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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
FORM 10-KSB
(MARK ONE)
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
[_] THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-25465
CORNERSTONE BANCORP, INC.
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(Name of small business issuer in its charter)
<TABLE>
<S> <C>
CONNECTICUT 06-1170335
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(State or other jurisdiction of incorporation or organization) ( I.R.S. Employer Identification No.)
550 SUMMER ST., STAMFORD, CONNECTICUT 06901
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(Address of principal office) ( Zip Code)
</TABLE>
Issuer's telephone number: (203) 356-0111
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Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
Title of Each Class Name of each exchange on which registered
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Common Stock, par value $0.01 per share American Stock Exchange
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No_____
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. (X)
The issuer's revenues for the fiscal year ended December 31, 1998 were
$11,266,000.
The aggregate market value of the issuer's Common Stock held by non-affiliates
of the issuer as of March 2, 1999, was $15,808,310 based on the closing price of
$17.875 per share.
The number of shares outstanding of the issuer's common stock as of March 2,
1999 was 1,122,837.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held on May 19, 1999 -
Part III.
Transitional Small Business Disclosure Format (check one): Yes____ No X
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TABLE OF CONTENTS
<TABLE>
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PART I PAGE
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Item 1 - Description of Business........................................ 1
Item 2 - Description of Property........................................ 11
Item 3 - Legal Proceedings.............................................. 12
Item 4 - Submission of Matters to a Vote of Security Holders............ 12
Item 4A - Executive Officers of the Issuer............................... 13
PART II
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Item 5 - Market for Common Equity and
Related Stockholder Matters.................................... 13
Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14
Item 7 - Financial Statements........................................... 26
Item 8 - Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure......................... 27
PART III
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Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.............. 27
Item 10 - Executive Compensation......................................... 27
Item 11 - Security Ownership of Certain Beneficial Owners and Management 27
Item 12 - Certain Relationships and Related Transactions................. 27
</TABLE>
(i)
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<TABLE>
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PART IV
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Item 13 - Exhibits and Reports on Form 8-K.................................. 27
SIGNATURES.................................................................... 30
</TABLE>
(ii)
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ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Cornerstone Bancorp, Inc. (the "Bancorp") is a Connecticut corporation,
incorporated in 1998 to serve as a bank holding company to provide executive,
financial and administrative functions for its subsidiaries. The Bancorp is the
successor registrant to Cornerstone Bank (the "Bank"). The Bancorp completed
the acquisition of the Bank on March 1, 1999 pursuant to a reorganization
whereby the Bancorp acquired all of the issued and outstanding shares of common
stock of the Bank in a one-for-one share exchange. As a result of this
reorganization, the Bank is now a wholly-owned subsidiary of the Bancorp. The
holding company formation was accounted for in a manner similar to a pooling of
interests and, accordingly, it had no effect on the Bank's financial statements.
The Bank will continue its operations at the same locations and with the same
management it had prior to the reorganization. References to the "Bancorp" in
this report include references to Cornerstone Bancorp, Inc. and Cornerstone
Bank, unless the context indicates otherwise.
The Bank is a Connecticut corporation incorporated in 1985. The Bank's
business consists primarily of attracting deposits from the general public and
local businesses and investing or loaning these deposits. The Bank originates
loans collateralized by liens on commercial and residential properties and
engages in making secured and unsecured consumer installment and commercial
loans.
The Bank engages in a full service commercial and consumer banking
business. The Bank offers retail banking services including demand, savings and
time deposits and commercial mortgage and consumer/installment loans. Since its
inception, the Bank's primary mission has been to serve the banking needs of its
community, the businesses in Fairfield County, Connecticut (including minority-
owned businesses in low and moderate income areas) and its citizens (including
low and moderate income areas) while focusing on its surrounding community towns
and cities of Stamford, Greenwich, Darien and New Canaan. The Bank conducts its
operations through its main office located on 550 Summer Street in Stamford,
Connecticut; its branch offices located on Hope Street, West Broad Street and
High Ridge Road in Stamford, Connecticut; and a fourth branch located in Cos
Cob, Connecticut. The Bank anticipates that it will open a fifth branch in
Norwalk, Connecticut on or about April 30, 1999. The Bank also offers limited
service mobile branches which operate within a five mile radius of the offices
located on Summer Street in Stamford, Cos Cob and Norwalk, Connecticut.
FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Bancorp regarding expectations for earnings,
credit quality, other financial and business matters and efforts to achieve Year
2000 compliance. In addition, when used in this report, the words "anticipate,"
"plan," "believe," "estimate," "expect" and similar expressions as they relate
to the Bancorp or its management are intended to identify forward-looking
statements. All forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those discussed in, or implied by, the
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forward-looking statements as a result of certain factors, including but not
limited to, competitive pressures on loan and deposit product pricing, other
actions of competitors, changes in economic conditions, the extent and timing of
actions of the Federal Reserve Board, customer deposit disintermediation,
changes in customers' acceptance of the Bank's products and services, the extent
and timing of legislative and regulatory actions and reforms, and unanticipated
internal and/or third party delays or failures in achieving Year 2000
compliance.
The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Bancorp assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
MARKET AREA AND COMPETITION
The primary market area of the Bank consists of the town of Stamford and
the surrounding communities of Greenwich, Darien and New Canaan. The balance of
Fairfield County forms a secondary market. Stamford is 37.71 square miles and
is located in the Southwest corner of Connecticut. It is located 40 miles north
of New York City and is adjacent to Greenwich, Darien, and New Canaan,
Connecticut and Pound Ridge, New York.
Competition in the financial services industry and in the Bank's market
area is strong. Numerous commercial banks, savings banks and savings
associations maintain offices in the area. Commercial banks, savings banks,
savings associations, money market funds, mortgage brokers, finance companies,
credit unions, insurance companies, investment firms and private lenders compete
with the Bank for various segments of the Bank's business. These competitors,
which are located both inside and outside the Bank's market area, often have
far greater resources than the Bank and are able to conduct more intensive and
broader based promotional efforts to reach both commercial and individual
customers. The Bank has emphasized personalized banking services and the
advantage of local decision-making in its banking business, and this emphasis
has been well received by the public in the Bank's market area.
Changes in the financial services industry resulting from fluctuating
interest rates, technological changes and deregulation have resulted in an
increase in competition, cost of funds, merger activity, and customer awareness
of product and service differences among competitors.
Connecticut has enacted legislation which liberalized banking powers and
has put thrift institutions on equal footing with other banks, thereby improving
their competitive position. In addition, Connecticut's Interstate Banking Act
permits mergers or acquisitions of Connecticut banks and bank holding companies
in other states, so long as such states have reciprocal legislation. Many of
these states currently have such legislation. Connecticut banking law also
permits non-Connecticut bank holding companies to open offices in Connecticut
that may engage in a banking business, other than the provision of deposit
services, and several New York and other out-of-state bank holding companies
have done so. Such legislative authority has also increased the size of
financial institutions competing with the Bank for deposits and loans in its
market place.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") became federal law in October 1994. The
Interstate Banking Act authorizes a number of interstate banking transactions
and activities, including, among others, the following: (i) since October 1995,
a bank holding company has been allowed to acquire banks in states outside of
the
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holding company's home state; (ii) beginning on June 1, 1997 (or earlier, if
allowed by state law), an insured bank may acquire a bank outside of the
acquiring bank's home state, unless the home state of such bank involved in the
transaction passes a law before June 1, 1997 prohibiting such transactions with
out-of-state banks; (iii) an insured bank may acquire a branch of a bank located
outside of the acquiring bank's home state if the law of the state where the
branch is located allows such out-of-state acquisitions; and (iv) an insured
bank will be able to establish new branches in states outside of the bank's home
state if the state in which the bank desires to establish a branch has a law
permitting out-of-state banks to establish branches. The effect of the
Interstate Banking Act has increased competition for the Bank.
The business of the Bank also may be affected by governmental and
regulatory actions and policies. Monetary and fiscal policies of the United
States Government and its instrumentalities, including the Board of Governors of
the Federal Reserve System, significantly influence the growth of loans,
investments and deposits. The present bank regulatory environment may undergo
further change which will affect the banking industry itself and competition
between banks and non-bank financial institutions.
LENDING ACTIVITIES
At December 31, 1998, the Bank's loan portfolio totaled approximately $69
million. The portfolio represented approximately 49% of total assets and
approximately 57% of total deposits. Approximately 66% of the loan portfolio
consisted of loans collateralized by residential construction, residential real
estate or nonfarm nonresidential properties; approximately 30% of the portfolio
consisted of commercial loans; and approximately 4% of the portfolio consisted
of consumer installment, auto and other loans. The Bank's lending limit to one
borrower under applicable law was approximately $2.5 million at December 31,
1998. The Bank's lending limit to one borrower is equal to 15% of its
unimpaired capital (approximately $15.0 million) plus loan and lease loss
reserves (approximately $1.7 million) at December 31, 1998. Sources to fund the
Bank's loans are derived primarily from deposits and stockholders' equity.
Loans are generated through the Bank's marketing efforts, its present
customers, walk-in customers and referrals from professionals including
certified public accountants, attorneys, real estate brokers, builders and local
businesses. The Bank's lending activities are also impacted by economic trends
which affect the availability of funds, the demand for loans, and the level of
interest rates. Loan demand throughout the Bank's market generally is expected
to be moderate in 1999. The Bank is well positioned in terms of capital and
liquidity and looks forward to extending credit opportunities to qualified
borrowers.
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ANALYSIS OF LOAN PORTFOLIO
The following table sets forth an analysis of the composition of the loan
portfolio as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
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(in thousands)
<S> <C> <C> <C>
Loans secured by real estate:
Construction $ 5,089 $ 6,780 $ 9,489
Residential 23,645 23,598 23,493
Nonfarm nonresidential 16,859 14,686 11,867
Commercial loans 20,576 31,800 25,650
Consumer loans 2,750 1,865 2,607
Lease financing receivables 202 127 0
Other loans 248 99 146
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Total principal balances 69,369 78,955 73,252
Net deferred loan costs 15 3 7
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Total loans $ 69,384 $ 78,958 $ 73,259
========= ======== ========
</TABLE>
INTEREST RATES
Interest rates charged by the Bank on its loans are determined by
competitive conditions in its market area, the cost of funds, the demand for
funds and the availability of loanable funds. The average yield on the loan
portfolio was 10.19% in 1998, as compared to 9.40% in 1997. One large loan
carried on nonaccrual at the end of 1997 was fully recovered in the second
quarter of 1998, contributing significantly to the higher portfolio yield in
1998. Interest income and fees totalling $454,000 were recognized at the time
of recovery, including approximately $325,000 in prior year interest which had
not been accrued.
