director
September 20, 1997
/s/ Herbert E. Bullock
Herbert E. Bullock
Director
September 20, 1997
/s/ Joseph Carlson II
Joseph Carlson II
Director
September 20, 1997
/s/ Laurie G. Gonthier
Laurie G. Gonthier
Director
September 20, 1997
/s/ Dr. John V. Haxo
Dr. John V. Haxo
Director
September 20, 1997
/s/ Betty F. Pacocha
Betty F Pacocha
Director and Secretary
September 20, 1997
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
September 20, 1997
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 20, 1997
/s/ Mary C. Williams
Mary C. Williams
Director
September 20, 1997
/s/ B. Ian McMahon
B. Ian McMahon
Chief Financial Officer
September 20, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEWMIL BANCORP, INC.
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 20, 1997
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
indicated, on the dates indicated below.
Willis H. Barton, Jr.
Director
September 20, 1997
Herbert E. Bullock
Director
September 20, 1997
Joseph Carlson II
Director
September 20, 1997
Laurie G. Gonthier
Director
September 20, 1997
Dr. John V. Haxo
Director
September 20, 1997<PAGE>
Betty F. Pacocha
Director and Secretary
September 20, 1997
Suzanne L. Powers
Director
September 20, 1997
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 20, 1997
Mary C. Williams
Director
September 20, 1997
B. Ian McMahon
Chief Financial Officer
September 20, 1997
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made as of August 4, 1997 by and
between NEWMIL BANCORP, INC. (the "Company"), a Delaware corporation
headquartered in New Milford, Connecticut, and its subsidiary, NEW MILFORD
SAVINGS BANK (the "Bank"), (sometimes collectively referred to as the
"Client"), and ANTHONY J. NANIA, an individual residing in Canaan,
Connecticut ("Consultant").
WHEREAS, Consultant has served as Chairman of the Board of Directors
and President of Company, and in similar capacities at the Bank, since 1991.
WHEREAS, the Consultant has voluntarily resigned from all positions at
the Company and the Bank so as to have the opportunity to pursue other
interests.
WHEREAS, the Company and Bank desire to have continued access to the
services of Consultant from time to time.
WHEREAS, Consultant has considerable background with Company and
Bank matters so as to both be a valuable resource for and potential competitive
threat to them.
WHEREAS, Company and Bank are desirous of using the continued
services of Consultant as a consultant to perform services on an occasional
basis as described herein and to obtain Consultant's agreement not to engage
in certain competitive activities as described herein, and Consultant is
desirous of offering its services to and so agreeing with Client:
NOW, THEREFORE, Client and Company hereby agree as follows:
1. SERVICES OF CONSULTANT
Commencing as of September 1, 1997, Consultant will provide consulting
services to Company and Bank as an independent contractor. Consultant will
provide the Client with such services on an as needed, as-called basis, provided
that Consultant shall not be required to provide more than 10 hours of such
services in any calendar month, shall be subject to reasonable vacation periods,
sick days, personal days, holidays and other business commitments. Consultant
agrees to use his best efforts to perform consulting services for Client in
connection with (i) customer relations; (ii) governmental and regulatory
relations; (iii) legal issues; and (iv) other senior management and/or Board
of Director issues as Client may from time to time require. Consultant
shall receive his assignments from, and shall report only to (unless
otherwise directed) the Client's President and/or Board of Directors.
Consultant shall not purport to speak or act on behalf of Company or Bank
unless specifically instructed to do so in writing. Consultant shall
promptly report to Client any unsolicited communications relating to Company
or Bank received from Company or Bank employees, agents, or advisors, or any
other persons. Client and Consultant shall cooperate to coordinate the
extent and timing of these services.
2. COMPENSATION
Commencing as of September 1, 1997, Consultant will perform services as
an independent consultant to Client and be compensated at a rate of (through
August 31, 1998) SEVENTY-FIVE THOUSAND DOLLARS ($75,000) per year,
and, commencing as of September 1, 1998 (through August 31, 1999) SEVENTY-
FIVE THOUSAND DOLLARS ($75,000) per year, in each case such amounts
shall be payable in twelve (12) equal monthly installments in advance on the
first day of each calendar month. In the event Consultant is to be compensated
for a portion of a year or month remaining under the term of this Agreement,
Consultant's compensation shall be calculated on a pro-rata basis based upon the
actual number of months or weeks of service. Consultant shall not be
required to maintain records to reflect the time spent and services rendered
in providing consulting services under this Agreement. For purposes of
determining compensation payable under this Section, one calendar week
equals one-fourth of a calendar month and where necessary compensation
calculations shall be rounded to the nearest week.
3. STATUS
The status of Consultant in relation to Client under this Agreement
will be that of an independent contractor. Consultant is expressly not an
employee of Client and is not eligible to participate in any benefits or
privileges provided or offered to Client's employees.
4. TERM
(a) The term of this Consulting Agreement shall commence as of
September 1, 1997 and will expire two (2) years from that date, or
August 31, 1999, unless earlier terminated as provided in this
Section. This Agreement shall terminate automatically upon (i) the
death of Consultant, or (ii) the election to terminate this Agreement
by either Client or Consultant in accordance with Section 4(b)
hereof due to the total and permanent disability of Consultant, or
(iii) the Date of Termination of this Agreement as defined in
Section 9(b) hereof. Any termination of this Agreement because of
the death or total and permanent disability of Consultant shall not
be considered a breach of this Agreement and the parties'
obligations under this Agreement, other than those intended to
survive the termination of this Agreement, shall cease upon the
effective date of the termination of this Agreement.
(b) In the event that Consultant becomes "totally and
permanently disabled" as defined in this subsection 4(b), Client
shall continue to pay Consultant compensation in accordance with
the terms of this Agreement unless either Client or Company elects
to terminate as described below. "Totally and permanently
disabled" shall mean any physical or mental disability which
prevents Consultant from substantially performing the consulting
services contemplated by this Agreement. Client shall be furnished
with acceptable medical evidence of Consultant's disability.
Acceptable medical evidence shall be a written certification
furnished by a physician satisfactory to both Client and Consultant
certifying that Consultant is then incapable of substantially
performing his duties under this Agreement. If the parties cannot
agree upon a physician to make the necessary examination and
certification, the parties shall submit the matter to the President of
the local medical society nearest the place where Consultant is then
physically located to have a physician designated to make such
examination and certification. In the event Consultant is totally and
permanently disabled for a continuous period of more than three (3)
months from the commencement of such disability, either Client or
Consultant may elect to terminate this Agreement upon the delivery
of ten (10) days notice to the other party and such termination shall
take effect upon the tenth day following delivery of such notice.
Client's obligation to pay compensation to Consultant shall cease as
of the effective date of such termination of this Agreement, except
as provided in this sub-paragraph. Unless this Agreement is
terminated, Client shall continue to pay Consultant's compensation
in accordance with the terms of this Agreement notwithstanding
Consultant's total and permanent disability.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION
Consultant agrees that he will not, at any time, disclose to others,
use for his own benefit or otherwise appropriate or copy for the benefit of
anyone other than Company or Bank, any Confidential Information, whether or
not developed by Consultant, except as required in Consultant's duties
hereunder; provided, however, that this Section shall apply only so long
as the information in question is secret and confidential.
The term "Confidential Information" shall refer to any information not
publicly known which was obtained from Client or which was discovered,
developed or prepared during or as a result of the performance of any consulting
services on behalf of Client.
6. PROCEDURE FOR PRESERVING CONFIDENTIALITY OF CONFIDENTIAL INFORMATION
Consultant agrees to comply with any and all reasonable procedures which
Client may adopt from time to time to preserve the confidentiality of any
Confidential Information.
7. NONCOMPETITION AGREEMENT
(a) Employment with Competitors. During the term of this Agreement,
Consultant agrees that he will not render, directly or indirectly,
any services of an advisory or consulting nature or as an employee
or otherwise to any bank, bank holding company, savings bank, savings
and loan holding company or similar financial services business
operating in the Bank's principal or secondary market area (a
"Competing Bank"). Without otherwise limiting the foregoing,
Consultant may continue his service as a director of the Connecticut
Development Authority.
