Exhibit 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
Form F-2
ANNUAL REPORT
UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR
THE YEAR ENDED DECEMBER 31, 1996
FDIC Insurance Certificate No. 17944
NORWALK SAVINGS SOCIETY
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(Exact name of bank as specified in its charter)
48 Wall Street, Norwalk, CT 06852
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(Address of principal executive offices)
Connecticut
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(State or other jurisdiction of incorporation or organization)
06-0475300
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(I.R.S. Employer Identification Number)
(203) 838-4545
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(Bank's telephone number, including area code)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 10 is
not contained herein, and will not be contained, to the best of the bank's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form F-2 or any amendment of this Form F-2. [ ]
Indicate by check mark whether the Bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date:
2,442,129 shares of Common Stock, par value
$.0l per share as of March 7, 1997
As of March 7, 1997, the aggregate market value of the 2,442,129 shares of
common stock of the registrant issued and outstanding on such date was
$61,663,757.25. As of that same date, the aggregate market value of the voting
stock held by non-affiliates of the registrant was $43,229,464.50.
PART I.
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ITEM 1. BUSINESS
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General
Historically, the principal business of the Bank has been attracting
deposits from the general public, extending loans to individuals in the
community for the purchase or construction of one- to four-family residences,
making consumer installment loans, investing in securities, and providing
typical consumer banking services. During the early 1980's, the Bank also began
to emphasize loans secured by multi-family (e.g., five or more units) and
commercial real estate, as well as construction loans, land acquisition and
development loans and, to a lesser extent, commercial business, consumer and
other loans. As a result, the Bank experienced dramatic growth as assets
increased from $185 million in 1980 to $509 million in 1988. As the local and
regional economies deteriorated in 1989, the Bank experienced increasing levels
of problem loans and losses primarily resulting from delinquencies in commercial
real estate, construction and land acquisition and development loans. Since
1990, a significant portion of the Bank's resources has been devoted to
resolving problems associated with high levels of non-performing assets,
including sales of OREO, loan restructurings and development for sale of a
number of residential subdivisions and condominiums held as OREO. Since that
time, the Bank has limited multi-family commercial real estate and construction
lending to borrowers purchasing OREO from the Bank and to borrowers refinancing
or restructuring currently outstanding loans. The Bank has since returned the
focus of its lending activities to one- to four-family residential lending and
is beginning to offer asset-based commercial and industrial loans to local small
businesses. The Bank recently resumed commercial and commercial real estate
lending.
The principal sources of funds for the Bank's activities are deposit
accounts, amortization and prepayment of loans, borrowings from the Federal Home
Loan Bank (FHLB) and funds provided from operations. The Bank's principal
sources of income are interest on loans and mortgage-backed securities, and
interest and dividends on investments. In recent years, the Bank also has
realized income from the sale of loans and mortgage-backed and investment
securities. To a lesser extent, the Bank realizes other non-interest income,
including income from service charges on deposit accounts and income from its
Trust Department and Savings Bank Life Insurance ("SBLI").
Market Area and Competition
Norwalk Savings Society (NSS) has seven retail banking offices
located in Norwalk, Wilton, Westport, Georgetown, and Fairfield. All of the
Bank's office facilities and its primary market area are located in Fairfield
County, Connecticut. The State of Connecticut is reported to be the wealthiest
state in the United States, and Fairfield County among the wealthiest counties
in terms of per capita income. Fairfield County is located in the southwestern
corner of Connecticut in close proximity to New York City. Based on 1990 census
data, Fairfield County had a population of over 828,200 with approximately
307,800 households and average household income of $72,700. At December 31,
1996, the unemployment rate for the Norwalk metropolitan area was 3.0% compared
to 4.6% for the State of Connecticut as a whole.
Fairfield County has a diversified mix of industry groups, including
manufacturing, service, government and corporate offices. Fairfield County is
the location for the headquarters of 19 Fortune 500 industrial companies, 6
Fortune 500 service companies and 62 of Connecticut's largest 100 companies. The
southwestern portion of Fairfield County, which includes the towns of Norwalk,
Wilton and Westport, reported as of April 1992 that 43% of its residents over 25
years of age had completed four or more years of college, as compared to 27.2%
for the State as a whole. Fairfield County's industrial economy includes the
manufacture of helicopters and other aircraft, sophisticated electronics,
missile parts, clothing and precision instrumentation. In addition to the
headquarters of large corporations, Fairfield County is the home for an
increasing number of small businesses as well as a large number of research and
development laboratories, which take advantage of the County's convenient
location, access to investment capital and sales opportunities, and a highly
educated labor force.
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As of December 31, 1996, the latest date for which information is
available, the Bank ranked as the third largest depository institution
headquartered in Fairfield County. In addition, the Bank ranked 6th out of 181
mortgage lenders in Fairfield County based on the number of mortgages originated
in 1996.
Intense competition exists in all major lines of business in which
the Bank is presently engaged. The Bank's market area has a significant number
of financial institutions with offices of commercial banks, thrift institutions
and credit unions in Fairfield County alone. Due to its proximity and the number
of commuters traveling to New York City, the Bank also faces intense and varied
competition for loans and deposits with financial institutions headquartered in
New York, many of which have, or have indicated plans to have, offices in
Fairfield County. Recent federal legislation expanding interstate banking
options may cause this type of competition to increase. The Bank faces
additional competition for deposits from short-term money market funds and other
securities funds offered by brokerage firms and other financial institutions as
well as significant competition for retail products from insurance companies.
Lending Activities
General. Historically the Bank, like most other savings institutions,
concentrated its lending activities on the origination of loans secured by first
mortgage liens for the purchase or refinancing of one- to four-family
residential properties. Through the 1980's, in an effort to diversify its loan
portfolio and originate higher yielding adjustable rate loans, the Bank expanded
its lending activities to include a significant volume of permanent and
construction financing of a wide variety of real estate properties, including
residential subdivision developments, condominium developments, land and various
types of commercial properties. The Bank also emphasized various home equity,
home improvement, commercial business and consumer loan products. However,
following a sharp downturn in the New England real estate markets, a significant
portion of the Bank's real estate loans became non-performing.
The Bank has refocused its lending activities on maintaining and
expanding its market presence as a one- to four-family residential lender and on
maintaining current banking relationships with borrowers that have good credit
histories with the Bank. The Bank is also engaged in lending activities to
facilitate the sale of OREO and the refinancing and restructuring of
non-performing and other loans. The Bank has expanded home equity, home
improvement and direct consumer lending and has begun to offer small business
lending. The Bank recently resumed commercial and commercial real estate lending
on a conservative basis. A commercial lending department has been established
and experienced commercial lenders have been hired to underwrite and service
loans. The Bank is also engaged in indirect auto leasing on a limited basis.
Such auto lease loans are secured by an assignment of individual consumer auto
leases. NSS loan officers underwrite the individual auto lease loans prior to
accepting the credit. In addition, the Bank is engaged in airplane financing on
a limited basis.
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Loan Portfolio Composition. The following table sets forth, at the
dates indicated, information concerning the Bank's loan portfolio in dollar
amounts and in percentages, by type of loan.
At December 31,
-------------------------------------------------------------------------
1996 % 1995 % 1994* %
---- --- ---- --- ----- ---
(Dollars in thousands)
Real Estate Loans:
One- to four-family adjustable rate............ $302,686 72.28% $231,168 64.13% $180,275 62.07%
One- to four-family fixed rate ................ 31,933 7.62 56,360 15.63 42,840 14.75
Multi-family .................................. 7,450 1.78 8,902 2.47 8,605 2.96
Commercial real estate ........................ 46,272 11.05 44,914 12.46 41,367 14.24
Land .......................................... 828 0.20 1,290 0.36 1,806 0.62
Construction .................................. 1,227 0.29 1,617 0.45 987 0.35
-------- ------ -------- ------ -------- ------
Total ....................................... 390,396 93.22 344,251 95.50 275,880 94.99
-------- ------ -------- ------ -------- ------
Other Loans:
Commercial business ........................... 8,425 2.01 1,485 0.41 30 0.01
Home equity lines of credit ................... 7,127 1.70 5,698 1.58 6,570 2.25
Home improvement and
second mortgages ........................... 2,568 0.61 3,422 0.95 4,392 1.51
Passbook ...................................... 1,510 0.36 1,634 0.45 1,761 0.62
Credit Cards................................... 991 0.24 - - - -
Other consumer ................................ 7,801 1.86 3,985 1.11 1,783 0.62
-------- ------ -------- ------ -------- ------
Total ....................................... 28,422 6.78 16,224 4.50 14,536 5.01
-------- ------ -------- ------ -------- ------
Total Loans (before net items) .................. 418,818 100.00% 360,475 100.00% 290,416 100.00%
-------- ======= -------- ======= -------- =======
Deduct:
Deferred loan fees ............................ 718 509 704
Allowance for credit losses ................... 7,334 4,170 4,827
-------- -------- --------
Total ......................................... 8,052 4,679 5,531
-------- -------- --------
Loans, net ...................................... $410,766 $355,796 $284,885
======== ======== ========
At December 31,
--------------------------------------------------
1993* % 1992* %
----- --- ----- ---
(Dollars in thousands)
Real Estate Loans:
One- to four-family adjustable rate............ $150,333 55.82% $153,315 50.21%
One- to four-family fixed rate ................ 39,124 14.53 53,359 17.47
Multi-family .................................. 8,391 3.12 9,507 3.11
Commercial real estate ........................ 50,259 18.66 57,333 18.77
Land .......................................... 2,338 0.87 6,201 2.03
Construction .................................. 3,505 1.30 6,678 2.19
-------- ------ -------- ------
Total ....................................... 253,950 94.30 286,393 93.78
-------- ------ -------- ------
Other Loans:
Commercial business ........................... 30 0.01 30 0.01
Home equity lines of credit ................... 7,340 2.73 9,681 3.17
Home improvement and
second mortgages ........................... 4,727 1.76 5,897 1.93
Passbook ...................................... 1,788 0.66 1,823 0.60
Credit Cards................................... - - - -
Other consumer ................................ 1,465 0.54 1,562 0.51
-------- ------ -------- ------
Total ....................................... 15,350 5.70 18,993 6.22
-------- ------ -------- ------
Total Loans (before net items) .................. 269,300 100.00% 305,386 100.00%
-------- ======= -------- =======
Deduct:
Deferred loan fees ............................ 587 688
Allowance for credit losses ................... 2,532 4,567
-------- --------
Total ......................................... 3,119 5,255
-------- --------
Loans, net ...................................... $266,181 $300,131
======== ========
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* Includes assets originally disclosed as in-substance foreclosures, under then
current accounting pronouncements, for the years ended December 31, 1994, 1993,
and 1992.
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Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Bank's loan portfolio. Demand loans and loans having no stated schedule
of repayments and no stated maturity are reported as due within one year. Loan
amounts are net of non-accruing loans.
After One After
Year through Five Years
Within Five through After
Amount One Year Years Ten Years Ten Years
------ -------- ------------ ---------- ---------
(In thousands)
Real estate loans:
One- to four-family adjustable rate... $265,717 $118,789 $127,989 $18,939 $ -
One- to four-family fixed rate........ 74,588 1,244 2,013 12,061 59,270
All other loans secured by
real estate........................... 49,623 25,562 14,643 2,601 6,817
All other loans (primarily consumer).... 18,449 8,292 8,308 1,364 485
-------- -------- -------- ------- -------
Total .................................. $408,377 $153,887 $152,953 $34,965 $66,572
======== ======== ======== ======= =======
The following table sets forth the dollar amount of all loans
maturing or repricing after December 31, 1997 by fixed or adjustable interest
rates.
Fixed Rates Adjustable Rates
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(In thousands)
Real estate loans:
One- to four-family................... $73,344 $146,928
All other loans secured
by real estate...................... 15,740 8,321
All other loans
(primarily consumer)................... 10,035 122
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Total................................... $99,119 $155,371
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Loan Portfolio Activity. The following table shows loan origination,
sale and repayment activity of the Bank at and during the periods indicated.
At or For the Year Ended December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Loans at beginning of period (before net items) ................ $360,475 $290,416 $269,300
-------- -------- --------
Add:
Loans originated:
Real estate loans:
One- to four-family adjustable rate ........................ 102,109 78,624 48,263
One- to four-family fixed rate ............................. 23,574 18,116 13,954
Multi-family................................................ - - 1,214
Commercial real estate ..................................... 12,355 8,617 5,588
Land ....................................................... 58 525 847
Construction ............................................... 7,516 4,784 3,078
Other loans:
Commercial business ........................................ 2,995 1,965 12
Home improvement and second mortgage ....................... 6,334 520 618
Passbook ................................................... 1,132 726 965
Other consumer ............................................. 5,911 1,424 1,179
-------- -------- --------
Total loans originated ......................................... 161,984 115,301 75,718
-------- -------- --------
Loans Purchased................................................. 13,724 - -
-------- -------- --------
Less:
Loans sold ..................................................... 45,319 1,296 221
Loans securitized .............................................. - 4,361 829
Loan repayments ................................................ 67,800 37,462 51,963
-------- -------- --------
Total loans sold, securitized and repaid ....................... 113,119 43,119 53,013
-------- -------- --------
Less:
Charge-offs .................................................... 2,488 1,799 1,589
Net transfers to OREO .......................................... 1,758 324 -
-------- -------- --------
Net increase in loans ...................................... 58,343 70,059 21,116
-------- -------- --------
Loans at end of period ......................................... $418,818 $360,475 $290,416
======== ======== ========
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One to Four-Family Residential Lending. The Bank continues to focus
on the origination of loans secured primarily by first mortgage liens on
existing one- to four- family residences, offering a variety of fixed and
variable-rate mortgage loan products. At December 31, 1996, $334.6 million, or
79.9%, of the Bank's total loan portfolio consisted of one- to four-family
mortgage loans, substantially all of which are conventional loans (i.e., loans
that are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veterans Administration (the "VA")).
The Bank actively solicits one- to four-family residential mortgage
loan applications through its branch banking offices, as well as its team of
"outside" loan originators, who will complete residential loan applications
"off-site" throughout the Bank's market area. In addition, the Bank periodically
conducts first-time home buyer seminars in an effort to develop residential loan
applications and promote the Bank's community reinvestment.
Other than with respect to certain single-family residential loans
originated in connection with loans to facilitate the sale of OREO, the Bank's
current practice is primarily to originate single-family residential loans which
qualify for sale to FNMA and FHLMC underwriting standards. In addition, the Bank
has entered into agreements with several conduits whereby these institutions
will purchase loans at a pre-determined price and on a pre-approved basis. This
relationship will allow the Bank to make mortgage loans that do not conform to
the Bank's asset/liability management strategy. All of the Bank's rights and
interest in such loans, including, in some instances, the right to service the
loan, are thereby transferred to the purchasers. The Bank will earn an
origination fee on any loans sold. The Bank presently originates both fixed-rate
and adjustable-rate mortgage loans with loan terms of 10, 15, 30 and 40 years.
Adjustable-rate mortgage loans have interest rates that adjust at annual
intervals based upon an index tied to the average yield on U. S. Treasury
securities adjusted to a constant maturity of one year. These loans typically
provide that the amount of any increase or decrease in the interest rate is
limited to two percentage points per adjustment period and is limited to an
aggregate of seven percentage points by which the rate can increase or decrease
over the life of the loan. The Bank also originates, on a limited basis,
self-insured residential loans with a maximum L.T.V. of 90% as well as limited
documentation loans.
Borrower demand for adjustable-rate versus fixed-rate mortgage loans
is a function of the level of interest rates, expectations as to future changes
in interest rates, and pricing differences between fixed-rate mortgage loans and
adjustable-rate mortgage loans. The relative amount of fixed-rate and
adjustable-rate residential loans that are originated at any time is therefore
largely determined by market and financial conditions.
At December 31, 1996, $31.9 million, or 7.6%, of the Bank's one- to
four-family residential loan portfolio consisted of loans which provide for
fixed rates of interest. Although these loans generally provide for repayment of
principal over a fixed period of 10, 15 or 30 years, it is the Bank's experience
that because of prepayments and due-on-sale clauses, such loans generally remain
outstanding for a substantially shorter period of time.
Adjustable-rate loans tend to decrease the risks to the Bank's net
interest income associated with changes in interest rates, but involve credit
risk, primarily because as interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected by higher interest rates. The Bank offers
introductory rates on its adjustable-rate residential mortgage loans, which are
lower than the fully indexed rate on adjustable-rate loans but are competitive
with other lenders in the Bank's market. The Bank typically underwrites the
ability of borrowers to service the one year adjustable-rate mortgage loans at
the fully indexed rate or at rates acceptable to the secondary markets.
The Bank's general practice is to lend up to 80% of the appraised
value of the property securing a one- to four-family residential loan. Under
certain circumstances, the Bank will lend up to 95% of the appraised value.
Except as to certain loans to facilitate the sale of residential subdivision
OREO, to the extent that a loan exceeds 80% of the appraised value of the
property, the borrower generally must obtain private mortgage insurance on the
portion of the principal amount of the loan that exceeds 80%, which effectively
reduces the loss exposure to an 80% loan-to-value ratio or less. The Bank offers
self-insured residential mortgage loans to a maximum L.T.V. of 90%. The Bank
will, under certain circumstances, lend up to 95% of appraised value to
facilitate the sale of residential OREO and up to 85% for the sale of
non-residential OREO.
-6-
Appraisals on property securing the Bank's one- to four-family
residential loans are made by both independent appraisers and by the Bank's
licensed, in-house appraisal staff.
The Bank's policy also requires that appraisals be performed in
accordance with applicable federal and state laws and regulations. Borrowers
also must obtain hazard insurance prior to closing and, when required by the
United States Department of Housing and Urban Development, flood insurance. The
Bank generally has required borrowers to advance funds, with each monthly
payment of principal and interest, to a loan escrow account from which the Bank
makes disbursements for items such as real estate taxes as they become due.
Multi-Family, Commercial Real Estate, Land and Construction Lending.
During the 1980s, the Bank expanded its origination of loans secured by
multi-family and commercial real estate located primarily within the Bank's
market area, and to a lesser extent throughout Connecticut. The Bank also
increased the origination of land acquisition and development loans, as well as
construction loans for one- to four-family, multi-family and commercial real
estate projects. These loan programs reflected efforts to diversify the type of
property securing loans in the Bank's portfolio and to increase the sensitivity
of the loan portfolio to changes in interest rates by originating loans with
adjustable rates tied to indices more reflective of actual market rates. Such
loans also generally had higher fees and interest rates than comparable one- to
four-family residential real estate loans. The Bank also originated fixed rate
commercial mortgages generally matched by FHLB advances of like terms.
At December 31, 1996, $7.5 million, or 1.8%, of the Bank's total loan
portfolio consisted of loans secured by multi-family properties. Multi-family
loans are comprised primarily of loans secured by income producing properties
with five to 10 residential units.
At December 31, 1996, $46.3 million, or 11.0%, of the Bank's total
loan portfolio consisted of loans secured by commercial real estate. Also at
December 31, 1996, $1.2 million, or 0.3% of the Bank's total loan portfolio,
were construction loans, the majority of which were for construction of one to
four-family residential units. Land loans to acquire and develop real estate at
December 31, 1996 amounted to $828,000 or 0.2% of the Bank's total loan
portfolio. Most of the Bank's land loans were for residential real estate
development projects, and, to a lesser extent, commercial and small industrial
developments. The Bank has curtailed the origination of land loans, except in
connection with loans to facilitate the sale of land held and under other
limited circumstances.
From 1990 to December 31, 1994, the Bank had limited multi-family,
commercial real estate and construction lending to borrowers purchasing OREO
from the Bank and to borrowers refinancing or restructuring currently
outstanding loans. Beginning in 1995, the Bank originates permanent loans to
borrowers for owner-occupied, one- to four-family units and originates
construction loans on a limited basis. The Bank's lending policy allows for
loans secured by multi-family properties and commercial real estate with a
maximum loan-to-value ratio of 80% (or up to 85% to finance the sale of OREO).
Historically, the Bank's multi-family and commercial real estate loans had
maturities of 15 to 30 years. As to current loans, the Bank typically offers
maturities of 3 to 25 years and terms which provide that interest rates thereon
adjust at regular intervals of one, three, five, seven, or ten years, based upon
an index tied to a treasury securities index or the FHLB advance rate for a
period matching the repricing period of the loan. The Bank also originates fixed
rate commercial mortgages having maturities from 15 to 25 years. The Bank
generally obtains personal guarantees on loans from the principals of the
borrowing entity. Appraisals of the property securing such loans are generally
made by both independent appraisers and by the Bank's licensed, in-house
appraisal staff.
Multi-family, commercial real estate and commercial construction
lending to builders is generally considered to involve a higher degree of risk
than one- to four-family residential lending. Such lending typically involves
larger loan balances concentrated in a single property or with a single borrower
or groups of related borrowers. In addition, the payment experience on loans
secured by existing income-producing properties is typically dependent on the
successful operation of the related real estate project and thus may be more
susceptible to adverse conditions in the real estate markets or in the economy
generally. Moreover, such financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including the possibility
of cost exceeding the initial estimates and risk associated with the failure of
the ultimate purchaser to purchase such property, or the failure of the lender
holding take-out financing to
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provide such financing. The Bank recently resumed such lending, but on a limited
basis consistent with prudent underwriting standards.
Home Equity Lines of Credit, Home Improvement and Second Mortgages.
At December 31, 1996, $7.1 million, or 1.7% of the Bank's total loan portfolio,
consisted of home equity lines of credit. At that date, the Bank had outstanding
commitments for an additional $7.8 million of unused home equity lines of
credit. Also at December 31, 1996, the Bank had outstanding a variety of home
improvement loans and second mortgages secured by one- to four-family
residential properties. Although home equity lines of credit and home
improvement loans typically are secured by second mortgage liens on residential
properties, some of the Bank's home equity lines and home improvement loans are
secured by first mortgage liens on property which is not otherwise mortgaged or
subject to similar encumbrances.
Originations of home equity, home improvement and other second
mortgages on residential properties have declined substantially since 1990.
Reduced origination volume of equity line of credit, home equity and second
mortgages are in part the result of lower interest rates which make refinancing
a first mortgage a preferred alternative. Also in more recent periods, the Bank
generally has not offered other introductory rates or substantial discounts on
loan fees and closing costs which have been offered by some of its competitors.
Management believes, however, that the residential real estate market in
Fairfield County has stabilized and the Bank now markets such products more
actively.
The Bank currently offers home equity lines of credit consistent with
prudent underwriting standards and favorable economic conditions. The Bank also
currently offers amortizing second mortgage loans to enable home owners to
access equity in their home. The Bank offers repayment schedules up to 15 years.
The Bank also offers installment second mortgage loans fully amortized over five
years. These loans are underwritten based on the borrower's consumer credit and
may be up to 100% of the equity in the borrower's home. These loans do not
exceed $40,000.
The Bank's current Loan Policy permits home equity and second
mortgage loans to be made for up to 80% of the appraised value of the property
securing the loan, less any existing encumbrances. Appraisals on the property
securing the Bank's home equity and second mortgage loan products and lines are
made by both independent appraisers and by the Bank's licensed, in-house
appraisal staff.
Commercial Business Lending. The Bank formed a Commercial Business
Lending Department in late 1994 offering a wide array of commercial lending and
deposit services. The Bank is offering traditional commercial and industrial
loan products and commercial real estate loans to local businesses consistent
with prudent underwriting standards. The Bank believes these loan products will
provide higher interest rates and will allow the Bank to serve the local small
business community, a market sector which is not currently being served by large
regional commercial banks or money center banks. Management believes development
of the Bank's commercial department affords the Bank the best opportunity to
increase market penetration in the Bank's local market area.
Consumer Lending. The Bank currently offers a variety of consumer
loan products, including loans secured by passbook accounts at the Bank,
unsecured lines of credit, education and automobile loans and personal loans.
Interest rates are set from time to time and are intended to be generally
competitive in the Bank's market. The Bank is now more actively pursuing direct
consumer lending. In addition, the Bank also funds indirect consumer auto leases
subject to prudent underwriting. Management believes that higher interest rates
and shorter maturities associated with this type of lending will complement both
earnings and asset/liability management objectives. The Bank intends to actively
market consumer loan products and to build the consumer loan and lease
portfolio.
-8-
Credit Cards. The Bank currently offers consumer and business credit
cards. In addition, the Bank provides merchants services as an additional source
of fee income. The Bank acquired this department in conjunction with the
Fairfield First Bank and Trust Co. transaction. See "Management's Discussion and
Analysis - Financial Condition - Fairfield First Bank & Trust Company."
Mortgage Loan Servicing. The following table sets forth information
regarding the Bank's loan servicing portfolio at the dates indicated.