PROBLEM LOANS
It is the Bank's policy to manage its loan portfolio so as to recognize
problem loans at an early point. The Bank commences internal collection efforts
once a loan payment is more than 15 days past due. Loans are classified as
nonaccrual and placed on a cash basis for purposes of income recognition when
the collectibility of interest and principal become uncertain, generally 90
days after becoming past due. Once a residential or commercial mortgage loan is
90 days past due, the Bank reviews the loan, including the appraisal of the
collateral, and may request an updated appraisal. If the value of the
collateral, based on such appraisal, is not sufficient to cover the loan
obligation, such loans will be classified as nonaccrual. Commercial loans are
generally classified as nonaccrual after being 90 days past due. Construction
loans 90 days past due are subject to a present value analysis, utilizing
current appraisal data, to determine whether or not they will be classified as
nonaccrual. Generally, any uncollected but previously accrued interest is
charged against current income when a loan is placed on nonaccrual status. The
Bank's data processing system generates delinquency reports on all of the Bank's
loans weekly and management reviews the loan portfolio on a weekly basis to
determine if past due loans should be placed on nonaccrual status. Unless the
customer is working with the Bank toward repayment, once a loan payment is 90
days past due, the Bank generally initiates appropriate collection action.
Reinstatement of the loan to accrual status is done on a case-by-case basis and
only after the loan has been brought current and the borrower has demonstrated
adequate performance.
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Loans classified as nonperforming include nonaccrual loans, loans that are
ninety days or more past due and restructured loans. Nonperforming loans
aggregated approximately $812,000 at December 31, 1998, compared to
approximately $3,330,000 at December 31, 1997. The decrease in nonperforming
loans was primarily due to one loan being placed on nonaccrual status in 1997
which was subsequently paid off in 1998. Management is not aware of any
characteristics of groups of loans not classified as nonperforming that would
give rise to other than normal collectibility concerns. Information concerning
nonperforming loans is provided in the following table:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status:
Real estate loans (1) $ 370 $ 2,708 $ 573 $ 477 $ 425
Commercial loans 154 293 314 298
Installment and other loans 16 1 4
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524 3,017 888 779 425
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Accruing loans past due
90 days or more:
Real estate loans 288 295 81 374 181
Commercial loans 15 4 13
Installment and other loans 3 4 7
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288 313 89 394 181
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Restructured loans 290 293 294
Total nonperforming loans $ 812 $ 3,330 $ 1,267 $ 1,466 $ 900
Total nonperforming loans as a ====== ======== ======== ======== ======
percentage of total loans 1.17% 4.22% 1.73% 2.28% 1.74%
====== ======== ======== ======== ======
</TABLE>
(1) The amount at December 31, 1997 includes a loan with a balance of $2,050,000
which was fully collected during 1998.
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ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,529 $ 1,660 $ 1,384 $ 1,177 $ 1,151
Charge-offs:
Commercial 105 188 51 1 11
Real estate mortgage 26 102 81 64
Installment loans to individuals 37 4 16
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168 294 148 1 75
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Recoveries:
Commercial 74 33 10 2 10
Real estate mortgage 14
Installment loans to individuals 12 14
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100 47 10 2 10
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Net charge-offs 68 247 138 (1) 65
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Provisions charged to income 272 116 414 206 91
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Balance at end of period $ 1,733 $ 1,529 $ 1,660 $ 1,384 $ 1,177
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans outstanding 0.09% 0.33% 0.20% 0.00% 0.13%
======= ======= ======= ======= =======
</TABLE>
INVESTMENT ACTIVITIES
The Bank has authority to invest in a number of investment products
deemed prudent by the Board of Directors. Subject to various restrictions, the
Bank may own obligations of the United States Government, Federal Agencies,
certain obligations of municipalities, certificates of deposit, banker's
acceptances, commercial paper and corporate bonds.
The Bank has established a written securities policy which is approved
annually by its Board of Directors. The policy states specific objectives
relating to interest rate sensitivity and contribution to Bank profitability.
The Bank emphasizes the quality and term of the securities acquired for its
portfolio. The Bank does not engage in the practice of trading securities for
the purpose of generating portfolio gains.
At December 31, 1998, the Bank's held-to-maturity portfolio consisted of
debt securities carried at a total amortized cost of approximately $9,661,000.
The fair value of these securities was approximately $9,744,000. At December
31, 1998, the Bank's available-for-sale portfolio was carried at a total fair
value of approximately $30,003,000 (or $222,000 more than amortized cost of
$29,781,000). The after-tax unrealized gain on available for sale securities of
$131,000 is included in stockholders' equity at December 31, 1998. The Bank
also maintained an investment of $22,544,000 in Federal funds sold at December
31, 1998. See Note 3 to the Bank's Financial Statements for additional
information on the securities portfolio.
DEPOSITS
Deposits are the primary source of funds for the Bank. The Bank's
deposits consist of checking accounts, preferred savings accounts, regular
savings deposits, NOW accounts, money
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market accounts, and certificates of deposit. Deposits are obtained from
individuals, partnerships, small and medium size businesses and professionals in
the Bank's market area. The Bank does not accept brokered deposits.
The following table shows, by maturity, the dollar amount of certificates
of deposit of $100,000 or more at December 31, 1998.
<TABLE>
<CAPTION>
Rate
Maturity Amount Paid
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(dollars in thousands)
<S> <C> <C>
Less than 3 months $ 2,851 4.95%
Greater than 3 months and less than 6 months 1,361 5.51
Greater than 6 months and less than 1 year 3,331 5.15
Greater than 1 year 2,947 5.57
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Total $ 10,490 5.26%
========= ========
</TABLE>
The following table summarizes the average amount and the average rate paid
on the Bank's deposits for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
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Average Rate Average Rate
Type of Account Balance Paid Balance Paid
- --------------- ---------- --------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
NOW Accounts $ 15,187 1.41% $ 13,213 1.42%
Money Market Accounts 2,866 2.33 2,923 2.40
Regular, Club, Cash Management 4,922 2.50 4,042 2.47
Preferred Rate Savings 19,678 3.00 17,891 3.04
Certificates of Deposit 48,349 5.40 46,242 5.41
---------- ------- ---------- -------
Total $ 91,002 3.96% $ 84,311 4.04%
========== ======= ========== =======
</TABLE>
See Note 6 to the Bank's Financial Statements for additional information on time
deposits.
REGULATION
As a Connecticut-chartered bank whose deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), the Bank
is subject to regulation and supervision by both the Connecticut Banking
Commissioner (the "Banking Commissioner") and the FDIC. The Bank also is
subject to the laws and regulations of the Federal Reserve Board that are
applicable to FDIC-insured financial institutions. The Bancorp is also subject
to certain regulations of the Federal Reserve Board and the Banking
Commissioner. This governmental regulation and supervision is primarily
intended to protect depositors, not shareholders.
This structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Banking Commissioner, the FDIC or
through legislation, could have a material adverse impact on the Bancorp and its
operations. Until February 1998, the Bank was operating under a supervisory
agreement, a Memorandum of Understanding, issued by the FDIC with regard to
certain compliance aspects of the Bank's operations. The Memorandum of
Understanding
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was issued early in 1997. The regulators removed the Memorandum of Understanding
in February 1998 in light of the significant steps taken by the Bank to improve
the compliance personnel and policies of the Bank.
CONNECTICUT REGULATION
The Banking Commissioner regulates the Bank's internal organization as well
as its deposit, lending and investment activities. The approval of the Banking
Commissioner is required for, among other things, certain amendments to the
Bank's Articles of Incorporation and Bylaws, as well as for the establishment of
branch offices and business combination transactions. The Banking Commissioner
conducts periodic examinations of the Bank. Many of the areas regulated by the
Banking Commissioner are subject to similar regulation by the FDIC.
Connecticut banking laws grant banks broad lending authority. Subject to
certain limited exceptions, however, total secured and unsecured loans made to
any one obligor pursuant to this statutory authority may not exceed 25% of the
bank's equity capital and reserves for loan and lease losses.
Subject to certain limited exceptions, state-chartered banks are prohibited
from engaging as a principal in any activity that is not permissible for
national banks. State-chartered banks, for example, are prohibited from
acquiring equity investments of a type, or in an amount, not permissible for a
national bank.
The Connecticut Interstate Banking Act permits Connecticut banks and bank
holding companies to engage in stock acquisitions with depository institutions
in other states with reciprocal legislation. A majority of states have enacted
such legislation. Several interstate mergers and acquisitions involving
Connecticut bank holding companies or banks with offices in the Bank's service
area and bank holding companies or banks headquartered in other states recently
have been completed.
FDIC REGULATION
The Bank's deposit accounts are insured by the Bank Insurance Fund of the
FDIC to a maximum of $100,000 for each insured depositor. FDIC insurance of
deposits may be terminated by the FDIC, after notice and hearing, upon a finding
by the FDIC that the insured institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, rule or order, or conditions
imposed by the FDIC.
As a FDIC-insured, state-chartered bank, the Bank is subject to supervision
and examination by the FDIC and also is subject to FDIC regulations regarding
many aspects of its business, including types of deposit instruments offered,
permissible methods for acquisition of funds, and activities of subsidiaries and
affiliates of the Bank. The FDIC periodically makes its own examination of
insured institutions.
Federal law requires each federal banking agency to prescribe for
depository institutions under its jurisdiction standards relating to, among
other things: internal controls; information systems and audit systems; loan
documentation; credit underwriting; interest rate risk exposure; asset growth;
compensation, fees and benefits; and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
final regulations and Interagency Guidelines
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Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset quality; earnings; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard by the Federal Deposit Insurance Act, as amended. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance programs.
Under the Community Reinvestment Act, as amended ("CRA"), as implemented by
FDIC regulations, the Bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not prescribe specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of an institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to
require public disclosure of an institution's CRA rating and requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The Bank's latest CRA rating, received
from the FDIC, was "satisfactory."
The FDIC has adopted risk-based capital guidelines to which FDIC-insured,
state-chartered banks that are not members of the Federal Reserve System, such
as the Bank, are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Banks are required to
maintain minimum levels of capital based upon their total assets and total
"risk-weighted assets." For purposes of these requirements, capital is
comprised both of Tier 1 and Tier 2 capital. Tier 1 capital consists primarily
of common stock and retained earnings. Tier 2 capital consists primarily of
loan loss reserves, subordinated debt, and convertible securities. In
determining total capital, the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital. A bank's total "risk-based assets" are determined by
assigning the bank's assets and off-balance sheet items (e.g., letters of
credit) to one of four risk categories based upon their relative credit risks.
The greater the risk associated with an assets, the greater the amount of such
asset that will be subject to the capital requirements. Banks must satisfy the
following three minimum capital standards: (1) Tier 1 capital in an amount equal
to between 4% and 5% of total assets (the "leverage ratio"); (2) Tier 1 capital
in an amount equal to 4% of risk-weighted assets; and (3) total Tier 1 and Tier
2 capital in an amount equal to 8% of risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") defines specific capital categories based upon an institution's
capital ratios. The capital categories, in declining order, are: (i) well
capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv)
significantly undercapitalized; and (v) critically undercapitalized. Under
FDICIA and the FDIC's prompt correction action rules, the FDIC may take any one
or more of the following actions against an undercapitalized bank: restrict
dividends and management fees; restrict asset growth; and prohibit new
acquisitions, new branches or new lines of business without prior FDIC approval.