(b) Ownership or Management of Competitors. During the term of this
Agreement, Consultant agrees that he will not, either alone or as a
member of a partnership or joint venture, as a beneficiary of a trust,
or as an officer, director, stockholder or investor of or in any other
corporation or enterprise, or otherwise (except as an investor in or
stock holder of not more than five percent (5%) of publicly-traded
securities (including options) of such entity or enterprise), be
engaged in the ownership or management of any Competing Bank.
(c) Extension of Noncompetition Agreement. If the Consulting
Agreement is terminated for any reason by either party prior to the
expiration of the two (2) year period commencing on September 1,
1997 (the "Agreement Expiration Date"), Client will have the
option to extend the period of effectiveness of the covenant not to
compete contained in this Section 7 until the Agreement Expiration
Date upon making continued consulting payments as otherwise
provided herein. If Client decides not to continue the covenant not
to compete, Client will not have a continuing obligation to make
payments to Consultant for the covenant not to compete and the
Consultant will be released from the restrictions of the covenant not
to compete as of the termination of this Consulting Agreement.
8. DUTY UPON TERMINATION OF ASSOCIATION
Upon termination of its association with Client for any reason,
Consultant agrees to deliver to Client all writings, documents, records,
data, memoranda, notes and other material of any nature which are in its
possession or control and which are or contain Confidential Information
relating to his consulting services to the Client under this Agreement.
9. DEFAULT AND TERMINATION
(a) It shall be a default and an event of default hereunder if
Client or Consultant (or such parties permitted as assignees of the
interests of Client or Consultant) violates a term, covenant or condition
of this Agreement, unless the defaulting party cures such default within
thirty (30) days following the receipt of written notice of such
default from the other party, or, if the nature of the default is such
that it cannot be cured within said thirty (30) day period, unless the
defaulting party, upon receipt of such notice of default, immediately
commences appropriate steps to cure the default and thereafter
diligently and continuously pursues such curative steps and, in fact,
cures the default within a reasonable time, but in any event within
ninety (90) days after the receipt of the notice of default.
(b) In addition to the remedies otherwise available at law or in
equity to a party to this Agreement upon a breach of this Agreement, if
Client or Consultant (the "Non-Defaulting Party") has given written
notice to the other party to this Agreement (the "Defaulting Party")
of a default by the Defaulting Party and the Defaulting Party has
not cured such default in the time period permitted by Section 9(a)
hereof, then the Non-Defaulting Party may elect, upon written
notice to the Defaulting Party, to terminate this Agreement effective
as of the Date of Termination. For purposes of this Agreement, the
"Date of Termination") shall be the date notice is given by the
Non-Defaulting Party under this Section 9(b). Termination of this
Agreement for any reason shall not, unless otherwise provided,
affect (a) obligations accruing prior to the effective date of
termination; or (b) any obligations which, from the context hereof,
are intended to survive termination of this Agreement. If
Consultant elects to terminate this Agreement under this Section for
the non-payment of amounts owed by Client to Consultant under
this Agreement, Consultant shall receive immediate payment from
Client of the compensation payable to Consultant under this
Agreement through the Agreement Expiration Date, provided that,
in such case, the non-compete provisions of Section 7 shall apply
through the Agreement Expiration Date.
(c) Any right of termination of this Agreement or suit for specific
performance under this Agreement shall not abrogate any other
legal or equitable remedies the parties may otherwise have under
this Agreement.
10. ASSIGNMENT
This Agreement and the rights and obligations of Consultant hereunder
may not be assigned or transferred in whole or in part by Consultant without the
prior written consent of Client, and no such assignment or transfer or attempted
assignment or transfer shall be effective for any purpose whatsoever without
Client's prior written consent. Client shall have no obligation to recognize any
purported assignee or transferee of this Agreement. The rights of Client,
however, may be assigned or transferred to any corporate affiliate of Client,
with Client to remain liable for the performance of this Agreement. A
"corporate affiliate" of Client shall mean any corporation that controls,
is controlled by or is under common control with, the Client. "Control"
means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether through
the ownership of voting securities, by contract or otherwise.
11. TAXES
Client shall, in addition to the payments required hereunder, pay all
sales, use, transfer or other taxes, whether federal, state or local,
however designated, which are levied or imposed by reason of the provision
of consulting services contemplated hereby; excluding, however, income taxes
payable by Consultant.
12. SEVERABILITY
If any provision of this Agreement is declared invalid by any
tribunal, then the parties shall negotiate in good faith a replacement
provision therefor. The remaining provisions of this Agreement shall remain
in effect.
13. NOTICES
All notices or other communications required or permitted to be given
hereunder shall be (as elected by the person giving such notice) (a) personally
delivered, or (b) transmitted by telex, telefax or telegram (with postage
prepaid mail confirmation), or (c) by overnight courier service, or (d) by
registered or certified mail to the parties at the following addresses unless
otherwise notified in writing:
NewMil Bancorp, Inc.
New Milford Savings Bank
19 Main Street
New Milford, CT 06776
Attention: Chairman of the Board
Anthony J. Nania
P.O. Box 101
Canaan, Connecticut 06018
Except as otherwise specified herein, all notices and other
communications shall be deemed to have been duly given on the date of
receipt if delivered personally, one (1) day after delivery to an overnight
courier service, five (5) days after posting if transmitting by registered
or certified mail, or the date of transmission if transmitted by telex,
telefax or telegram, whichever shall first occur.
14. GOVERNING LAW
This Agreement is subject to and will be construed in accordance with the
laws of the State of Connecticut, without regard to the State's internal
conflict of law, for the resolution of all claims and controversies arising
between the parties under and relating to this Agreement. In the event of a
dispute relating to the enforcement or interpretation of this Agreement, the
prevailing party shall be entitled to recover, in addition to all other
remedies available at law and equity, all costs, including, but not limited
to, attorneys' fees incurred in such dispute and in the collection of costs,
including attorneys' fees, provided in this Section.
15. HEADINGS
The headings used in this Agreement are for the convenience of reference
only.
16. WAIVER
The failure of any party to require the performance of any obligation of
the other party or to enforce any right or remedy hereunder shall not prevent
enforcement of that same right or remedy or any other right or remedy on any
other occasion.
17. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement of the parties as to the
subject matter hereof and supersedes any and all prior oral or written
understandings or agreements as to such subject matter. This Agreement may be
amended only by written amendment duly signed by authorized representatives of
both parties.
18. SURVIVABILITY
This Agreement shall be binding upon, and shall inure to the benefit
of Client's successors and assigns, whether by way of consolidation, merger,
acquisition, purchase of substantially all Client's assets, or the like.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands as of the date first above written.
CLIENT: CONSULTANT:
NEWMIL BANCORP, INC.
By:________________________________ _____________________________
Its President Anthony J. Nania
Francis J. Wiatr
NEW MILFORD SAVINGS BANK
By________________________________
Its President
Francis J. Wiatr
<TABLE>
<CAPTION>
Exhibit 11.1
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
Year ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Net income
Net income - primary and fully diluted $2,602 $2,242 $6,224
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 3,978 4,371 4,487
Assumed conversion as of the
beginning of each period or upon
issuance during a period of stock
options outstanding at the end
of each period 454 365 226
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (248) (231) (169)
Weighted average common and common
equivalent stock outstanding
- primary 4,184 4,505 4,544
Weighted average common stock
outstanding 3,978 4,371 4,487
Assumed conversion as of the
beginning of each period or upon
issuance during a period of stock
options outstanding at the end
of each period 454 384 247
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (196) (243) (170)
Weighted average common and common
equivalent stock outstanding
- fully diluted 4,236 4,512 4,564
Earnings Per Common and Common
Equivalent Share
Primary $0.62 $0.50 $1.37
Fully diluted $0.61 $0.50 $1.37
</TABLE>
Exhibit 18.3
NEWMIL BANCORP, INC.
CONSENT OF COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
NewMil Bancorp, Inc.