December 31,
-------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
(Dollars in thousands)
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
Loans owned and serviced by
the Bank (before net items) ...... $418,818 85.74% $360,475 81.42% $286,167 76.17%
Loans serviced for others .......... 69,680 14.26 82,281 18.58 89,545 23.83
-------- ------ -------- ------ -------- ------
Total loans serviced by
the Bank (before net items) ...... $488,498 100.00% $442,756 100.00% $375,712 100.00%
======== ====== ======== ====== ======== ======
The Bank has historically serviced loans for other institutions as a
means of maintaining customer relationships and generating fee income. These
loans are comprised of loans originated by the Bank and securitized into
participation certificates or whole loans sold to private banking institutions
or FNMA or FHLMC. Fee income derived from these loans serviced for others
totalled $334,000, $379,000 and $427,000 in 1996, 1995 and 1994, respectively.
Non-Performing, Delinquent and Classified Assets
General. At December 31, 1996, non-performing assets were comprised
of $10.4 million of non-performing loans and $858,000 of OREO. Most of the
Bank's non-performing assets consist of OREO and non-performing loans secured by
property located in the Bank's Fairfield County, Connecticut market area.
The Bank believes that the reduction in non-performing assets is the
result of concentrated efforts by the Bank's management and Board of Directors
to improve credit quality and dispose of problem assets. Utilizing the
accelerated non-performing asset disposition program (ADP) which concluded in
1995, and through the normal course of business, the major steps taken to reduce
non-performing assets included (i) the decision to build out and improve OREO
properties, which were priced and marketed aggressively and subsequently sold
through a subsidiary, The NSS Realty Corporation ("NSS Realty"), formed for this
purpose; (ii) increased collection efforts and charge-offs; and (iii) the
origination of loans to facilitate the sale of OREO at aggressive prices. The
Bank believes the stabilization of the Fairfield County residential real estate
market and lower market interest rates also helped facilitate the reduction in
non-performing assets.
The Bank also maintains a "watch list" which consists of Watch List
Loans that are classified as performing loans but which the Bank believes
exhibit a higher than normal degree of risk than other loans due to a variety of
factors, such as geographic and industry related weaknesses, downturn in
operations in recent years, bankruptcy of a related company and other loans from
the same borrower that are classified as non-performing. Watch List Loans
totalled $8.5 million at December 31, 1996, compared to $5.6 million at December
31, 1995.
As mentioned above, the Bank implemented the Accelerated
Non-Performing Asset Disposition Program in 1994 to allow the Bank to more
rapidly dispose of certain non-performing assets at discounts below their net
realizable value. The program established a $5.7 million special allowance to
dispose of $14.0 million of non-
-9-
performing assets, $3.1 million allocated to the provision for credit losses and
$2.6 million allocated to the provision for estimated losses on OREO. The Bank
concluded the ADP program on December 31, 1995 with the following results having
been achieved. In total, gross assets of $16.1 million were disposed of, and a
total of $4.6 million was charged to the ADP allowances. The Bank continued to
reduce non-performing assets in 1996 through the normal course of business.
Non-performing loans totalled $10.4 million at December 31, 1996, a decrease of
$2.7 million from the $13.1 million level at December 31, 1995. OREO totalled
$858,000 at December 31, 1996, a decrease of $3.4 million from the $4.3 million
level at December 31, 1995. Total non-performing assets totalled $11.3 million
at December 31, 1996 or 1.9% of total assets compared to $17.3 million or 3.4%
of total assets at December 31, 1995.
-10-
Non-Performing Assets. The following table sets forth the amounts
of the Bank's non-performing assets, by category at the dates indicated.
At December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Non-performing loans:
Real estate loans:
One- to four-family ...................... $ 2,784 $ 1,422 $ 2,402 $ 6,219 $ 9,465
Multi-family ............................. 1,739 2,330 2,119 2,120 1,645
Commercial real estate ................... 3,819 7,645 4,538 15,756 22,106
Land ..................................... - 105 509 1,180 4,285
Construction ............................. - 450 191 590 3,152
Other loans:
Commercial ............................... 1,197 65 12 - -
Home equity lines of credit .............. 175 395 57 141 274
Home improvement and second mortgage ..... 653 658 148 169 160
Other consumer ........................... 74 - - 5 134
------- ------- ------- ------- -------
Total non-performing loans (a) (b)............ 10,441 13,070 9,976 26,180 41,221
------- ------- ------- ------- -------
OREO:
One- to four-family ...................... 90 148 2,257 2,246 2,336
Multi-family ............................. - - - 548 426
Commercial real estate ................... 586 3,386 6,480 10,555 10,054
Land ..................................... 182 733 2,885 4,475 4,797
Allowance for estimated losses
on OREO ................................ - - (802) (194) (1,025)
------- ------- ------- ------- -------
Total OREO, net .............................. 858 4,267 10,820 17,630 16,588
------- ------- ------- ------- -------
Total non-performing assets, net ............. $11,299 $17,337 $20,796 $43,810 $57,809
======= ======= ======= ======= =======
Total non-performing assets, net, as a
percentage of total assets ............... 1.92% 3.36% 4.47% 10.24% 13.41%
- -----------------
(a) For presentation purposes, no amount of the allowance for credit
losses has been allocated to non-performing loans.
(b) Includes amounts previously reflected as in-substance foreclosures
under prior accounting methods in effect as of the years ended
December 31, 1992 through 1994.
-11-
Troubled debt restructurings ("TDRs") are loans to which the Bank has
granted certain concessions in light of the borrower's financial difficulty. The
objective of the Bank in granting these concessions, through a modification of
terms, is to maximize the recovery of its investment. This modification of terms
may include a reduction in stated rate, an extension of maturity at a more
favorable rate and a reduction of accrued interest. In the past, any TDRs
entered into by the Bank were classified as non-performing loans. The Bank may,
from time to time, engage in TDRs when appropriate. At December 31, 1996, the
Bank had no TDR's classified as non-performing.
An additional form of troubled debt restructuring that is available
to the Bank is loan splitting. In instances where cash flows are insufficient to
service total debt, the debt may be split into two separate notes, one note at
current market terms and a second at below market terms. This practice enables a
certain portion of the loan to return to performing status. At December 31,
1996, the Bank had $2.1 million in former TDR's which have been integrated into
the Bank's performing loan portfolio based on satisfactory performance.
Delinquent Loans. Total loans delinquent 30 to 89 days increased
to $4.1 million as of December 31, 1996 from $2.6 million at December 31, 1995.
The delinquency consisted primarily of one- to four-family residential loans (29
loans with an aggregate balance of $2.7 million).
The Bank continues to address collection of delinquent loans. Each
loan officer is assigned a portfolio of delinquent loans. Delinquent borrowers
receive written correspondence once a loan becomes 30 days past due. A loan
officer will make contact before the loan becomes 20 days past due. A call
letter will be sent out by the time a loan becomes 60 days past due unless a
work-out schedule has been agreed to with the borrower. Foreclosure will
commence after the loan becomes 90 days past due unless a repayment schedule has
been mutually accepted or the Bank determines that foreclosure would not be in
its best interests.
Because of certain provisions of Connecticut foreclosure law, the
Bank may encounter delays in its attempt to foreclose on property for which it
is mortgagee. Unlike many states which permit a secured party such as a bank
mortgagee to foreclose on real estate without court involvement, Connecticut
foreclosure law requires a lawsuit by the foreclosing party against the
mortgagor (owner) of real estate (and the suit must name as defendants all
junior lien holders). In addition, Connecticut law protects consumers who are
unemployed or under-employed, as defined by statute, by permitting them to
obtain a six-month stay of a mortgage foreclosure action and to restructure
their mortgage debt. In general, although foreclosure actions are subject to far
fewer defenses than ordinary lawsuits, mortgagors can and sometimes do raise
defenses which, even if not meritorious, can delay the foreclosure process for
months or even years. Foreclosure in Connecticut is typically accomplished by
strict foreclosure in contrast to foreclosure by sale. Strict foreclosure
involves the rendering of a judgment by a court in favor of the foreclosing
party (e.g., a bank) and sets a date by which the property owner (the mortgagor)
and any other mortgagees must either redeem the property by paying the
foreclosing party the full amount of its debt or lose their interest in the
property. Foreclosure by sale requires a court to appoint a committee to sell
property at public auction, and involves advertising and appraisal of the
property. Although foreclosure by sale is less common in Connecticut than in
some other states, to the extent it is used, it frequently imposes significant
delays when compared to the strict foreclosure process.
-12-
Management of the Bank regularly reviews delinquent loans, which are
placed on non-accrual status when, in its judgment, the probability of
collection is too uncertain to warrant further accrual. All loans 90 days or
more past due as to interest or principal are placed on non-accrual status
unless, in exceptional circumstances, the loan is both well secured and in the
process of collection. The Bank was accruing interest on one loan which was 90
days or more past due with a principal balance of $347,000 at December 31, 1996.
Allowances for Credit Losses. The Bank uses four separate analyses
for determining a reasonable range for an adequate level of allowance for credit
losses. At December 31, 1996, the allowance calculations under the four analyses
were $3.9 million, $3.3 million, $4.4 million, and $4.6 million. The average of
these three methods was $4.1 million. The Bank's allowance for credit losses was
$7.3 million at December 31, 1996. The Bank's Watch List loans, unused lines of
credit, and letters of credit are also taken into account in establishing the
allowance for credit losses.
The following table sets forth an analysis of the activity in the
allowance for credit losses at and during the periods indicated.
At or for the Year Ended December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period........ $ 4,170 $ 4,827 $ 2,532 $ 4,567 $ 6,081
-------- -------- -------- -------- -------
Add:
- ---
Provision charged to operations....... 4,415 2,105 690 1,000 2,330
Allowance on Acquired Loans .......... 1,000 - - - -
ADP plan ............................. - (1,100) 3,100 - -
Recoveries............................ 237 137 94 38 56
-------- ------- -------- -------- --------
Less:
- ----
Charge offs:
Real estate loans:
One- to four-family ................ 394 648 956 392 465
Multi-family ....................... 220 355 1 83 -
Commercial real estate ............. 1,788 671 551 1,442 2,598
Land ............................... 18 118 - - 538
Construction ....................... - - 61 1,075 275
Consumer and commercial
business ........................... 68 7 20 81 24
-------- -------- -------- -------- --------
2,488 1,799 1,589 3,073 3,900
-------- -------- -------- -------- --------
Balance at end of period ............. $ 7,334 $ 4,170 $ 4,827 $ 2,532 $ 4,567
======== ======== ======== ======== ========
Net charge-offs ...................... $ 2,251 $ 1,662 $ 1,495 $ 3,035 $ 3,844
======== ======== ======== ======== ========
Loans outstanding
(before net items) ................. $418,818 $360,475 $290,416 $269,300 $305,386
======== ======== ======== ======== ========
Ratio of net charge-offs to
loans outstanding (before
net items) at end of
period ............................. 0.54% 0.46% 0.51% 1.13% 1.26%
-13-
The following table sets forth, at the dates indicated, the Bank's
allocation of the allowance for credit losses to the total amount of loans in
each of the categories listed.
At December 31,
-------------------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- --------------------------------------------
Percent of Percent of Loans Percent of Percent of Loans
Total Allowance in each Category Total Allowance in each Category
Amount For Credit Losses to Total Loans Amount for Credit Losses to Total Loans
------ ----------------- ---------------- ------ ----------------- ----------------
(Dollars in thousands)
Mortgage Loans
Residential (a) ..... $1,045 14.2% 79.9% $ 750 18.0% 79.8%
Commercial (b) ...... 4,710 64.3 13.3 3,153 75.6 15.7
Other Loans (c) ....... 1,579 21.5 6.8 267 6.4 4.5
------ ------ ------ ------ ------ ------
Total allowance for
credit losses ....... $7,334 100.0% 100.0% $4,170 100.0% 100.0%
====== ====== ====== ====== ====== ======
Ratio of allowance
for credit losses to
loans outstanding
(before net items)
at end of period .... 1.75% 1.16%
====== ======
At December 31,
---------------------------------------------
1994
---------------------------------------------
Percent of Percent of Loans
Total Allowance in each Category
Amount for Credit Losses to Total Loans
------ ----------------- -----------------
(Dollars in thousands)
Mortgage Loans
Residential (a) ..... $ 524 10.9% 76.8%
Commercial (b) ...... 4,013 83.1 18.2
Other Loans (c) ....... 290 6.0 5.0
------ ------ ------
Total allowance for
credit losses ....... $4,827(d) 100.0% 100.0%
========= ====== ======
Ratio of allowance
for credit losses to
loans outstanding
(before net items)
at end of period .... 1.66%
======
- --------------------
(a) Includes one- to four-family loans.
(b) Includes all commercial real estate loans, multi-family, land and
construction loans.
(c) Includes commercial business, home equity lines of credit, home
improvement, second mortgages, passbook and other consumer loans.
(d) Includes the 1994 provision of $3.1 million for the ADP Program, the
balance of which was $2.2 million as of December 31, 1994.
-14-
Allowance for Estimated Losses on OREO. The following table sets
forth an analysis of the activity in the allowance for estimated losses on OREO
at and during the periods indicated.
At or For the Year Ended December 31,
----------------------------------------------------
Allowance for Estimated Losses on OREO 1996 1995 1994 1993
- -------------------------------------- ---- ---- ---- ----
(In thousands)
Balance at beginning of period ........... $ - $ 802 $ 194 $ 1,025
------ ------ ------ ------
Add:
Provision charged to operations ........ 459 460 2,894(b) 3,975
------ ------ ------ ------
Less:
Charge-offs:
One- to four-family .............. - 284 449 298
Multi-family ..................... - 58 153 224
Commercial real estate ........... 459 582 1,097 2,008
Land ............................. - 338 193 840
Construction ..................... - - 394 1,436
------ ------ ------ ------
459 1,262 2,286 4,806
------ ------ ------ ------
Balance at end of period (a) ............. $ - $ - $ 802 $ 194
====== ====== ====== ======
- --------------------
(a) The Bank carries OREO at net realizable value. Beginning in 1991, the
Bank established general and specific reserves against OREO to arrive
at net realizable value. Beginning in 1993, the Bank netted the
specific reserves against OREO carrying values, and continues to
maintain a general reserve when deemed necessary by management to
arrive at net realizable value.
(b) Of the $2.9 million provision charged to operations, $2.6 million
was a result of the ADP Program.
Investment Activities
General. In accordance with Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), which the Bank adopted as of January 1, 1994, the Bank
was required to classify each security in the portfolio as either
"Held-to-Maturity," "Available-for-Sale," or "Trading Account Security." It was
the decision of management to classify substantially all of the portfolio as
Held-to-Maturity at the adoption date based upon the Bank's ability and intent
to hold, taking into account currently available liquidity and the potential for
additional liquidity afforded by the Bank's stock conversion (see Note 2 to the
consolidated financial statements).
In accordance with the additional guidance provided by the Financial
Accounting Standards Board ("FASB") in conjunction with SFAS 115, during 1995
the Bank reassessed and reclassified certain of its investments originally
classified as Held-to-Maturity to Available-for-Sale. Most of the short-term
Treasury and Federal Agency positions and all of the five- and seven-year
balloon mortgage-backed securities were reclassified. Furthermore, during 1996
the Bank assessed whether the Held-to-Maturity classification was supported by
management's intent due to the repositioning of the Bank's long term objectives
and financial condition; as a result, the Bank reclassified substantially all of
these investments to Available For Sale. This decision required the Bank to mark
each security to market through Shareholders' equity as of December 31, 1996 and
reflect each investment at fair value.
Under Connecticut law, the Bank has authority to purchase a wide
range of investment securities. However, as a result of recent changes in
federal banking laws, financial institutions such as the Bank may not engage as
principals in any activities that are not permissible for a national bank,
unless the FDIC has determined that the activity would pose no significant risk
to the Bank Insurance Fund and the Bank is in compliance with applicable capital
standards. In March 1993, the Regional Director of the FDIC approved a request
by the Bank to invest in certain listed stock and/or registered stock subject to
certain conditions. As of December 31, 1996, the Bank had accumulated
investments in equity securities amounting to $5.5 million compared to $4.8
million as of December 31, 1995.
-15-
The Bank utilized the trading account classification to account for
the portion of the equity portfolio with common stock investments in the covered
call option program. This program is designed for yield enhancement and to
lessen the Bank's exposure to a potentially volatile stock market. In this
program, the Bank purchases shares of qualified common stock and sells a call
option against the investment. The holding period of each investment averages
one to three months and there are ten to fifteen investment positions in the
program. As required by SFAS 115 the Bank marks the common stock and related
covered call option to market through current period earnings. The mark to
market affect on earnings as of December 31, 1996 was a loss of $61,000 on the
$3.3 million trading portfolio.
During 1996 the Bank liquidated the utility stock portfolio; however,
it intends to maintain the equity stock portfolio under the guidance provided by
the investment committee of the Board of Directors and the policies and
procedures established by the Bank's investment policy.
During the second half of 1995, the Bank accumulated a significant
investment in the common stock of Hometown Bancorporation ("Hometown"), a local
bank holding company, which resulted in the Bank's filing a form 13-D with an
over 5% ownership position. In April 1996 the Bank sold its position shortly
after HUBCO, Inc., a New Jersey-based bank holding company, announced its
planned acquisition of Hometown. The Bank recorded a $627,000 gain on the sale
of its investment.
-16-
The following table sets forth the composition of the Bank's
securities at fair value at the dates indicated.
At December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Debt Securities:
U.S. Treasury securities ........ $ - $ 8,316 $24,137 $38,488 $31,985
Obligations of other U.S.
Government agencies .......... 42,120 20,366 25,240 19,633 -
------- ------- ------- ------- -------
Total ........................... $42,120 $28,682 $49,377 $58,121 $31,985
======= ======= ======= ======= =======
Equity Securities.................. $ 5,528(1) $ 4,844 $ 22 $ 23 $ 23
======= ======= ======= ======= =======
(1) Includes $3,292 classified as trading.
The following table sets forth the maturities of the Bank's
investment securities (excluding equity securities) by amortized cost at
December 31, 1996 and the weighted average yields of such securities.
After One But After Five But
Within One Year Within Five Years Within 10 Years After 10 Years Totals
---------------- ----------------- ---------------- ---------------- ------------------
(Dollars in Thousands)
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Other Bonds and
notes (a) ...... $ - -% $ - -% $29,316 7.40% $13,120 7.40% $42,436 7.40%
Mortgage-backed
securities (b) . 24,961 7.10 3,859 6.80 12,432 7.60 51,191 8.20 92,443 7.76
------- ------ ------- ------- -------
Total ........... $24,961 7.10% $3,859 6.80% $41,748 7.46% $64,311 8.04% $134,879 7.65%
======= ====== ======= ======= ========
- -------------------
(a) Solely U.S. Government agencies.
(b) Solely FHLMC and FNMA participation certificates.
Mortgage-Backed Securities and Secondary Market Activities.
Mortgage-backed securities increase the quality of the Bank's assets because of
the insurance or guarantees of federal agencies on non-guaranteed mortgage
loans. In addition, mortgage-backed securities are more liquid than individual
mortgage loans and may be more readily available to collateralize borrowings or
other obligations of the Bank. All of the FNMA or FHLMC securities owned by the
Bank at December 31, 1996 had initial maturities of five to 30 years, although
the Bank expects the average lives will be considerably shorter due to principal
amortization and prepayments. There were no significant sales of mortgage-backed
securities during 1994. In 1995 the Bank sold $38.6 million (carrying value) of
securities, $4.4 million (carrying value) of which were created by mortgages
originated and securitized by the Bank during that year to alleviate an excess
concentration in those products. In 1996 the Bank sold $11.9 million (carrying
value) of primarily low yielding fixed rate mortgage-backed securities for yield
enhancement.
-17-
The following table sets forth the activity in the Bank's
mortgage-backed securities portfolio at and during the periods indicated.
At or For the Year Ended December 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Mortgage-backed securities at beginning of period ...... $90,281 $97,719 $58,219
Purchases ............................................ 38,650 44,318 77,195
Acquired in exchange for loans ....................... - 4,361 829
Sales ................................................ (11,886) (38,615) -
Repayments ........................................... (24,602) (17,502) (38,524)
------- ------- -------
Mortgage-backed securities at end of period ............ $92,443 $90,281 $97,719
======= ======= =======
Sources of Funds
The primary sources of funds for the Bank's use in its lending
activities and for other general business purposes are amortization and
prepayment of loans, deposit accounts and funds provided from operations. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
Loan repayments and funds provided from operations are relatively
stable sources of funds, while deposit inflows and outflows are significantly
influenced by prevailing interest rates and general economic conditions. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank attempts to control the flow of funds in its
deposit accounts according to its need for funds and the cost of alternative
sources of funds primarily through the pricing of deposits and, to a lesser
extent, by promotional activities.
Among the deposit accounts offered by the Bank at December 31, 1996
were regular passbook and statement savings accounts, which earn interest at an
annual rate of 1.99% with an effective annual yield at 2.00%. Interest on
passbook and statement savings accounts is compounded daily and credited
monthly. The Bank requires a minimum deposit of $5.00 to open a passbook or
statement savings account. The Super Savings Account earns interest at annual
rates of 1.99% to 2.98% with an effective annual yield of 2.00% to 3.00%. The
minimum deposit to open Super Savings Accounts is $1,000 and the interest is
compounded and credited monthly. The Bank also offers money market accounts
which are competitive with similar money market mutual funds. The Bank requires
a $2,500 minimum deposit to open the account. Balances of less than $2,500 are
subject to service charges. Interest is compounded and credited monthly. The
interest rate is reviewed weekly and adjusted as money market conditions
warrant. Minimum balance requirements for the Bank's certificates of deposit for
one year or more are $500. Certificates which have a maturity of under one year
have a minimum balance requirement of $1,000. Interest rates on all certificates
are determined by the Bank's Funds Management Committee based on market
conditions, competitive factors, cash flow requirements of the Bank, and funding
objectives. Interest is compounded and credited monthly on all certificates. The
Bank also offers checking accounts which require a $25 minimum initial deposit
and bear no interest, and NOW accounts which pay interest on balances over
$1,000 and require a $25 minimum initial deposit.
-18-
The following table sets forth, at the dates indicated, the distribution of
the Bank's deposit accounts at the dates indicated and the weighted average cost
on each category of deposits for the periods then ended.
At December 31,
-----------------------------------------------------------------------
1996 1995
--------------------------------- --------------------------------
(Dollars in Thousands)
Percent of Weighted Percent of Weighted
Total Average Total Average
Total Deposits Cost Total Deposits Cost
----- ---------- -------- ----- ---------- --------
Demand deposits .................... $22,479 5.31% 0.00% $ 13,697 3.40% 0.00%
Savings:
Regular savings ................. 28,096 6.64 2.06 28,660 7.12 1.82
Super savings ................... 45,404 10.73 2.60 55,042 13.66 2.79
NOW ............................. 30,262 7.15 1.88 35,097 8.71 .95
Money Market fund ............... 47,957 11.33 2.95 59,724 14.83 3.89
Escrow deposits ................. 4,965 1.17 2.83 4,142 1.03 2.73
Certificates:
Certificate accounts ............ 197,108 46.56 6.03 154,340 38.32 5.31
Money Market certificates....... 47,019 11.11 5.01 52,095 12.93 4.47
-------- ------ ------- ------
Total Deposits ..................... $423,290 100.00% 3.91% $402,797 100.00% 3.81%
======== ======= ======== ======
At December 31,
--------------------------------
1994
--------------------------------
(Dollars in Thousands)
Percent of Weighted
Total Average
Total Deposits Cost
----- ---------- --------
Demand deposits .................... $ 9,201 2.53% 0.00%
Savings:
Regular savings ................. 29,052 8.00 1.52
Super savings ................... 84,555 23.29 2.50
NOW ............................. 26,998 7.44 1.00
Money Market fund ............... 38,390 10.57 2.93
Escrow deposits ................. 3,818 1.05 2.11
Certificates:
Certificate accounts ............ 138,384 38.11 4.10
Money Market certificates....... 32,673 9.01 2.93
------- ------
Total Deposits ..................... $363,071 100.00% 2.94%
======= =======
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Net deposit inflow (outflow)........ $ 3,649 (a) $ 25,557 $( 6,265)
Interest credited .................. 16,844 14,169 10,273
------- -------- --------
Net increase in deposits ........... $20,493 $ 39,726 $ 4,008
======= ======== ========
(a) Includes deposits assumed in the FFB&T transaction of $47.6 million, and
$48.0 million in deposits sold in the Brookfield and Bethel branch sales
(see Management Discussion and Analysis - Financial Condition).
-19-
The following table presents the amounts of certificate accounts of the
Bank at December 31, 1996 maturing during the periods reflected below and the
weighted average interest rate of such accounts at such date:
Weighted Average
Amount Interest Rate
------ ----------------
(Dollars in thousands)
Certificate accounts maturing during the 12 months ending:
December 31, 1997 ......................................... $186,547 5.39%
December 31, 1998 ......................................... 32,981 5.77
December 31, 1999 ......................................... 7,937 5.89
Thereafter .............................................. 16,662 6.69
--------
Total ....................................................... $244,127 5.54%
========
The following table presents the maturities of the Bank's time certificates
of deposit in amounts of $100,000 or more at December 31, 1996 by time remaining
to maturity.