If a bank is significantly undercapitalized, the FDIC may also require the bank
to raise capital, restrict interest rates a bank may
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pay on deposits, require a reduction in assets, restrict any activities that
might cause risk to a bank, require improved management, prohibit the acceptance
of deposits from correspondent banks and restrict compensation to any senior
executive officer. When a bank becomes critically undercapitalized, (i.e., the
ratio of tangible equity to total assets is equal to or less than 2%), the FDIC
must, within 90 days thereafter, appoint a receiver for the bank or take such
other action as the FDIC determines would better achieve the purposes of the
law. Even where such other action is taken, the FDIC generally must appoint a
receiver for a bank if the bank remains critically undercapitalized during the
calendar quarter beginning 270 days after the date on which the bank became
critically undercapitalized.
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 capital to risk-weighted assets
ratio of at least 4%, and a total (Tier 1 and Tier 2) capital to risk-weighted
assets ratio of at least 8%. As of December 31, 1998, the Bank was in full
compliance with all three minimum capital standards and was categorized as "well
capitalized" under the provisions of FDICIA. See Note 14 to the Bank's
Financial Statements for an analysis of the Bank's actual and required
regulatory capital.
FEDERAL RESERVE SYSTEM REGULATION
Under the regulations of the Federal Reserve Board, banking institutions
are required to maintain reserves with respect to transaction accounts
(primarily NOW and regular checking accounts), which allow payments or transfers
to third parties. These regulations generally require the maintenance of
reserves of 3% against net transaction accounts of $47.8 million or less and,
for net transaction accounts over $47.8 million, $1,434,000 plus 10% of the
amount of such accounts in excess of $47.8 million. There is no reserve
requirement for transaction account balances of $4.7 million or less. These
amounts and percentages are subject to adjustment by the Federal Reserve Board.
In addition, the Bancorp is subject to regulation by the Federal Reserve
Board as a bank holding company. The Federal Reserve Board has established
capital adequacy guidelines for bank holding companies that are similar to the
FDIC capital guidelines described above. The Federal Bank Holding Company Act
of 1956, as amended (the "Federal BHC Act"), limits the types of companies that
a bank holding company may acquire or organize and the activities in which it or
they may engage. In general, the Bancorp and its subsidiaries are prohibited
from engaging in or acquiring direct control of any company engaged in non-
banking activities unless such activities are so closely related to banking or
managing or controlling banks as to be proper incident thereto. State-chartered
banks forming holding companies generally are allowed those powers, with certain
restrictions, granted to them by applicable state law. The Bancorp believes
that it may continue to engage in those activities in which the Bank engages.
Under the Federal BHC Act, the Bancorp is required to file annually with
the Federal Reserve Board a report of its operations, and the Bancorp, the Bank
and any other subsidiaries is subject to examination by the Federal Reserve
Board. In addition, the Bancorp is required to obtain the prior approval of the
Board of Governors of the Federal Reserve System to acquire, with certain
exceptions, more than 5% of the outstanding voting stock of any bank or bank
holding company, to acquire all or substantially all of the assets of a bank or
to merge or consolidate with another bank holding company. Moreover, the
Bancorp, the Bank and any other subsidiaries is prohibited from engaging in
certain tying arrangements in connection with any extension of credit or
provision of any property or services. The Bank also is subject to certain
restrictions imposed by the Federal Reserve Act on issuing any extension of
credit to the Bancorp or any of its subsidiaries, or making any investments in
the stock or other
-10-
<PAGE>
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower.
The Federal Reserve Board has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company should pay cash dividends only to the
extent that a bank holding company's net income for the past year is sufficient
to cover both the cash dividends and a rate of earnings retention that is
consistent with a bank holding company's capital needs, asset quality and
overall financial condition. The Federal Reserve Board also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized".
Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of their consolidated retained
earnings. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
PERSONNEL
As of December 31, 1998 the Bank had 43 employees, 38 of whom are full-time
and 5 of whom are part-time. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The following table sets forth the location of the Bank's main office and
branches, as well as certain additional information relating to those offices.
<TABLE>
<CAPTION>
Year Facility Owned or
Opened Leased
-------------- ----------
<S> <C> <C>
Main office (1)
550 Summer Street
Stamford, Connecticut 1988 Owned
Springdale office (2)
1042 Hope Street
Stamford, Connecticut 1989 Leased
High Ridge office(3)
1117 High Ridge Road
Stamford, Connecticut 1994 Leased
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Year Facility Owned or
Opened Leased
------------- --------
<S> <C> <C>
Cos Cob office (4)
211 East Putnam Avenue
Cos Cob, Connecticut 1995 Leased
West Broad office (5)
56 West Broad Street
Stamford, Connecticut 1997 Leased
Norwalk office (6)
79 New Canaan Avenue
Norwalk, Connecticut Pending Leased
</TABLE>
(1) The main office provides 11,000 square feet of interior space and has
offstreet parking facilities.
(2) The Springdale facility is a full-service branch. The office lease provides
for 1,500 square feet of interior space with an initial term of approximately 3
years, and renewal options for six additional 5 year terms. The lease has been
renewed through 2002.
(3) The High Ridge facility is a full-service branch. The office lease provides
for approximately 1,763 square feet of interior space with an initial term of 5
years, expiring 1999, and renewal options for three additional 5 year periods.
(4) The Cos Cob facility is a full-service branch. The office lease provides for
approximately 900 square feet of interior space with an initial term of 5 years,
expiring 2000, and renewal options for two additional 5 year periods.
(5) The West Broad facility is a full-service branch. The office lease provides
for approximately 2,000 square feet of interior space with an initial term of 5
years, expiring 2001, and renewal options for three additional 5 year periods.
(6) The Norwalk facility will be a full-service branch, expected to open on or
about April 30, 1999. The office lease provides for approximately 2,200 square
feet of interior space with an initial term of 5 years commencing the day the
branch opens for business, and renewal options for three additional 5 year
periods.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Bancorp is a party or of
which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A Special Meeting of Shareholders of the Bank was held on October 21,
1998. At the special meeting, the shareholders of the Bank approved the
formation of a bank holding company by approving an Agreement and Plan of
Reorganization dated as of August 19, 1998 between the Bank and the Bancorp.
There were 816,729 votes cast for, 14,961 votes cast against, and 2,371
abstentions with respect to the Agreement and Plan of Reorganization.
-12-
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE ISSUER
--------------------------------
The following table shows the name, age, positions held with the
Bancorp, and the principal occupations during the past five years of the
Bancorp's executive officers.
<TABLE>
<CAPTION>
Positions Held with the Bancorp and Principal
Name Age Occupations During the Past Five Years
- ---- ----- --------------------------------------
<S> <C> <C>
Norman H. Reader* 74 President and Chief Executive Officer
(1985 - present)
James P. Jakubek 49 Executive Vice President and Chief
Operating Officer (1991 - present)
Paul H. Reader 40 Senior Vice President (1993 - Present)
Vice President (1988 - 1993)
Leigh A. Hardisty 41 Vice President, Chief Financial Officer
and Corporate Secretary (1999 - present)
Vice President & Comptroller and
Corporate Secretary (1993 - 1999)
Comptroller and Corporate
Secretary (1988 - 1993)
</TABLE>
* Norman H. Reader is the father of Paul H. Reader.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
The common stock of the Bancorp has traded on the American Stock
Exchange under the symbol CBN since March 2, 1999, and prior thereto, the common
stock of the Bank was traded on the American Stock Exchange from January 1996
under the same symbol. The following table sets forth, for the periods
indicated, the actual high and low sales prices for the common stock as reported
by the American Stock Exchange.
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------
High Low High Low
-------- --------- ------- --------
<S> <C> <C> <C> <C>
First Quarter $ 21.875 $ 19.25 $20.375 $ 16.375
Second Quarter 22.50 20.50 16.625 14.50
Third Quarter 25.875* 19.50* 19.50 16.75
Fourth Quarter 20.50* 17.1875* 21.25 19.0625
</TABLE>
* A 10% stock dividend was declared in July 1998 and distributed in August 1998.
As of February 26, 1999, there were approximately 556 holders of record of
the Bancorp's common stock.
-13-
<PAGE>
The transfer agent and registrar for the Bancorp's common stock is American
Stock Transfer & Trust Company.
DIVIDEND POLICY
The Bancorp's shareholders are entitled to dividends, when and if declared
by the Bancorp's Board of Directors out of funds legally available therefor. The
Bancorp is not directly subject to the restrictions imposed by Connecticut law
regarding the payment of dividends by a Connecticut-chartered capital stock
bank. For the foreseeable future, however, the sole source of amounts available
to the Bancorp for the declaration of dividends will be dividends declared and
paid by the Bank on the Bank's Common Stock held by the Bancorp. The Bank is
prohibited by Connecticut banking law from paying dividends, except from its net
profits. Net profits are defined as the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets
after deducting from the total thereof all current operating expenses, actual
losses, accrued dividends on preferred stock, if any, and all federal and state
taxes. The total of all dividends declared by the Bank in any calendar year may
not, unless specifically approved by the Banking Commissioner, exceed the total
of its net profits for that year combined with its retained net profits of the
preceding two years. Federal statutes prohibit FDIC insured depository
institutions from paying dividends or making capital distributions that would
cause the institution to fail to meet minimum capital requirements. These
dividend limitations can affect the amount of dividends payable to the Bancorp.
In 1998 and 1997, the Bank declared a total of $357,000 and $298,000 in
quarterly cash dividends on its common stock. On January 20, 1999 the Bank's
Board of Directors declared a special dividend of $0.18 cents per share payable
February 19, 1999 to shareholders of record on February 8, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion and analysis presents a review of financial
condition as of December 31, 1998 and 1997, and operating results for the years
ended December 31, 1998, 1997 and 1996.
FINANCIAL CONDITION
(dollars in thousands)
COMPARATIVE ANALYSIS OF 1998 AND 1997
Total assets increased to $139,733 at December 31, 1998 from $125,408 at
December 31, 1997, an increase of $14,325 (or 11%). The Bank's net loan
portfolio decreased to $67,651 at December 31, 1998 from $77,429 at December 31,
1997, a decrease of $9,778 (or 13%). The decline in the loan portfolio from
December 31, 1997 to December 31, 1998 was primarily attributable to a decrease
in commercial mortgage loans (commercial loans collateralized by real estate),
term loans, aircraft loans, conventional mortgage loans and demand loans. These
decreases were partially offset by increases in other loans, time loans and
installment loans. Loan payoffs and competitive pressures on both rates and
terms for various loan types have resulted in a decline in the Bank's loan
portfolio. Although the Bank cannot predict future economic or competitive
conditions, the Bank's strategically planned expansion in 1999, with the opening
of its fifth branch office in Norwalk, may stimulate loan originations and
lessen any further decline in the loan portfolio.