We consent to the incorporation by reference in the registration statement of
NewMil Bancorp, Inc. and Subsidiary on Form S-8 (File No 0-16455) of our
report dated July 17, 1997, on our audits of the consolidated financial
statements of NewMil Bancorp, Inc. as of June 30, 1997 and 1996, and for the
years ended June 30, 1997, 1996 and 1995, which report is included in this
Annual Report on Form 10-K.
/s/ Coopers & Lybrand
Hartford, Connecticut
September 19, 1997
NEWMIL BANCORP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of NewMil Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders of
NEWMIL BANCORP, INC. will be held at the Candlewood Valley Country Club,
New Milford, Connecticut on Friday, October 24, 1997 at 9:30 a.m., for the
purpose of considering and voting on the following matters:
1. To elect three Directors to serve until the Annual Meeting of
Shareholders in 2000 and one Director to serve until the Annual Meeting
of Shareholders in 1999 who with the five Directors whose terms
of office do not expire at this meeting, will constitute the full Board.
2. To approve an Amendment to the Corporation's 1986 Stock Option Incentive
Plan for Key Officers and Employees.
3. To ratify the appointment of Coopers & Lybrand as independent auditors
for the fiscal year ending June 30, 1998.
4. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on September 4,
1997, are entitled to notice of and to vote at this meeting or any
adjournment thereof.
By order of the Board of Directors,
Betty F. Pacocha
Secretary
New Milford, Connecticut
September 22, 1997
YOUR VOTE IS IMPORTANT. WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY
IN THE ENCLOSED POSTAGE PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU MAY
THEN REVOKE YOUR PROXY AND VOTE IN PERSON.
NEWMIL BANCORP, INC.
19 Main Street
New Milford, Connecticut 06776
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 24, 1997
PROXY STATEMENT
INFORMATION CONCERNING THE SOLICITATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of NewMil Bancorp, Inc. (the
"Corporation"), a Delaware corporation, for the Annual Meeting of
Shareholders of the Corporation to be held at the Candlewood Valley Country
Club, New Milford, Connecticut on Friday, October 24, 1997 at 9:30 a.m.
(the "Meeting"), and any adjournments thereof. This Proxy Statement and
the enclosed proxy card are first being given or sent to shareholders on or
about September 22, 1997.
The Corporation will bear the costs of soliciting proxies from its
shareholders. In addition to this solicitation by mail, proxies may be
solicited by Directors, officers and employees of the Corporation and the
Bank by personal interview, telephone or telegram. Arrangements will also be
made with brokerage houses and other custodians, nominees and fiduciaries
for the forwarding of solicitation material to the beneficial owners of the
Corporation's Common Stock (as hereinafter defined) held of record by such
persons, and the Corporation may reimburse such custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred in connection
therewith.
Only holders of Common Stock of record at the close of business on
September 4, 1997 (the "Record Date") are entitled to vote at the Meeting.
On that date, there were 3,835,090 shares of the Corporation's $.50 par value
common stock outstanding (the "Common Stock"). All shares of Common Stock
outstanding carry voting rights and all shareholders are entitled to one
vote per share of Common Stock held by such shareholder on each matter
submitted to vote. Pursuant to the Corporation's Bylaws, a majority of the
outstanding shares entitled to vote, present either in person or by proxy,
will constitute a quorum for transacting business at the Meeting.
Shares represented by properly executed proxies in the enclosed form will
be voted in accordance with any specifications made therein. Proxies that
contain no directions to the contrary will be voted FOR the election of all
nominees for Director, FOR the Amendment to the Corporation's 1986 Stock
Option and Incentive Plan for key officers and employees and FOR the
ratification of the appointment of Coopers & Lybrand as the Corporation's
independent auditors for the fiscal year ending June 30, 1998. If any other
business is properly presented at this Meeting, the Proxy shall be voted in
accordance with the recommendations of management.
A shareholder who executes and returns a proxy on the enclosed form has
the power to revoke it at any time before it is voted at the Meeting by
filing with the Secretary of the Corporation an instrument revoking it, or
a duly executed proxy bearing a later date, or by attending the Meeting and
voting in person. Attendance at the Meeting will not in and of itself
constitute the revocation of a proxy. Voting by those present during the
conduct of the Meeting will be by ballot.
PRINCIPAL SHAREHOLDERS
The following table shows those persons known to the Corporation
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) to be the beneficial owners of more than
five percent of the Common Stock as of the Record Date. In preparing the
following table, the Corporation has relied on information supplied in
public filings filed by such persons with the Securities and Exchange
Commission and other information available to it. According to this
information, each person listed below is believed to have sole voting and
investment powers with respect to shares beneficially owned except as noted.
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent
of Beneficial Owner Owned of Class
<S> <C> <C>
Dimensional Fund Advisor Inc. 297,000(1) 7.74%
1299 Ocean Avenue, 11th Floor,
Santa Monica, CA 90401
First Manhattan Company 265,600(2) 6.93%
437 Madison Ave
New York, NY 10022
James R. Williams 245,978(3) 6.41%
RFD #2, Box 281
Millerton, NY 12522
</TABLE>
(1) Dimensional Fund Advisors, Inc.'s beneficially owned shares are based on a
Securities and Exchange Commission 13F filing for the quarter ended
June 30, 1997. Dimensional Fund Advisors, Inc. ("Dimensional"), a
registered investment advisor, is deemed to have beneficial ownership
of 297,000 shares of NewMil Bancorp, Inc. common stock as of June 30,
1997, all of which shares are held in portfolios of DFA Investment
Dimensions Group, Inc., a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust,
or the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, for each of which
Dimensional serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.
(2) First Manhattan Company's beneficially owned shares are based on a
Securities and Exchange Commission 13F filing for the quarter ended
June 30, 1997. First Manhattan Company ("First Manhattan"), a registered
investment advisor, is deemed to have beneficial ownership of 265,600
shares of NewMil Bancorp, Inc. common stock as of June 30, 1997, all of
which shares are held in investment portfolios of First Manhattan clients.
(3) Mr. Williams' beneficially owned shares are based on information
available to the Bank.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
In accordance with the Corporation's Bylaws and the applicable laws of
Delaware, responsibility for the management of the Corporation is vested in
the Board of Directors. During the year ended June 30, 1997, the Board
of Directors of the Corporation held thirteen (13) regular and special
meetings. The Board of Directors of the Corporation is comprised of the
same individuals who serve on the Board of Directors of the Corporation's
wholly-owned subsidiary, New Milford Savings Bank (the "Bank"). Each
Director attended at least 75 percent of the meetings of the Board of
Directors of the Corporation and any committee(s) of which he or she was a
member.
During fiscal 1997 many matters ordinarily dealt with by subcommittees of
each Board of Directors were dealt with by the appropriate Board of Directors
as a committee of the whole. The committees of the Corporation's Board of
Directors are the Audit Committee, the Investment Committee, the Nominating
Committee, and the Salary and Benefits Committee. The committees of the
Bank's Board of Directors are the Audit Committee, the Community Reinvestment
Act Committee, the Investment Committee, the Loan Committee, the Nominating
Committee, the Salary and Benefits Committee, and the Trust Committee.
The Corporation's Audit Committee met two (2) times during fiscal 1997.
The Corporation's Audit Committee is responsible, amongst other things, for
oversight of: internal accounting controls; the internal audit function; the
selection of independent accountants; the results of the annual audit
examination; and, relationships with state and federal regulatory agencies.
The members of the Corporation's Audit Committee are Willis H. Barton, Jr.,
Herbert E. Bullock, Laurie G. Gonthier and Mary C. Williams.
The Corporation's Nominating Committee met two (2) times during fiscal
1997. The Corporation's Nominating Committee recommends to the Corporation's
Board of Directors candidates for director either to be elected at annual
meetings of shareholders or to be appointed by the Board of Directors from
time to time for the purpose of filling any vacancy on the Board of
Directors. Vacancies in directorships may be filled, until the expiration
of the term of the vacated directorship, by a vote of a majority of the
directors then in office. The members of the Corporation's Nominating
Committee are Herbert E. Bullock, John V. Haxo, Suzanne L. Powers and Mary C.