Maturing
--------
(In thousands)
Six months or less .............................................. $12,602
Over six through twelve months .................................. 3,366
Over twelve months .............................................. 5,759
-------
Total ................................................. $21,727
=======
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank also utilizes borrowings from the FHLB as an alternative funding
source. The Federal Home Loan Bank System functions in a reserve credit
capacity for savings institutions and certain other home financing
institutions. The Bank is required to own capital stock in the FHLB in order to
access the System and is authorized to apply for advances on the security of
such stock and certain of its home mortgages and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain credit worthiness standards have been met. FHLB advances to
the Bank at December 31, 1994, 1995, and 1996 were $62.5 million, $61.8
million, and $82.2 million, respectively.
-20-
At December 31, 1996, the Bank had outstanding $82.2 million in borrowings
from the FHLB, maturing as follows: Next Interest Adjustable Rate Due Date
Adjustment Amount Rate (in thousands)
Next Interest
Adjustable Rate Due Date Adjustment Amount Rate
- --------------- -------- ------------- ------ ----
(in thousands)
March 1997 January 1997 $10,000 5.61%
May 1999 November 1997 4,400(a) 5.73
------
Total Adjustable Rate 14,400
------
Fixed Rate January 1997 5,000 5.40
- ---------- January 1997 900(b) 8.20
January 1997 600(b) 8.25
April 1997 3,000 5.39
April 1997 750 5.39
November 1997 10,000 5.66
November 1997 4,000 5.78
December 1997 2,000 5.50
February 1998 5,000 5.30
April 1998 5,000 5.98
May 1998 10,000 6.13
May 1998 5,000 6.28
June 1998 5,000 6.28
July 1998 5,000 5.26
November 1998 5,000 5.90
December 2013 1,558(b)(c) 6.55
-------
Total Fixed Rate 67,808
-------
Total Borrowings $82,208
-------
- --------------------
(a) These borrowings were initiated as a direct arbitrage against adjustable
rate mortgage-backed securities to "lock in" an interest rate spread.
(b) These borrowings were initiated as a direct arbitrage against long-term
fixed rate lending to "lock in" an interest rate spread. On a weighted
average basis, that spread amounts to 190 basis points. See "Management's
Discussion and Analysis - Asset/Liability Management."
(c) This borrowing has an amortization feature attached to it and pays down
over a term consistent with the loan it is matched against.
-21-
From time to time, as interest rate market conditions allow, the Bank may
also use reverse repurchase agreements as a short-term source of funds. The Bank
had outstanding borrowings of $31.4 million and $4.6 million under various
reverse repurchase agreements at December 31, 1996 and 1995, respectively.
The following table sets forth, at the dates indicated, information
concerning the Bank's reverse repurchase agreements:
Year Ended December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollar amounts in thousands)
Average Balance During the Year $29,203 $6,857 $ -
Maximum Month-End Balance During the Year $36,350 $9,310 $ -
Average Interest Rate During the Year 5.61% 5.88% $ -
At December 31, 1996, repurchase agreements aggregating approximately $22.4
million and $9.0 million mature during the years ending December 31, 1997 and
1998, respectively.
The following table sets forth, at the dates indicated, information
regarding the weighted average interest rate and the highest and average month-
end balances of the Bank's total borrowings.
Year Ended December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Weighted average interest rate of total borrowings .......... 5.89% 6.44% 6.15%
Highest outstanding balance of total borrowings ............. $159,903 $77,229 $62,981
Average month end balance of total borrowings ............... $115,465 $65,644 $49,386
Trust Department
The Bank offers a full array of trust services through its Trust
Department which was organized in 1984. The Trust Department generated $552,000
in gross revenues in 1996 on assets totalling $262.2 million. In 1995 and 1994,
gross revenues were $515,000 and $513,000, respectively. Trust services are
considered to be an integral element of the Bank's strategy for future growth of
non-interest income by providing an alternative investment choice to depositors
seeking returns other than that of traditional certificates of deposit, as well
as an attractive investment for the Banks' commercial depositor base.
Savings Bank Life Insurance
The Bank offers savings bank life insurance ("SBLI") to customers up
to a maximum of $300,000 per insured. The Bank also offers mortgage life,
disability and credit life insurance relating to loans as part of its SBLI
business. During 1995 and 1996, the Bank had pre-tax income of $23,000, and
$18,000, respectively, from all SBLI sales.
-22-
Subsidiaries
The Bank has one wholly owned subsidiary, NSS Realty, which was formed in
1990 for the sole purpose of developing and disposing of certain real estate the
Bank acquired through foreclosure or deed in lieu of foreclosure. NSS Realty has
recorded sales of Bank owned real estate of $1.2 million for the twelve months
ended December 31, 1996. Currently, NSS Realty has one property with a book
value of $114,000. NSS Realty has one wholly owned subsidiary, NSS Westport
Development Corp., which was formed in 1992 solely for the purpose of developing
an OREO property, Sherwood Farms in Westport, CT. This subdivision was
completely sold out in 1996 and the subsidiary is currently inactive.
Employees
155 employees were employed by the Bank as of February 28, 1997; 146 were
full time equivalents.
Miscellaneous
A material portion of the Bank's deposits have not been obtained from a
single customer. A material portion of the Bank's loans is not concentrated in
one industry or related group (other than residential mortgage lending in
Fairfield County, Connecticut). The Bank holds no material patents, trademarks,
licenses or concessions except as required by regulatory authorities. The Bank
has undertaken no material research activities related to new services or the
improvement of existing services, other than routine activities in the ordinary
course of the Bank's business. The Bank conducts substantially all of its
marketing research using existing personnel, none of which is engaged full-time
in such activities.
-23-
ITEM 2.
- -------
Properties
At December 31, 1996 the Bank had seven full service banking offices
and one satellite (ATM) branch. The following table lists information at
December 31, 1996 for the properties of the Bank.
Lease Year Office Area Amount of Owned or
Location Opened by Square Feet Deposits Leased
- -------- ------ -------------- --------- --------
Expiration
- ----------
(Dollars in thousands)
Executive Offices:
48 Wall Street 1849 24,000 Owned
Norwalk, Connecticut
Full Service
Banking Offices:
48 Wall Street 1849 2,950 $155,047 Owned
Norwalk, Connecticut
117 Old Ridgefield Road 1960 3,450 41,220 Owned
Wilton, Connecticut
Rt. 7 & 107 1972 2,560 29,207 Leased June 30, 2002
Georgetown, Connecticut
Main Avenue &
West Rocks Road 1974 3,560 71,405 Leased April 30, 2006
Norwalk, Connecticut
578 Westport Avenue 1983 3,500 53,043 Owned
Norwalk, Connecticut
1815 Post Road East 1988 3,392 35,307 Owned
Westport, Connecticut
2000 Post Road 1996 3,300 38,061 Leased October 31, 2006
Fairfield, Connecticut
Satellite Branch
So. Norwalk Railroad Station 1996 Free standing - Leased June 14, 2001
ATM --------
$423,290
========
-24-
ITEM 3.
- -------
Legal Proceedings
Norwalk Savings Society is not involved in any legal proceeding that it
believes is material to its financial condition.
ITEM 4.
- -------
Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from page 5 of the definitive Proxy Statement
filed with the FDIC on March __, 1997, pursuant to Section 335.204 of the FDIC
Rules and Regulations ("Proxy Statement").
PART II
- -------
ITEM 5.
- -------
Market for the Bank's Common Stock and Related Shareholder Matters
See Item 7 in the section captioned "Market Price of Common Stock" on Page
53.
The Bank began paying dividends to its shareholders in 1996. The first
dividend since becoming a public company in June, 1994 was $0.05 per share
payable to the shareholders of record as of the close of business on May 6,
1996. Subsequent dividends were declared and paid on a quarterly basis during
1996. The Board of Directors recognizes that it is under no obligation to
continue paying dividends and will consider such a payment on a quarterly basis
assuming such action would be consistent with its primary goal of maintaining
the adequacy of the Bank's capital. Connecticut law prohibits the Bank from
paying dividends other than to the extent of retained net profits from the
current fiscal year and two preceding full fiscal years.
-25-
ITEM 6.
- -------
Selected Financial Data
The following tables set forth certain selected consolidated financial and
other data of the Bank at or for the dates indicated. This information should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere herein. The consolidated financial data as of and for the
years ended December 31, 1992 through 1996 have been derived from the audited
Consolidated Financial Statements of the Bank.
At or For the Year Ended December 31,
---------------------------------------------------------------------
($ thousands, except per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Selected Balance Sheet Data:
Total assets ................................. $589,589 $515,267 $464,901 $427,950 $431,079
Treasury & other gov't agency securities...... 42,120 28,682 51,139 58,129 31,743
Mortgage-backed securities ................... 92,453 90,339 97,270 58,219 46,725
Equity Securities............................. 5,528 4,844 22 9 9
Loans, net of deferred loan fees ............. 418,100 359,966 289,712 268,713 304,698
Allowance for credit losses................... 7,334 4,170 4,827 2,532 4,567
-------- -------- -------- -------- --------
Loans, net ................................... 410,766 355,796 284,885 266,181 300,131
OREO ......................................... 858 4,267 11,622 17,824 17,613
Allowance for estimated losses ............... - - 802 194 1,025
-------- -------- -------- -------- --------
OREO, net .................................... 858 4,267 10,820 17,630 16,588
Deposits ..................................... 423,290 402,797 363,071 359,063 368,214
Borrowings.................................... 114,043 67,123 63,510 48,765 42,550
Shareholders' Equity/Retained Earnings ....... 49,353 43,595 37,513 19,712 18,931
Non-Performing Assets:
Non-performing loans ....................... 10,441 13,070 9,976 26,180 41,221
OREO, net .................................. 858 4,267 10,820 17,630 16,588
-------- -------- -------- -------- --------
Total non-performing assets ................ $ 11,299 $ 17,337 $ 20,796 $ 43,810 $ 57,809
======== ======== ======== ======== ========
Summary of Operations:
Interest and dividend income ................. $ 41,255 $ 33,015 $ 25,045 $ 24,520 $ 29,860
Interest expense ............................. 23,640 18,398 13,112 13,719 18,382
-------- -------- -------- -------- --------
Net interest income .......................... 17,615 14,617 11,933 10,801 11,478
Provision for credit losses .................. 4,415 1,005 * 3,790 1,000 2,330
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses .......................... 13,200 13,612 8,143 9,801 9,148
Non-interest income:
Service charges and other income ........... 2,687 1,897 1,890 2,173 1,842
Gains (losses) on loans and
investment securities .................... 517 798 (64) 2,410 1,454
Gain on sale of branches ................... 3,639 - - - -
Non-interest expenses:
Provision for estimated losses on OREO ..... 459 460 **2,894 3,975 1,550
Holding costs and expenses of OREO, net .... 903 955 532 850 44
Operating expenses ......................... 14,104 11,304 9,980 8,705 8,284
-------- -------- -------- -------- --------
Income (loss) before income taxes ............ 4,577 3,588 (3,437) 854 2,566
Current income tax provision ................. 175 10 50 73 430
Deferred income tax benefit .................. (1,300) (1,200) - - (600)
-------- -------- -------- -------- --------
Net income (loss)............................. $ 5,702 $ 4,778 $ (3,487) $ 781 $ 2,736
======== ======== ======== ======== ========
Net income excluding the effects of the
ADP Program (*, **) .......................... $ 2,213
========
Income (loss) per share....................... $2.39 $2.04 $(1.51) N/A N/A
Income per share excluding the effects of
the ADP Program (*, **)....................... N/A N/A $0.96 N/A N/A
- -----------------
* Includes $3.1 million allocated to loans of the total $5.7 million one-time
special charge for the Accelerated Non-Performing Asset Disposition Program
(ADP).
** Includes $2.6 million allocated to OREO of the total $5.7 million one-time
special charge for the ADP Program.
-26-
At or For the Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Performance Ratios:(***)
Return on average total assets ............... 0.97% 0.76% 0.51% 0.18% 0.63%
Return on average retained earnings .......... 12.52 8.97 7.36 3.95 15.41
Net yield on interest-earning assets ......... 3.12 3.17 2.96 2.84 2.90
Asset Quality Data:
Non-performing loans as a % of net loans ..... 2.54 3.67 3.50 9.84 13.73
Non-performing assets as a % of total assets.. 1.92 3.36 4.47 10.24 13.41
Allowance for credit losses as a % of
net loans ................................ 1.79 1.17 1.69 0.95 1.52
Allowance for credit losses as a % of
non-performing loans........................ 70.24 31.91 48.39 9.67 11.08
Net charge-offs to average loans ............. 0.56 0.53 0.56 1.13 1.30
Capital Ratios:
Tier 1 leverage capital ...................... 7.9 8.4 8.2 4.6 4.4
Tier 1 risk-based capital .................... 15.7 16.7 14.5 8.9 7.8
Total risk-based capital ..................... 17.0 17.9 15.8 10.0 9.0
Other Selected Financial and Statistical Data:
Loans originated during period ............... $161,984 $115,301 $75,718 $55,133 $43,204
Dividend payout ratio......................... 6.3% - - - -
- --------------------
*** Ratios for 1995 and 1994 exclude the effects of the ADP Program. All
such ratios for 1994 would be negative if the ADP charge of $5.7 million
was included.
-27-
ITEM 7.
- ------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
--------
Norwalk Savings Society was founded in 1849 and is a Connecticut chartered
capital stock savings bank, with deposits insured by the Federal Deposit
Insurance Corporation (FDIC), headquartered in Norwalk, Connecticut. Its initial
public offering of common stock was effective June 15, 1994.
The Bank reported net earnings of $5.7 million, or $2.39 per share, for the year
ended December 31, 1996. Included in net earnings were $1.3 million in deferred
tax benefits.
During 1996, the Bank consummated a series of significant transactions to better
position itself for profitable growth, franchise strength and flexibility. To
that end, the Bank began the transformation of its financial condition and the
refocus of its branch network toward the more commercially-oriented area of
southern Fairfield County.
The Bank acquired certain assets and assumed essentially all of the liabilities
of Fairfield First Bank & Trust Company ("FFB&T") in an FDIC-assisted
transaction (see Financial Condition-Fairfield First Bank & Trust Company) and
applied for permission to open a new branch in Darien. The Bank completed the
sale of its northernmost branch offices in Brookfield and Bethel to the Savings
Bank of Danbury (see Financial Condition-Branch Sales). During the year the Bank
aggressively expanded the residential mortgage portfolio and continued the
expansion of its commercial loan operations, building upon the efforts initiated
in 1995. To fund these activities the Bank aggressively pursued deposits,
especially lower cost core deposits, and supplemented deposit growth with
short-term use of FHLBB borrowings and reverse repurchase agreements. The Bank
intends to replace these borrowings with additional core deposit growth from its
newly refocused commercially-oriented franchise.
In addition, in connection with the transformation of the Bank's financial
condition, the Bank sold $44.8 million of five year adjustable rate residential
mortgages with servicing released (see Financial Condition-Loans), reclassified
all of its Held-to- Maturity securities to Available-for-Sale, and established a
Trading portfolio of equity securities allocated to a covered call option
program (see Financial Condition-Investment Securities).
The Tier one leverage capital ratio was 7.9% as of December 31, 1996, qualifying
the Bank as "well capitalized" according to standards established by the FDIC.
Asset quality continued on a steady course of improvement. Non-performing
assets, comprised of non-accrual and restructured loans (collectively,
"non-performing loans"), and other real estate owned (OREO) declined to $11.3
million or 1.9% of total assets. In addition, the Bank substantially increased
the provision for credit losses to $4.4 million for the year ended December 31,
1996, which resulted in a coverage ratio provided by the allowance for credit
losses to the loan portfolio of 1.8% and to non- performing loans of 70.2% (see
Financial Condition-Asset Quality).
-29-
RESULTS OF OPERATIONS
---------------------
Comparison of Operating Results for the Years Ended
---------------------------------------------------
December 31, 1996 and 1995.
---------------------------
Overview
--------
Net earnings for the year ended December 31, 1996 were $5.7 million, or $2.39
per share, compared to $4.8 million or $2.04 per share for 1995. Net earnings
for 1996 and 1995 included $1.3 million and $1.2 million, respectively, of
deferred tax benefits from the recognition of the benefits of operating loss
carryforwards.
Several significant non-recurring items were included in 1996 net earnings. The
first of these items was the gain on the sale of the branch operations in
Brookfield and Bethel, the result of the deposit premium of $3.6 million or 7
1/2% percent of total deposits of $48.0 million in the two branches. In
addition, the Bank recognized a gain on the sale of its investment in Hometown
Bancorporation of $627,000.
The allowance for credit losses was increased to $7.3 million at December 31,
1996, resulting from a provision for credit losses aggregating $4.4 million for
the year ended December 31, 1996 and a $1.0 million credit risk allocation for
the loans acquired in the FFB&T transaction.
Net Interest Income
- -------------------
Net interest income, which is the primary source of income for the Bank, is the
difference between the interest earned on loans and investments and the interest
paid on deposits and borrowings.
Net interest income was $17.6 million for the year ended December 31, 1996, an
increase of 20.5% over the $14.6 million for the year ended December 31, 1995.
The $3.0 million increase resulted from an increase in interest income of $8.2
million partially offset by a $5.2 million increase in interest expense. The 25%
growth in interest income, from $33.0 million for 1995 to $41.3 million for
1996, was primarily attributable to the growth in the mortgage and commercial
loan portfolios, while the 28% growth in interest expense, from $18.4 million in
1995 to $23.6 million in 1996, resulted primarily from the increased levels of
deposits and short term borrowings.
The Bank's "wholesale" borrowings, which increased 71% from 1995, are comprised
of borrowings from the Federal Home Loan Bank and reverse repurchase agreements.
These funding tools were utilized to sustain the Bank's substantial growth in
total assets over the last two years. The Bank's plan, through the branch
transactions accomplished in 1996 and the upcoming opening of a new branch in
Darien in 1997, is to move away from higher cost borrowings from the wholesale
market into less costly core deposits, primarily from small business commercial
and consumer relationships.
The overall favorable interest rate environment played a significant role in the
Bank's net interest income improvement for 1996. The effect of lower, more
attractively priced rates (from the borrower's viewpoint) in the residential
mortgage loan market spurred activity, and the Bank's share of that activity
contributed $6.8 million of the $7.6 million volume increase in the Bank's gross
interest income, while $0.6 million of the increase was due to rate increases,
primarily in the securities portfolio.
-30-
The Bank's average cost on interest-bearing liabilities rose to 4.54% for the
year 1996 from 4.29% for the year 1995. The Bank's interest expense increased
primarily as a result of the increase in the volume of borrowed funds and
secondarily from the increased volume of time deposits, reflecting the continued
shift by the consumer into time deposits from regular savings and money market
accounts. However, the Bank was able to mitigate the effect of higher interest
rates on time deposits through lower rates on borrowed funds.
On an overall basis, approximately $2.4 million of the $3.0 million increase in
net interest income was due to increased volume, while $0.6 million of the
increase in net interest income was due to favorable rate adjustments.
As a result of all of these significant movements in interest income and
interest expense, the Bank experienced a slight decrease in its net interest
margin during the year ended December 31, 1996, from 3.17% for 1995 down to
3.12% for 1996.
The following table summarizes the Bank's net interest income and net yield on
average interest-earning assets. Non-accruing loans are included in average
loans outstanding during the periods, and daily average amounts were used to
compute average balances.
-31-
TABLE 1 - AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
($ thousands)
Years Ended December 31,
------------------------------------------
1996
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
Interest-Earning Assets
Loans Receivable $403,207 $30,589 7.59 %
Investment Securities 36,012 2,571 7.14
Mortgage-Backed Securities 104,000 7,076 6.80
Short-Term Investments 14,970 739 4.94
Marketable Equity Investments 7,253 280 3.86
------- ------
Total Interest-Earning Assets 565,442 41,255 7.30 %
------- ------ ----
Non-Interest-Earning Assets
Cash and Cash Equivalents 9,310
Accrued Income Receivable 6,645
Premises and Equipment 3,150
Other 9,957
Less: Allowance for Credit Losses (4,882)
-------
Total Non-Interest-Earning Assets 24,180
-------
Total Assets $589,622
=======
Interest-Bearing Liabilities
Deposits
--------
Regular Savings and NOW $ 58,599 $ 745 1.27 %
Super and Money Market Savings 116,232 3,411 2.93
Time 227,255 12,580 5.54
------- ------
Total Deposits 402,086 16,736 4.16
Borrowings 115,465 6,796 5.89
Mortgage Escrow Deposits 3,556 108 3.04
------- ------
Total Interest-Bearing Liabilities 521,107 23,640 4.54 %
------- ------ ----
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 18,922
Other Liabilities 4,036
-------
Total Non-Interest-Bearing Liabilities 22,958
-------
Shareholders' Equity 45,557
-------
Total Liabilities and Shareholders' Equity $589,622
=======
Net Interest-Earning Assets
and Interest Rate Spread $44,335 2.76 %
====== ----
Net Interest Income and Net Yield on
Average Interest-Earning Assets $17,615 3.12 %
====== ====
Years Ended December 31,
-------------------------------------------
1995
-------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
Interest-Earning Assets
Loans Receivable $313,072 $23,666 7.56 %
Investment Securities 39,490 1,961 4.97
Mortgage-Backed Securities 98,334 6,753 6.87
Short-Term Investments 6,915 514 7.43
Marketable Equity Investments 3,076 121 3.93
------- ------
Total Interest-Earning Assets 460,887 33,015 7.16 %
------- ------ ----
Non-Interest-Earning Assets
Cash and Cash Equivalents 8,138
Accrued Income Receivable 3,532
Premises and Equipment 3,117
Other 10,341
Less: Allowance for Credit Losses (4,468)
-------
Total Non-Interest-Earning Assets 20,660
-------
Total Assets $481,547
=======
Interest-Bearing Liabilities
Deposits
Regular Savings and NOW $ 53,788 $ 749 1.39 %
Super and Money Market Savings 123,582 3,902 3.16
Time 182,430 9,434 5.17
------- ------
Total Deposits 359,800 14,085 3.91
Borrowings 65,644 4,229 6.44
Mortgage Escrow Deposits 3,089 84 2.72
------- ------
Total Interest-Bearing Liabilities 428,533 18,398 4.29 %
------- ------ ----
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 10,221
Other Liabilities 1,787
-------
Total Non-Interest-Bearing Liabilities 12,008
-------
Shareholders' Equity 41,006
-------
Total Liabilities and Shareholders' Equity $481,547
=======
Net Interest-Earning Assets
and Interest Rate Spread $32,354 2.87 %
====== ----
Net Interest Income and Net Yield on
Average Interest-Earning Assets $14,617 3.17 %
====== ====
-32-
Rate/Volume Analysis
- --------------------
The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in volume of interest-earning assets and interest-bearing liabilities during the
years of 1996 and 1995. Changes which are attributable to both rate and volume
have been allocated proportionately.
TABLE 2 - RATE/VOLUME ANALYSIS
($ thousands)
Year Ended December 31, 1996
Compared to Year Ended
December 31, 1995
----------------------------
Net
Rate Volume Change
---- ------ ------
Interest Income:
---------------
Loans Receivable $ 94 $6,829 $6,923
Mortgage-Backed Securities (69) 392 323
Short-Term Investments (217) 442 225
Investment Securities 793 (24) 769
--- ----- -----
Total 601 7,639 8,240
--- ----- -----
Interest Expense:
----------------
Deposits:
--------
Savings and Other 68 (64) 4
Super and Money Market 270 221 491
Time (709) (2,438) (3,147)
--- ----- -----
Total Deposits (371) (2,281) (2,652)
Borrowings 396 (2,962) (2,566)
Mortgage Escrow Deposits (10) (14) (24)
--- ----- -----
Total 15 (5,257) (5,242)
--- ----- -----
Change in Net Interest Income $616 $2,382 $2,998
=== ===== =====
-33-
Provision for Credit Losses
- ---------------------------
The provision for credit losses for the year ended December 31, 1996 was $4.4
million, compared to $2.1 million for the year ended December 31, 1995.
The allowance for credit losses as of December 31, 1996 was $7.3 million
compared to $4.2 million as of December 31, 1995. Coverage of non-performing
loans provided by the allowance for credit losses was 70.2% and 31.9% as of
December 31, 1996 and 1995, respectively. Coverage of the net loan portfolio
provided by the allowance for credit losses was 1.8% and 1.2% as of December 31,
1996 and 1995, respectively.
The increase in the allowance was the result of several factors, including the
overall loan portfolio growth, the increased level of higher risk consumer and
commercial lending, the increasing average size of the residential mortgages
being originated, and the increase in the Bank's Watch List from $5.6 million at
December 31, 1995 to $6.0 million at September 30, 1996 and $8.5 million at
December 31, 1996. The Bank's Watch List is comprised of loans which have been
identified by the Bank's credit analysis system as exhibiting more than usual
risk of nonperformance or loss.