-14-
<PAGE>
Securities increased to $39,664 at December 31, 1998 from $27,303 at
December 31, 1997, an increase of $12,361 (or 45%). In 1998, the increase in
the securities portfolio resulted from the influx of deposits and the decline in
the Bank's loan portfolio.
Deposits increased to $121,879 at December 31, 1998 from $108,904 at
December 31, 1997, an increase of $12,975 (or 12%). Time deposits contributed
the largest increase, increasing to $52,492 at December 31, 1998 from $45,860 at
December 31, 1997, for an increase of $6,632 (or 14%). The largest increase in
time deposits occurred in 12-17 month certificates of deposit ("CD's") which
increased by $2,894 (or 13%). The second largest increase in time deposits
occurred in 36-47 month CD's which increased by $1,663 (or 151%). The third
largest increase in time deposits occurred in 24-30 month CD's which increased
by $1,208 (or 47%). Demand deposits increased to $25,746 at December 31, 1998
from $22,627 at December 31, 1997, an increase of $3,119 (or 14%). Money market
and NOW accounts increased to $18,941 at December 31, 1998 from $17,428 at
December 31, 1997, an increase of $1,513 (or 9%). Most of this increase was
attributable to NOW accounts, which increased by $1,420 (or 10%). Regular, club
and money market savings increased to $24,700 at December 31, 1998 from $22,989
at December 31, 1997, an increase of $1,711 (or 7%). This increase included an
increase in regular savings of $1,274 (or 31%).
In general, the Bank attempts to control the flow of deposits primarily by
pricing its accounts to remain competitive with other financial institutions in
its market area, although the Bank does not necessarily seek to match the
highest rates paid by competing institutions. In particular, during 1998 the
Bank attempted to retain market share by remaining generally competitive with
other financial institutions in its market area in the CD and NOW account
categories.
COMPARATIVE ANALYSIS OF 1997 AND 1996
Total assets increased to $125,408 at December 31, 1997 from $111,632 at
December 31, 1996, an increase of $13,776 (or 12%). The Bank's net loan
portfolio increased to $77,429 at December 31, 1997 from $71,599 at December 31,
1996, an increase of $5,830 (or 8%). Growth in the loan portfolio from
December 31, 1996 to December 31, 1997 was primarily attributable to an increase
in commercial mortgage loans (commercial loans collateralized by real estate),
demand loans and conventional mortgage loans. These increases were partially
offset by a decline in the term, time and aircraft loan portfolio.
Securities increased to $27,303 at December 31, 1997 from $20,558 at
December 31, 1996, an increase of $6,745 (or 33%). In 1997, the increase in the
securities portfolio resulted from the influx of deposits.
Deposits increased to $108,904 at December 31, 1997 from $96,843 at
December 31, 1996, an increase of $12,061 (or 12%). Demand deposits contributed
the largest increase, increasing to $22,627 at December 31, 1997 from $18,385 at
December 31, 1996, for an increase of $4,242 (or 23%). Time deposits
contributed the second largest increase, increasing to $45,860 at December 31,
1997 from $42,142 at December 31, 1996, for an increase of $3,718 (or 9%). The
largest increase in time deposits occurred in 12-17 month CD's which increased
by $3,903 (or 18%). Regular, club and money market savings increased to $22,989
at December 31, 1997 from $19,969 at December 31, 1996, an increase of $3,020
(or 15%). The largest increase was attributable to money market savings which
increased by $2,050 (or 12%). Regular savings increased $930 (or 29%). Money
market and NOW accounts increased to $17,428 at December 31, 1997 from $16,347
at December 31, 1996, an increase of $1,081 (or 7%).
-15-
<PAGE>
During 1997 the Bank attempted to retain market share by remaining
generally competitive with other financial institutions in its market area, in
particular in the 12-17 month CD category. The influx of deposits was also a
result of advertising and the opening of a new branch in the Stamford area in
1997.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth information relating to the Bank's balance
sheet and reflects average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing interest
income or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. Fully taxable equivalent ("FTE")
adjustments have been made using a 34% tax rate in calculating income and yields
on tax exempt securities.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------ -----------
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance
---------- ---------- ------- --------- ---------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) $ 74,229 $ 7,563 10.19% $ 75,348 $ 7,082 9.40% $ 68,881
Taxable securities 32,508 2,123 6.53 25,531 1,658 6.50 18,280
Tax-exempt securities 0 0 0.00 148 8 5.42 454
Federal funds sold 15,697 817 5.20 10,282 551 5.36 11,008
--------- ------- -------- --------- ---------- ------- --------
Total interest earning assets 122,434 10,503 8.58 111,309 9,299 8.35 98,623
--------- ------- -------- --------- ---------- ------- --------
Non-interest earning assets:
Cash and due from banks 4,937 4,413 3,494
Premises and equipment 2,922 2,792 2,800
Other assets 2,250 2,255 2,530
Allowance for loan losses (1,701) (1,782) (1,552)
--------- --------- --------
Total Assets $ 130,842 $ 118,987 $105,895
========= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
NOW accounts $ 15,187 $ 214 1.41% $ 13,213 $ 187 1.42% $ 12,659
Money market accounts 2,866 67 2.33 2,923 70 2.40 3,115
Regular, club, cash management 4,922 123 2.50 4,042 100 2.47 3,192
Preferred rate savings 19,678 591 3.00 17,891 543 3.04 17,032
Certificates of deposit 48,349 2,612 5.40 46,242 2,502 5.41 41,118
Borrowed funds 2,346 65 2.77 2,110 58 2.73 2,169
Other interest bearing deposits 17 0 1.04 18 0 1.68 19
--------- ------- -------- --------- ---------- ------- --------
Total interest bearing liabilities 93,365 3,672 3.93% 86,439 3,460 4.00% 79,304
--------- ------- -------- --------- ---------- ------- --------
Non-interest bearing liabilities:
Demand deposits 20,745 19,192 16,191
Other 2,508 739 1,378
--------- --------- --------
Total non-interest bearing liabilities 23,253 19,931 17,569
Stockholders' equity 14,224 12,617 9,022
--------- --------- --------
Total Liabilities & Stockholders' Equity $ 130,842 $ 118,987 $105,895
========= ========= ========
Net interest income (FTE) $ 6,831 $ 5,839
Less: Fully taxable equivalent adjustment 0 (2)
------- ----------
Net interest income (non-FTE) $ 6,831 $ 5,837
------- ==========
Interest rate spread 4.65% 4.35%
======== =======
Net yield on interest earning assets 5.58% 5.25%
======= ==========
Ratio of average interest earning assets
to average interest bearing liabilities 131.14% 128.77% 124.36%
========= ========= ========
<CAPTION>
----------------------
1996
----------------------
Yield/
Interest Cost
---------- ------
<S> <C> <C>
ASSETS
Interest earning assets:
Loans (1) $ 6,809 9.89%
Taxable securities 1,101 6.02
Tax-exempt securities 27 5.95
Federal funds sold 579 5.26
-------- -----
Total interest earning assets
8,516 8.63
-------- -----
Non-interest earning assets:
Cash and due from banks
Premises and equipment
Other assets
Allowance for loan losses
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
NOW accounts $ 180 1.42%
Money market accounts 74 2.38
Regular, club, cash management 78 2.46
Preferred rate savings 513 3.01
Certificates of deposit 2,269 5.52
Borrowed funds 60 2.79
Other interest bearing deposits 1 2.34
-------- -----
3,175 4.00%
Total interest bearing liabilities -------- -----
Non-interest bearing liabilities:
Demand deposits
Other
Total non-interest bearing liabilities
Stockholders' equity
Total Liabilities & Stockholders' Equity
Net interest income (FTE) $ 5,341
Less: Fully taxable equivalent adjustment (9)
--------
Net interest income (non-FTE) $ 5,332
========
Interest rate spread 4.63%
=====
Net yield on interest earning assets 5.42%
========
</TABLE>
(1) Average balances include loans on non-accrual status.
-16-
<PAGE>
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income on a tax equivalent basis for
the periods indicated.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
For the Year Ended December 31,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---- --- ---- ---- -- ----
Increase (Decrease) Due To Increase (Decrease ) Due To
---------------------------- ---------------------------
Rate Volume Total Rate Volume Total
------ ------ ----- ---- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 588 $ (107) $ 481 $ (348) $ 621 $ 273
Taxable securities 8 457 465 93 464 557
Tax-exempt securities 0 (8) (8) (3) (16) (19)
Federal funds sold (16) 282 266 11 (39) (28)
------ ------ ------ ------ ------ ------
Total earning assets $ 580 $ 624 $1,204 $ (247) $1,030 $ 783
====== ====== ====== ====== ====== ======
INTEREST EXPENSE:
NOW accounts $ (1) 28 $ 27 $ 0 $ 7 $ 7
Money market accounts (2) (1) (3) 1 (5) (4)
Regular, club, cash management 1 22 23 0 22 22
Preferred rate savings (6) 54 48 5 25 30
Certificates of deposit (3) 113 110 (46) 279 233
Borrowed funds 1 6 7 (1) (1) (2)
Other interest bearing deposits 0 0 0 (1) 0 (1)
------ ------ ------ ------ ------ ------
Total interest bearing liabilities $ (10) $ 222 $ 212 $ (42) $ 327 $ 285
====== ====== ====== ====== ====== ======
CHANGE IN NET INTEREST INCOME $ 590 $ 402 $ 992 $ (205) $ 703 $ 498
====== ====== ====== ===== ====== ======
</TABLE>
OPERATING RESULTS
(dollars in thousands)
COMPARATIVE ANALYSIS OF 1998 AND 1997
NET INCOME
Net income was $1,874 for the year ended December 31, 1998 compared to
$1,425 for the year ended December 31, 1997, an increase of $449 or 32%. Basic
earnings per common share was $1.68 for the year ended December 31, 1998 and
$1.29 for the year ended December 31, 1997 based on weighted average shares
outstanding of approximately 1,117,000 and 1,106,000, respectively. Diluted
earnings per share were $1.60 for the year ended December 31, 1998 and $1.24 for
the year ended December 31, 1997 based on weighted average shares of
approximately 1,170,000 and 1,148,000, respectively. Return on average common
stockholder's equity was 13.17% and 11.29% for the years ended December 31, 1998
and 1997, respectively.
The increase in net income for the year ended December 31, 1998 was
primarily due to securities volume and the resolution of a large problem loan.
One large loan carried on nonaccrual status at the end of 1997 was fully
recovered in the second quarter of 1998. Interest income and fees totalling
$454 were recognized at the time of recovery, including approximately $325 in
prior year interest which had not been accrued. The average yield on interest
earning assets (FTE) increased 23 basis points in 1998 compared to 1997,
primarily reflecting the impact of this nonaccrual loan, while the average cost
of interest bearing liabilities decreased by 7 basis points for the same period.