Williams.
The Corporation's Salary and Benefits Committee met one (1) time during
fiscal 1997. The Corporation's and the Bank's Salary and Benefits Committees
make recommendations to their respective Boards of Directors on compensation
for officers and employees, and on benefit plans for employees of the
Corporation and the Bank. The Bank's Salary and Benefits Committee
administers the 1986 Stock Option Plan for officers and key employees of the
Bank, which includes recommendations for the granting of stock options. The
members of the Salary and Benefits Committee are Willis H. Barton, Jr.,
John V. Haxo, Suzanne L. Powers and Mary C. Williams.
The Corporation's Investment Committee met ten (10) times during fiscal
year 1997. The Corporation's and the Bank's Investment Committees approve
investment policies and monitor the performance of the Corporation's and
the Bank's investment portfolios. The members of the Corporation's and the
Bank's Investment Committees are Herbert E. Bullock, Laurie G. Gonthier,
John V. Haxo and Francis J. Wiatr.
Matters ordinarily dealt with by the Bank's Loan Committee were dealt
with during fiscal year 1997 by the Bank's Board of Directors as a committee
of the whole. The Bank's Loan Committee approves the loan policies of
the Bank, approves certain loans and reviews all reports on the loan
portfolio.
Matters ordinarily dealt with by the Bank's Trust Committee were dealt
with during fiscal year 1997 by the Bank's Board of Directors as a committee
of the whole. The Trust Committee approves the trust policies of the Bank
and reviews all trust accounts. The Bank's Trust Committee no longer
administers trust accounts for unrelated third parties. The Bank remains as
Trustee for only one account, New Milford Savings Bank Pension Plan, and
serves as custodian for the New Milford Savings Bank Foundation. The Bank's
Trust Committee, therefore, continues to administer these accounts. The
members of the Bank's Trust Committee are Herbert E. Bullock, John V. Haxo,
and Suzanne L. Powers.
The Bank's Community Reinvestment Act Committee ("CRA") met two (2) times
during fiscal year 1997. The committee was formed as a means of assuring
compliance with the requirements of the Community Reinvestment Act. The
members of the Bank's CRA Committee are Herbert E. Bullock, Willis H. Barton,
Jr., and Francis J. Wiatr.
Directors Compensation
Officers of the Corporation who are also directors receive no compensation
as directors. Each non-employee director received an annual stipend of
$7,500 for the fiscal year ended June 30, 1997. Directors also receive $250
for each Board meeting attended and $150 for each additional committee
meeting attended.
On October 23, 1992, at the 1992 Annual Meeting, the Shareholders approved
the 1992 Stock Option Plan for Outside Directors (the "1992 Plan"). Each
non-employee director was granted options to purchase 10,000 shares of Common
Stock of the Corporation pursuant to such 1992 Plan, at an exercise price of
$3.00, the fair market value of the Corporation's Common Stock on the date
of grant. On October 20, 1995, at the 1995 Annual Meeting, the Shareholders
approved certain amendments to the 1992 Plan. The 1992 Plan, as amended,
provides that on June 30 of each year each non-employee director shall
receive a grant of additional options of 2,000 shares. In addition, any
newly elected non-employee directors shall receive an initial option grant of
3,000 shares. Directors who are also employees of the Corporation or the
Bank are not eligible to participate in this 1992 Plan.
PROPOSAL 1
ELECTION OF DIRECTORS
The Certificate of Incorporation and the Bylaws of the Corporation provide
for the election of directors by the shareholders. For this purpose, the
Board of Directors is divided into three classes, as nearly equal in size as
possible, with one class elected each year for a three-year term, to hold
office until the end of such term and until successors have been elected and
qualified. The terms of office of the members of one class expire and a
successor class is elected at each annual meeting of the shareholders. The
Corporation's Bylaws contain a special provision applicable only to
a director who is also an officer of the Corporation; in such case, the
officer/director shall be deemed to have resigned as a director should he or
she, for any reason, no longer be an officer of the Corporation.
At the Meeting, the terms of three directors, Willis H. Barton, Jr.,
Herbert E. Bullock and Francis J. Wiatr expire. They have been nominated to
be elected each for a three-year term, expiring at the annual meeting in 2000.
In addition, Betty F. Pacocha has been nominated to be elected to a two-year
term, expiring at the annual meeting in 1999. In the event that any nominee
for director is unable or declines to serve, which the Board of Directors has no
reason to expect, the attorneys named in the proxy will vote for a substitute
designated by the present Board of Directors.
Nominations of persons for election to the Board of Directors may be made
at a meeting of shareholders by or at the direction of the Board of Directors
or by any shareholder of the Corporation entitled to vote for the election
of directors at the meeting who complies with certain notice procedures set
forth in the Bylaws. Such nominations, other than those made by or at the
direction of the Board of Directors, must be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
Corporation's principal executive offices not fewer than 60 days nor more than
90 days prior to the annual meeting; provided, however, that if fewer than
50 days' notice or prior public disclosure of the date of the annual
meeting is given or made to shareholders, notice by the shareholder to be
timely must be received not later than the close of business on the 10th day
following the day on which such notice of the date of the Meeting was mailed
or such public disclosure was made. A shareholder's notice must set forth
(a) as to each person whom the shareholder proposes to nominate for election
or re-election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by such person, (iv) the total number
of shares of capital stock of the Corporation that will be voted for each
proposed nominee; and (v) any other information relating to such person that
is required to be disclosed in solicitation of proxies for election of
Directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including without
limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected) and (b) as
to the shareholder giving the notice (i) the name and address of such
shareholder, as they appear on the Corporation's books, and (ii) the class
and number of shares of capital stock of the Corporation which are
beneficially owned by such shareholder.
On August 21, 1997, the Board of Directors elected Joseph Carlson II to
fill the remaining term of Anthony J. Nania, who retired from the
Corporation. Mr. Carlson has over thirty years of banking experience and a
strong financial background, which will complement the Board. In addition,
Mr. Carlson sits on the boards of several local community organizations.
On August 21, 1997, the Board of Directors elected Betty F. Pacocha to be
nominated to a two-year term expiring in 1999. Ms. Pacocha has been an
employee of the Bank since 1961 where she has served in a number of
management positions. Ms. Pacocha is currently the Executive Vice President
and Secretary of the Bank and Secretary of the Corporation.
The following tables set forth information as of the Record Date based
upon the Corporation's and the Bank's books and records and upon
Questionnaires executed by the Corporation's and the Bank's directors and
executive officers, regarding the nominees for election as directors at the
Meeting and each director continuing in office. The tables include the
total number and percentage of shares of Common Stock beneficially owned by
each nominee and by all directors and executive officers as a group. Each
person has sole voting and investment powers with respect to shares listed
as being beneficially owned by them, except as indicated in the notes
following the tables.
<TABLE>
<CAPTION>
NOMINEES FOR ELECTION FOR A THREE YEAR TERM
Positions Held Common
With the Term Stock Percent
Corporation and Will Bene- of
the Bank; Prin- Has Expire ficially Common
cipal Occupation Served at the Owned Stock
During the Past as a Annual as of Bene-
Five Years and Director Meeting September 4, ficially
Name Directorships Age Since in 1997 Owned
<S> <C> <C> <C> <C> <C> <C>
Willis H.
Barton, Jr. Director;
Retired Partner 75 1987(1) 2000 24,250(2) 0.63%
in W.G. Barton
& Son;
Director of
New Milford
Center Cemetery
Association
and New Milford
Hospital,
New Milford, CT
Herbert E.
Bullock Director;
Employee, Echo 62 1987(3) 2000 16,400(4) 0.43%
Bay Marina,
New Milford, CT
Betty F.
Pacocha Director;
Secretary of 63 1997(5) 1999 31,126(6) 0.81%
the Corporation
and Executive
Vice President
and Secretary of
the Bank
Francis J.