Non-Interest Income
- -------------------
Non-interest income consists of deposit service charges and fees, fees derived
from servicing of loans, net realized and unrealized gains on securities, net
gain on sale of loans, fees derived from the Bank's Trust Department and, in
1996, the credit card program.
Non-interest income for the year ended December 31, 1996 was $6.8 million
compared to $2.7 million for the comparable period of 1995.
The table below identifies the primary components of Non-interest income. The
core elements of Non-interest income, in total, showed sustainable improvement
over the prior period.
TABLE 3 - NON-INTEREST INCOME
($ thousands)
Years Ended December 31,
--------------------------
1996 1995
---- ----
Loan Servicing Fees $ 334 $ 379
Other Loan Fees 146 136
Deposit Service Charges 763 599
Credit Card Fees 514 -
Trust Department Fees 552 515
Other 378 268
----- -----
Total Fees 2,687 1,897
----- -----
Net Gains on Securities 661 798
Net Loss on Sale of Loans (144) -
Gain on Sale of Branches 3,639 -
----- -----
Total Gains on Sales of Assets and Liabilities 4,156 798
----- -----
Total Non-Interest Income $6,843 $2,695
===== =====
-34-
Non-interest income for 1996 increased by $4.1 million, or 153.9% over 1995.
Service fees from deposits increased to $763,000 for the year ended December 31,
1996 compared to $599,000 for the same period a year ago. The 27.4% increase of
$164,000 is indicative of the Bank's strategy of establishing small business
commercial account relationships, which provide a higher level of fee income.
Excluding the gain transactions, the overall increase in fee income was
primarily attributable to the credit card fees from both the consumer and
merchant programs aggregating $514,000, which resulted from the Bank acquiring a
credit card portfolio in the FFB&T transaction in July 1996.
Included in Non-interest income for the year ended December 31, 1996 is $3.6
million of gain on deposits as a result of selling the Bank's branch operations
in Brookfield and Bethel. Included in the net gain on sales of securities and
loans was the $627,000 gain from the sale of the Bank's investment in Hometown
Bancorporation, other securities gains and losses (both realized and unrealized
as a result of the Trading portfolio of equities), and the loss of $144,000 from
the sale of $44.8 million in five year adjustable residential mortgages.
Non-Interest Expense
- --------------------
Non-interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with managing
and selling OREO properties.
Non-interest expense was $15.5 million for the year ended December 31, 1996,
compared to $12.7 million for the same period in 1995.
The table that follows indicates the elements of Non-interest expense, including
OREO related expense, which is directly related to the level of non-performing
assets.
TABLE 4 - NON-INTEREST EXPENSE
($ thousands)
Years Ended December 31,
----------------------------
1996 1995
---- ----
General and Administrative Expense
----------------------------------
Compensation $ 5,726 $ 4,665
Employee Benefits 1,923 1,567
Occupancy and Equipment 1,646 1,336
Data Processing 1,303 702
Regulatory Assessments 9 438
Marketing 687 700
Legal and Professional 779 354
Office Supplies 578 481
Insurance 228 237
Other 1,225 824
------ ------
Total 14,104 11,304
------ ------
OREO Related Expense
--------------------
Net Holding Costs and Expenses 352 728
Net Loss on Sales of OREO 551 227
Provision for Estimated Losses 459 460
------ ------
Total 1,362 1,415
------ ------
Total Non-Interest Expense $15,466 $12,719
====== ======
-35-
Overall, Non-interest expense increased by $2.7 million or 21.6%. The overall
result was the difference between a net increase of $2.8 million in general and
administrative expense and a $0.1 million decrease in OREO related expenses. On
an overall basis, there were approximately $500,000 of nonrecurring expenses in
1996 included in the classifications of compensation, occupancy, data
processing, and other, primarily related to the Bank's significant, one-time
transactions.
General and Administrative Expense
- ----------------------------------
Of the total increase of $2.8 million in general and administrative expense,
approximately $1.4 million was attributable to increased compensation and
benefits expenses. Part of the increase was the result of the expanded labor
force in the commercial loan and credit card departments, and additional branch
personnel to enhance service capability; incentive compensation programs were
also offered to all personnel for loan origination, service performance, and
Bank profitability goals. As of December 31, 1996, the Bank employed 157 people
based on a full time equivalent measure. The comparable number as of December
31, 1995 was 146, representing a 7.5% increase, most of which was attributable
to the commercial lending function. The balance of the increase was attributable
to an average salary increase of 4%.
Employee benefits rose $356,000 as a result of higher staff levels, a severance
package for former FFB&T employees, and an increase in Employee Stock Ownership
Program (ESOP) costs. The ESOP cost is based on the average market price per
share for NSS stock, which calculated out to be $21.56 per share for 1996,
compared to $16.33 for 1995. The price per share increase of more than $5.00,
combined with the shares allocated in 1996, resulted in an additional $128,000
of employee benefits expense. Although the ESOP purchased the shares at the time
of the stock conversion for $10.00 per share, the accounting rules for ESOP
compensation require the expense to be based upon the average market value of
the Bank's stock during the period employees perform service to earn their
allocated shares.
Occupancy and equipment costs rose $310,000 from 1995's level as a result of
increased square footage of space under lease for a period of time in 1996. The
total square footage increased as there was an overlap of time between the FFB&T
transaction and the sale of the Brookfield and Bethel branches. Additionally,
the Bank incurred significantly higher depreciation costs on capital
improvements, primarily attributable to the updating and replacement of the
automated teller machine network during the year.
Higher data processing costs resulted for the most part from the FFB&T
transaction, the branch sales, and upgrades and integration enhancements to the
Bank's EDP capabilities during the year. In addition, other elements of 1996
Non-interest expense not present in 1995, but likely to continue, are the fees
the Bank paid to an outside service bureau relating to the credit card program,
which amounted to $382,000 for the year ended December 31, 1996. Expenses
associated with legal and professional fees increased as a result of the large
and unusual transactions in 1996; legal fees also increased as a result of
several new litigations related to the Bank's lending activities. Office
supplies showed slightly more than a 20% increase, attributable to outfitting
the Bank's newly acquired office in Fairfield and the Bank's generally expanded
level of operations. These increases were partially offset by the decline in
regulatory assessments from $438,000 for 1995 to $9,000 for 1996, reflecting the
full year's effect of the roll-back of FDIC insurance assessments. The Bank
qualifies as well-capitalized in accordance with FDIC guidelines and pays the
lowest rate available to member institutions.
OREO Related Expenses
- ---------------------
In addition to the general and administrative component of Non-interest expense,
OREO related expenses declined by $53,000 to $1,362,000 for the year ended
December 31, 1996.
Net holding costs and expenses declined to $352,000 from $728,000 for the years
ended December 31, 1996 and 1995, respectively. This reduction is a result of
the overall decline in the OREO portfolio. The net balance of OREO was $0.9
million as of December 31, 1996 compared to $4.3 million at December 31, 1995.
As of December 31, 1996 there were six properties comprising the OREO portfolio,
four of which were under contract of sale.
Management's long-standing approach has been to reduce OREO as quickly,
efficiently and effectively as possible, balancing the effect of accepting a
reduced offer for an OREO property against the holding costs associated with
continued ownership. Aggregating the allowance provisions and net losses on
sales, the Bank incurred losses on OREO properties of $1.0 million in 1996 and
$687,000 in 1995.
-36-
Provision for Income Taxes
- --------------------------
The current provision for income taxes for the year ended December 31, 1996 as
well as the year ended December 31, 1995 represented estimated minimum state and
federal tax requirements for the periods inasmuch as both federal and state
income-based tax liabilities were offset by loss carryforwards.
In 1995 the Bank recognized a portion of its net deferred tax assets in the
amount of $1.2 million by reflecting a deferred tax benefit. In 1996 the Bank
recovered the remainder of the valuation allowance against its net deferred tax
assets by reflecting a deferred tax benefit in the current year's earnings of
$1.3 million.
As of December 31, 1996 the Bank has recognized all of its available net
deferred tax assets, and future taxable earnings will be subject to taxation at
a combined state and federal rate of approximately 40%.
RESULTS OF OPERATIONS
---------------------
Comparison of Operating Results for the Years Ended
---------------------------------------------------
December 31, 1995 and 1994.
--------------------------
Operations
- ----------
Net earnings for the year ended December 31, 1995 were $4.8 million, or $2.04
per share, compared to a net loss of $3.5 million or $1.51 per share for 1994.
Net earnings for 1995 included $1.2 million of net deferred tax benefits as well
as a $1.1 million recovery from the successful completion of the ADP Program.
The loss sustained for the year ended December 31, 1994 was due primarily to a
one-time special charge of $5.7 million for the ADP Program in order to
facilitate the rapid disposition of certain non-performing assets at discounts
below their net realizable value. Excluding the one time special charge, the
Bank recorded net earnings of $2.2 million, or $0.96 per share, for the year
ended December 31, 1994.
Net Interest Income
- -------------------
Net interest income, which is the primary source of income for the Bank, is the
difference between interest earned on loans and investments and the interest
paid on deposits and borrowings.
The increase in net interest income of $2.7 million for the year ended December
31, 1995, compared to the year ended December 31, 1994, was attributable to an
increase in interest income of $8.0 million partially offset by a $5.3 million
increase in interest expense.
The 31.8% improvement in interest income was the result of a combination of
yield enhancement and increased levels of interest-earning assets. The yield on
total interest-earning assets increased to 7.16% from 6.21% as of December 31,
1995 and 1994, respectively. In addition, average interest-earning assets rose
to $460.9 million for 1995 from a $403.1 million average for 1994. The Bank's
calculations indicate that of the $8.0 million improvement in interest income,
$3.6 million was attributable to higher yields and $4.4 million was attributable
to higher levels of interest-earning assets.
During 1995 the Bank focused on maximizing returns on interest-earning assets
through a number of different approaches. Interest income on investment
securities and short-term investments declined by $809,000 as the Bank
redirected the funds invested in these two portfolios toward higher yielding
assets in loans and mortgage backed securities. Loan growth, centered in
residential lending with added emphasis on commercial lending, provided for the
majority of the higher yield of interest income. Additional interest income of
$5.4 million came from the loan portfolio during 1995 and $3.3 million came from
the mortgage-backed securities portfolio.
Interest expense increased to $18.4 million for the year ended December 31,
1995, from $13.1 million for the comparable period of 1994. Interest expense was
driven by a rising interest rate environment during most of 1995. Overall, the
Bank's cost of funds rose to 4.29% from 3.28% on interest bearing-liabilities
for the year ended December 31, 1995, compared to the same period a year ago.
Volume, or the average balance of deposits and borrowings, rose to $428.5
million from $399.2 million for the years ended December 31, 1995 and 1994,
respectively, contributing to the increase in interest expense as well.
-37-
As the competition for deposits intensified during much of 1995, the banking
industry generally experienced a higher interest rate environment on liabilities
while yields on earning assets remained constant or declined. NSS experienced
just the opposite with regard to interest-earning assets. Taking advantage of a
portfolio of loans and mortgage-backed securities heavily weighted toward
adjustable rate products and, therefore, tied to shorter term interest rates,
the Bank experienced higher yields on its portfolios. The higher yields achieved
on loans and mortgage backed securities resulted from a combination of
adjustable rates repricing to higher levels as well as additional investments at
current rates; overall, net interest margin improved to 3.17% from 2.96%.
The following table summarizes the Bank's net interest income and net yield on
average interest-earning assets. For the purpose of this analysis, non-accruing
loans are included in average loans outstanding during the periods indicated and
daily average amounts were used to compute average balances.
-38-
TABLE 5 - NET INTEREST INCOME ANALYSIS
($ thousands)
Years Ended December 31,
----------------------------------------------------------------------------------
1995 1994
------------------------------------ ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Interest-Earning Assets
Loans Receivable $313,072 $23,666 7.56 % $265,581 $18,234 6.87 %
Investment Securities 39,490 1,961 4.97 58,870 2,633 4.47
Mortgage-Backed Securities 98,334 6,753 6.87 65,348 3,471 5.31
Short-Term Investments 3,498 277 7.92 9,802 445 4.54
Equity Investments 6,493 358 5.51 3,459 262 7.57
------- ------ ------- ------
Total Interest-Earning Assets $460,887 $33,015 7.16 % $403,060 $25,045 6.21 %
======= ====== ---- ======= ====== ----
Interest-Bearing Liabilities
Deposits
--------
Savings and Other $177,086 $ 4,651 2.63 % $184,702 $ 4,046 2.19 %
Time 182,714 9,434 5.16 161,841 6,144 3.80
------- ------ ------- ------
Total Deposits 359,800 14,085 3.91 346,543 10,190 2.94
Borrowings 65,644 4,229 6.44 49,386 2,839 5.75
Mortgage Escrow Deposits 3,089 84 2.72 3,238 83 2.56
------- ------ ------- ------
Total Interest-Bearing Liabilities $428,533 $18,398 4.29 % $399,167 $13,112 3.28 %
======= ====== ---- ======= ====== ----
Net Interest-Earning Assets
and Interest Rate Spread $32,354 2.87 % $3,893 2.93 %
====== ---- ===== ----
Net Interest Income and Net Yield on
Average Interest-Earning Assets $14,617 3.17 % $11,933 2.96 %
====== ==== ====== ====
-39-
Rate/Volume Analysis
- --------------------
The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in volume of interest-earning assets and interest-bearing liabilities during the
years of 1995 and 1994. Changes which are attributable to both rate and volume
have been allocated proportionately.
TABLE 6 - RATE/VOLUME ANALYSIS
($ thousands)
Year Ended December 31, 1995
Compared to
Year Ended December 31, 1994
----------------------------
Net
Rate Volume Change
---- ------ ------
Interest Income:
---------------
Loans Receivable $1,964 $3,468 $5,432
Mortgage-Backed Securities 1,205 2,077 3,282
Short-Term Investments 217 (385) (168)
Investment Securities 180 (756) (576)
----- ----- -----
Total 3,566 4,404 7,970
----- ----- -----
Interest Expense:
----------------
Deposits:
--------
Savings and Other (778) 173 (605)
Time (2,421) (869) (3,290)
----- ----- -----
Total Deposits (3,199) (696) (3,895)
Borrowings (373) (1,017) (1,390)
Mortgage Escrow Deposits (5) 4 (1)
----- ----- -----
Total (3,577) (1,709) (5,286)
----- ----- -----
Change in Net Interest Income ($11) $2,695 $2,684
== ===== =====
Provision for Credit Losses
- ---------------------------
The regular provision for credit losses for the year ended December 31, 1995 was
$2.1 million compared to $690,000 for the year ended December 31, 1994. The $1.4
million increase resulted from loan growth of approximately $70 million during
the period, of which $61 million was residential mortgages. In addition, the
Bank's newly formed Commercial Loan Department originated $8.7 million of
commercial loans, the majority of which closed in the second half of 1995.
Increased commercial lending necessarily involves increased inherent credit
risk. The additional provision in 1995 is deemed prudent by management to
accommodate this increased risk.
Upon the successful completion of the ADP program, the Bank recovered $1.1
million of the original ADP allowance. As a result, the Bank had a net provision
of $1.0 million for the year ended December 31, 1995 compared to $3.8 million,
of which $3.1 million was the special ADP provision, for the year ended December
31, 1994.
The allowance for credit losses as of December 31, 1995 was $4.2 million
compared to $4.8 million as of December 31, 1994. Coverage of non-performing
loans provided by the allowance for credit losses was 31.9% and 48.4% as of
December 31, 1995 and 1994, respectively. Coverage of net loans provided by the
allowance for credit losses was 1.2% and 1.7% as of December 31, 1995 and 1994,
respectively.
-40-
Non-Interest Income
- -------------------
Non-interest income consists of service charges and fees, fees derived from
servicing of loans, net securities gains, fees derived from the Bank's Trust
Department, and third party sales of annuities and mutual funds.
Non-interest income for the year ended December 31, 1995 was $2.7 million
compared to $1.8 million for the comparable period of 1994. The increase of
$869,000 or 47.6% was primarily attributable to gains on sales of securities of
$798,000 recorded in 1995 compared to a net loss on the sale of securities of
$64,000 during 1994.
The table below identifies the primary components of non-interest income. The
core elements of non-interest income were virtually unchanged for the periods.
TABLE 7 - NON-INTEREST INCOME
($ thousands)
Years Ended December 31,
---------------------------
1995 1994
---- ----
Loan Servicing Fees $ 379 $ 427
Other Loan Fees 136 152
Deposit Service Charges 599 546
Trust Department Fees 515 513
Other 268 252
------ ------
Total Fees 1,897 1,890
Net Gains (Losses) on Securities 798 (64)
------ ------
Total Non-Interest Income $2,695 $1,826
===== =====
Non-Interest Expense
- --------------------
Non-interest expense is comprised of general and administrative expenses
incurred in managing the business of the Bank and costs associated with managing
and selling OREO properties.
Non-interest expense was $12.7 million for the year ended December 31, 1995,
compared to $13.4 million for the same period in 1994.
-41-
The table that follows indicates the elements of non-interest expense, including
OREO related expense, which is directly related to the level of non-performing
assets.
TABLE 8 - NON-INTEREST EXPENSE
($ thousands)
Years Ended December 31,
------------------------------
1995 1994
---- ----
General and Administrative Expense
----------------------------------
Compensation $ 4,665 $ 3,888
Employee Benefits 1,567 1,229
Occupancy and Equipment 1,854 1,639
Regulatory Assessments 438 1,054
Marketing 700 400
Legal and Professional 354 271
Office Supplies 481 299
Insurance 237 310
Other 1,008 890
------ ------
Total 11,304 9,980
------ ------
OREO Related Expense
--------------------
Net Holding Costs and Expenses 728 851
Net Loss (Gain) on Sales of OREO 227 (319)
Provision for Estimated Losses 460 294
Provision for ADP - 2,600
------ ------
Total 1,415 3,426
------ ------
Total Non-Interest Expense $12,719 $13,406
====== ======
Overall, non-interest expense decreased by $687,000 or 5.1%. The overall result
was the difference between a net increase of $1.3 million in general and
administrative expense and a $2.0 million decrease in OREO related expenses.
Slightly more than half of the total increase in general and administrative
expense, or $777,000, was attributable to compensation expense. The reason for
the increase in compensation expense was two-fold: staff levels increased as the
Bank added additional staff to the commercial lending function along with new
residential loan originators; the balance of the increase was attributable to
salary increases and incentive-based compensation. Employee benefits rose
$338,000 as a result of higher staff levels along with increased Employee Stock
Ownership Program (ESOP) costs. The ESOP cost is based on the average market
price per share for NSS stock which calculated out to be $16.33 per share for
1995, compared to $11.69 for 1994. The price per share increase of almost $5.00
combined with the shares allocated in 1995 resulted in an ESOP employee benefits
expense of $434,000 for 1995 compared to $283,000 for 1994. Although the ESOP
purchased the shares at the time of the stock conversion for $10.00 per share,
the accounting requirements for ESOP compensation expense is based upon the
market value of the shares allocated to employees.
Occupancy and equipment costs rose $215,000 from 1994's level as a result of
increased depreciation costs on capital improvements coupled with higher data
processing costs included in these totals. Marketing expenses increased as the
Bank stepped up general image and specific product advertising campaigns.
Expenses associated with legal and professional fees as well as office supplies
are higher as a result of the Bank's having been a public company for a full
year in 1995 and incurring a full year's worth of associated costs. All other
expenses increased to $1.0 million from $890,000 for the years ended December
31, 1995 and 1994, respectively. Included in 1995 was an out-of-court settlement
of a long running law suit amounting to $83,000.
These increases were partially offset by regulatory assessments declining by
$616,000 to $438,000 for 1995 reflecting the roll- back of FDIC insurance
premiums during the year. The Bank qualified as well-capitalized in accordance
with FDIC guidelines and paid the lowest rate available to member institutions.
-42-
In addition to the general and administrative component of non-interest expense,
OREO related expenses declined to $1.4 million from $3.4 million for the years
ended December 31, 1995 and 1994, respectively. The $2.0 million decline is
primarily attributable to the ADP provision of $2.6 million included in 1994's
OREO expense. The ADP was a program begun after the Bank's stock conversion in
1994 and was designed to more rapidly dispose of certain nonperforming assets at
discounts below their net realizable values. The ADP program was concluded on
December 31, 1995 with no additional provision taken during 1995. Holding costs
and expenses declined to $728,000 from $851,000 for the years ended December 31,
1995 and 1994, respectively. This reduction is a result of the overall decline
in the OREO portfolio. The net balance of OREO was $4.3 million as of December
31, 1995 compared to $10.8 million at December 31, 1994. The provision for
estimated OREO losses amounted to $460,000 for 1995 compared to $294,000 in
1994. As a result of the relatively low balance of OREO as of year end 1995,
combined with the stabilization in real estate values in Fairfield County,
management determined that there was no need for an allowance for estimated OREO
losses. Since management's approach is to reduce OREO as quickly, efficiently
and effectively as possible, the Bank may incur losses to dispose of OREO below
its net realizable value, should the opportunities arise. Sales of OREO
properties in 1995 resulted in net losses of $227,000 compared to net gains in
1994 of $319,000.
Provision for Income Taxes
- --------------------------
The current provision for income taxes during the year ended December 31, 1995
as well as the year ended December 31, 1994 represented estimated minimum state
income tax requirements for the periods as both federal and state income-based
tax liabilities are offset by loss carryforwards. In addition, the Bank
recovered a portion of the valuation allowance against its net deferred tax
asset by reflecting a deferred tax benefit in the current year's earnings of
$1.2 million. The remaining available net deferred tax asset as of December 31,
1995 amounted to $3.3 million and was offset entirely by a valuation allowance
as of that date.
FINANCIAL CONDITION
-------------------
General
- -------
Total assets were $589.6 million as of December 31, 1996, representing a $74.3
million increase from the $515.3 million at December 31, 1995. Total loans, net
of allowance for credit losses, were $410.8 million, an increase of $55.0
million from the $355.8 million as of December 31, 1995. Total deposits were
$423.3 million, an increase of $20.5 million from the December 31, 1995 level of
$402.8 million. Shareholders' equity was $49.4 million as of December 31, 1996
compared to $43.6 million as of December 31, 1995. The tier one leverage capital
ratio was 7.9% as of December 31, 1996 compared to 8.4% as of December 31, 1995.
Two significant transactions during 1996 significantly affected the Bank's asset
and liability composition. A summary of each transaction follows:
Fairfield First Bank & Trust Company (FFB&T)
- -------------------------------------------
In July 1996 the Bank assumed essentially all liabilities, primarily $47.6
million in deposits, and acquired certain assets of Fairfield First Bank & Trust
Company (FFB&T), Fairfield, Connecticut, in an FDIC-assisted transaction.
Certain of the commercial real estate loans acquired from the FDIC were
simultaneously sold to another bank at an amount in excess of the Bank's bid
price to the FDIC.
As of September 30, 1996 the Bank completed its evaluation and allocated the net
purchase price to the assets acquired and the liabilities assumed based upon
their fair values. The net acquired loans were reflected at a fair value of
$13.7 million, which was net of a valuation allowance of $1.0 million, and the
excess of the purchase price over the net assets acquired, which approximated
$1.8 million and which management deems to represent a core deposit intangible,
has been reflected as Goodwill in the Consolidated Statement of Financial
Condition. Approximately $76,000 of goodwill amortization has been included in
Other non-interest expense for the year ended December 31, 1996, based on an
estimated life of six years.
-43-
Branch Sales
- ------------
In October 1996 the Bank sold two of its branch office operations, comprised of
deposits aggregating $48.0 million, loans aggregating $0.2 million, and premises
and equipment amounting to $307,000. As a result of the sale, the Bank
recognized a total gain of $3.6 million, essentially all of which was the
deposit premium gain.
Investment Securities
- ---------------------
Total securities amounted to $140.1 million as of December 31, 1996 compared to
$123.9 million at December 31, 1995, representing a $16.2 million increase or
13.1%. Purchases of investments made during 1996 amounted to $82.4 million,
compared to $67.6 million for the year ended December 31, 1995.
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115),
which the Bank adopted as of January 1, 1994, the Bank was required to classify
each security in the portfolio as either "Held-to-Maturity," "Available-for-
Sale," or "Trading Account Security." In accordance with the additional guidance
provided by the Financial Accounting Standards Board ("FASB") in conjunction
with SFAS 115, during 1995 the Bank re-assessed and reclassified certain of its
investments originally classified as Held-to-Maturity to Available-for-Sale.
During 1996 management continued to assess the objectives of the Bank's
investment portfolio in light of its plans to transform the Bank's financial
condition, and decided during the fourth quarter that the Held-to-Maturity
classification was no longer supported by management's intent for the portfolio.
Therefore, effective December 31, 1996, the Bank reclassified all of its
Held-to-Maturity investments to the Available-for-Sale classification. This
decision required the Bank to mark each security to fair value through an
adjustment to Shareholders' equity, net of income tax effect, as of December 31,
1996.