This resulted in an interest rate spread of 4.65% in 1998, up 30 basis points
from 4.35% in 1997. The net interest margin (FTE) increased to 5.58% in 1998
from 5.25% in 1997.
-17-
<PAGE>
The return on average assets was 1.43% for the year ended December 31, 1998
and 1.20% for the year ended December 31, 1997.
NET INTEREST INCOME
Net interest income is the difference between the interest income the Bank
earns on its loans, securities, and other earning assets, and the interest
expense it pays on deposits and other interest-bearing liabilities necessary to
fund these earning assets. Net interest income is the primary component of the
Bank's earnings.
Net interest income was $6,831 for the year ended December 31, 1998
compared to $5,837 for the year ended December 31, 1997, an increase of $994, or
17%.
INTEREST INCOME
Average interest earning assets for the year ended December 31, 1998 were
$122,434 compared to $111,309 for the year ended December 31, 1997, an increase
of $11,125, or 10%. Total interest income, which is a function of the volume of
interest earning assets and their related rates, was $10,503 in 1998 and $9,299
in 1997, representing an increase of $1,204, or 13%.
Loans represent the largest component of interest earning assets. Average
loans outstanding in 1998 were $74,229 compared to $75,348 in 1997, a 1%
decrease. Interest on loans was $7,563 in 1998 compared to $7,082 in 1997, a
7% increase. The average yield on loans increased to 10.19% in 1998 as compared
to 9.40% in 1997. One large loan carried on nonaccrual at the end of 1997 was
fully recovered in the second quarter of 1998, contributing significantly to the
higher yield in 1998. Interest income and fees totalling $454 were recognized
at the time of recovery, including approximately $325 in prior year interest
which had not been accrued. Excluding the decrease in 1997 interest income due
to this loan's nonaccrual status and the increase in 1998 interest income due to
the recovery, the average yield on the loan portfolio would have been 9.75% in
1998 and 9.81% in 1997.
Average investments in debt securities and Federal funds sold were $48,205
for the year ended December 31, 1998 compared to $35,961 for the year ended
December 31, 1997, an increase of $12,244, or 34%. Related income increased to
$2,940 for the year ended December 31, 1998 from $2,217 for the year ended
December 31, 1997, an increase of $723, or 33%. The increased income resulted
primarily from a larger portion of excess funds (generated by increased deposits
and decreased loans) being invested in taxable securities. Average investments
in debt securities, not including Federal funds, increased by $6,829, or 27% in
the year ended December 31,1998 and average Federal funds sold increased by
$5,415, or 53%. The average rate earned on federal funds decreased to 5.20% for
the year ended December 31, 1998 compared to 5.36% for the year ended December
31, 1997.
Average interest bearing liabilities increased by $6,926 during 1998, while
average loans decreased by $1,119 and average debt securities and Federal funds
sold increased by $12,244. In 1998, the Bank attempted to retain market share by
remaining generally competitive with other financial institutions in its market
area in the CD category. Loan payoffs and competitive pressures on both rates
and terms for various loan types resulted in a decline in the Bank's loan
portfolio. Although the Bank cannot predict future economic or competitive
conditions, the Bank's strategically planned expansion in 1999 (Norwalk branch)
may stimulate loan originations and lessen any further decline in the loan
portfolio.
-18-
<PAGE>
INTEREST EXPENSE
Interest expense was $3,672 for the year ended December 31, 1998 compared
to $3,460 for the year ended December 31, 1997, a 6% increase. Interest
expense is a function of interest bearing liabilities and their related rates.
Average interest bearing liabilities were $93,365 in 1998 compared to $86,439 in
1997, an increase of $6,926, or 8%. The growth in average interest bearing
liabilities was primarily due to growth in time deposits, as well as NOW and
regular savings accounts.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based upon the size and composition of the
loan portfolio, and management's estimate of losses inherent in the loan
portfolio based upon an evaluation of portfolio risk and economic factors. A
review of the quality of the loan portfolio is conducted internally by
management on a quarterly basis with the results presented to the Bank's Board
of Directors for approval. The evaluation considers individual borrowers whose
aggregate loans are greater than $100, as well as all Bank classified assets.
Consideration is also given to several factors including, but not limited to,
economic conditions, delinquency, charge off history, growth and composition of
the loan portfolio, and other relevant factors. The provision for loan losses
was $272 for the year ended December 31, 1998 and $116 for the year ended
December 31, 1997. As of December 31, 1998, the allowance for loan losses was
$1,733 or 2.50% of gross loans, compared to $1,529 or 1.94% of gross loans at
December 31, 1997, and $1,660 or 2.27% of gross loans at December 31, 1996.
At December 31, 1998, the Bank had $812 of nonperforming loans, of which
$524 were non-accrual loans and $288 were accruing loans greater than 90 days
past due. At December 31, 1997, the Bank had $3,330 of nonperforming loans of
which $3,017 were non-accrual loans and $313 were accruing loans greater than 90
days past due. The decrease in nonperforming loans in 1998 is primarily due to
the payoff of a loan in the second quarter of 1998 which was carried on
nonaccrual status at the end of 1997.
NONINTEREST INCOME
Noninterest income was $763 for the year ended December 31, 1998, compared
to $624 for the year ended December 31, 1997, an increase of $139, or 22%.
Approximately 72% of the increase was due to increased late payment charges and
fees collected on the payoff of a few large loans.
-19-
<PAGE>
NONINTEREST EXPENSE
Total noninterest expenses were $4,143 for the year ended December 31,
1998 and $3,874 for the year ended December 31, 1997, an increase of $269, or
7%.
A table summarizing the dollar amounts for each category and percent
changes is as follows:
<TABLE>
<CAPTION>
Increase
Year ended December 31, 1998 vs 1997
------------------------ ------------
CATEGORY 1998 1997 $ %
------ ------ - -
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 2,015 $ 1,884 $ 131 7%
Occupancy 461 451 10 2
Furniture and equipment 412 371 41 11
Other 1,255 1,168 87 7
------- ------- ----- ----
Total noninterest expense $ 4,143 $ 3,874 $ 269 7%
======= ======= ===== ====
</TABLE>
The increase in salaries and employee benefits was due to increased
personnel, salary increases and bonuses. The increase in occupancy expenses
primarily resulted from the renewal of the lease for the Springdale branch. The
increase in furniture and equipment expenses resulted from additional equipment
purchases as well as ancillary service contracts in 1998. The increase in other
noninterest expense was due to increased data processing charges as well as
legal, accounting and miscellaneous fees relating to the formation of the bank
holding company.
The following table summarizes dollar amounts for each major category of
noninterest expense as a percentage of total operating income (interest income
plus noninterest income):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
CATEGORY 1998 1997
------ ------
<S> <C> <C>
Salaries and employee benefits 17.89% 18.99%
Occupancy 4.09 4.55
Furniture and equipment 3.65 3.74
Other 11.14 11.77
----- -----
Total noninterest expense 36.77% 39.05%
===== =====
</TABLE>
COMPARATIVE ANALYSIS OF 1997 AND 1996
NET INCOME
Net income was $1,425 for the year ended December 31, 1997 compared to
$1,252 for the year ended December 31, 1996, an increase of $173 or 14%. Basic
earnings per common share was $1.29 for the year ended December 31, 1997 and
$1.33 for the year ended December 31, 1996 based on weighted average shares
outstanding of approximately 1,106,000 and 944,000, respectively. Diluted
earnings per share were $1.24 for the year ended December 31, 1997 and $1.30 for
the year ended December 31, 1996 based on weighted average shares of
approximately 1,148,000 and 962,000, respectively. Return on average common
stockholder's equity was 11.29% and 13.88% for the years ended December 31, 1997
and 1996, respectively.
-20-
<PAGE>
The increase in net income for the year ended December 31, 1997 was
primarily due to increased loan volume and securities volume. The average yield
on interest earning assets (FTE) decreased 28 basis points in 1997 while the
average yield on interest bearing liabilities remained unchanged for the same
period. This resulted in an interest rate spread (FTE) of 4.35% in 1997 compared
to 4.63% in 1996. The net interest margin (FTE) decreased to 5.25% in 1997 from
5.42% in 1996.
The return on average assets was 1.20% for the year ended December 31, 1997
and 1.18% for the year ended December 31, 1996.
NET INTEREST INCOME
Net interest income was $5,837 for the year ended December 31, 1997
compared to $5,332 for the year ended December 31, 1996, an increase of $505, or
9%.
INTEREST INCOME
Average interest earning assets for the year ended December 31, 1997 were
$111,309 compared to $98,623 for the year ended December 31, 1996, an increase
of $12,686, or 13%. Total interest income, which is a function of the volume of
interest earning assets and their related rates, was $9,297 in 1997 and $8,507
in 1996, representing an increase of $790, or 9%.
Loans represent the largest component of interest earning assets. Average
loans outstanding in 1997 were $75,348 compared to $68,881 in 1996, a 9%
increase. Loan growth was funded by an increase in deposits and the growth in
retained earnings both of which were aided by the opening of new branches in
1994, 1995 and 1997. Interest on loans was $7,082 for 1997 compared to $6,809 in
1996, a 4% increase. The increase in loan income in 1997 was primarily due to
increased loan volume. The average yield on loans decreased to 9.40% for the
year ended December 31, 1997 as compared to 9.89% for the year ended December
31, 1996. The decrease in loan yield in 1997 was primarily due to one large loan
placed on nonaccrual status in 1997. Had the loan remained on accrual status,
the average yield on loans in 1997 would have been 9.81%.
Average investments in debt securities and Federal funds sold were $35,961
for the year ended December 31, 1997 compared to $29,742 for the year ended
December 31, 1996, an increase of $6,219, or 21%. Related income increased to
$2,215 for the year ended December 31, 1997 from $1,698 for the year ended
December 31, 1996, an increase of $517, or 30%. The increased income resulted
primarily from a larger portion of excess funds being invested in taxable
securities. Average investments in debt securities, not including Federal funds,
increased by $6,945, or 37% in the year ended December 31, 1997 while average
Federal funds sold decreased by $726, or 7%. The average rate paid on federal
funds increased to 5.36% for the year ended December 31, 1997 compared to 5.26%
for the year ended December 31, 1996.
Average interest bearing liabilities increased by $7,135 during 1997, while
average loans increased by $6,467 and average debt securities and Federal funds
sold increased $6,219. In 1997, the Bank attempted to retain market share by
remaining generally competitive with other financial institutions in its market
area in the 12-17 month CD category. The influx of deposits is also a result of
advertising and the opening of a new branch in the Stamford area in 1997.
-21-
<PAGE>
INTEREST EXPENSE
Interest expense was $3,460 for the year ended December 31, 1997 compared
to $3,175 for the year ended December 31, 1996, a 9% increase. Interest
expense is a function of interest bearing liabilities and their related rates.