Wiatr Director;
Chairman,
President, 47 1994(7) 2000 130,581(8) 3.30%
and CEO of
the Corporation
and Bank;
Former President
and CEO, Bank of
Waterbury,
Waterbury, CT;
Former Senior
Executive Vice
President,
Citytrust,
Bridgeport, CT
</TABLE>
(1) Mr. Barton has been a director of the Corporation since its formation
in 1987. Mr. Barton has been a director of the Bank since 1970.
(2) Includes 5,000 shares held jointly with spouse, 1,250 shares held by
spouse and daughter, 2,000 shares held directly and options to purchase
16,000 shares of Common Stock exercisable within 60 days of the Record
Date.
(3) Mr. Bullock has been a director of the Corporation since its formation
in 1987. Mr. Bullock has been a director of the Bank since 1972.
(4) Includes 400 shares held jointly with spouse and options to purchase
16,000 shares of Common Stock exercisable within 60 days of the Record
Date.
(5) Ms. Pacocha was elected a Director of the Corporation and the Bank by
the Board of Directors on August 21, 1997. Ms. Pacocha has been an
employee of the Bank since 1961 and she has served as Secretary of the
Corporation since 1992.
(6) Includes 3,626 shares held directly by Ms. Pacocha and options to
purchase 27,500 shares of Common Stock exercisable within 60 days of
the Record Date.
(7) Mr. Wiatr was appointed President of the Corporation and President and
Chief Executive Officer ("CEO") of the Bank on March 21, 1994. He was
appointed Chairman and CEO of the Corporation and Chairman of the
Bank on August 5, 1997, to replace the retiring Anthony J. Nania as
Chairman and CEO of the Corporation
and Chairman of the Bank.
(8) Includes 5,581 shares held directly by Mr. Wiatr and options to
purchase 125,000 shares of common stock exercisable within 60 days of
the Record Date.
<TABLE>
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
Positions
Held With the Shares
Corporation Term of
and the Bank; Will Common Percent
Principal Expire Stock of
Occupation Has At Bene- Common
During the Served the ficially Stock
Past Five as a Annual Owned as of Bene-
Years and Director Meeting September 4, ficially
Directorships Age Since in 1997 Owned
<S> <C> <C> <C> <C> <C>
Joseph
Carlson II Director;
Former Vice
Chairman 58 1997(1) 1999 13,000(2) 0.34%
and CFO of
Centerbank
and Center
Financial
Laurie G.
Gonthier Director;
Vice President- 47 1990 1998 21,000(3) 0.55%
Investments
for Paine
Webber,
Middlebury, CT
Dr. John V.
Haxo Director;
Retired Surgeon 73 1987(4) 1998 17,000(5) 0.44%
Suzanne L.
Powers Director;
Attorney; 59 1988 1998 26,000(6) 0.68%
Judge of
Probate
Mary C.
Williams Director;
Former Vice 58 1990 1999 76,000(7) 1.97%
President of
J & J Log and
Lumber Corp.
All Directors and 417,299(8) 10.04%(9)
Executive Officers as
a Group (16 Persons)
(1) Mr. Carlson was elected a Director of the Corporation and the Bank by
the Board of Directors on August 21, 1997 to fill the vacancy created
by Mr. Nania upon his retirement from the Corporation and the Bank.
(2) Includes 10,000 shares held directly by Mr. Carlson and options to
purchase 3,000 shares of Common Stock exercisable within 60 days of the
Record Date.
(3) Includes 2,500 shares held jointly by Mr. Gonthier with his spouse,
2,500 shares in Mr. Gonthier's Individual Retirement Account and
options to purchase 16,000 shares of Common Stock exercisable within
60 days of the Record Date.
(4) Dr. Haxo has been a director of the Corporation since its formation in
1987. Dr. Haxo has been a director of the Bank since 1973.
(5) Includes 1,000 shares held directly by Dr. Haxo and options to purchase
16,000 shares of Common Stock exercisable within 60 days of the Record
Date.
(6) Includes 1,000 shares held directly by Ms. Powers, 4,000 shares held
jointly by Ms. Powers with her spouse, 5,000 shares held by Ms. Powers'
spouse and options to purchase 16,000 shares of Common Stock exercisable
within 60 days of the Record Date.
(7) Includes 60,000 shares held directly by Ms. Williams and options to
purchase 16,000 shares of Common Stock exercisable within 60 days of
the Record Date.
(8) Includes 320,500 shares issuable upon the exercise of options
exercisable by such persons within 60 days of the Record Date.
(9) For the purpose of calculating the percentage of Common Stock
beneficially owned by the persons listed in the table, including the
directors and executive officers as a group, the total number of
shares outstanding includes the 320,500 shares issuable upon the
exercise of options which may be exercised by such persons within
60 days of the Record Date (the "Option Shares").
THE NOMINEES FOR DIRECTOR MUST BE ELECTED BY A MAJORITY OF THE SHARES
PRESENT IN PERSON OR BY PROXY AT THE ANNUAL MEETING.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
PROPOSED NOMINEES.
Section 16 Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Corporation's directors and executive officers,
and persons who own more than ten percent of a registered class of the
Corporation's equity securities (collectively referred to as the "Insiders"),
to file with the Securities and Exchange Commission and NASD initial reports
of ownership and reports of changes in ownership of any securities of the
Corporation. Insiders are required by the Exchange Act to furnish the
Corporation with copies of all Section 16(a) reports they file. Based
solely on a review of the copies of such reports furnished to the Corporation
and written representations that no other reports were required, the
Corporation believes that during the fiscal year ended June 30, 1997, all
Section 16(a) required filings applicable to the Corporation's Insiders were
made.
EXECUTIVE COMPENSATION
The following Cash Compensation Table sets forth cash compensation and
certain other compensation paid or accrued by the Corporation or the Bank
for services in all capacities rendered during fiscal years ended June 30,
1997, 1996 and 1995 to the Corporation's CEO and the three most highly
compensated executive officers of the Corporation and the Bank, other than
the CEO, whose cash compensation for the fiscal year ended June 30, 1997
exceeded $100,000 (together, the "Named Executives").
</TABLE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e) (g) (i)
All
Other
Name and Other Annual Compen-
Principal Compensation Options/ sation
Position Year Salary($) Bonus($) ($) SARs(#) ($)(12)
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Nania(1) 1997 $ 69,538 $ - $ - - $4,261
Past Chairman/ 1996 150,000 20,000(2) - 60,000 4,573
CEO of the 1995 150,000 37,570(3) - 20,000 6,300
Corporation and
Past Chairman
of the Bank
Francis J. Wiatr(1) 1997 $170,000 $75,000(4) $ - - $6,103
Chairman, President 1996 168,462 65,000(5) - 50,000 4,676
and CEO of the 1995 160,000 57,570(6) - - 959
CEO of the
Corporation
and the Bank
Thomas W. Grant 1997 $95,000 $25,000(7) $ - - $3,622
Senior Vice 1996 93,847 7,500(8) - 15,000 2,942
President of the 1995 80,000 42,759(9) - - 518
Bank
B. Ian McMahon 1997 $94,423 $ 7,500(10) $ - - $3,693
Senior Vice 1996 89,419 15,000(11) - 8,000 2,882
President & CFO 1995 81,681 - - - 2,857
of the Bank
</TABLE>
(1) On August 5, 1997, Mr. Wiatr was appointed Chairman and CEO of the
Corporation and Chairman of the Bank to replace Mr. Nania who retired
as Chairman and CEO of the Corporation and Chairman of the Bank.
(2) Mr. Nania received a performance bonus of $20,000 for the 1996 fiscal
year.
(3) Mr. Nania received a performance bonus valued at $37,570. The amount
shown reflects the total amount of cash bonus and the dollar value of
stock option bonus (measured as the market value of the underlying stock
on the date of grant minus the exercise price) paid or earned during
the 1995 fiscal year.
(4) Mr. Wiatr will receive a performance bonus of $75,000 for the 1997
fiscal year, the payment of which is deferred until October 31, 2001
and which is conditioned upon the stock performance of the Corporation.