During 1996 the Bank decided to liquidate its portfolio of utility stocks as a
result of the decision to re-position the investment security portfolios. This
resulted in a net loss of $165,000. The Bank has established two portfolios of
equity securities, an Available-for-Sale portfolio of a variety of equities and
mutual funds aggregating $2.2 million at December 31, 1996, and a Trading
Account group of equities for certain other common stock equity securities
against which the Bank sells covered call options from time to time as market
conditions allow.
The Bank's covered call option program is designed for yield enhancement and to
lessen the Bank's exposure to a potentially volatile stock market. In this
program, the Bank purchases shares of qualified common stock and sells a call
option against the investment. The holding period of each investment is usually
one to three months and there are ten to fifteen investment positions in the
program. As required by SFAS 115, the Bank marks the common stock and related
covered call option to market through current period earnings. The mark to
market effect on earnings as of December 31, 1996 was a loss of $61,000 on the
$3.3 million Trading Portfolio.
Inasmuch as the Bank has had its equity investment privileges grandfathered by
the FDIC, it intends to continue to maintain an equity stock portfolio. To
provide direction, the Bank's Board of Directors has established upward limits
and an investment policy which includes guidelines which require that the Bank's
equity investments have a minimum quality rating of "A" by a widely recognized
rating service; the policy also requires adequate diversification to avoid
concentrations in lines of business and geographic regions.
During the second half of 1995, the Bank accumulated a significant common stock
position in Hometown Bancorporation ("Hometown"), a local bank holding company,
to the extent that the Bank filed a Form 13-D with an over 5% ownership
position. In April 1996 the Bank liquidated its position shortly after HUBCO,
Inc., a New Jersey-based bank holding company, announced its planned acquisition
of Hometown. The Bank recorded a $627,000 gain on the sale of its investment in
Hometown in 1996.
In total, net securities gains for the year ended December 31, 1996 were
$661,000 compared to $798,000 for the year ended December 31, 1995.
-44-
The following table presents a summary of the investments and other securities
portfolios as of December 31, 1996 and December 31, 1995, fair values and
unrealized gains and losses as of those dates.
TABLE 9 - INVESTMENT & OTHER SECURITIES
($ thousands)
December 31, 1996
----------------------------------------------------------------------
Unrealized Holding
Amortized ----------------------- Fair
Cost Gains Losses Value
--------- ----- ------ -----
Available for Sale
- ------------------
U.S. Government and Federal
Agency Obligations $ 42,436 $145 $461 $ 42,120
Mortgage Backed Securities 92,443 382 372 92,453
Equity Securities 2,110 138 12 2,236
------- --- --- -------
Total Available for Sale $136,989 $665 $845 $136,809
======= === === =======
Trading
- -------
Equity Securities $3,353 $46 $107 $3,292
===== == === =====
December 31, 1996
----------------------------------------------------------------------
Unrealized Holding
Amortized ----------------------- Fair
Cost Gains Losses Value
--------- ----- ------ -----
Trading
- -------
Equity Securities $268 $ - $5 $263
=== == = ===
Available for Sale
- ------------------
U.S. Government and Federal
Agency Obligations $26,611 $128 $ 55 $26,684
Mortgage-Backed Securities 50,243 220 162 50,301
Equity Securities 4,572 94 85 4,581
------- ---- ---- -------
Total Available for Sale $81,426 $442 $302 $81,566
====== === === ======
Held to Maturity
- ----------------
U.S. Government and Federal
Agency Obligations $ 1,998 $ - $ - $ 1,998
Mortgage-Backed Securities 40,038 358 114 40,282
------ --- --- ------
Total Held to Maturity $42,036 $358 $114 $42,280
====== === === ======
-45-
Loans
- -----
Total loans, before reductions for deferred credits, fees and the allowance for
credit losses, amounted to $418.8 million, representing a $58.3 million or 16.2%
increase over the December 31, 1995 level of $360.5 million.
TABLE 10 - LOAN PORTFOLIO
($ thousands)
December 31, 1996 December 31, 1995
----------------- -----------------
Real Estate Loans
- -----------------
1 To 4 Family Adjustable Rate $302,686 72.3% $231,168 64.1%
1 To 4 Family Fixed Rate 31,933 7.6% 56,360 15.6%
Multi-Family 7,450 1.8% 8,902 2.5%
Commercial 46,272 11.0% 44,914 12.5%
Home Equity Lines Of Credit 7,127 1.7% 5,698 1.6%
Home Improvement and
Second Mortgages 2,568 0.6% 3,422 0.9%
Land 828 0.2% 1,290 0.4%
Construction 1,227 0.3% 1,617 0.4%
------- -------
Total Real Estate Loans 400,091 95.5% 353,371 98.0%
------- -------
Commercial Loans 8,425 2.0% 1,485 0.4%
- ---------------- ------- -------
Consumer Loans
- --------------
Passbook 1,510 0.4% 1,634 0.4%
Automobile Loans 2,619 0.6% 2,792 0.8%
Automobile Leases 3,149 0.8% 230 0.0%
Credit Cards 991 0.2% - -
All Other 2,033 0.5% 963 0.3%
------- -------
Total Consumer Loans 10,302 2.5% 5,619 1.6%
------- -------
Total Loans, Gross 418,818 100% 360,475 100%
Deferred Fees and Credits (718) (509)
------- -------
418,100 359,966
Allowance for Credit Losses (7,334) (4,170)
------- -------
Total Loans, Net $410,766 $355,796
======= =======
The increase in demand for new residential mortgage loans continued during 1996
as a result of the Bank's loan originators offering competitively priced
residential mortgage products combined with NSS's outstanding reputation for
service. During 1996, the Bank continued to focus on originating adjustable rate
residential loans. As indicated by the table, 79.9% of the total loan portfolio
is in first mortgage residential loans. Of the $418.8 million in the loan
portfolio, 72.3% of the portfolio or $302.7 million is in residential adjustable
first mortgage loan products.
The Bank continued to emphasize small business commercial lending during 1996.
By December 31, 1996 the commercial and industrial portion of the portfolio had
grown to $8.4 million from $1.5 million as of December 31, 1995. These loans are
originated by the commercial loan team that was established in 1995 and
continues to grow. The loans are most often at a margin over and above the NSS
bank rate which follows the prime rate and adjusts whenever the prime changes.
Automobile leases also increased substantially during the year. These leases are
originated on an indirect basis, which means that they are acquired from a third
party provider after having been re-underwritten by an NSS credit
representative. The indirect automobile lease portfolio as of December 31, 1996
was $3.1 million compared to $0.2 million, last year.
-46-
In conjunction with the FFB&T transaction the Bank acquired a credit card
portfolio. As of December 31, 1996 this portfolio was $1.0 million and the Bank
plans to maintain the credit card product and to continue to offer it on a
prudent lending basis.
The sale of $44.8 million in five year adjustable rate residential mortgages was
consummated during the fourth quarter of 1996. This sale generated a loss of
$144,000 but alleviated a concentration of assets in a particular product and
was done in conjunction with the plan to accomplish the transformation of the
Bank's balance sheet. The sale was negotiated on a servicing-released basis,
whereby the servicing of the loans was sold along with the mortgages. A
marketing evaluation of these borrowers resulted in the assessment that as a
group they could not be cross-sold on additional Bank products and services; as
such, the profitability of a continued relationship was limited.
There were no loan securitizations during 1996. Securitization of $4.3 million
of certain types of adjustable rate mortgage loans took place during the year
ended December 31, 1995 to alleviate an excess concentration in those products
at that time.
Non-Performing Assets/Asset Quality
- -----------------------------------
The Bank's level of non-performing assets continued to steadily decline during
1996. Total non-performing assets as of December 31, 1996 were $11.3 million,
representing 1.92% of total assets. As of December 31, 1995, non-performing
assets were $17.3 million or 3.36% of total assets.
Details of the Bank's asset quality are shown in the analysis provided by Table
11.
-47-
TABLE 11 - ASSET QUALITY
($ thousands)
AT DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Non-Performing Assets
- ---------------------
Non-Accrual Loans $10,441 $12,598 $ 9,489 $26,180 $40,591
Restructured Loans - 472 487 - 630
------- ------- -------- ------- -------
Total Non-Performing Loans 10,441 13,070 9,976 26,180 41,221
------- ------- -------- ------- -------
Foreclosed Assets 858 4,267 11,622 17,824 17,613
Allowance for Estimated OREO Losses - - (802) (194) (1,025)
------- ------- -------- ------- -------
Total OREO 858 4,267 10,820 17,630 16,588
------- ------- -------- ------- -------
Total Non-Performing Assets $11,299 $17,337 $ 20,796 $43,810 $57,809
======= ======= ======== ======= =======
Allowance for Credit Losses
- ---------------------------
Balance at Beginning of Period $4,170 $4,827 $2,532 $4,567 $6,081
Provision for Credit Losses 4,415 1,005(A) 3,790 1,000 2,330
Allocated to FFB&T Acquired Loans 1,000 - - - -
Charge-Offs (2,488) (1,799) (1,589) (3,073) (3,900)
Recoveries 237 137 94 38 56
------- ------- -------- ------- -------
Net Charge-Offs (2,251) (1,662) (1,495) (3,035) (3,844)
------- ------- -------- ------- -------
Balance at End of Period $7,334 $4,170 $4,827 $2,532 $4,567
======= ======= ======== ======= =======
(A) Gross Provision of $2,105
Less ADP Credit of $1,100
Allowance for Estimated OREO Losses
- -----------------------------------
Balance at Beginning of Period $ - $ 802 $ 194 $1,025 $1,146
Provision for Estimated OREO Losses 459 460 2,894 3,975 1,550
Charge-Offs (459) (1,262) (2,286) (4,806) (1,671)
------- ------- -------- ------- -------
Balance at End of Period $- $- $802 $194 $1,025
= = === === =====
Loans Receivable, Net
- ---------------------
End of Period $410,766 $355,796 $284,885 $266,181 $300,131
Average 403,207 313,072 265,581 267,729 295,209
------- ------- -------- ------- -------
Total Assets, End Of Period $589,589 $515,267 $464,901 $427,950 $431,079
======= ======= ======== ======= =======
Ratios
- ------
Allowance for Credit Losses to Total Loans 1.79% 1.17% 1.69% 0.95% 1.52%
Net Charge-Offs to Average Loans 0.56% 0.53% 0.56% 1.13% 1.30%
Non-Performing Loans to Total Loans 2.54% 3.67% 3.50% 9.84% 13.73%
Non-Performing Assets to Total Assets 1.92% 3.36% 4.47% 10.24% 13.41%
Allowance for Credit Losses to
Non-Performing Loans 70.24% 31.91% 48.39% 9.67% 11.08%
-48-
Of the total non-performing assets, non-performing loans were $10.4 million as
of December 31, 1996 compared to $13.1 million as of December 31, 1995. There
were no troubled debt restructurings included in non-performing loans as of
December 31, 1996 and $472,000 of troubled debt restructurings as of December
31, 1995.
The allowance for credit losses amounted to $7.3 million as of December 31,
1996, representing coverage of 70.24% of non- performing loans compared to $4.2
million and 31.91% coverage of non-performing loans at December 31, 1995. The
allowance for credit losses at December 31, 1996 includes $1.0 million of credit
risk allowance allocated to the loans acquired through the FFB&T transaction.
Net charge-offs for 1996 were $2.3 million or 56 basis points of the average
loan portfolio, compared to $1.7 million and 53 basis points for the year ended
December 31, 1995.
During 1996 the Bank decided to substantially increase its allowance for credit
losses in light of its increased levels of commercial and consumer loans, the
significant increase in mortgage lending, and the substantial increase in its
Watch List at December 31, 1996.
No allowance for estimated OREO losses was deemed necessary as of December 31,
1996 as a result of the minimal amount of OREO remaining at that time, the
stabilization of the residential real estate market, and management's assessment
that the carrying value of OREO fairly represents net realizable values.
The Bank concluded the ADP program on December 31, 1995 with the following
results. In total, gross assets of $16.1 million were disposed of. A total of
$4.6 million was charged to the ADP allowances. The Bank exceeded its initial
target in each category, as originally the ADP program was set up to dispose of
$14.0 million of assets utilizing a reserve of $5.7 million. The OREO component
of the program resulted in sales of $12.4 million utilizing a reserve of $2.6
million. Loans disposed of through the program amounted to $3.7 million
utilizing a reserve of $2.0 million. In addition, the $1.1 million remaining in
the ADP allowance was credited to income upon the program's conclusion on
December 31, 1995.
Deposits
- --------
Total deposits at December 31, 1996 were $423.3 million compared to $402.8
million as of December 31, 1995, an increase of $20.5 million or 5.1%. The Bank
continues to seek deposits with marketing and sales efforts directed towards all
of its products. As a result of the Bank's building the small business
commercial lending operation, coupled with aggressive marketing campaigns,
demand deposits ("DDA") increased by $8.8 million, or 64.1%, to $22.5 million as
of December 31, 1996. This result comes after a year when the Bank had 48.9%
growth in DDA deposits during 1995. Back-to-back substantial gains in
interest-free money provided by demand accounts continues to contribute to net
interest margin enhancement. The Bank does not solicit, nor does it accept,
brokered deposits.
-49-
The following table presents a summary of deposits as of December 31, 1996 and
1995.
TABLE 12 - DEPOSITS
($ thousands)
December 31, 1996 December 31, 1995
----------------- -----------------
Demand $22,479 5.3% $13,697 3.4%
Savings
Regular Savings 28,096 6.6% 28,660 7.1%
NOW 30,262 7.2% 35,097 8.7%
Super and Money Market Accounts
Super Savings 45,404 10.7% 55,042 13.7%
Money Market 47,957 11.3% 59,724 14.8%
Time
Certificate Accounts 197,204 46.6% 154,205 38.3%
Money Market Certificates 46,923 11.1% 52,230 13.0%
Escrow Deposits 4,965 1.2% 4,142 1.0%
--------- ------- --------- -------
Total Deposits $423,290 100.0% $402,797 100.0%
========= ======= ========= =======
Federal Home Loan Bank of Boston Advances and Other Borrowings
- --------------------------------------------------------------
The Bank continues to utilize the FHLB as a source of funds alternative to the
traditional deposit account relationship. As of December 31, 1996, borrowings
from the FHLB totaled $82.2 million compared to $61.8 million as of December 31,
1995. In addition, the Bank increased the use of the reverse repurchase
agreement as a means to borrow funds. These agreements are essentially
collateralized borrowings, similar to FHLB borrowings, and to the extent that
the rates and terms are more favorable, the Bank utilizes the reverse repurchase
agreement in lieu of an FHLB borrowing. As of December 31, 1996 there was $31.4
million of borrowings outstanding under reverse repurchase agreements compared
to $4.6 million as of December 31, 1995.
In total, borrowings as of December 31, 1996 were $113.6 million at a weighted
average rate of 5.74% and a weighted average maturity of 1.1 years, compared to
$66.4 million at a weighted average rate of 6.42% and a weighted average
maturity of 1.38 years as of December 31, 1995. As a percentage of total assets,
borrowings amounted to 19.3% as of December 31, 1996 compared to 13.0% as of
December 31, 1995.
As a result of the Bank's stock conversion, the Bank has reflected the guaranty
of the ESOP loan as an obligation of the Bank. This note is a five-year
adjustable rate note (convertible to a fixed rate at the Bank's option) with
interest and principal payable monthly. The outstanding balance was $485,000 and
the rate in effect as of December 31, 1996 was 6.86%.
-50-
Shareholders' Equity
- --------------------
Shareholders' equity at December 31, 1996 increased to $49.4 million from $43.6
million at December 31, 1995, reflecting Tier 1 regulatory leverage capital
ratios of 7.9% and 8.4%, respectively.
The following table indicates required and actual levels of capital as of
December 31, 1996 and 1995.
TABLE 13 - REGULATORY CAPITAL
Required Actual
-------- ------
December 31,
------------
1996 1995
---- ----
Tier 1 Risk-Based Capital 4.0% 15.7% 16.6%
Total Risk-Based Capital 8.0% 17.0% 17.9%
Tier 1 Leverage Capital 4.0%-5.0% 7.9% 8.4%
Asset and Liability Management
- ------------------------------
In accordance with the Asset and Liability Management Policy of Norwalk Savings
Society, senior management postures the Bank toward an acceptable level of
interest rate risk, in turn producing a stable net interest income in ever
changing interest rate environments. On a continual basis, at its monthly asset
and liability committee meeting and more frequently, if necessary, the level of
interest-earning assets is monitored and measured in relation to
interest-bearing liabilities utilizing the "gap" schedule in conjunction with
other supporting documents and systems providing relevant information. Certain
assumptions are made during this process, and the applicable assumptions to the
gap schedule are indicated on the following page. These assumptions may or may
not be indicative of future withdrawals of deposits or loan repayments.
The following table presents the Interest Rate Risk Exposure ("GAP") as of
December 31, 1996.
-51-
TABLE 14 - GAP AT DECEMBER 31, 1996
Repricing
Repricing After One Repricing
($ thousands) Total Percent Within and Within Over
A S S E T S Amount of Total One Year Five Years Five Years
- ----------- ------ -------- -------- ---------- ----------
Loans (1)
- ---------
Fixed Rate by Maturity $105,890 17.96% $ 6,779 $ 17,664 $ 81,447
Floating Rate by Maturity 302,487 51.31 158,416 126,242 17,829
Securities:
- ----------
Governments and Agencies 42,120 7.14 - - 42,120
Mortgage-Backed Securities (1) 92,453 15.68 42,862 3,859 45,732
Equity Securities/FHLB Stock 11,712 1.99 11,712
Short-Term Investments 4,121 0.70 4,121
-------- ------- ------- ------- -------
Total Rate Sensitive Assets 558,783 94.78 223,890 147,765 187,128
------- ------- -------
Cumulative Rate Sensitive Assets $223,890 $371,655 $558,783
======= ======= =======
Other Assets (2) 30,806 5.22
-------- -------
Total Assets $589,589 100.00%
======= ======
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
- --------
Savings $ 28,096 4.77% $28,096 $ - $ -
Super Savings 45,404 7.70 45,404 - -
NOW 30,262 5.13 30,262 - -
Money Market 47,957 8.13 47,957 - -
Escrow 4,965 0.84 4,965 - -
Certificates 244,127 41.42 186,405 57,722 -
-------- ------- ------- ------- -------
Total Deposits 400,811 67.99 343,089 57,722 -
Borrowings 114,043 19.34 68,557 44,051 1,435
-------- ------- ------- ------- -------
Total Rate Sensitive Liabilities 514,854 87.33 411,646 101,773 1,435
------- ------- -------
Cumulative Rate Sensitive Liabilities $411,646 $513,419 $514,854
======= ======= =======
Other Liabilities 25,382 4.30
Shareholders' Equity 49,353 8.37
-------- -------
Total Liabilities and Shareholders' Equity $589,589 100.00%
======== =======
Net Position of Assets (Liabilities) ($187,756) $45,992 $185,693
Adjustments (3), (4) (117,713) 61,947 55,766
------- ------- -------
Adjusted GAP (70,043) (15,955) 129,927
------- -------
Cumulative Repricing Difference (Cumulative Gap) ($70,043) ($85,998) $ 43,929
======= ======= =======
Cumulative GAP to Total Assets (11.88%) (14.59%) 7.45%
===== ===== ====
Note:
(1) Included in the one year period are regularly scheduled monthly
payments to be received on Loans and Mortgage-backed securities.
(2) Not included above as interest rate sensitive are $10.4 million in
non-accruing loans and $0.9 million in OREO property.
(3) 95% of savings and NOW accounts were reclassified to the over five year
period.
(4) Money market and super savings were divided 1/3, 2/3, respectively in
each of the first two periods.
52
Liquidity and Capital Resources
- -------------------------------
Liquidity is the ability of the Bank to meet its cash flow requirements arising
from fluctuations in loans, securities, deposits, and other borrowings. At
December 31, 1996, the Bank's primary liquidity, consisting of cash, cash
equivalents and marketable securities with maturities of one year or less was
$30.6 million or 5.2% of total assets, compared to $30.3 million or 5.9% of
total assets at December 31, 1995.
The Bank's primary sources of funds are deposits and other borrowings, primarily
from the FHLB. The Bank monitors its liquidity in accordance with policy
guidelines established by the Asset and Liability Management Policy and
regulatory standards, administered by the Asset and Liability Management
Committee of the Bank.
As of December 31, 1996, the Bank had approved loan commitments outstanding for
one-to four-family loans of $4.1 million. In addition, there was $7.8 million of
unused credit under the home equity line of credit facility, $833,000 under the
overdraft protection credit line facility, and $1.1 million in unused credit
card lines. The unadvanced portion of residential construction loans amounted to
$1.8 million. There were $2.6 million in approved loan commitments in the
Commercial Lending Department, $1.7 million in unused commercial lines of credit
and $603,000 in commercial letters of credit outstanding.
Management believes that the Bank's liquidity is currently in a position to meet
normal operating needs. To meet unexpected demands, the Bank maintains a line of
credit with the FHLB. At December 31, 1996, this line of credit was $10.3
million, of which no amount was outstanding.
Management also believes that the Bank's capital position is currently adequate
to meet present needs and anticipated growth, and does not currently plan to
raise capital from external sources in the near future. (see Shareholders'
Equity).
Market Price of Common Stock
- ----------------------------
Norwalk Savings Society trades on the NASDAQ National Market under the symbol
"NSSY".
The following table sets forth the high/low price range as reported by NASDAQ
and dividends paid for the periods indicated:
1996 1995
---- ----
High Low Div(1) High Low Div (1)
---- --- --- ---- --- ----
First Quarter $22.00 $18.75 $ - $15.63 $11.00 $ -
Second Quarter $22.25 $17.94 $.05 $16.38 $14.63 $ -
Third Quarter $23.13 $20.88 $.05 $20.00 $15.88 $ -
Fourth Quarter $24.88 $22.75 $.05 $19.25 $17.50 $ -
(1) The Bank began paying quarterly dividends during the second quarter of 1996.
The Bank's initial public offering of common stock was effective June 15, 1994.
At December 31, 1996 Norwalk Savings Society had approximately 750 shareholders
of record.
-53-
ITEM 8.
- -------
Financial Statements and Supplementary Data
-54-
NORWALK SAVINGS SOCIETY
Consolidated Financial Statements
YEARS ENDED
DECEMBER 31, 1996 AND 1995
-55-
NORWALK SAVINGS SOCIETY
-----------------------
CONTENTS
Independent auditor's report
CONSOLIDATED FINANCIAL STATEMENTS
Statements of financial condition..................................Exhibit A
Statements of operations...........................................Exhibit B
Statements of shareholders' equity.................................Exhibit C
Statements of cash flows...........................................Exhibit D
Notes to consolidated financial statements
-56-
[LETTERHEAD OF FRIEDBERG, SMITH & CO., P.C. APPEARS HERE]
Independent Auditor's Report
----------------------------
The Board of Directors and Shareholders
Norwalk Savings Society
Norwalk, Connecticut
We have audited the accompanying consolidated statements of financial condition
of Norwalk Savings Society as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of Norwalk Savings
Society's management. Our responsi-bility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
-57-
The Board of Directors and Stockholders
Norwalk Savings Society
Page Two
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Norwalk
Savings Society at December 31, 1996 and 1995, and the consolidated results of
their operations, changes in their shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
FRIEDBERG, SMITH & CO., P.C.
Bridgeport, Connecticut
February 20, 1997
-58-
NORWALK SAVINGS SOCIETY EXHIBIT A
-----------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
----------------------------------------------
A S S E T S 1996 1995
- ----------- ---- ----
(Dollar amounts in thousands)
Cash and Due from Banks (Note 1) $ 14,978 $ 10,222
Interest-Bearing Deposits in Other Banks (Notes 2 and 8) 2,373 406
Federal Funds Sold (Note 1) 1,500 8,000
Securities (Notes 1 and 2):
- --------------------------
Trading, At Fair Value 3,292 263
Available-for-Sale, At Fair Value 136,809 81,566
Held-to-Maturity (Fair Value $42,280 in 1995) - 42,036
------- -------
140,101 123,865
Loans Receivable, Net of Allowance for Credit Losses of $7,334
in 1996 and $4,170 in 1995 (Notes 1, 3, 7, 14, 17 and 18) 410,766 355,796
Accrued Income Receivable (Notes 1 and 3) 4,034 3,012
Investment in FHLBB Stock, At Cost (Note 7) 6,184 3,621
OREO, Net (Notes 1, 4 and 14) 858 4,267
Bank Premises and Equipment, Net (Notes 1, 5 and 17) 3,151 3,319
Deferred Income Tax Asset, Net (Notes 1 and 9) 2,574 1,200
Other Assets (Notes 1 and 18) 3,070 1,559
------- -------
TOTAL ASSETS $589,589 $515,267
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities
- -----------
Deposits (Notes 6, 17 and 18):
-----------------------------
Non-Interest Bearing $ 22,479 $ 13,697
Interest Bearing 400,811 389,100
------- -------
423,290 402,797
Advances from FHLBB (Note 7) 82,208 61,795
Securities Sold Under Agreements to Repurchase (Notes 2 and 7) 31,350 4,600
Other Borrowings (Notes 8 and 12) 485 728
Accrued Expenses and Other Liabilities (Note 8) 2,903 1,752
------- -------
Total Liabilities 540,236 471,672
------- -------
Commitments and Contingent Liabilities (Notes 5 and 11)
- -------------------------------------------------------
Shareholders' Equity (Notes 1, 2, 5, 8, 11, 12, 13, 16 and 20):
- --------------------------------------------------------------
Preferred Stock - $.01 Par Value -
500,000 shares Authorized, None Issued - -
Common Stock - $.01 Par Value -
Authorized 7,000,000 shares; Issued 2,442,129 shares in 1996 and 2,435,234
shares in 1995; Outstanding 2,397,312 shares in 1996
and 2,364,720 shares in 1995 24 24
Additional Paid-In Capital 23,545 23,133
Retained Earnings 26,339 21,003
Net Unrealized (Losses) Gains on Securities
Available-for-Sale, Net of tax effect (106) 140
------- -------
Total 49,802 44,300
Less: Unearned ESOP Shares (449) (705)
------- -------
Total Shareholders' Equity 49,353 43,595
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $589,589 $515,267
======= =======
See notes to consolidated financial statements.