Average interest bearing liabilities were $86,439 in 1997 compared to $79,304
in 1996, an increase of $7,135, or 9%. The growth in average interest bearing
liabilities was primarily due to growth in time deposits as well as regular,
club and money market savings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $116 for the year ended December 31,
1997 and $414 for the year ended December 31, 1996. As of December 31, 1997,
the allowance for loan losses was $1,529 or 1.94% of gross loans, compared to
$1,660 or 2.27% of gross loans at December 31, 1996 and $1,384 or 2.15% of gross
loans at December 31, 1995.
At December 31, 1997, the Bank had $3,330 of nonperforming loans, of which
$3,017 were non-accrual loans and $313 were accruing loans greater than 90 days
past due. At December 31, 1996, the Bank had $1,267 of nonperforming loans of
which $888 were non-accrual loans, $89 were accruing loans greater than 90 days
past due and $290 were restructured loans. Although the ratio of nonperforming
loans to total loans at December 31, 1997 increased to 4.22% from 1.73% at the
previous year end, the increase was due primarily to one loan which was resolved
in 1998.
NONINTEREST INCOME
Noninterest income was $624 for the year ended December 31, 1997, compared
to $585 for the year ended December 31, 1996, an increase of $39, or 7%.
Approximately 96% of the increase was due to increased late payment charges and
other service charges on loans. Income from late charges and service charges on
loans increased to $87 in 1997 from $38 in 1996, an increase of $49 or 129%.
NONINTEREST EXPENSE
Total noninterest expenses were $3,874 for the year ended December 31,
1997 and $3,350 for the year ended December 31, 1996, an increase of $524, or
16%.
A table summarizing the dollar amounts for each category and percent
changes is as follows:
<TABLE>
<CAPTION>
Increase
Year ended December 31, 1997 vs 1996
------------------------ ------------
CATEGORY 1997 1996 $ %
---- ---- - -
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,884 $ 1,603 $ 281 18%
Occupancy 451 388 63 16
Furniture and equipment 371 311 60 19
Other 1,168 1,048 120 11
------- ------- ----- ----
Total noninterest expense $ 3,874 $ 3,350 $ 524 16%
======= ======= ===== ==
</TABLE>
The increase in salaries and employee benefits was due to salary increases,
bonuses and the addition of branch personnel in the fourth quarter of 1996. The
increase in occupancy expenses
-22-
<PAGE>
primarily resulted from the renewal of the lease for the Springdale branch. The
increase in furniture and equipment expense resulted from additional equipment
purchases at the main office and the West Broad street branch which opened in
1997, as well as ancillary service contracts. The increase in other noninterest
expense was due to increased data processing charges, legal fees, insurance
costs and donations.
The following table summarizes dollar amounts for each major category of
noninterest expense as a percentage of total operating income:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
CATEGORY 1997 1996
------ ------
<S> <C> <C>
Salaries and employee benefits 18.99% 17.63%
Occupancy 4.55 4.27
Furniture and equipment 3.74 3.42
Other 11.77 11.53
----- -----
Total noninterest expense 39.05% 36.85%
===== =====
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
At December 31, 1998, total short term investments, which are made up of
Federal funds sold, all available-for-sale securities, and held-to-maturity
securities maturing in one year or less, totalled $55,552. The liquidity of the
Bank is measured by the ratio of net cash, short term, and marketable assets to
net deposits and short term liabilities. The Bank's liquidity ratio at
December 31, 1998 was 52.57%. The Bank's internal guideline is to maintain a
liquidity ratio of at least 20%.
As reported in the statements of cash flows, the Bank's cash flows are
classified as operating, investing, or financing. The $883 increase in net
cash provided by operating activities in 1998, compared to 1997, was primarily
due to the $449 increase in net income. Approximately $309 of the increase in
net income was a result of the recovery of all previously nonaccrued interest
and certain loan fees on a nonaccrual loan. Net cash used in investing
activities declined by $10,172 in 1998, compared to 1997, due to the higher
levels of loan repayments and maturities of available-for-sale securities.
Compared to 1997, net cash provided by financing activities increased by $81,
and cash and cash equivalents increased by $11,870 during 1998.
Management anticipates that the Norwalk branch will commence operations on
or about April 30, 1999. Construction costs are projected to be $120,000 and
furniture, equipment and signs are projected to cost $130,000. General
corporate funds will be used to support the renovation and ancillary purchases.
At December 31, 1998, the Bank had outstanding loan commitments under
unused lines of credit approximating $8,955 and outstanding letters of credit
approximating $225.
The following table sets forth the maturity or repricing distribution of
the Bank's interest earning assets and interest bearing liabilities as of
December 31, 1998, the Bank's interest rate sensitivity gap (i.e., interest-
sensitive assets less interest-sensitive liabilities), the Bank's cumulative
interest rate sensitivity gap, the ratio of cumulative total interest-earning
assets to cumulative total interest-bearing liabilities, and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table, an
asset or liability is considered rate sensitive within a specified period when
it matures or could be repriced within such period in accordance with its
contractual terms. Debt securities are placed in maturity periods based upon
their projected call date, where applicable. Regular savings, preferred rate
-23-
<PAGE>
savings, NOW and money market demand accounts totaling $43,546 have been
included in the column for liabilities repricing within 6 months. Regular
savings, preferred rate savings, NOW and money market demand accounts are
believed to be sensitive to changes in interest rates in a rising rate
environment. Management believes such deposits would move into higher yielding
deposit products in a rising rate environment.
<TABLE>
<CAPTION>
Interest Sensitivity
---------------------------------------------------
Within 6 6 Months- 1-5 Over 5
Months 1 Year Years Years Total
---------- ---------- --------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold and securities $ 29,397 $ 5,537 $ 27,274 $ 0 $ 62,208
Loans (1)
Adjustable rate 21,293 12 0 0 21,305
Fixed rate 6,209 2,894 22,037 16,152 47,292
--------- ---------- --------- --------- ----------
Total interest earning assets 56,899 8,443 49,311 16,152 130,805
--------- ---------- --------- --------- ----------
Interest bearing liabilities:
Money market demand and
NOW accounts 18,941 0 0 0 18,941
Regular, club, and preferred
rate savings accounts 24,605 95 0 0 24,700
Time 21,210 14,993 16,185 104 52,492
--------- ---------- --------- --------- ----------
Total deposits 64,756 15,088 16,185 104 96,133
Repurchase agreements 2,198 0 0 0 2,198
Other interest-bearing liabilities 0 3 0 0 3
--------- ---------- --------- --------- ----------
Total interest bearing liabilities 66,954 15,091 16,185 104 98,334
--------- ---------- --------- --------- ----------
Total interest earning assets
less interest bearing liabilities
for the period $ (10,055) $ (6,648) $ 33,126 $ 16,048
Cumulative total
interest earning assets less
interest bearing liabilities $ (10,055) $ (16,703) $ 16,423 $ 32,471
Cumulative total interest earning
assets less interest bearing
liabilities as a percentage of
total interest earning assets (7.64)% (12.69)% 12.48% 24.68%
</TABLE>
(1) Excludes loans on nonaccrual status and overdrafts.
-24-
<PAGE>
The tabular presentation of the Bank's interest sensitivity position
indicates that for the period up to one year following December 31, 1998
cumulative total interest earning assets are less than cumulative total interest
bearing liabilities. If interest rates were to decline during this period, more
liabilities would be repricing than assets and therefore the Bank would
experience an increase in its net interest margin. If interest rates were to
increase during this period, more liabilities would be repricing than assets for
that period and therefore the Bank would experience a decline in its net
interest margin. Periods of one through five years and over five years indicate
that more interest earning assets will be repricing than interest bearing
liabilities, therefore the Bank would experience an increase in its net interest
margin in a rising rate environment while in a declining rate environment the
Bank would experience a decrease in its net interest margin.
The tabular presentation only represents repricing of interest earning
assets and interest bearing liabilities at a point in time and is not indicative
of when and how the interest earning assets and interest bearing liabilities
will actually reprice.
CAPITAL RESOURCES
At December 31, 1998 and December 31, 1997, the Bank's leverage capital
ratio was equal to 10.95% and 10.81%, respectively. At December 31, 1998 and
December 31, 1997, the Bank's Tier 1 risk-based capital ratio was 18.54% and
15.76%, respectively. The Bank's total-risk based capital ratio at December 31,
1998 and December 31, 1997 was 19.80% and 17.02%, respectively. These ratios
exceeded the stated minimum regulatory requirements.
During 1998, the Bank declared a total of $357,000 in quarterly and special
cash dividends on its common stock, and on January 20, 1999 the Bank's Board of
Directors declared a special dividend of $0.18 cents per share payable February
19, 1999 to shareholders of record on February 8, 1999. The Bank also
distributed a 10% stock dividend during 1998, resulting in the issuance of
101,552 additional common shares.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, generate accurate
customer statements, or engage in similar normal business activities.
While the Bank believes that most of its systems are already Year 2000
compliant, the Bank has in place an action plan to identify, review and test all
of its operating systems. In addition, the FDIC monitors the Bank's
preparedness for the Year 2000. The actions being taken by the Bank in response
to the Year 2000 issue are consistent with the guidelines in policy statements
issued by the bank regulatory agencies.
Management has initiated a Bank-wide program, consistent with guidelines
issued by the Federal Financial Institutions Examination Council, to prepare the
Bank's computer systems and software applications for the Year 2000. The
program includes the following phases (current status is indicated for each
phase):
-25-
<PAGE>
* Identification (Completed)
* Assessment (Completed)
* Remediation (Completed)
* Testing (Continuing)
* Contingency Planning (Continuing)
The Bank has tested its mission critical applications, which are those
comprising its "core" data processing system for loans, deposits and the general
ledger maintained by a third-party vendor. Testing of these applications was
completed by December 31, 1998.
The Bank has initiated formal communications with all of its significant
vendors and has contacted certain of its customers to determine the extent to
which the Bank is vulnerable to those third parties' failures to remediate their
own Year 2000 Issue. The Bank is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant. However, there can be no guarantee that
the systems of other entities on which the Bank's systems rely will be timely
converted, or that a failure to convert by another entity, or a conversion that
is incompatible with the Bank's systems, would not have a material adverse
effect on the Bank.
The Bank has also initiated dialogue with its loan customers concerning
their Year 2000 preparedness and has incorporated the consideration of Year 2000
readiness into its loan review and credit underwriting processes. The Bank has
also employed an outside consultant to assist in developing its Year 2000 plan.