(5) Mr. Wiatr will receive a performance bonus of $65,000 for the 1996
fiscal year, the payment of which is deferred until October 31, 2000
and which is conditioned upon the stock performance of the Corporation.
(6) Mr. Wiatr received a performance bonus totaling $57,570 for the 1995
fiscal year.
(7) Mr. Grant received a performance bonus totaling $25,000 for the 1997
fiscal year.
(8) Mr. Grant received a performance bonus totaling $7,500 for the 1996
fiscal year.
(9) Mr. Grant received bonuses totaling $42,759 for the 1995 fiscal year.
Mr. Grant received $15,000 as a stipulation to his being hired by the
Bank on June 20, 1994 and an additional performance bonus of $27,759
for the 1995 fiscal year.
(10) Mr. McMahon received a performance bonus totaling $7,500 for the 1997
fiscal year.
(11) Mr. McMahon received a performance bonus totaling $15,000 for the 1996
fiscal year.
(12) The amounts reported for All Other Compensation include the following:
(i) Term life insurance premiums paid by the Corporation or the Bank in
fiscal year 1997, 1996 and 1995 on behalf of each of the named
executives: Mr. Nania, $2,098, $1,573 and $1,573, respectively; Mr.
Wiatr, $1,475, $1,100 and $959, respectively; Mr. Grant, $547, $547
and $518, respectively; and Mr. McMahon, $410, $407 and $407,
respectively; and (ii) Contribution match paid by the Bank under the
Bank's 401K Plan in fiscal year 1997, 1996 and 1995 on behalf
of Mr. Nania of $2,163, $3,000 and $4,727 respectively; Mr. Wiatr,
$4,628 and $3,576 for 1997 and 1996 respectively; Mr. Grant $3,075 and
$2,395 for 1997 and 1996 respectively and Mr. McMahon, $3,283, $2,475
and $2,450 for 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Fiscal Year Ended June 30, 1997
and June 30, 1997 Option/SAR Value Table
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares Acquired Value(a) at June 30, 1997 at June 30, 1997
Name on Exercise(#) Realized($) Exercisable/
Exercisable/ Unexercisable
Unexercisable(1)
<S> <C> <C> <C> <C>
Anthony J. Nania - $ - 115,000 / 0 $697,995 /$ -
Francis J. Wiatr - - 125,000 / 0 $770,313 /$ -
Thomas W. Grant - - 15,000 / 0 $ 77,813 /$ -
B. Ian McMahon - - 20,000 / 0 $124,500 /$ -
</TABLE>
(1) Based on the average of the bid and asked price of the Corporation's
common stock as reported on The Nasdaq Stock Market on June 30, 1997.
Employment Agreements
The Bank currently has an Employment Agreement with Mr. Wiatr. Mr.
Wiatr's agreement provides for an annual base compensation of $170,000. Mr.
Wiatr also agrees to serve as director of the Corporation and the Bank
(for so long as he continues as an officer of the Corporation and Bank) for
which he will receive no additional compensation. The Agreement also
provides for certain customary benefits, including an automobile allowance and
country club membership.
Mr. Wiatr's agreement provides that if the Corporation or the Bank
experiences a change in control, Mr. Wiatr will be entitled to receive a
lump sum cash payment equal to three times the greater of his compensation
for the last full fiscal year preceding the change in control or the average
of such compensation for the last three full fiscal years. In no event shall
such payments be made in an amount which would cause them to be deemed
"excess parachute payments" under Section 280G of the Internal Revenue Code
of 1986, as amended. If Mr. Wiatr is terminated before a change in control
occurs, no severance would be due other than a continuation of benefits for
three months and payment for unused vacation time.
The agreement provides that for a period of two (2) years following
Mr. Wiatr's employment with the Bank, he shall not engage in, render advice
or assistance to or be employed on a compensation basis by any person, firm
or entity which is in competition (as defined in the agreement) with the
Bank. In addition, Mr. Wiatr agrees in the agreement not to use or reveal,
at any time during or after the term of the agreement, any confidential
information that he has received during the course of his employment at the
Bank.
The Bank has entered into one-year change of control agreements with
Messrs. Grant and McMahon and two other executive officers of the Bank. The
agreements provide that, in the event of a change in control of the
Corporation or Bank, the executive will be entitled to a lump sum cash
payment equal to the greater of his or her compensation for the last full
fiscal year preceding the change in control or the average of such
compensation for the last three full fiscal years. In no event shall such
payments be made in an amount which would cause them to be deemed "excess
parachute payments" under Section 280G of the Internal Revenue Code, as
amended.
The Corporation and Bank entered into a Consulting Agreement with Mr.
Nania upon his retirement from the Corporation and Bank. In return for
consulting services and a covenant not to compete, Mr. Nania will be paid
$75,000 for each of the two years of the Consulting Agreement.
EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank maintains a non-contributory defined benefit pension plan (the
"Pension Plan") that is qualified under the Internal Revenue Code and
complies with the requirements of the Employee Retirement Income Security Act of
1984 ("ERISA").
Effective September 1, 1993 the Pension Plan was curtailed and the
crediting of additional benefits to participants under the Pension Plan
discontinued. Distributions of vested benefits will be made after the
retirement of vested participants. If a participant terminates employment
before attaining the normal retirement date as set forth in the Pension
Plan, the Pension Plan's vesting provisions will govern whether such
participant is entitled to any benefits pursuant to such Pension Plan.
The Pension Plan covers full-time employees, as of September 1, 1993,
who had attained the age of 21 years and had completed at least six months
service with the Bank at September 1, 1993. The Pension Plan provides in
general for monthly payments to or on behalf of each covered employee upon such
employee's retirement at age 62 or 65, depending upon whether their
employment began before April 1, 1976, or after that date. Annual payments are
based upon the employee's basic annual compensation for the highest paid three
years of employment through September 1, 1993 and such employee's covered
months of service to a maximum of 60 percent.
The Pension Plan provides for optional early retirement benefits provided
a participant has attained age 58 and completed at least 25 years of service
with the Bank or attained the age of 62 depending on whether their employment
began before April 1, 1976 or after that date. The Pension Plan also provides
death benefits comparable to the benefits offered in the case of early
retirement. To fund the benefits provided by the Pension Plan, the Bank
makes an annual contribution, if required, for the benefit of eligible
employees computed on an actuarial basis. No contribution was required or
made during the last fiscal year. Contributions to the Pension Plan fund are
paid entirely by the Bank and expenses of administering the Pension Plan are
paid from the fund.
The Bank also maintains a supplemental pension plan to provide retirement
benefits for key employees who are not covered under the Pension Plan.
The following table illustrates annual pension benefits for retirement in
fiscal 1997 at age 65 under the most advantageous Pension Plan provisions
available for various levels of compensation and years of service. The Bank's
Pension Plan does not provide for Social Security integration.
<TABLE>
<CAPTION>
Pension Plan Table
Average Final Years of Service(b)
Earnings(a) 15 Years 20 Years 25 Years 30 Years 35 Years
<S> <C> <C> <C> <C> <C>
$ 25,000 $ 7,500 $10,000 $12,500 $15,000 $15,000
50,000 15,000 20,000 25,000 30,000 30,000
75,000 22,500 30,000 37,500 45,000 45,000
100,000 30,000 40,000 50,000 60,000 60,000
125,000 37,500 50,000 62,500 75,000 75,000
150,000 45,000 60,000 75,000 90,000 90,000
</TABLE>
(a) Average of highest three years of annual compensation.
(b) Benefits are computed based on the participant's average of highest
three years of annual compensation and the number of months of service,
up to a maximum of 60%. The Pension Plan does not provide for Social
Security integration.
As of June 30, 1997, Mr. Nania's salary for pension benefit purposes was
$146,957, he had one year of service accrued, and his estimated accrued
annual pension benefit payable upon retirement assuming full vesting (which
amount was frozen effective September 1, 1993) was $2,939. No amounts would
be payable to Messrs. Wiatr, Grant or McMahon pursuant to the Pension Plan.