-59-
NORWALK SAVINGS SOCIETY EXHIBIT B
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------
1996 1995 1994
---- ---- ----
(Dollar amounts in thousands,
except per share data)
Interest Income (Note 1)
- -----------------------
Interest and Fees on Loans $30,589 $23,666 $18,234
------ ------ ------
Securities:
----------
U.S. Government and Agencies 2,571 1,961 2,633
Mortgage-Backed Securities 7,076 6,753 3,471
Marketable and Other Equities 528 358 262
------ ------ ------
10,175 9,072 6,366
Cash Equivalent Investments and Other 491 277 445
------ ------ ------
Total Interest Income 41,255 33,015 25,045
------ ------ ------
Interest Expense
- ----------------
Deposits (Note 6) 16,844 14,169 10,273
Borrowed Funds (Note 7) 6,796 4,229 2,839
------ ------ ------
Total Interest Expense 23,640 18,398 13,112
------ ------ ------
Net Interest Income 17,615 14,617 11,933
Provision for Credit Losses (Notes 1 and 3) 4,415 1,005 3,790
------ ------ ------
Net Interest Income after
Provision for Credit Losses 13,200 13,612 8,143
------ ------ ------
Non-Interest Income
- -------------------
Trust Department Fees 552 515 513
Net Securities Gains (Losses) (Note 2) 661 798 (64)
Net Loss from Sale of Loans (Note 3) (144) - -
Loan Servicing and Other Loan Fees 480 515 579
Service Charges on Deposit Accounts 763 599 546
Other (Note 17) 4,531 268 252
------ ------ ------
Total Non-Interest Income 6,843 2,695 1,826
------ ------ ------
Non-Interest Expense
- --------------------
Salaries and Employee
Benefits (Notes 8 and 13) 7,649 6,232 5,117
Occupancy and Equipment (Note 5) 2,391 1,854 1,639
Losses and Expenses of OREO, Net (Note 4) 1,362 1,415 3,426
Other (Notes 10, 12 and 18) 4,064 3,218 3,224
------ ------ ------
Total Non-Interest Expense 15,466 12,719 13,406
------ ------ ------
Income (Loss) before Income Tax
(Benefit) Provision 4,577 3,588 (3,437)
Income Tax (Benefit)
Provision, Net (Notes 1 and 9) (1,125) (1,190) 50
------ ----- -----
Net Income (Loss) $5,702 $4,778 ($3,487)
===== ===== =====
Per Share Data (Note 1)
- ----------------------
Weighted Average Shares Outstanding 2,381,264 2,346,487 2,305,524
========= ========= =========
Income (Loss) Per Share $2.39 $2.04 ($1.51)
==== ==== ====
See notes to consolidated financial statements.
-60-
NORWALK SAVINGS SOCIETY
-----------------------
EXHIBIT C
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------
Additional Unrealized
Common Paid-In Retained Gains
Shares Stock Capital Earnings (Losses)
------ ----- ---------- -------- ----------
(Notes 1 and 2)
(Dollar amounts in thousands)
Balance - January 1, 1994 - $ - $ - $19,712 $ -
Net Loss for 1994 - - - (3,487) -
Stock Conversion (Note 12) 2,426,740 24 22,797 - -
Shares Purchased by ESOP (Note 12) (121,337) - - - -
Shares Committed to be Released (Note 8) 24,267 - 41 - -
Change in Unrealized Gains (Losses), Net - - - - (603)
--------- -- ------ ------ ---
Balance - December 31, 1994 2,329,670 24 22,838 16,225 (603)
Net Income for 1995 - - - 4,778 -
Shares Committed to be Released (Note 8) 26,556 - 168 - -
Stock Options Exercised (Note 13) 8,494 - 127 - -
Change in Unrealized Gains (Losses), Net - - - - 743
--------- -- ------ ------ ---
Balance - December 31, 1995 2,364,720 24 23,133 21,003 140
Net Income for 1996 - - - 5,702 -
Cash Dividends Paid on Common Stock,
$0.15 per share (Note 12) - - - (366) -
Shares Committed to be Released (Note 8) 25,697 - 304 - -
Stock Options Exercised (Note 13) 6,665 - 103 - -
Shares Distributed to Advisory Board (Note 12) 230 - 5 - -
Change in Unrealized Gains (Losses), Net - - - - (246)
--------- -- ------ ------ ---
Balance - December 31, 1996 2,397,312 $24 $23,545 $26,339 ($106)
========= == ====== ====== ===
Total
Unearned Share-
ESOP holders'
Shares Equity
-------- ------
(Notes 8 and 12)
(Dollar amounts in thousands)
Balance - January 1, 1994 $ - $19,712
Net Loss for 1994 - (3,487)
Stock Conversion (Note 12) - 22,821
Shares Purchased by ESOP (Note 12) (1,213) (1,213)
Shares Committed to be Released (Note 8) 242 283
Change in Unrealized Gains (Losses), Net - (603)
----- ------
Balance - December 31, 1994 (971) 37,513
Net Income for 1995 - 4,778
Shares Committed to be Released (Note 8) 266 434
Stock Options Exercised (Note 13) - 127
Change in Unrealized Gains (Losses), Net - 743
--- ------
Balance - December 31, 1995 (705) 43,595
Net Income for 1996 - 5,702
Cash Dividends Paid on Common Stock,
$0.15 per share (Note 12) - (366)
Shares Committed to be Released (Note 8) 256 560
Stock Options Exercised (Note 13) - 103
Shares Distributed to Advisory Board (Note 12) - 5
Change in Unrealized Gains (Losses), Net - (246)
--- ------
Balance - December 31, 1996 ($449) $49,353
=== ======
See notes to consolidated financial statements.
-61-
NORWALK SAVINGS SOCIETY EXHIBIT D
----------------------- Page 1 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Cash Flows from Operating Activities
- ------------------------------------
Net Income (Loss) $ 5,702 $ 4,778 $(3,487)
------ ------ ------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
-----------------------------------------
Provision for Credit Losses 4,415 1,005 3,790
Provision for Estimated Losses on OREO 459 460 2,894
Provision for ESOP Benefit Cost 560 434 283
Stock Issued to Advisory Board As Compensation 5 - -
Depreciation and Amortization 521 391 286
Goodwill Amortization 76 - -
Net Amortization (Accretion) of Discounts
and Premiums on Securities 504 (954) (746)
Deferred Income Tax Benefit (1,300) (1,200) -
Net Gain on Sale of Deposits (3,600) - -
Net Realized (Gains) Losses on
Sales of Securities Available-for-Sale (693) (803) 64
Net Loss on Sale of Loans 144 - -
Net Losses (Gains) on Sales of OREO 551 227 (319)
Net Increase in Trading Securities (847) (263) -
Net Gain on Sale of Bank
Premises and Equipment (33) - -
Increase in Accrued Income Receivable (1,022) (477) (341)
Decrease (Increase) in Other Assets 243 (341) 31
Increase in Accrued
Expenses and Other Liabilities 1,151 945 397
------ ------ ------
Total Adjustments 1,134 (576) 6,339
------ ------ ------
Net Cash Provided by
Operating Activities 6,836 4,202 2,852
------ ------ ------
Cash Flows from Investing Activities
- ------------------------------------
Proceeds From:
-------------
Sales of Securities Available-for-Sale 37,261 62,062 17,294
Maturities and Principal Amortization
of Securities Available-for-Sale
and Held-to-Maturity 29,612 37,199 30,134
Sale of Loans 45,319 - -
Sale of Bank Premises and Equipment 340 - -
Sales of OREO 2,917 3,288 12,907
Purchase of Loans (13,724) - -
Purchases of Securities Available-for-Sale (81,601) (67,571) (55,746)
Purchases of Securities Held-to-Maturity (792) - (22,847)
Purchase of FHLBB Stock (2,563) (290) (158)
Net Increase in Loans Receivable (91,532) (72,529) (29,277)
Additions to OREO (110) (1,170) (2,719)
Additions to Bank Premises and Equipment (660) (750) (330)
Acquisition of Goodwill (1,830) - -
------ ------ ------
Net Cash Used by Investing Activities (77,363) (39,761) (50,742)
------ ------ ------
See notes to consolidated financial statements.
-62-
NORWALK SAVINGS SOCIETY EXHIBIT D
----------------------- Page 2 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Cash Flows from Financing Activities
Net Increase in Deposits from Customers $20,934 $39,726 $ 4,008
Assumption of Deposits 47,556 - -
Sale of Deposits (44,397) - -
Advances from FHLBB 68,750 32,900 30,681
Repayments of Advances
from FHLBB and Other Borrowings (48,580) (33,887) (17,149)
Net Increase in Securities Sold
Under Agreements to Repurchase 26,750 4,600 -
Net Proceeds from Stock Conversion - - 22,821
Proceeds from Exercised Stock Options 103 127 -
Dividends Paid to Shareholders (366) - -
------ ------ ------
Net Cash Provided by
Financing Activities 70,750 43,466 40,361
------ ------ ------
Increase (Decrease) in Cash
and Cash Equivalents (Note 1) 223 7,907 (7,529)
Cash and Cash Equivalents - Beginning 18,628 10,721 18,250
------ ------ ------
Cash and Cash Equivalents - Ending $18,851 $18,628 $10,721
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash Paid During the Year For
- -----------------------------
Interest $23,546 $18,458 $13,048
====== ====== ======
Income Taxes $22 $ - $18
== === ==
Non-Cash Investing and Financing Activities
Loans Receivable Transferred to OREO $1,758 $324 $ -
===== === ===
Loans Originated in Connection
with Sales of OREO $1,350 $4,072 $7,650
===== ===== =====
Exchange of Loans for
Mortgage-Backed Securities $ - $4,361 $829
===== ===== ===
Transfer of Securities
Available-for-Sale to Trading $2,182 $ - $ -
===== ===== ===
Transfer of Securities
Held-to-Maturity to Available-for-Sale $30,514 $36,628 $
====== ====== ===
See notes to consolidated financial statements.
-63-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
The following is a summary of significant accounting policies
followed by Norwalk Savings Society (Bank) and its wholly owned
subsidiary NSS Realty Corporation (NSSR), and reflected in the
accompanying Consolidated financial statements:
Nature of Operations
--------------------
The Bank is primarily engaged in the business of providing
credit secured by residential real estate and retail banking
services to the consumer segment of its service area, which is
in and around the Norwalk, Connecticut area. Its operations are
regulated by the Banking Commissioner of the State of
Connecticut and its deposit accounts are insured by the Federal
Deposit Insurance Corporation, and as such its activities are
subject to periodic examination by both agencies. NSSR is a
special-purpose subsidiary whose operations consist of the
development and sale of certain of the real property acquired
by the Bank in satisfaction of loans.
Principles of Consolidation
---------------------------
The accompanying Consolidated financial statements include the
accounts of the Bank and NSSR. Inasmuch as the results of the
operations of NSSR and the financial condition of NSSR are
wholly dependent on the financial and administrative support of
the Bank, separate financial information on NSSR has not been
provided. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Consolidated Financial Statement Presentation
------------------------------------------------------
The accompanying Consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles and general practice within the banking industry. In
preparing the Consolidated financial statements, management is
required to make estimates and assumptions that effect the
reported amounts of assets, liabilities, income and expenses,
and disclosure of contingent assets and liabilities. Actual
results could differ significantly from those estimates.
-64-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
-------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------------------------------
Material Estimates
------------------
Material estimates that are particularly susceptible to
significant change in the near-term relate to the
determination of the Allowance for credit losses and the
valuation of real estate acquired in satisfaction of loans
(other real estate owned or OREO). Such estimates reflect the
realization that the Bank's OREO and a substantial portion of
the Bank's mortgage loans receivable are related to real estate
located in markets in and around Norwalk, Connecticut, which
have experienced value fluctuations in recent years.
While management uses available information to recognize
possible losses on loans and OREO, including the services of
professional appraisers for significant properties, future
adjustments to the Allowance for credit losses and valuation of
OREO may be necessary based on changes in economic and real
estate market conditions in and around the Bank's service area.
In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's
Allowance for credit losses and valuation of OREO and may
require the Bank to recognize adjustments based on their
judgment of information available to them at the time of their
examination.
Cash Equivalents
----------------
For the purposes of reporting cash flows in the Consolidated
statements of cash flows, cash equivalents include federal
funds sold and interest-bearing deposits in other financial
institutions.
Securities
----------
Securities are accounted for in accordance with the Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS
No. 115). This statement establishes standards of financial
accounting and reporting for investments in equity securities
that have readily determinable fair values and for all
investments in debt securities.
-65-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Securities (continued)
---------------------
SFAS No. 115 requires the classification of investment securi-
ties into categories of Held-to-maturity, Available-for-sale or
Trading. Investments in debt securities are classified as
Held-to-maturity only if there is a positive intent and ability
to hold those securities to maturity. Carrying basis is
reflected at amortized cost and adjusted for any premiums or
discounts. Premiums are amortized and discounts are accreted to
interest income using the level yield method.
Securities classified as Trading comprise securities purchased
in connection with the Bank's trading activities and, as such,
are expected to be sold in the near-term. Trading securities
are carried at fair value with unrealized holding gains and
losses recognized in Non-interest income. Equity securities and
debt securities not classified as Held-to-maturity or Trading
are classified as Available-for-sale. Securities classified as
Available-for-sale are carried at estimated fair value, with
net unrealized holding gains and losses reported as a separate
component of Shareholders' equity, net of applicable income
taxes.
A decline in the estimated fair value of any security below its
carrying value that is deemed by management to be other than
temporary results in a write-down of the individual security to
its estimated fair value. Such write-downs are recognized as a
realized loss in Operations in the accompanying Consolidated
financial statements.
Mortgage-backed securities are accounted for in the same manner
as debt securities and consist of certificates that are
participation interests in pools of long-term first mortgage
loans.
Gain or loss on dispositions of securities is based on the net
proceeds and adjusted carrying amount of the securities sold
using the specific identification method.
Loans Held for Sale
-------------------
Loans held for sale generally consist of certain first mortgage
loans that management has identified will most likely be sold
for reasons of managing rate risk, liquidity, and/or asset
growth and are reflected at the lower of aggregate cost or
estimated market value. Net unrealized losses, if any,
resulting from market value less than cost are recognized
through a valuation allowance by a charge to Operations in the
accompanying Consolidated financial statements.
-66-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Loans Receivable
----------------
Loans receivable that the Bank has the intent and ability to
hold for the foreseeable future or until maturity or payoff are
reflected at amortized cost (unpaid principal balances reduced
by any partial charge-offs or specific valuation accounts) net
of any net deferred fees or costs on originated loans or any
unamortized premiums or discounts on purchased loans, and less
an Allowance for credit losses.
Effective January 1, 1995, the Bank implemented the provisions
of SFAS Nos. 114/118, "Accounting by Creditors for Impairment
of a Loan" (SFAS Nos. 114/118). These statements address the
accounting for loans considered impaired and the recognition of
impairment. A loan is considered impaired when, in management's
judgment, current information and events indicate it is
probable that collection of all amounts due according to the
contractual terms of the loan agreement will not be met. The
provisions of these statements are prospective, with any
adjustments resulting from initial application reflected as an
adjustment to the provision for credit losses. The effect on
the accompanying Consolidated financial statements of adopting
these statements was not significant.
Interest on loans is included in income as earned based on
rates applied to principal amounts outstanding. The accrual of
inter-est income is generally discontinued and all previously
unpaid accrued interest is reversed when a loan becomes past
due 90 days or more as to contractual payments of principal or
interest, or is determined to be impaired. Management may elect
to continue the accrual of interest when the estimated net
realizable value of collateral is sufficient to cover the
principal balance and accrued interest. Interest on purchased
loans is adjusted for the accretion of discounts and the
amortization of premiums using the interest method over the
contractual lives of the loans, adjusted for estimated
prepayments.
-67-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Loans Receivable (continued)
---------------------------
Loan origination fees and certain direct related costs are
deferred, and the net fee or cost is amortized as an
adjustment of the loan yield over the life of the related
loan.
The Allowance for credit losses has been established by
provisions charged to Operations, decreased by loans charged
off (net of recoveries). This Allowance represents an amount
which, in management's judgment, is adequate to absorb possible
losses on loans that may become uncollectible based on such
factors as the Bank's past loan loss experience, changes in the
nature and volume of the loan portfolio, current and
prospective economic conditions that may affect the borrowers'
ability to pay, overall portfolio quality, and review of
specific problem loans. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated future cash flows.
Effective January 1, 1996, the Bank implemented the provisions
of SFAS No. 122, "Accounting for Mortgage Servicing Rights an
Amendment to SFAS 65" (SFAS No. 122). This statement requires
recognition of the value of the rights to service mortgage
loans (MSR's) for others as a separate asset, however those
servicing rights are acquired, and assessment for impairment
based on fair value. Capitalized MSR's are amortized to
Non-interest income in proportion to estimated mortgage service
fee revenues. Any impairment adjustments are reflected through
a valuation allowance recognized by a charge or credit to
Non-interest income. The effect on the accompanying
Consolidated financial statements of adopting this statement
was not significant.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization.
Depreciation is computed by accelerated and straight-line
methods, generally at rates based on estimated useful lives of
the related assets. Bank premises are generally depreciated
over periods ranging from 10 to 50 years; furniture and
equipment are generally depreciated over periods ranging from 3
to 20 years. For income tax purposes, the Bank uses the
appropriate depreciation provisions of the Internal Revenue
Code.
-68-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
-------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Other Real Estate Owned (OREO)
-----------------------------
OREO includes real estate properties that are held for sale
which have been acquired through foreclosure proceedings or
deeds accepted in lieu of foreclosure. These properties are
initially recorded at the lower of the carrying value of the
related loans or the estimated fair value of the real estate
acquired, with any excess of the loan balance over the
estimated fair value of the property charged to the Allowance
for credit losses. Subsequent changes in net realizable values
are reflected by charges or credits to the Allowance for
estimated losses on OREO. Costs relating to the subsequent
development or improvement of a property are capitalized when
value is increased. All other holding costs and expenses, net
of rental income, if any, are expensed as incurred.
Goodwill
--------
The goodwill acquired in connection with the Fairfield First
Bank and Trust Company transaction (Note 18) is being
amortized on a straight-line basis over six years.
Income Taxes
------------
Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to temporary
differences, which are differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in
Operations in the period that includes the enactment date.
-69-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Income Taxes (continued)
-----------------------
Provisions for income taxes are computed based on all taxable
revenue and deductible expense items included in the
accompanying Consolidated statements of operations regardless
of the period in which such items are recognized for income tax
filing purposes. The Bank and NSSR file consolidated Federal
and combined Connecticut income tax returns.
Employee Retirement Benefits
----------------------------
Employee retirement benefits and related deferred assets and/or
liabilities are accounted for in accordance with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions" (SFAS No. 106). Post-retirement health care expenses
are based on actuarial computations of current and future
benefits.
Earnings Per Share
------------------
Income (loss) per share is based on the weighted average number
of common shares outstanding during the period. Shares held in
trust by the Bank's Employee Stock Ownership Plan (ESOP) are
not considered outstanding until such shares are committed to
be released by the Trust (Note 8). Potential dilutive effects
of exercisable stock options are reflected under applicable
financial disclosure requirements, if and when material.
Stock Options
-------------
The Bank accounts for stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
Accordingly, no compensation cost is recognized at the time
options are granted. Pursuant to SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), stock-based
compensation awards granted in 1995 and 1996 that continue to
be accounted for under APB 25 require pro forma disclosures of
net income and earnings per share as if the fair value based
method of accounting under SFAS No. 123 had been applied (Note
13).
-70-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Financial Instruments
---------------------
Financial instruments include substantially all the Bank's
financial assets and liabilities, and certain
off-balance-sheet rights and/or obligations. Such items
generally reflect cash and cash equivalents and contractual
rights or obligations to receive cash or other financial
instruments, respectively.
Derivative financial instruments are financial instruments used
to construct a transaction that is derived from and reflects
the underlying value of assets, other instruments or various
indices. The primary purpose of derivative financial
instruments is to transfer price risk associated with the
fluctuations in asset values rather than borrow or lend funds.
Such items include forward contracts, interest rate swap
contracts, options and futures, and other financial instruments
with similar characteristics, which include the Bank's
off-balance-sheet financial instruments. All derivative
financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In accordance with SFAS No. 105, "Disclosure of Information
About Financial Instruments with Off-Balance-Sheet Risk and
Concentrations of Credit Risk," SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," and SFAS No. 119,
"Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments," the Bank is required to
disclose information about financial instruments with
off-balance-sheet market or credit risk and concentrations of
credit risk associated with its financial instruments (Notes 14
and 15), fair values of its financial instruments (Note 15),
and information about its derivative financial instruments
(Note 15), respectively.
-71-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Reclassification
----------------
Certain reclassifications have been made to the accompanying
1995 and 1994 Consolidated financial statements to conform
to the 1996 presentation.
NOTE 2 - SECURITIES
- -------------------
Securities have been classified in the accompanying
Consolidated statements of financial condition according to
management's intent. Carrying amounts and approximate fair
values of Securities consisted of the following:
December 31, 1996
--------------------------------------------------------------------
Amortized Gross Unrealized Holding Fair
------------------------
Trading Cost Gains Losses Value
------- --------- ----- ------ -----
(Amounts in thousands)
Equity Securities $3,353 $46 ($107) $3,292
===== == === =====
Available-for-Sale
------------------
U.S. Government and
Agency Obligations $ 42,436 $145 ($461) $42,120
Mortgage-Backed
Securities 92,443 382 (372) 92,453
Mutual Funds 2,011 88 (12) 2,087
Equity Securities 99 50 - 149
------- --- --- -------
Total $136,989 $665 ($845) $136,809
======= === === =======
-72-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 2 - SECURITIES (continued)
- -------------------------------
December 31, 1995
---------------------------------------------------------------------
Amortized Gross Unrealized Holding Fair
------------------------
Trading Cost Gains Losses Value
------- ---- ----- ------ -----
(Amounts in thousands)
Equity securities $268 $ - ($5) $263
=== === = ===
Available-for-Sale
------------------
U.S. Government and
Agency Obligations $26,611 $128 $(55) $26,684
Mortgage-Backed
Securities 50,243 220 (162) 50,301
Equity Securities 4,572 94 (85) 4,581
------ --- --- ------
Total $81,426 $442 ($302) $81,566
====== === === ======
Held-to-Maturity
----------------
U.S. Government and
Agency Obligations $ 1,998 $ - $ - $ 1,998
Mortgage-Backed
Securities 40,038 358 (114) 40,282
------ --- --- ------
Total $42,036 $358 ($114) $42,280
====== === === ======
The scheduled contractual maturities of debt securities at
December 31, 1996 were as follows:
Amortized Fair
Cost Value
--------- -----
(Amounts in thousands)
Due After Five Years $ 29,316 $ 29,340
Through Ten Years 13,120 12,780
------- -------
Due Over Ten Years 42,436 42,120
Mortgage-Backed Securities 92,443 92,453
------- -------
Total $134,879 $134,573
======= =======
-73-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 2 - SECURITIES (continued)
- ------------------------------
Proceeds and gross realized gains and losses from sales of
securities classified as Available-for-sale and Trading
securities gains and losses consisted of the following:
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Available-For-Sale
------------------
Proceeds from Sales $37,261 $62,062 $17,294
====== ====== ======
Gross Realized Gains $1,157 $985 $ 9
Gross Realized Losses (464) (182) (73)
----- --- --
Net Realized Gains (Losses) 693 803 (64)
--- --- --
Trading
-------
Realized Gains 24 - -
Gross Change in
Unrealized Losses (56) (5) -
--- --- --
(32) (5) -
--- --- --
Net Securities Gains (Losses) $661 $798 ($64)
=== === ==
During the year ended December 31, 1996, the Bank transferred
securities Available-for-sale with a carrying basis of
approximately $2.2 million to the classification of Trading
and securities Held-to-maturity with an amortized cost of
approximately $30.5 million to the classification of
Available-for-sale at their fair value of approximately $30.6
million. The transfer of securities Held-to-maturity to the
classification of Available-for-sale was the result of
management's assessment that there was no longer a positive
intent to hold these securities to maturity based on
management's revised asset/liability management strategies.