The Bank estimates that its total Year 2000 project costs, including costs
charged to expense, will not exceed $100,000. As of December 31, 1998, the Bank
had incurred $40,000 of costs relating to Year 2000, the majority of which are
hardware and software related. The cost of the project and the date on which
the Bank plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the availability of certain resources, third party modification
plans and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that may cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Significant Year 2000 failures in the Bank's systems or in the systems of
third parties, and a significant reduction in liquidity due to high levels of
withdrawals of customer deposits, would have a material adverse effect on the
Bank's financial condition and results of operations. The Bank believes that
its reasonably likely worst case scenario might include a material increase in
credit losses due to Year 2000 problems of borrowers, a significant reduction in
liquidity due to high levels of withdrawals of customer deposits, and a
disruption in financial markets generally. The magnitude of potential credit
losses, liquidity problems or a disruption in financial markets cannot be
determined at this time; however, the Bank's Year 2000 program described above
is designed to address exposure to risks. The Bank continues to develop a
business resumption contingency plan to address the possibility of unplanned
system difficulties or third party failures. This plan will entail some type
of manual recordkeeping and reporting procedures in critical operating areas.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The Statements of Condition of Cornerstone Bank as of December 31,
1998 and 1997, and
-26-
<PAGE>
the related Statements of Income, Changes in Stockholders' Equity and Cash Flows
for the years ended December 31, 1998, 1997 and 1996, together with the related
notes and the reports of KPMG LLP and Deloitte & Touche LLP, independent
auditors, are included herein on pages F-1 through F-24.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
There have been no changes in or disagreements with accountants required to
be reported herein.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
Information regarding the Bancorp's directors is incorporated by reference
herein to the Bancorp's Proxy Statement for its Annual Meeting of Shareholders
to be held on May 19, 1999 (the "1999 Proxy Statement"). Information regarding
the Bancorp's executive officers is included as Item 4A in Part I of this Form
10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Information regarding the compensation of the Bancorp's executive officers
is incorporated by reference herein to the 1999 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information regarding the beneficial ownership of the Bancorp's common
stock by certain persons is incorporated by reference herein to the 1999 Proxy
Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain transactions involving the Bancorp is
incorporated by reference herein to the 1999 Proxy Statement.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Reorganization dated as of August 19, 1998
between Cornerstone Bank and Cornerstone Bancorp, Inc. (Exhibit
2.1 to Form 8-K12G3 dated March 1, 1999, File No. 0-25465 ("Form
8-K12G3")) (1)
3.1 Certificate of Incorporation of Cornerstone Bancorp, Inc.
(Exhibit 4.1 to Form 8- K12G3) (1)
-27-
<PAGE>
Exhibit No. Description
3.2 Bylaws of Cornerstone Bancorp, Inc. (Exhibit 4.2 to Form 8-K12G3)
(1)
4.1 Form of Specimen Common Stock Certificate of Cornerstone Bancorp,
Inc. (Exhibit 4.3 to Form 8-K12G3)(1)
10.1 Lease agreement dated as of January 19, 1989 between First
National Bank of Stamford and Joseph F. Calve Family Trust, and
Lease agreement dated as of June 28, 1994 between Cornerstone
Bank and The Samuel Lotstein Realty Company (Exhibit 2 to
Cornerstone Bank's Registration Statement on Form F-1 filed with
the FDIC) (1)
10.2 Lease agreement dated as of May 16, 1995 between Cornerstone Bank
and Mill Pond Company (Exhibit 3 (ii) to Cornerstone Bank's Form
F-2 for the year ended December 31, 1994 filed with the FDIC) (1)
10.3 Lease agreement dated as of November 29, 1996 between Cornerstone
Bank and John P. Rossi (Exhibit 3(vii) to Cornerstone Bank's Form
F-2 for the year ended December 31, 1996 filed with the FDIC) (1)
10.4 Lease agreement dated as of December 22, 1998 between Cornerstone
Bank and Ralph Sandolo (2)
10.5 Cornerstone Bancorp, Inc. 1986 Incentive and Non-Qualified Stock
Option Plan (Exhibit 99.1 to Registration Statement on Form S-8
Registration No. 333-73129 ("Form S-8")) (1)
10.6 Cornerstone Bancorp, Inc. 1996 Incentive and Non-Qualified Stock
Option Plan (Exhibit 99.2 to Form S-8)(1)
10.7 Cornerstone Bancorp, Inc. Director Compensation Plan (Exhibit
99.3 to Form S-8)(1)
10.8 Employment agreement dated as of July 1, 1998 between Cornerstone
Bank and Norman H. Reader (2)
10.9 Employment agreement dated as of July 15, 1998 between
Cornerstone Bank and James P. Jakubek (2)
21.1 Subsidiaries of Cornerstone Bancorp, Inc. (2)
23.1 Consent of KPMG LLP (2)
-28-
<PAGE>
Exhibit No. Description
27.1 Financial Data Schedule (2)
(1) Incorporated by reference.
(2) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1998.
-29-
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORNERSTONE BANCORP, INC.
Date: March 24,1999 By: /s/ Norman H. Reader
------------- --------------------------------
Norman H. Reader
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Melvin L. Maisel Chairman of the Board March 24, 1999
- --------------------------- --------------
Melvin L. Maisel
/s/ Norman H. Reader Director, President, March 24, 1999
- --------------------------- --------------
Norman H. Reader Chief Executive Officer and
Principal Financial Officer
/s/ Joseph Field Director March 24, 1999
- --------------------------- --------------
Joseph Field
/s/ J. James Gordon Director March 24, 1999
- --------------------------- --------------
J. James Gordon
/s/ James P. Jakubek Director, Executive March 24, 1999
- --------------------------- --------------
James P. Jakubek Vice President
/s/ Stanley A. Levine Director March 24, 1999
- --------------------------- --------------
Stanley A. Levine
/s/ Joseph A. Maida Director March 24, 1999
- --------------------------- --------------
Joseph A. Maida
/s/ Ronald C. Miller Director March 24, 1999
- --------------------------- --------------
Ronald C. Miller
/s/ Courtney A. Nelthropp Director March 24, 1999
- --------------------------- --------------
Courtney A. Nelthropp
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Martin Prince Director March 24, 1999
- --------------------------- --------------
Martin Prince
/s/ Patrick Tisano Director March 24, 1999
- --------------------------- --------------
Patrick Tisano
/s/ Joseph D. Waxberg, M.D. Director March 24, 1999
- --------------------------- --------------
Joseph D. Waxberg, M.D.
/s/ Leigh A. Hardisty Senior Vice President, Comptroller March 24, 1999
- ------------------------------- --------------
Leigh A. Hardisty & Principal Accounting Officer
</TABLE>
-31-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Reorganization dated as of August 19, 1998
between Cornerstone Bank and Cornerstone Bancorp, Inc. (Exhibit 2.1
to Form 8-K12G3 dated March 1, 1999, File No. 0-25465 ("Form 8-
K12G3")) (1)
3.1 Certificate of Incorporation of Cornerstone Bancorp, Inc. (Exhibit
4.1 to Form 8-K12G3) (1)
3.2 Bylaws of Cornerstone Bancorp, Inc. (Exhibit 4.2 to Form 8-K12G3)
(1)
4.1 Form of Specimen Common Stock Certificate of Cornerstone Bancorp,
Inc. (Exhibit 4.3 to Form 8-K12G3) (1)
10.1 Lease agreement as of January 19, 1989 between First National Bank
of Stamford and and Joseph F. Calve Family Trust, Lease agreement as
of June 28, 1994 between Cornerstone Bank and The Samuel Lotstein
Realty Company (Exhibit 2 to Cornerstone Bank's Registration
Statement on Form F-1 filed with the FDIC) (1)
10.2 Lease agreement dated as of May 16, 1995 between Cornerstone Bank
and Mill Pond Company (Exhibit 3(ii) to Cornerstone Bank's Form
F-2 for the year ended December 31, 1994 filed with the FDIC) (1)
10.3 Lease agreement dated as of November 29, 1996 between Cornerstone
Bank and John P. Rossi (Exhibit 3(vii) to Cornerstone Bank's Form F-
2 for the year ended December 31, 1996 filed with the FDIC) (1)
10.4 Lease agreement dated as of December 22, 1998 between Cornerstone
Bank and Ralph Sandolo (2)
10.5 Cornerstone Bancorp, Inc. 1986 Incentive and Non-Qualified Stock
Option Plan (Exhibit ("Form S-8")) 99.1 to Registration
Statement on Form S-8 Registration No. 333-73129 (1)
10.6 Cornerstone Bancorp, Inc. 1996 Incentive and Non-Qualified Stock
Option Plan (Exhibit 99.2 to Form S-8) (1)
10.7 Cornerstone Bancorp, Inc. Director Compensation Plan (Exhibit 99.3
to Form S-8) (1)
10.8 Employment agreement dated as of July 1, 1998 between Cornerstone
Bank and Norman H. Reader (2)
10.9 Employment agreement dated as of July 15, 1998 between Cornerstone
Bank and James P. Jakubek (2)
21.1 Subsidiaries of Cornerstone Bancorp, Inc. (2)
23.1 Consent of KPMG LLP (2)
<PAGE>
Exhibit No. Description
27.1 Financial Data Schedule (2)
(1) Incorporated by reference.
(2) Filed herewith.