Savings and Protection Plan
Effective April 1, 1994 the Bank amended its Profit-Sharing Plan to add a
401K provision. This part of the Plan allows for a defined contribution by
employees with a match by the Bank of 50% on the first 6% of an employee's
salary. If an employee elects to contribute greater than 6% of his or her
salary, the Bank's match is capped at 50% of 6% of the employee's salary.
The Bank's matching contribution for the 1997 fiscal year, covering the
period from July 1, 1996 to June 30, 1997, was $61,972. All contributions
under the 401K are vested when made, except to the extent adjustment may be
necessary to comply with applicable allocation restrictions which apply to
401K plans generally.
The Bank maintains a non-contributory profit-sharing feature to the Profit
Sharing Plan which benefits all full-time employees and follows the same
eligibility requirements contained in the Bank's Pension Plan. The amounts
contributed to the Profit-Sharing Plan are determined annually by the Board of
Directors of the Bank on a discretionary basis. No contributions were made
to the profit-sharing feature of the Profit Sharing Plan in the fiscal year
ended June 30, 1997.
The Board of Directors of the Bank reviews the structure of the Profit-
Sharing Plan annually, and makes whatever adjustments it deems appropriate.
The Bank has no long-term agreement or commitment to maintain the Profit-
Sharing Plan.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Board of Directors as a whole makes decisions on compensation for
executive officers (with Mr. Wiatr and Ms. Pacocha not participating in
decisions concerning their compensation). The Board is currently comprised of
nine members. Because the business of the Corporation currently consists of
the business of the Bank, no separate cash compensation is paid to the
executive officers of the Corporation. Except for Mr. Wiatr, who participated
in discussions concerning Ms. Pacocha's compensation, no other members of
the Board who participated in these decisions are employed by the Corporation
or the Bank, neither do any of these members have an interlocking
relationship with a compensation committee of another entity, nor do they
participate in any of the Corporation's or Bank's executive compensation plans.
In addition, the Salary and Benefits Committee, none of whose members are
employees of the Corporation or the Bank, makes recommendations to the Board
of Directors concerning the grant of stock options pursuant to the 1986 Plan
to employees, including director and non-director executive employees. Based
on these recommendations, the Board of Directors makes decisions regarding
the grant of any such options (with Mr. Wiatr and Ms. Pacocha not
participating in decisions concerning themselves). This Committee also makes
recommendations to the Board of Directors on compensation for other officers
and employees and on other benefit plans for employees of the Corporation
and the Bank.
The Board of Directors does not have formal compensation policies. The
Board does, however, consider the Corporation's and the Bank's performance,
the accomplishment of business objectives, and the individual's contribution
to earnings and shareholder value in setting senior officer compensation
levels. The Board also considers the compensation paid by peer group
institutions with the goal of being competitive in the attraction and
retention of qualified executives. The two principal components of
executive officers' compensation are salary and stock options granted under
the Corporation's 1986 Plan. The Board considers granting bonuses only when
it determines that performance is meritorious and exceptional, and only
after consideration of such factors as the Bank's performance for such year
compared to prior years, and the time and effort exerted by management.
These decisions are made on a judgmental basis, and not according to a
specific formula. The Board chose to recognize meritorious performance by
Messrs. Wiatr, Grant and McMahon in the fiscal year ended June 30, 1997 by
the payment of a cash bonus as reflected in the Summary Compensation Table.
Board of Directors of the Corporation and the Bank
Willis H. Barton, Jr. Suzanne L. Powers
Herbert E. Bullock Francis J. Wiatr (not as to himself)
Laurie G. Gonthier Mary C. Williams
John V. Haxo
Please note that Mr. Carlson and Ms. Pacocha, appointed to the Board of
Directors, August 21, 1997, did not participate in compensation discussions
for the fiscal year ended June 30, 1997. Mr. Nania, who retired August 5,
1997, did participate as described above.
PERFORMANCE GRAPH
The following graph compares over the last five years the cumulative total
shareholder return on the Corporation's Common Stock, based on the market
price of the Corporation's Common Stock, with the cumulative total return
of companies on the S&P 500 Index and the reported total return of companies
on the KBW New England Savings Bank Index. Total return values were
calculated based on cumulative total return values assuming reinvestment
of dividends. The graph assumes a $100 investment on June 30, 1992.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During the fiscal year ended June 30, 1997, certain directors and officers
of the Corporation and the Bank and associates of such directors and
officers have been and currently are customers of the Bank and the
Corporation and have had banking and other transactions with the Bank and
the Corporation. All transactions, including loans, if any, made to such
persons and their associates (a) were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other customers of the Bank, (b) were made
in the ordinary course of business, and (c) did not involve more than the
normal risk of collectability or present other unfavorable features.
During the fiscal year ended June 30, 1997 the Bank and the Bank's Pension
Plan and Profit-Sharing Plan paid PaineWebber fees or commissions totaling
$71,542, of which approximately $14,670 was earned by Director Laurie G.
Gonthier a Vice President of Marketing for PaineWebber, in Middlebury,
Connecticut. During the fiscal year ended June 30, 1997 the Bank paid legal
fees totaling $6,496 to the law firm of Powers & Powers of which director
Suzanne L. Powers is a partner. During the fiscal year ended June 30, 1997
the Bank paid legal fees totaling $918 to the law firm of Nania & Drury of
which Anthony J. Nania, past Chairman and CEO of the Corporation and past
Chairman of the Bank, is a partner.
PROPOSAL 2
AMENDMENT OF THE 1986 STOCK OPTION AND INCENTIVE PLAN
The Board of Directors has adopted an amendment to the Corporation's 1986
Stock Option and Incentive Plan (the "Plan") subject to approval by
shareholders, pursuant to which the aggregate number of shares of stock
subject to options which may be granted under the Plan will increase from
its present 446,000 shares to 525,000 shares (an increase of 79,000 shares).
Set forth below is a description of the Plan substantially in the form
presented in the Bank's 1986 proxy statement pursuant to which the
shareholders originally approved the Plan. The Plan was amended by the
shareholders in October 1994 to extend the term of the Plan until 2005, to
increase the number of option shares from 296,000 to 446,000 and to make
other technical changes. The Plan is designed to allow the Corporation and
the Bank to attract and to retain key personnel through the use of an
executive stock incentive plan. The Plan provides for incentive stock
options and nonqualified stock options ("Stock Options"), stock appreciation
rights ("SAR"), and performance awards. The maximum number of shares
reserved for the Plan is presently 446,000 and, if the amendment is approved,
will increase to 525,000.
The Amendment is subject to approval by the shareholders. Options
already granted pursuant to the Plan are not affected by the proposed
Amendment. Although utilizing the language of the Plan as amended in 1994,
the Amendment will be deemed to be a new plan for the purposes of Internal
Revenue Code of 1986, as amended, Section 422(b)(3) with respect to all
options not previously granted.
The Plan is administered by the Salary and Benefits Committee of the Board
of Directors. The Committee will select full-time key employees eligible
to participate, determine the terms of the awards, interpret the Plan and
make all other determinations for administering the Plan. No person who may
be in a position to receive a Plan option may be a member of the Salary and
Benefits Committee; therefore, Mr. Wiatr and Ms. Pacocha are not and may not
be (as long as they are full-time employees) members of that Committee.
The Plan provides that certain of the Stock Options are intended to
qualify as "Incentive Stock Options" within the meaning of Section 422A of
the Code. Incentive Stock Options may entitle the optionees to favorable
federal income tax treatment if certain required holding periods are met.
Other Stock Options will be granted as nonqualifying Stock Options.
Incentive Stock Options will be issued at an option price based upon the fair
market value of the shares of Common Stock on the date of grant.
Nonqualifying Stock Options will be issued at an option price determined by
the Board, but may not be less than 85 percent of the market value of the
Corporation's stock at the time the option is issued. Exercise of a Stock
Option will be subject to terms and conditions set by the Board and set forth
in the instrument evidencing the Stock Option. Stock Options may be
exercised with either cash or shares of Common Stock. The date of
expiration of a Stock Option will be fixed by the Board, but may not be longer
than ten years from the date of grant.