Gross unrealized gains and losses reflected in the accompanying
Consolidated statements of operations for the year ended
December 31, 1996 as a result of the transfer to Trading were
approximately $95,000 and $41,000, respectively. Net unrealized
gains, net of tax effect, which were reflected in the
accompanying Consolidated statements of shareholders' equity as
a result of the transfer to Available-for-sale were
approximately $46,000.
-74-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 2 - SECURITIES (continued)
- ------------------------------
The Financial Accounting Standards Board issued a "Special
Report" in November 1995, "A Guide to Implementation of SFAS
115" (Note 1). This guide provided additional guidance as to
the criteria for the financial statement classifications
prescribed in SFAS No. 115. As a result of this additional
guidance, the Bank could reassess the appropriateness of the
classification of all its securities held and, accordingly, in
December 1995, reclassified securities Held-to-maturity with an
aggregate amor-tized cost approximating $37.0 million to the
classification of Available-for-sale at a fair value
approximating $36.6 million.
At December 31, 1996, the aggregate amortized cost of
securities pledged as collateral against public funds and
securities sold under agreements to repurchase (Note 7) were
approximately $3.0 million and $32.4 million, respectively,
which approximated fair values.
NOTE 3 - LOANS RECEIVABLE
- -------------------------
The components of Loans receivable, net in the accompanying
Consolidated statements of financial condition consisted of
the following:
December 31,
----------------------
1996 1995
---- ----
(Amounts in thousands)
Loans Secured by Real Estate:
----------------------------
One-to-Four Family Residential $344,314 $296,648
Commercial and Multi-Family 54,550 55,106
Construction and Land Development 1,227 1,617
------- -------
400,091 353,371
Consumer 10,302 5,619
Commercial 8,425 1,485
------- -------
Total Loans Receivable 418,818 360,475
Less:
----
Net Deferred Fees, Premiums
and Discounts (718) (509)
------- -------
418,100 359,966
Less:
----
Allowance for Credit Losses (7,334) (4,170)
------- -------
Loans Receivable, Net $410,766 $355,796
======= =======
Loans receivable carry interest rate terms as follows:
December 31,
----------------------
1996 1995
---- ----
(Amounts in thousands)
Fixed Rate $110,245 $ 91,815
Variable Rate 308,573 268,660
------- -------
Total Loans Receivable $418,818 $360,475
======= =======
-75-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 3 - LOANS RECEIVABLE (continued)
- ------------------------------------
Activity in the Allowance for credit losses consisted of the
following:
Years Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Balance - January 1 $4,170 $4,827 $2,532
Allowance on Acquired
Loans (1) 1,000 - -
----- ----- -----
Provisions (Credit)
for Credit Losses:
------------------
Regular 4,415 2,105 690
ADP (2) - (1,100) 3,100
----- ----- -----
Net Provision for
Credit Losses 4,415 1,005 3,790
----- ----- -----
Loans Charged-Off
or Settled at Loss:
-------------------
Regular (2,488) (662) (726)
ADP (2) - (1,137) (863)
----- ----- -----
Total Loans Charged-Off
or Settled at Loss (2,488) (1,799) (1,589)
Recoveries of Loans
Previously Charged-Off 237 137 94
----- ----- -----
Net Loans Charged-Off (2,251) (1,662) (1,495)
----- ----- -----
Balance - December 31 $7,334 $4,170 $4,827
===== ===== =====
(1) In connection with the Fairfield First Bank and Trust
Company transaction (Note 18), the Bank reflected
approximately $1.0 million as an allowance against the
acquired loans. This valuation allowance reflects the
estimated credit risk associated with the respective loans
and was based on the Bank's valuation analysis of the loans
acquired in the transaction.
-76-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 3 - LOANS RECEIVABLE (continued)
- ------------------------------------
(2) In order to further position the Bank to reduce non-
performing assets, the Board of Directors of the Bank
approved an Accelerated Non-Performing Assets Disposition
Program (the "Accelerated Disposition Program" or "ADP") in
December 1993. In conjunction with the Bank's stock
conversion in June 1994 (Note 12), the Bank made a special
provision for credit losses of $3.1 million and a special
provision for estimated losses on OREO of $2.6 million in
order to more rapidly dispose of certain non-performing
assets at discounts below their net realizable value. As of
December 31, 1995 and 1994, the Bank had absorbed
approximately $2.0 and $0.9 million of the special
allowance for credit losses, respectively, and $2.6 and
$1.8 million of the special allowance for OREO losses,
respectively, through packaged or individual discounted
sales of loans and OREO or other discounted settlements of
non-performing assets with borrowers. The Bank concluded
the ADP on December 31, 1995 and reflected a credit to the
Provision for credit losses in the amount of $1.1 million
for the unused portion of the special provisions for
estimated losses. Total non-performing assets sold or
otherwise settled under the ADP aggregated approximately
$3.7 million of loans and $12.4 million of OREO.
The Bank has sold the rights to receive payments of interest
and principal on certain loans while retaining the related
servicing rights (Note 1). Aggregate principal balances of
loans serviced for others that are not reflected in the
accompanying Consolidated statements of financial condition
approximated $69.7 and $82.3 million at December 31, 1996 and
1995, respectively.
During the year ended December 31, 1996, the Bank sold mortgage
loans aggregating approximately $45.0 million, all with
servicing released. As a result of such sale, a loss
approximating $144,000 is reflected in Non-interest expense in
the accompanying Consolidated statements of operations for the
year ended December 31, 1996.
There were no significant loan sales during the years ended
December 31, 1995 and 1994.
-77-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 3 - LOANS RECEIVABLE (continued)
- ------------------------------------
Loans securitized into participation certificates (Note 1)
issued by the Federal Home Loan Mortgage Corporation, with
servicing retained, aggregated approximately $4.4 million and
$0.8 million for the years ended December 31, 1995 and 1994,
respectively. There were no loan securitizations during the
year ended December 31, 1996.
At December 31, 1996, the Bank had no capitalized mortgage
servicing rights under SFAS No. 122 (Note 1).
SFAS Nos. 114/118 (Note 1) applies to loans that are
individually evaluated for impairment in accordance with the
Bank's ongoing loan review procedures. The Bank's recorded
investment in impaired loans and related Allowance for credit
losses measured under SFAS Nos. 114/118 approximated $10.4
million and $1.4 million at December 31, 1996 and $13.1 million
and $1.4 million at December 31, 1995, respectively. The
average recorded investment in impaired loans during the years
ended December 31, 1996 and 1995 was approximately $11.7
million and $12.4 million, respectively. During the years ended
December 31, 1996 and 1995, amounts recognized as interest
income on impaired loans were not significant. At December 31,
1996, the Bank had no commitments outstanding to lend
additional funds to debtors whose loans were determined to be
impaired.
Loans to directors and their associates aggregated
approximately $341,000 and $373,000 at December 31, 1996 and
1995, respectively. These related party loans are made on
substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the time for
comparable transactions with unrelated persons and do not
involve more than normal risk of collectibility.
-78-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 4 - OTHER REAL ESTATE OWNED (OREO)
- --------------------------------------
OREO, net consisted of the following:
December 31,
-------------------------
1996 1995
---- ----
(Amounts in thousands)
Real Estate Owned:
-----------------
One-to-Four Family Residential $272 $3,033
Commercial Real Estate 586 1,234
--- -----
Total Real Estate Owned 858 4,267
Allowance for Estimated Losses - -
--- -----
OREO, Net $858 $4,267
=== =====
Activity in the Allowance for estimated losses consisted of
the following:
Years Ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Balance - January 1 $ - $ 802 $ 194
--- ----- -----
Provision Charged to Expense:
----------------------------
Regular 459 460 294
ADP (Note 3) - - 2,600
--- ----- -----
Total Provision Charged to Expense 459 460 2,894
--- ----- -----
Losses Charged to the Allowance:
-------------------------------
Regular (459) (494) (454)
ADP (Note 3) - (768) (1,832)
--- ----- -----
Total Losses Charged to the Allowance (459) (1,262) (2,286)
--- ----- -----
Balance - December 31 $ - $ - $802
=== ===== ===
Losses and expenses, net related to OREO consisted of the
following:
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Provision Charged to Expense $ 459 $ 460 $2,894
----- ----- -----
Gains on Sales (73) (163) (573)
Losses on Sales 624 390 254
----- ----- -----
Losses (Gains) on Sales, Net 551 227 (319)
----- ----- -----
Holding Costs and Expenses 523 839 1,159
Rental Income (171) (111) (308)
----- ----- -----
352 728 851
----- ----- -----
Losses and Expenses of OREO, Net $1,362 $1,415 $3,426
===== ===== =====
-79-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 5 - BANK PREMISES AND EQUIPMENT
- ------------------------------------
Bank premises and equipment, net consisted of the following:
December 31,
--------------------------
1996 1995
---- ----
(Amounts in thousands)
Banking House and Land $4,086 $4,484
Furniture, Equipment and Autos 2,317 1,898
Leasehold Improvements 82 535
----- -----
Total Bank Premises and Equipment 6,485 6,917
Accumulated Depreciation
and Amortization (3,334) (3,598)
----- -----
Bank Premises and Equipment, Net $3,151 $3,319
===== =====
Depreciation and amortization expense included in Non-interest
expense in the accompanying Consolidated statements of
operations for the years ended December 31, 1996, 1995 and
1994 was approximately $521,000, $391,000 and $286,000,
respectively.
The Bank has operating leases for certain branch and
administrative offices and equipment. Rental expense of
$333,000, $220,000 and $179,000 is included in Occupancy and
equipment expense in the accompanying Consolidated statements
of operations for the years ended December 31, 1996, 1995 and
1994, respectively. The office leases contain provisions which
provide for adjustments of the rent to reflect changes in cost
of living and real estate taxes.
During the year ended December 31, 1995, the Bank entered into
an operating lease agreement for office space with one of its
directors. Amounts included in Occupancy and equipment expense
in the accompanying Consolidated statements of operations for
the years ended December 31, 1996 and 1995 relating to this
lease aggregated approximately $49,000 and $32,000,
respectively.
Future minimum payments under non-cancellable operating leases
with initial or remaining terms of one year or more at December
31, 1996 consisted of the following:
Years Ending December 31, Amount
------------------------ ------
(Amounts in thousands)
1997 $ 344
1998 322
1999 320
2000 284
2001 237
-----
Total Future Minimum
Lease Payments $1,507
======
-80-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 6 - DEPOSITS
- -----------------
Deposits consisted of the following:
December 31,
------------------------------------------------------
1996 1995
------------------------ ------------------------
Weighted Average Weighted Average
Rates (a) Amount Rates (a) Amount
--------------- ------ ---------------- ------
(Dollar amounts in thousands)
Demand - $ 22,479 - $ 13,697
NOW 1.00-2.75% 30,262 1.00-1.50% 35,097
Regular Savings 1.99 28,096 2.00 28,660
Money Market and
Super Savings 1.99-2.98 93,361 1.99-3.45 114,766
Time Accounts 5.54 244,127 5.50 206,435
Escrow 3.10 4,965 2.80 4,142
------- -------
Total Deposits $423,290 $402,797
======= =======
(a) ranges indicate tiers
Scheduled maturities of time accounts at December 31, 1996 were
as follows:
Weighted
Average Stated Rate Amount
------------------- ------
(Dollar amounts in thousands)
Year of Maturity
----------------
1997 5.39% $186,547
1998 5.77% 32,981
1999 5.89% 7,937
2000 6.82% 13,940
2001 5.95% 2,722
-------
Total Time Accounts 5.54% $244,127
=======
Time accounts of $100,000 or more approximated $21.7 million at
December 31, 1996. Of those amounts approximately $12.6
million mature in six months or less, $3.3 million mature
after six months to one year, and $5.8 million mature after
one year.
Interest expense on deposits consisted of the following:
Years Ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
NOW $ 309 $ 242 $ 251
Regular Savings 436 507 446
Money Market and Super Savings 3,411 3,902 3,349
Time Accounts 12,580 9,434 6,144
Escrow 108 84 83
------ ------ ------
Total Interest
Expense on Deposits $16,844 $14,169 $10,273
====== ====== ======
-81-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 7 - BORROWED FUNDS
- -----------------------
Advances from Federal Home Loan Bank of Boston (FHLBB)
------------------------------------------------------
Terms of the Advances from FHLBB consisted of the following:
1996 1995
----------------- ------------------
Weighted Weighted
Average Average
Maturity/ Interest Interest
Reprice Date Rate Amount Rate Amount
------------ -------- ------ -------- ------
(Dollar amounts in thousands)
Fixed Rate 1996 -% $ - 6.52% $43,317(a)
1997 5.72 26,250 6.28 7,500
1998 5.91 40,000 - -
2013 6.55 1,558(b) 6.55 1,578(b)
Adjustable
Rate 1996 - - 7.00 5,000
1997 5.61 10,000 - -
1999/1997 5.73 4,400 6.00 4,400
------ ------
Total Advances
from FHLBB $82,208 $61,795
====== ======
(a) includes amortizing balance of approximately $2.2 million;
monthly payment $223,496 and a balloon payment of $222,206
at maturity
(b) amortizing with monthly payment of $10,358 and balloon
payment of $917,000 at maturity
The Bank has a cash management line of credit with FHLBB
approximating $10.3 million. There were no advances
outstanding on the line at December 31, 1996 or 1995.
The Bank's investment in the stock of the FHLBB, mortgage loans
and mortgage-backed securities with market values as determined
in accordance with FHLBB's blanket collateral pledge agreement,
at least equal to the outstanding advances and any unused line
of credit, are pledged against outstanding advances from the
FHLBB.
-82-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 7 - BORROWED FUNDS (continued)
- -----------------------------------
Securities Sold Under Agreements
to Repurchase (Repurchase Agreements) (Note 2)
-----------------------------------------------
Information concerning Repurchase agreements consisted of the
following:
Years Ended December 31,
------------------------
1996 1995
---- ----
(Dollar amounts in thousands)
Average Balance During the Year $29,203 $6,857
Maximum Month-End
Balance During the Year $36,350 $9,310
Average Interest Rate
During the Year 5.61% 5.88%
Repurchase agreements aggregating approximately $22.4 million
and $9.0 million mature during the years ending December 31,
1997 and 1998, respectively.
Interest Expense
----------------
Interest expense on borrowed funds consisted of the following:
Years Ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Advances from FHLBB $5,158 $4,015 $2,839
Repurchase Agreements 1,638 214 -
----- ----- -----
Total Interest
Expense on Borrowed Funds $6,796 $4,229 $2,839
===== ===== =====
NOTE 8 - EMPLOYEE BENEFIT PLANS
- -------------------------------
Incentive Savings Plan
----------------------
The Bank sponsors an incentive savings plan which is available
to substantially all of its employees. The Bank may make a
discretionary 50% match of employee contributions up to 4% of
each employee's salary. The Bank's matching expense
contributions, included in Salaries and employee benefits in
the accompanying Consolidated statements of operations for the
years ended December 31, 1996 and 1995, approximated $86,000
and $60,000, respectively. No expense provision was made for
the year ended December 31, 1994.
-83-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS (continued)
- -------------------------------------------
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Bank provides certain health care, dental care and life
insurance benefits to previously retired employees. The health
care benefits are provided through an insurance company whose
premiums are based on benefits paid during the year. The Bank
is self-insuring the dental care and death benefits.
The following table sets forth the accumulated postretirement
benefit obligation (APBO) and amounts recognized in the
accompanying Consolidated statements of financial condition:
December 31,
------------
1996 1995
---- ----
(Amounts in thousands)
Accumulated Postretirement
Benefit Obligation
--------------------------
Retirees $290 $294
Unrecognized Transition Obligation (224) (246)
--- ---
Accrued Postretirement Benefit Cost
Included in Accrued Expenses and
Other Liabilities $66 $48
== ==
The APBO includes approximately $221,000 and $218,000
attributable to the Bank's postretirement health care plan
at December 31, 1996 and 1995, respectively.
The components of net periodic postretirement benefit cost
reflected in Salaries and employee benefits in the accompanying
Consolidated statements of operations consisted of the
following:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Service Cost - Benefits
Attributable to Service
During the Period $ - $ - $ -
Interest Cost on APBO 21 22 22
Amortization of Transition
Obligation 22 22 22
-- -- --
Net Periodic Postretirement
Benefit Cost $43 $44 $44
== == ==
-84-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS (continued)
- -------------------------------------------
Postretirement Benefits Other Than Pensions (continued)
-------------------------------------------------------
For measurement purposes, a 4.0% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
each of the years ended December 31, 1996 and 1995. The rate
was assumed to be consistent over the period of coverage. The
health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by 1% in each year would increase
the accumulated postretirement benefit obligation as of
December 31, 1996 by approximately $12,000 and the aggregate of
the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by
approximately $1,000.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation in 1996 and
1995 was 7.5%.
Employee Stock Ownership Plan (ESOP)
------------------------------------
The Bank established a leveraged ESOP and a related trust in
connection with its stock conversion in 1994 (Note 12) as a
long-term non-contributory benefit for substantially all of its
employees. In accordance with the terms of its Plan of
Conversion, the Bank sold to the ESOP 5% of the shares issued
in its conversion, or 121,337 shares at $10 per share, the
stated conversion offering price. The shares were purchased by
the ESOP with the proceeds of a five-year LIBOR-based interest-
bearing loan from a third party lender guaranteed by the Bank
and requiring monthly payments of principal and interest. The
Bank has pledged an interest-bearing deposit as security for
its guarantee of the loan. At December 31, 1996, the amount on
deposit at the third party lender was approximately $605,000.
The loan and guarantee are reflected in the accompanying
Consolidated statements of financial condition as a long-term
debt and a reduction of Shareholders' equity. At December 31,
1996 and 1995 the interest rate on the loan was 6.86%. Interest
expense on the loan included in Salaries and employee benefits
expense in the accompanying Consolidated statements of
operations approximated $45,000, $60,000 and $37,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
-85-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS (continued)
- -------------------------------------------
Employee Stock Ownership Plan (ESOP) (continued)
------------------------------------------------
The shares are held by the ESOP in trust and are committed to
be issued to employees' accounts in the ESOP ratably over a
five-year period in settlement of the Bank's agreed-upon annual
ESOP benefit cost. The Bank's ESOP benefit cost, included in
Salaries and employee benefits in the accompanying Consolidated
statements of operations, aggregated approximately $560,000,
$434,000 and $283,000 for the years ended December 31, 1996,
1995 and 1994, respectively. The difference between the annual
ESOP benefit cost and the cost basis of the shares to be
committed is charged or credited to Additional paid-in capital.
The shares subject to the ESOP consisted of the following:
December 31,
----------------------
1996 1995 1994
---- ---- ----
Shares - Beginning 70,514 97,070 121,337
Shares Committed to be Released (25,697) (26,556) (24,267)
------ ------ -------
Shares - Ending 44,817 70,514 97,070
====== ====== ======
Shares Allocated to ESOP 26,556 24,267 -
====== ====== ======
NOTE 9 - INCOME TAXES
- ---------------------
The components of the federal and state income tax (benefit)
provision consisted of the following:
Years Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Current Income Tax Provision:
-----------------------------
Federal $ 150 $ - $ -
State 25 10 50
----- ----- --
Total Current Income
Tax Provision 175 10 50
----- ----- --
Deferred Income Tax Benefit:
----------------------------
Federal (960) (984) -
State (340) (216) -
----- ----- --
Total Deferred Income
Tax Benefit (1,300) (1,200) -
----- ----- --
Income Tax (Benefit)
Provision, Net ($1,125) ($1,190) $50
===== ===== ==
-86-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
The significant components of the deferred income tax (benefit)
expense consisted of the following:
Years Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Allowances for Losses $ (869) $ 820 $(1,208)
Basis Difference - Securities (389) (265) 345
Deferred Compensation
and Benefits (106) (18) -
Deferred Loan Fees 264 389 (26)
Depreciation 75 - -
Net Operating Losses 3,031 1,236 (736)
Other, Net (42) 26 (6)
----- ----- -----
1,964 2,188 (1,631)
Valuation Allowance (3,264) (3,388) 1,631
----- ----- -----
Total ($1,300) ($1,200) $ -
===== ===== =====
The Bank's effective income tax rate differed from the federal
statutory tax rate of 34% as follows:
Years Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
(Dollar amounts in thousands)
Tax at Statutory
Federal Rate $1,556 34.0 $1,220 34.0 ($1,169) (34.0)
State Tax* 167 3.6 276 7.7 (419) (12.2)
Capital Loss
Carryover Benefit (95) (2.1) (200) (5.6) - -
Effect of ESOP 108 2.4 65 1.8 - -
Current Loss
Carryover Benefit (1,930) (42.2) (1,322) (36.9) 1,631 47.4
Future Loss Carryover
Benefit (1,037) (22.7) (1,200) (33.4) - -
Federal Minimum Tax 150 3.3 - - - -
Other (44) (0.9) (29) (0.8) 7 0.2
----- ---- ----- ---- ----- ----
Total and
Effective Rate ($1,125) 24.6 ($1,190) (33.2) $50 1.4
===== ==== ===== ==== == ===
* Net of Federal tax benefit
-87-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
The tax effects of significant components of temporary
differences and net unrealized gains (losses) on securities
Available-for-sale that give rise to deferred income tax assets
and deferred income tax liabilities consisted of the following:
December 31,
-----------
1996 1995
---- ----
(Amounts in thousands)
Deferred Income Tax Assets:
--------------------------
Allowance for Credit Losses $1,798 $ 929
Goodwill 19 -
Employee Benefits 149 43
Trading Loss 25 2
Future Loss Carryover Benefit 1,037 4,068
----- -----
Gross Deferred Tax Asset 3,028 5,042
Less: Valuation Allowance - (3,264)
----- -----
Deferred Tax Asset, Net Of Allowance 3,028 1,778
----- -----
Deferred Income Tax Liabilities:
-------------------------------
Depreciation 75 -
Basis Difference on Securities 68 457
Deferred Loan Fees 385 121
----- -----
Gross Deferred Tax Liability 528 578
----- -----
Net Deferred Income Tax Asset -
Operations 2,500 1,200
Tax Benefit on Unrealized
Loss on Securities Available-for-Sale 74 -
----- -----
Deferred Income Tax Asset, Net $2,574 $1,200
===== =====
No income tax effect has been reflected on the net unrealized
gains or losses on securities Available-for-sale as of December
31, 1995 and 1994 due to the Bank's net operating loss
carryforward position and the substantial portion of net
deferred income tax assets against which a valuation allowance
has been reflected at both of those dates.
During the first calendar quarter of the year ended December
31, 1995, management reviewed its current projections for
future profitability and estimated that a portion of the Bank's
net deferred income tax asset as of December 31, 1994 could be
recognized in the amount of $1.2 million. The amount was
recognized through a partial adjustment of the valuation
allowance for the portion of the net deferred income tax asset
attributable to a net operating loss carryforward benefit which
management was of the opinion was realizable during the year
ended December 31, 1995. At December 31, 1995, management again
reviewed its current projections of future profitability and
determined that $1.2 million of net deferred income tax asset
was more likely than not realizable in the future.
-88-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
During the fourth quarter of 1996, management reviewed the
Bank's estimated profitability for the year ended December 31,
1996 and, on a projected basis, for the year ending December
31, 1997. Based on this review, management determined that it
was more likely than not that the Bank's net deferred tax
assets, including available future net operating loss benefits
of approximately $1.1 million, as of December 31, 1996 were
realizable, and therefore, reversed the existing valuation
allowance against net deferred tax assets. Realization of the
Bank's net deferred tax assets is dependent, however, on
various factors and is not assured.
The Bank has state and Federal tax operating loss carryforwards
aggregating approximately $3.0 million and $2.4 million,
respectively, at December 31, 1996. The state carryforwards
ultimately expire in the year ending December 31, 1999, and the
Federal carryforward expires in the year ending December 31,
2009.
During the years ended December 31, 1996 and 1995, the Bank was
able to absorb approximately $278,000 and $494,000,
respectively, of available capital loss carryforwards, the
benefits of which approximated $95,000 and $200,000,
respectively, which benefits had not been previously reflected
in deferred income tax assets.
Deductions from taxable income in prior years have been claimed
as loan loss provisions for qualifying (real estate) loans in
accordance with the Internal Revenue Code. Retained earnings at
December 31, 1996 includes a tax reserve for qualifying loans
aggregating approximately $4.6 million. If the reserve is used
for any purpose other than to absorb losses on loans, an income
tax liability could be incurred. Management does not anticipate
that this reserve will be made available for any purposes other
than to absorb losses on loans. In accordance with generally
accepted accounting principles, no deferred income taxes have
been provided for this temporary difference.