For an option to qualify as an incentive option, the optionee generally
must be an employee of the Corporation or a subsidiary from the date the
option is granted through a date within three months before the date of
exercise.
As to incentive options, the Corporation will not be entitled to any
deduction for tax purposes upon grant or exercise of an incentive option if
the optionee holds the shares for at least two years after the date of grant
or one year from the date of option exercise, whichever is later. If all of
the requirements for incentive stock options are met, except for the special
holding period rules set forth in the preceding sentence, the Corporation
will be allowed a deduction when the optionee disposes of the stock,
generally in an amount equal to the excess of the fair market vale
of the stock at the time the option was exercised over the option exercise
price (but not in excess of the gain realized on the sale). When the
optionee exercises a nonqualifying option, the Corporation will be entitled to
a tax deduction in an amount equal to the difference between the exercise
price and the fair market value of the stock on the date of exercise (or, if
the optionee is subject to certain restrictions imposed by the securities laws,
upon lapse of those restrictions, unless the optionee makes a special tax
election within 30 days after exercise to have income determined without
regard to restrictions). An optionee of nonqualified options will not
recognize income for federal income tax purposes on the grant of options,
but will recognize ordinary income on the date of exercise equal to the
difference between the exercise price and the fair market value of the
stock acquired through exercise of the option.
SARs may be granted in conjunction with all or any part of any Stock
Option. SARs entitle the holder of a Stock Option with respect to which
SARs are granted to surrender the Stock Option, or any applicable unexercised
portion thereof, and to receive the difference (the "SAR Difference") between
(i) fair market value of the shares of Common Stock subject to the
surrendered option at the time the SARs are exercised and (ii) the option
price of such shares. The Bank, at the sole discretion of the Board, will
pay such difference either by delivery of shares of Common Stock or cash or
some combination of Common Stock and cash. SARs may be exercised at such
time or times and to the extent, but only to the extent, that the related
Stock Options may be exercised, and only after the holder has held the SAR
and related Stock option for a period of at least six months. The SAR holder
will recognize income for federal income tax purposes, and the Corporation
will be entitled to a deduction for federal income tax purposes, upon
receipt of and in the amount of the SAR Difference.
Performance awards may be granted by the Board from time to time as an
additional incentive to management accountability and as a means of
performance measurement. Awards may be measured against individual
achievements, those of the Corporation or both. Upon making an award, the
Board will determine the stated value of such award (the "Stated Value").
The Stated Value will be a function of the fair market value of a share of
Common Stock. The earnings of an award (the "Performance Shares") by the
key employee will be calculated by reference to a performance target for
such shares for a prescribed period of time. The performance target will be
based on a specific dollar amount of growth or on a percentage rate of
improvement in such elements as the Corporation's earnings per share, net
income before securities transactions, return on equity or other such
measures related to growth or improvement of the Corporation as the Board
shall determine. To the extent that a performance target is either not
achieved or is exceeded, the Board shall determine the value deemed to have
been earned. Performance Share payments will be made in cash or Common
Stock or some combination of cash and Common Stock, at the discretion of the
Board. The recipient will recognize income for federal income tax purposes,
and the Corporation will be entitled to a deduction for federal income tax
purposes, in the amount of and at the time of earning Performance Shares.
Stock Options and SARs will expire based upon a schedule following
termination of employment due to retirement, disability or death. All
Performance Shares covered by a performance award agreement at the time of
termination of employment due to retirement, disability or death will be
subject to payment at the end of their term, in the determination of the
Board. Upon their termination of employment for any reason other than
retirement, disability or death, all Stock Options and SARs will terminate
on the earlier of their expiration date or thirty days following termination.
In no event may a Stock Option or SAR be exercised after the expiration of
its term.
At the present time, the Salary and Benefits Committee has not identified
any potential recipients of Stock Options, SARs or Performance Shares which
may be granted in the future under the proposed amendment to the Plan.
Currently, 21,464 option shares are available for grant under the Plan; there
are no SARs or Performance Shares outstanding. Future awards may be granted
to any full-time employee of the Bank or Corporation, of which there were
approximately 124 as of June 30, 1997. The 79,000 additional option shares
would have a market value of $1,051,688 in the aggregate based upon a fair
market value of $13.3125 per share on September 4, 1997.
THE ADOPTION OF THE AMENDMENT TO THE 1986 STOCK OPTION AND INCENTIVE PLAN
MUST BE RATIFIED BY THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE VOTES
PRESENT IN PERSON OR BY PROXY, AT THE ANNUAL MEETING.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE ADOPTION OF THE AMENDMENT TO THE 1986 STOCK OPTION AND INCENTIVE
PLAN.
PROPOSAL 3
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND AS INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 1998
The Board of Directors of the Corporation has made arrangements with
Coopers & Lybrand, independent certified public accountants, to be its
independent auditors for the fiscal year ending June 30, 1998 subject to
ratification by the Corporation's shareholders. Neither the firm nor any of
its partners has any direct or indirect financial interest in, or any
connection (other than as independent auditors) with the Corporation or the
Bank. A representative of Coopers & Lybrand is expected to be present at
the Meeting and will be provided with an opportunity to make a statement if
he or she desires to do so and to respond to shareholders' questions.
THE INDEPENDENT AUDITORS MUST BE RATIFIED BY A MAJORITY OF THE VOTES
PRESENT IN PERSON OR BY PROXY AT THE ANNUAL MEETING.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
RATIFICATION.
SHAREHOLDER PROPOSALS
Proposals of the Corporation's shareholders intended to be presented at
the 1998 annual meeting of the Corporation must be received by the
Corporation not later than May 26, 1998, to be included in the Corporation's
proxy statement and form of proxy relating to that meeting. Any such
proposal must comply with Rule 14a-8 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board of Directors
of the Corporation knew of no other matters to be presented for action at
the Meeting other than as set forth in the Notice of Annual Meeting of
Shareholders and described in this Proxy Statement. If any other matters
properly come before the Meeting or any adjournment(s) thereof, the proxies
will be voted in accordance with the determination of a majority of the Board of
Directors.
By order of the Board of Directors,
BETTY F. PACOCHA
Secretary
September 22, 1997
SUBSIDIARIES OF REGISTRANT
New Milford Savings Bank, a Connecticut state chartered savings bank.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's June 30, 1997 audited balance sheet, income statement and cash flow
statement, and notes thereto, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,168,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,460,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,549,000
<INVESTMENTS-CARRYING> 69,819,000
<INVESTMENTS-MARKET> 68,328,000
<LOANS> 171,593,000
<ALLOWANCE> 5,452,000
<TOTAL-ASSETS> 323,061,000
<DEPOSITS> 275,392,000
<SHORT-TERM> 13,000,000
<LIABILITIES-OTHER> 2,950,000
<LONG-TERM> 0
0
0
<COMMON> 2,994,000
<OTHER-SE> 28,725,000
<TOTAL-LIABILITIES-AND-EQUITY> 323,061,000
<INTEREST-LOAN> 14,601,000
<INTEREST-INVEST> 7,531,000
<INTEREST-OTHER> 719,000
<INTEREST-TOTAL> 22,851,000
<INTEREST-DEPOSIT> 10,199,000
<INTEREST-EXPENSE> 10,916,000
<INTEREST-INCOME-NET> 11,935,000
<LOAN-LOSSES> 400,000
<SECURITIES-GAINS> 9,000
<EXPENSE-OTHER> 8,566,000
<INCOME-PRETAX> 4,488,000
<INCOME-PRE-EXTRAORDINARY> 4,488,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,602,000
<EPS-PRIMARY> .62
<EPS-DILUTED> .61
<YIELD-ACTUAL> 3.98
<LOANS-NON> 2,054,000
<LOANS-PAST> 783,000
<LOANS-TROUBLED> 274,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,866,000
<CHARGE-OFFS> 124,000
<RECOVERIES> 310,000
<ALLOWANCE-CLOSE> 5,452,000
<ALLOWANCE-DOMESTIC> 4,812,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 640,000
</TABLE>