-89-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 9 - INCOME TAXES (continued)
- ----------------------------------
In August 1996, Congress amended the Internal Revenue Code retroactively
to January 1, 1996 relative to existing tax bad debt reserves of savings
banks as well as to allowable methods of taking future tax bad debt
deductions. The amendment requires savings banks with "excess tax bad
debt reserves", as defined, to recapture such excess into taxable income
ratably over the next six to eight years beginning in 1996. In addition,
future tax bad debt deductions will be based solely on loan charge-offs.
Based on the Bank's tax return as filed for the year ended December 31,
1995, the Bank has an excess tax bad debt reserve approximating $1.9
million which is subject to recapture in accordance with the change in
the tax law.
NOTE 10 - OTHER NON-INTEREST EXPENSE
- ------------------------------------
Other non-interest expense consisted of the following:
Years Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Advertising and Marketing $ 687 $ 700 $ 400
Legal and Professional 779 354 271
Regulatory Assessments 9 438 1,054
Office Supplies and Expense 578 481 299
Insurance 228 237 310
All Other, None Greater
than 1% of Income 1,783 1,008 890
----- ----- -----
Total Other
Non-Interest Expense $4,064 $3,218 $3,224
===== ===== =====
Payments to a related party for advertising services for the years ended
December 31, 1996, 1995 and 1994 approximated $353,000, $316,000 and
$284,000, respectively, significant portions of which were
reimbursements for payments by the related party to media companies.
-90-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Off-Balance-Sheet Risk
----------------------
The accompanying Consolidated financial statements do not reflect
various commitments and contingent liabilities which arise in the normal
course of business and which involve elements of credit risk, interest-
rate risk and liquidity risk. These commitments and contingent
liabilities are described in Note 15.
Litigation
----------
The Bank and NSSR are parties to certain litigation and claims arising
from the normal course of business. After consultation with legal
counsel, management is of the opinion that the liabilities, if any,
arising from such litigation and claims will not be material to the
consolidated financial condition.
NOTE 12 - SHAREHOLDERS' EQUITY
- ------------------------------
Stock Conversion
----------------
On February 23, 1994, the Board of Directors unanimously adopted and
approved the Bank's plan of Conversion (Conversion) to convert from a
Connecticut-chartered mutual to a Connecticut-chartered capital stock
savings bank through amendment of its mutual charter and the sale of
common stock to the Bank's depositors and others.
As part of the Conversion, the Board of Directors adopted a tax-
qualified employee stock ownership plan (ESOP) (Note 8). In addition,
the Board has adopted stock option plans for the benefit of the
employees and directors of the Bank, which became effective following
approval by the Bank's shareholders at the Annual Meeting in April 1995.
The options to be issued under the plans are granted on a post-
Conversion basis and began to become exercisable as of the first annual
anniversary date of the Conversion (Note 13).
At the time of Conversion, the Bank established a liquidation account in
an amount equal to its Retained earnings as of that date, which
approximated $19.7 million. The liquidation account will be maintained
for a period of ten years from the date of the Conversion for the
benefit of eligible account holders who continue to maintain their
accounts in the Bank
-91-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (continued)
- -----------------------------------------
Stock Conversion (continued)
----------------------------
after Conversion. In the event of a complete liquidation (and only in
such an unlikely event), each eligible account holder would be entitled
to receive a liquidation distribution equal to the current amount in
their subaccount balance.
The Bank may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
In the event transactions resulting from the Conversion or from future
events unrelated to the Conversion occur, causing an ownership change,
as defined by the Internal Revenue Code, the Bank's ability to utilize
its net operating losses may be limited (Note 9).
Advisory Board Compensation
---------------------------
During the year ended December 31, 1996, the Bank compensated its
advisory board members with shares of the Bank's common stock in lieu of
cash. The Bank reflected compensation expense in Other non-interest
expense in the accompanying Consolidated statements of operations for
the year ended December 31, 1996 in the amount of approximately $5,000,
which represented the fair value of the shares on the date of issuance.
Dividends
---------
During the year ended December 31, 1996, the Bank declared and paid cash
dividends on common stock aggregating $0.15 per share, which totalled
approximately $366,000. In January 1997 the Bank declared a cash
dividend of $0.05 per share to shareholders of record on February 10,
1997 and payable on February 28, 1997.
Preferred Stock
---------------
In May 1996, the Bank declared and paid a dividend distribution of one
"Right" for each outstanding share of Bank common stock. Each Right
entitles the holder to purchase from the Bank one one-hundredths of a
share of preferred stock, at a price of $40.000 per one one-hundredths
of a preferred share, subject to adjustment. The Rights are not
exercisable except as a result of particular events, including certain
acquisitions of 10% or more of the Bank's common stock and certain
exchange offers. If not sooner exercised, the Rights will expire in May
2006.
-92-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (continued)
- -----------------------------------------
Preferred Stock (continued)
--------------------------
Preferred shares purchasable upon exercise of the Rights will not be
redeemable. Each preferred share will be entitled to a minimum
preferential quarterly dividend payment of $1 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per
common share. In the event of liquidation, the holders of the preferred
shares will be entitled to a minimum preferential liquidation payment of
$100 per share but will be entitled to an aggregate payment of 100 times
the payment made per common share. All liquidation payments are subject
to the prior rights of Bank account holders to the Bank's "Liquidation
Account". Each preferred share will have 100 votes, voting together with
the common shares. In the event of any merger, consolidation or other
transaction in which common shares are exchanged, each preferred share
will be entitled to receive 100 times the amount received per common
share.
In the event that the Bank is acquired in a merger or other business
combination, proper provision shall be made so that each holder of a
Right shall thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, that number of
shares of common stock of the surviving company which at the time of
such transaction would have a market value of four times the exercise
price of the Rights.
At any time prior to the close of business on the date that Rights
holders become entitled to purchase preferred shares of the Bank, the
Bank may redeem the Rights in whole, but not in part, at a price of
$.001 per Right as adjusted.
NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS
- -----------------------------------------------------
Stock Option Plan
-----------------
During the year ended December 31, 1995, the Bank's Share-holders
approved stock option plans (Plans) for the benefit of the Bank's
employees and directors. Under the Plans, 169,872 and 72,802 shares of
the Bank's common stock were reserved for the Employee and Director
Plans, respectively.
In April 1996, the Shareholders approved increasing the shares of common
stock reserved by 150,000 shares.
-93-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS (continued)
- -----------------------------------------------------------------
Stock Option Plan (continued)
----------------------------
At December 31, 1996, 377,515, shares of common stock remained reserved
under the Bank's plans. Included in this amount are 111,477 shares of
common stock reserved for the Director Plans and 266,038 shares of
common stock reserved for the Employee Plans.
The Bank accounts for its stock options under APB 25 (Note 1).
Accordingly, at the time options are granted no accounting entry is
made; however, when options are exercised, proceeds are credited to
Common stock for the par value of the options purchased and the excess
of the option price over the par value of shares issued is credited to
Additional paid-in capital. The exercise price of options granted
equalled the fair market value of the shares on the dates granted.
The following table summarizes the shares subject to options under the
Plans for the years ended December 31, 1996 and 1995:
Directors Employees Total
--------- --------- -----
Outstanding at January 1, 1995 - - -
Granted in 1995 54,602 169,804 224,406
Exercised in 1995 (8,494) - (8,494)
------ ------- -------
Outstanding at December 31, 1995 46,108 169,804 215,912
Granted in 1996 12,000 30,000 42,000
Exercised in 1996 (2,831) (3,834) (6,665)
Cancelled in 1996 - (5,666) (5,666)
------ ------- -------
Outstanding at December 31, 1996 55,277(a) 190,304(b) 245,581(c)
====== ======= =======
Exercisable at December 31, 1996:
Options 39,908 102,219 142,127
====== ======= =======
Average Price $16.17 $15.25 $15.50
===== ===== =====
(a) Exercisable at prices ranging from $15 to $18.88.
(b) Exercisable at prices ranging from $15 to $21.75.
(c) Includes options that are exercisable based on three-year
vesting schedules from the dates of grant. These options expire
after 10 years.
-94-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS (continued)
- ----------------------------------------------------------------
Executive Incentive Plan
------------------------
During the year ended December 31, 1995, the Bank's Share-holders
approved an incentive plan for certain of the Bank's executives. Under
the plan, the Bank has reserved 100,000 shares of the Bank's common
stock. The Plan has a 10-year term during which awards of common stock
can be made based on specific performance goals over a three-year
period. The first measurement period covers the period January 1, 1995
to December 31, 1997. The Bank reflected an expense provision of
approximately $200,000 in Salaries and employee benefits in the
accompanying Consolidated statements of operations for the year ended
December 31, 1996 relative to this plan; no compensation expense was
reflected for the year ended December 31, 1995.
In accordance with SFAS No. 123 (Note 1), the Bank has elected to
continue accounting for its stock options under APB 25. Had compensation
cost for the Bank's stock option plans been deter-mined based on the
fair value at the grant dates for awards granted during the years ended
December 31, 1996 and 1995, which is consistent with the method under
SFAS No. 123, the Bank's net income and per share data would have been
reduced to the pro forma amounts as follows:
Years Ended December 31,
-----------------------
1996 1995
---- ----
(Dollar amounts in thousands,
except per share data)
Net Income
----------
As Reported $5,702 $4,778
===== =====
Pro Forma $5,456 $4,650
===== =====
Income Per Share
----------------
As Reported $2.39 $2.04
==== ====
Pro Forma $2.29 $1.98
==== ====
-95-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 14 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
- --------------------------------------------------------
The concentration of the Bank's loan portfolio by type of loan at
December 31, 1996 and 1995 is set forth in Note 3. A substantial portion
of these loans are collateralized by real estate located in markets in
and around Norwalk, Connecticut. The Bank also has loan commitments,
including unused lines of credit and amounts not yet advanced on
construction loans, secured by real estate substantially located in
these same markets. In addition, at December 31, 1996 a substantial
portion of the Bank's OREO was located in those same markets.
Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of its OREO are particularly susceptible to changes in
real estate market conditions in and around Norwalk, Connecticut.
In the normal course of business the Bank may have deposits in
correspondent accounts substantially in excess of depository insurance
limits. To reduce the credit risk associated with such activities the
Bank periodically reviews the financial condition of such correspondent
banks.
NOTE 15 - FINANCIAL INSTRUMENTS
- -------------------------------
Financial Instruments with Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and basically includes commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized in the accompanying Consolidated statements
of financial condition. The contract or notional amounts of these
instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by
the counterparty for commitments to extend credit is represented by the
contractual notional amount of those instruments.
-96-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS (continued)
- ------------------------------------------
Commitments to Extend Credit
----------------------------
Loan commitments are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. These
financial instruments are recorded in the financial statements when they
are funded or when related fees are incurred or received. Loan
commitments are subject to the same credit policies as loans and
generally have fixed expiration dates or other termination clauses.
Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained is based on management's credit
evaluation of the counterparty. Collateral held is primarily residential
and commercial real property. Interest rates are generally variable with
the exception of the unadvanced portions of construction loans, which
have fixed rates of interest and generally mature within one year.
The contractual notional amounts of the Bank's credit commitments
consisted of the following:
December 31,
--------------------
1996 1995
---- ----
(Amounts in thousands)
Loan Commitments:
----------------
Commitments to Extend Credit:
----------------------------
One-to-Four Family Residences $4,054 $5,869
Commercial Loans 2,581 100
Letters of Credit 603 -
Unadvanced Portion of Construction Loans 1,823 4,076
Unused Lines of Credit:
----------------------
Home Equity 7,771 6,036
Consumer Loans 833 830
Consumer Credit Cards 1,080 -
Commercial Loans 1,689 784
-97-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS (continued)
- ------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
Estimating the fair values of the Bank's financial instruments includes
the use of information that is highly subjective. The subjective factors
include, among other things, the estimated timing and amount of cash
flows, risk characteristics, and credit quality and interest rates, all
of which are subject to change. As a result, fair values estimated could
be significantly different from amounts actually realized or paid at
settlement or maturity of the financial instruments. The following
methods and assumptions were used to estimate the fair values of each
class of financial instruments:
Cash and equivalent investments. For those short-term instruments, the
-------------------------------
carrying amount is a reasonable estimate of fair value.
Securities. Fair values are based on quoted market prices.
----------
Loans receivable. Fair value for certain homogeneous categories of loans
----------------
is estimated using quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics. Fair value for
other types of loans is estimated by discounting future cash flows using
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Accrued income receivable. The carrying amount approximates fair value.
-------------------------
Investment in FHLBB stock. The carrying amount approximates fair value.
-------------------------
-98-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS (continued)
- ------------------------------------------
Fair Value of Financial Instruments (continued)
----------------------------------------------
Deposit liabilities. Carrying amounts for checking, NOW accounts,
-------------------
regular and club savings, money market and mortgagors' escrow accounts
are reasonable estimates of fair value, since they generally represent
amounts payable on demand. Fair value of time deposits is estimated to
be the present value of the deposits using rates currently offered for
deposits of similar remaining maturities.
Advances from FHLBB. The fair values of advances and borrowings from the
-------------------
FHLBB are estimated using rates which approximate the rates currently
being offered by the FHLBB for similar remaining maturities.
Securities sold under agreements to repurchase and Other borrowings. The
-------------------------------------------------------------------
fair value of these borrowings is estimated using rates which
approximate rates currently being offered for similar borrowings and
remaining maturities.
Off-balance-sheet financial instruments. The fair values of commitments
---------------------------------------
to extend credit and unadvanced lines of credit are estimated based on
interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the commitments and the
creditworthiness of the potential borrowers.
-99-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS (continued)
- ------------------------------------------
Fair Value of Financial Instruments (continued)
----------------------------------------------
the Bank's financial instruments consisted of the following:
December 31,
-------------------------------------------------------------
1 9 9 6 1 9 9 5
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(Amounts in thousands)
Financial Assets
----------------
Cash and Due
from Banks $ 14,978 $ 14,978 $ 10,222 $ 10,222
Federal Funds
Sold and Interest-
Bearing Deposits
in Other Banks 3,873 3,873 8,406 8,406
Securities 140,101 140,101 123,865 124,109
Total Loans
Receivable 418,818 411,200 360,475 354,000
Accrued Interest
Receivable 4,034 4,034 3,012 3,012
Investment in
FHLBB Stock 6,184 6,184 3,621 3,621
Financial Liabilities
---------------------
Deposits 423,292 424,740 402,797 404,300
Advances from FHLBB 82,208 81,958 61,795 62,100
Securities Sold Under
Agreements to
Repurchase 31,350 31,369 4,600 4,630
Other Borrowings 485 485 728 728
Off-Balance-Sheet
Financial Instruments
----------------------
Commitments to
Extend Credit * (a) * (a)
(a) Amounts were not significant
-100-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 16 - REGULATORY MATTERS AND CAPITAL ADEQUACY
- -------------------------------------------------
The Bank is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by those regulatory
authorities (Note 1).
On May 13, 1992, the Board of Directors of the Bank and the Banking
Commissioner of the State of Connecticut (Commissioner) entered into a
Stipulation and Agreement (Stipulation) in order to address certain
capital, asset quality and other concerns of the Commissioner. Although
not a party to the Stipulation, the FDIC concurred that the corrective
measures agreed to in the Stipulation were necessary to return the Bank
to a safe and sound condition. In June 1994 the Bank obtained additional
capital from its stock conversion to satisfy the capital requirements of
the Stipulation (Note 12). On October 25, 1994 the Stipulation was
terminated by the Commissioner with the concurrence of the FDIC.
In December 1991 the Federal Deposit Insurance Corporation Improvement
Act (FDICIA) established guidelines to determine capital adequacy for
insured banks. These guidelines evaluate the capital adequacy of banks
by the measure of their leverage capital ratio, which is the ratio of
capital (defined essentially as shareholders' equity minus intangibles)
to average assets. Such ratios are measured at the end of each calendar
quarter. FDICIA establishes categories based on a bank's leverage
capital ratio as of certain measurement dates; these categories affect a
bank's deposit insurance cost, place restrictions on certain types of
operating activities, and require certain types of regulatory action in
cases of failure to achieve certain minimum ratios.
The Bank's capital ratios consisted of the following at
December 31, 1996:
Risk-Based
Leverage ----------
Capital Tier 1 Total
-------- ------ -----
Minimum Guidelines 4.0%-5.0% 4.0% 8.0%
Norwalk Savings Society 7.9% 15.7% 17.0%
-101-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 17 - BRANCH SALE
- ---------------------
In October 1996, the Bank sold two of its branch office operations,
comprised of deposits aggregating approximately $48.0 million, loans
aggregating approximately $210,000, and premises and equipment amounting
to approximately $307,000. As a result of the sale, the accompanying
Consolidated statements of operations for the year ended December 31,
1996 includes a total gain, reflected in Other non-interest income, of
approximately $3.64 million, which includes a deposit premium gain of
approximately $3.6 million and a gain of approximately $33,000 from the
sale of assets.
NOTE 18 - ACQUISITION OF ASSETS AND RELATED LIABILITY OF FAIRFIELD FIRST
BANK & TRUST COMPANY (FFBT)
- ------------------------------------------------------------------------
In July 1996, the Bank assumed essentially all liabilities, primarily
$47.6 million in deposits, and acquired certain assets of FFBT, in an
FDIC-assisted transaction. Certain of the commercial real estate loans
acquired from the FDIC were simultaneously sold to another bank at an
amount in excess of the Bank's bid price to the FDIC.
The Bank has allocated the net purchase price to the assets acquired and
the liabilities assumed based upon their fair values. The net acquired
loans were reflected at a fair value of approximately $13.7 million,
which was net of a valuation allowance of $1.0 million (Note 3), and the
excess of the purchase price over the net assets acquired, which
approximated $1.8 million and which management deems to represent a core
deposit intangible, has been reflected as Goodwill in the accompanying
Consolidated statements of financial condition. Approximately $76,000 of
goodwill amortization has been included in Other non-interest expense in
the accompanying Consolidated statements of operations for the year
ended December 31, 1996.
-102-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 19 - RECENT ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
(SFAS No. 125) which was amended by SFAS No. 127 in December 1996 to
defer the effective date of certain provisions of SFAS No. 125 for one
year. SFAS No. 125 provides for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and
bases such distinguishment on control. It also amends SFAS No. 115 to
clarify that a debt security may not be classified as held-to-maturity
if it can contractually be prepaid in a way that an institution would
not recover substantially all of its recorded investment. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except
as amended by SFAS No. 127, and is to be applied prospectively.
Management has not yet determined the effect, if any, which application
of SFAS No. 125 will have on the Bank's financial condition.
NOTE 20 - PROPOSED HOLDING COMPANY
- ----------------------------------
In January 1997, the Board of Directors authorized management to pursue
the formation of a holding company and to present such proposal to the
Shareholders at the Annual Meeting in 1997.
-103-
NORWALK SAVINGS SOCIETY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
------------------------------------------
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------
The quarterly results of operations consisted of the following:
Quarters Ended
------------------------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- -------
(Dollar amounts in thousands)
Interest Income $10,920 $11,298 $9,962 $9,075
Interest Expense 6,376 6,638 5,650 4,976
----------------------------------------------------------
Net Interest Income 4,544 4,660 4,312 4,099
Provision for Credit Losses 3,205 405 405 400
Non-Interest Income 4,574 499 1,149 621
Non-Interest Expense 5,003 3,443 3,624 3,396
Income Taxes (1,147) - 17 5
---------------------------------------------------------
Net Income $2,057 $1,311 $1,415 $919
=========================================================
Income Per Share $0.85 $0.55 $0.60 $0.39
Average Shares 2,394,383 2,388,213 2,375,828 2,368,040
Quarters Ended
12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- -------
(Dollar amounts in thousands)
Interest Income $8,670 $8,501 $8,106 $7,738
Interest Expense 4,970 4,829 4,423 4,176
---------------------------------------------------------
Net Interest Income 3,700 3,672 3,683 3,562
Provision for Credit Losses 255 350 250 150
Non-Interest Income 1,009 676 600 447
Non-Interest Expense 3,548 3,028 3,060 3,120
Income Taxes 10 - (15) (1,185)
---------------------------------------------------------
Net Income $896 $970 $988 $1,924
=======================================================
Income Per Share $0.38 $0.41 $0.42 $0.83
Average Shares 2,361,401 2,350,501 2,332,703 2,332,703
-104-
PART III
- --------
ITEM 9.
- -------
Directors and Principal Officers of the Registrant
Director information is incorporated by reference from page of the
definitive Proxy Statement. The principal officers of the Bank (other than
Messrs. Judson and Howell, who are also Directors), all of whom are subject to
election annually by the Board of Directors, are:
Jeremiah T. Dorney has been Senior Vice President of the Bank since
April 1985, and was elected Corporate Secretary in June 1988. His
responsibilities are that of Senior Operations Officer and Director of Human
Resources. Mr. Dorney's career spans 35 years of diversified banking education
and experience.
Marcus I. Braverman, C.P.A. has been Senior Vice President and Chief
Financial Officer of the Bank since January 1994. He was appointed Treasurer in
1995. From 1988 through June 1993, he was Vice President in the Finance Division
of People's Westchester Savings Bank and Senior Vice President in June 1993.
ITEM 10.
- --------
Management Compensation and Transactions
Incorporated by reference to the definitive Proxy Statement under the
caption "PROPOSAL TWO - ELECTION OF DIRECTORS --Compensation of Directors;
Executive Compensation; Executive Compensation Pursuant to Plans; Compensation
Committee Report on Executive Compensation; and Performance Graph."
-105-
PART IV.
- --------
ITEM 11.
- --------
Exhibits, Financial Statement Schedules and Reports on Form F-3
(a) (1) Financial Statements - see Item 8.
(2) Financial Statement Schedules - Financial Statement Schedules are
omitted due to inapplicability or because required information is
shown in the Consolidated Financial Statements or the Notes thereto.
See Item 8.
(b) Reports on Form F-3 filed during the last quarter of the period covered by
this report: None
(c) Exhibits
(3) Material Contracts*
(a) Change of Control Agreement dated as of February 1, 1995 with
Robert T. Judson
(b) Howell
(c) Dorney
(d) Braverman
(e) Amendment No. 2 dated as of March 1, 1995 of Employment Agreement
with Braverman
(f) Deferred Compensation Plan for Management Employees
(g) Deferred Compensation Plan for Non-Employee Directors
(h) 1995 Executive Incentive Plan
(i) Amended 1994 Director Stock Option Plan
(j) Amended 1994 Employee Stock Option Plan
(k) Amendment No. 2 dated November 8, 1995 of Employment Agreements
with Judson, Howell, and Dorney
(l) Amendment No. 3 dated November 8, 1995 of Employment Agreement
with Braverman
* Previously Filed
(9) List of Subsidiaries
Subsidiary State of Incorporation
---------- ----------------------
NSS Realty Connecticut
-106-
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORWALK SAVINGS SOCIETY
Bank
By: /s/ Donald St. John Date: March --, 1997
------------------- ---------------------
Donald St. John
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Brian A. Fitzgerald Date: March --, 1997
----------------------- ---------------------
Brian A. Fitzgerald
Director
/s/ Charles F. Howell Date: March --, 1997
--------------------- ---------------------
Charles F. Howell
Director
/s/ Herbert L. Jay Date: March --, 1997
------------------ ---------------------
Herbert L. Jay
Director
/s/ Dr. Edward J. Kelley Date: March --, 1997
------------------------ ---------------------
Dr. Edward J. Kelley
Director
/s/ John L. Segall Date: March --, 1997
------------------ ---------------------
John L. Segall
Director
/s/ Alan R. Staack Date: March --, 1997
------------------ ---------------------
Alan R. Staack
Director
-107-
/s/ Robert T. Judson Date: March --, 1997
-------------------- ---------------------
Robert T. Judson
Director,
President and
Chief Executive Officer
/s/ Marcus I. Braverman Date: March --, 1997
----------------------- ---------------------
Marcus I. Braverman
Senior Vice President,
Chief Financial Officer
and Treasurer
-108-
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORWALK SAVINGS SOCIETY
Bank
By: Date: March --, 1997
----------------------- ---------------------
Donald St. John
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: Date: March --, 1997
----------------------- ---------------------
Brian A. Fitzgerald
Director
Date: March --, 1997
----------------------- ---------------------
Charles F. Howell
Director
Date: March --, 1997
----------------------- ---------------------
Herbert L. Jay
Director
Date: March --, 1997
----------------------- ---------------------
Dr. Edward J. Kelley
Director
Date: March --, 1997
----------------------- ---------------------
John L. Segall
Director
Date: March --, 1997
----------------------- ---------------------
Alan R. Staack
Director
-109-
Date: March --, 1997
----------------------- ---------------------
Robert T. Judson
Director,
President and
Chief Executive Officer
Date: March --, 1997
----------------------- ---------------------
Marcus I. Braverman
Senior Vice President,
Chief Financial Officer
and Treasurer
-110-