<PAGE>
CORNERSTONE BANK
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORTS F-1, F-2
FINANCIAL STATEMENTS:
Statements of Condition at December 31, 1998 and 1997 F-3
Statement of Income for the Years Ended December 31, 1998, 1997 and 1996 F-4
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-6
Notes to Financial Statements F-7 to F-24
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cornerstone Bank:
We have audited the statement of condition of Cornerstone Bank (the "Bank") as
of December 31, 1998 and the related statements of income, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank as of December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 27, 1999 (except as to
note 18, which is as of
March 1, 1999)
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cornerstone Bank
We have audited the statement of condition of Cornerstone Bank (the "Bank") as
of December 31, 1997 and the related statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1997 and
1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Bank as of December 31, 1997, and the
results of its operations and its cash flows for the years ended December 31,
1997 and 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 9, 1998
F-2
<PAGE>
CORNERSTONE BANK
Statements of Condition
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks (note 2) $ 4,768 $ 4,927
Federal funds sold 22,544 10,515
------------- -------------
Cash and cash equivalents 27,312 15,442
Available-for-sale securities, at fair value (note 3) 30,003 22,754
Held-to-maturity securities (fair value of $9,744 in 1998 and
$4,585 in 1997) (note 3) 9,661 4,549
Loans, net of allowance for loan losses of $1,733 in 1998 and
$1,529 in 1997 (note 4) 67,651 77,429
Bank premises and equipment, net (note 5) 2,815 2,966
Accrued interest receivable 970 850
Other assets 1,321 1,418
------------- -------------
Total assets $ 139,733 $ 125,408
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand (non-interest bearing) $ 25,746 $ 22,627
Money market demand and NOW 18,941 17,428
Regular, club and money market savings 24,700 22,989
Time (note 6) 52,492 45,860
------------- -------------
Total deposits 121,879 108,904
Securities sold under agreements to repurchase 2,198 2,510
Accrued interest payable 166 181
Other liabilities 500 503
------------- -------------
Total liabilities 124,743 112,098
------------- -------------
Commitments and contingencies (note 8)
Stockholders' equity (notes 10, 12, 13, 14 and 18):
Common stock, par value $0.01 per share; authorized
2,000,000 shares; issued and outstanding 1,119,336 shares
in 1998 and 1,011,947 shares in 1997 11 10
Additional paid-in capital 11,351 9,050
Retained earnings 3,497 4,164
Accumulated other comprehensive income, net of taxes
of $91 in 1998 and $63 in 1997 131 86
------------- -------------
Total stockholders' equity 14,990 13,310
------------- -------------
Total liabilities and stockholders' equity $ 139,733 $ 125,408
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CORNERSTONE BANK
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Interest income:
Loans $ 7,563 $ 7,082 $ 6,809
Securities 2,123 1,658 1,119
Federal funds sold 817 557 579
----------- ------------- ------------
Total interest income 10,503 9,297 8,507
----------- ------------- ------------
Interest expense:
Deposits 3,607 3,402 3,114
Other 65 58 61
----------- ------------- ------------
Total interest expense 3,672 3,460 3,175
----------- ------------- ------------
Net interest income 6,831 5,837 5,332
Provision for loan losses (note 4) 272 116 414
----------- ------------- ------------
Net interest income after provision for
loan losses 6,559 5,721 4,918
----------- ------------- ------------
Non-interest income:
Deposit service charges 403 357 369
Other 360 267 216
----------- ------------- ------------
Total non-interest income 763 624 585
----------- ------------- ------------
Non-interest expense:
Salaries and employee benefits 2,015 1,884 1,603
Occupancy 461 451 388
Furniture and equipment 412 371 311
Data processing 345 279 231
Professional fees 336 218 182
Other 574 671 635
----------- ------------- ------------
Total non-interest expense 4,143 3,874 3,350
----------- ------------- ------------
Income before income tax expense 3,179 2,471 2,153
Income tax expense (note 7) 1,305 1,046 901
----------- ------------- ------------
Net income $ 1,874 $ 1,425 $ 1,252
=========== ============= ============
Earnings per common share (note 11):
Basic $ 1.68 $ 1.29 $ 1.33
Diluted 1.60 1.24 1.30
=========== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CORNERSTONE BANK
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------------------
NUMBER PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
------------ --------- ---------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1995 852,713 $ 9 $ 7,095 $ 1,988 $ 13 $ 9,105
Comprehensive income:
Net income -- -- -- 1,252 -- 1,252
Net change in unrealized gain on
available-for-sale securities,
net of taxes (note 10) -- -- -- -- 37 37
--------------
Total comprehensive income 1,289
Cash dividends ($0.22 per share) -- -- -- (203) -- (203)
Shares issued in connection with:
Excercise of warrants 137,379 1 1,647 -- -- 1,648
Directors' Stock Compensation Plan 944 -- 12 -- -- 12
Dividend Reinvestment Plan 6,853 -- 83 -- -- 83
---------- -------- --------- ---------- ------------ --------------
At December 31, 1996 997,889 10 8,837 3,037 50 11,934
Comprehensive income:
Net income -- -- -- 1,425 -- 1,425
Net change in unrealized gain on
available-for-sale securities,
net of taxes (note 10) -- -- -- -- 36 36
--------------
Total comprehensive income 1,461
Cash dividends ($0.26 per share) -- -- -- (298) -- (298)
Shares issued in connection with:
Stock Option Plans 7,750 -- 102 -- -- 102
Directors' Stock Compensation Plan 688 -- 12 -- -- 12
Dividend Reinvestment Plan 5,620 -- 99 -- -- 99
---------- -------- --------- ---------- ------------ --------------
At December 31, 1997 1,011,947 10 9,050 4,164 86 13,310
Comprehensive income:
Net income -- -- -- 1,874 -- 1,874
Net change in unrealized gain on
available-for-sale securities,
net of taxes (note 10) -- -- -- -- 45 45
--------------
Total comprehensive income 1,919
Cash dividends ($0.32 per share) -- -- -- (357) -- (357)
Shares issued in connection with:
Stock dividend 101,552 1 2,183 (2,184) -- --
Stock Option Plans 250 -- 4 -- -- 4
Directors' Stock Compensation Plan 399 -- 8 -- -- 8
Dividend Reinvestment Plan 5,188 -- 106 -- -- 106
---------- -------- --------- ---------- ------------ --------------
At December 31, 1998 1,119,336 $ 11 $ 11,351 $ 3,497 $ 131 $ 14,990
========== ======== ========= ========== ============ ==============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CORNERSTONE BANK
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,874 $ 1,425 $ 1,252
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 272 116 414
Depreciation and amortization 299 254 264
Common stock issued under compensation agreements 8 12 12
Increase in accrued interest receivable (120) (149) (15)
(Increase) decrease in deferred loan costs (12) 4 (25)
Decrease (increase) in other assets 69 (114) (93)
(Decrease) increase in accrued interest payable (15) (2) 21
Decrease in other liabilities (3) (57) (195)
-------- -------- --------
Net cash provided by operating activities 2,372 1,489 1,635
-------- -------- --------
Investing activities:
Proceeds from maturities of available-for-sale securities 11,403 8,474 7,312
Proceeds from maturities of held-to-maturity securities 1,494 2,950 6,910
Purchases of available-for-sale securities (18,538) (14,569) (17,012)
Purchases of held-to-maturity securities (6,609) (3,489) (3,487)
Net receipts (disbursements) for loan repayments and originations 9,518 (5,950) (8,956)
Purchases of bank premises and equipment (186) (506) (209)
-------- -------- --------
Net cash used in investing activities (2,918) (13,090) (15,442)
-------- -------- --------
Financing activities:
Net increase in demand, money market and savings deposits 6,343 3,718 4,209
Net increase in time deposits 6,632 8,343 4,869
(Decrease) increase in securities sold under agreements
to repurchase (312) 371 (365)
Proceeds from issuance of common stock 110 201 1,731
Dividends paid on common stock (357) (298) (203)
-------- -------- --------
Net cash provided by financing activities 12,416 12,335 10,241
-------- -------- --------
Increase (decrease) in cash and cash equivalents 11,870 734 (3,566)
Cash and cash equivalents, beginning of year 15,442 14,708 18,274
-------- -------- --------
Cash and cash equivalents, end of year $ 27,312 $ 15,442 $ 14,708
======== ======== ========
Supplemental information:
Interest paid $ 3,687 $ 3,462 $ 3,196
Income taxes paid 1,153 1,381 1,198
Net change in unrealized gain on available-for-sale
securities, net of tax 45 36 37
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CORNERSTONE BANK
Notes to Financial Statements
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements of Cornerstone Bank (the "Bank") have been
prepared in conformity with generally accepted accounting principles and
banking industry practices. The Bank offers a broad range of lending and
depository services to individual customers and businesses primarily in
Southwestern Fairfield County, Connecticut. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilites as of the date of the
statement of condition and income and expenses for the year. Actual results
could differ significantly from those estimates.
For purposes of the statements of cash flows, cash and cash equivalents
include amounts due from banks and Federal funds sold. Generally, Federal
funds sold have a one-day maturity.
Certain prior year amounts have been reclassified to conform with the 1998
presentation. Earnings per share, dividends per share and other per share
data for all periods has been adjusted for the effect of the 10% stock
dividend distributed in August 1998.
SECURITIES
Securities are classified as either available-for-sale (representing
securities the Bank may sell in the ordinary course of business) or as
held-to-maturity (representing securities the Bank has the ability and
positive intent to hold until maturity). Securities held-to-maturity are
stated at amortized cost. Securities available-for-sale are stated at fair
value with unrealized gains and losses excluded from earnings and reported
in stockholders' equity as accumulated other comprehensive income.
Securities are not acquired for purposes of engaging in trading activities.
Gains and losses realized on sales of securities are determined using the
specific identification method. Premiums and discounts on debt securities
are amortized to interest income over the term of the security. Unrealized
losses on securities are charged to earnings if management determines that
the decline in fair value of a security is other than temporary.
LOANS
Loans are stated at the principal amount outstanding, net of deferred loan
costs and fees and the allowance for loan losses. Interest income is
accrued based on contractual rates applied to principal amounts
outstanding. Loan origination and commitment fees and certain direct costs
are deferred and amortized to income over the life of the related loan.
Loans are classified as nonaccrual when, in the opinion of management,
collectibility of interest or principal becomes uncertain. Generally, loans
are placed in nonaccrual status when principal or interest is past due for
a period of 90 days, or for a lesser period if circumstances indicate
collection of interest or principal is doubtful. When a loan is placed in
nonaccrual status, previously accrued and uncollected interest is reversed
against current year interest income. A nonaccrual loan is restored to
accrual status only when prospects for future payments of interest and
principal are no longer in doubt due to borrower performance and prospects.
Interest received on nonaccrual loans, including impaired loans, generally
is either applied against principal or reported as interest income
according to management's judgment of the collectibility of principal.
F-7
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions for losses charged
to income. When amounts on specific loans are judged to be uncollectible by
management, those amounts are charged off to reduce the allowance for loan
losses. Subsequent recoveries, if any, are restored to the allowance when
realized.
Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan, as amended, requires recognition of an
impairment loss on a loan within its scope when it is probable that
principal and/or interest are not collectible in accordance with the terms
of the loan agreement. SFAS No. 114 does not apply to large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, such as the Bank's portfolios of residential mortgage loans and
installment loans. Measurement of impairment is based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral, if the loan is collateral dependent.
The evaluation is inherently subjective as it requires material estimates
that may be susceptible to significant change. If the fair value of the
impaired loan is less than the recorded amount, a specific valuation
allowance is established within the allowance for loan losses or the write-
down is charged against the allowance for loan losses if the impairment is
considered to be permanent.
Management believes that the allowance for loan losses is adequate.
Management uses past loan loss experience, its evaluation of the loan
portfolio under current economic conditions and other relevant factors to
recognize loan losses. Future additions to the allowance may be necessary
based on changes in economic conditions, particularly in the Bank's service
area of Southwestern Fairfield County, Connecticut. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments of
information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provisions for depreciation are made on the basis of
the estimated useful lives of the assets, which range from three to twenty
years for equipment and thirty-five years for buildings, using the
straight-line method. Leasehold improvements are amortized over the shorter
of their estimated service lives or the term of the lease.
INCOME TAXES
In accordance with the asset and liability method required by SFAS No. 109,
Accounting for Income Taxes, deferred taxes are recognized for the
estimated future tax effects attributable to "temporary differences"
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A deferred tax liability is
recognized for all temporary differences that will result in future taxable
income. A deferred tax asset is recognized for all temporary differences
that will result in future tax deductions, subject to reduction of the
asset by a valuation allowance in certain circumstances. This valuation
allowance is recognized if, based on an analysis of available evidence,
management determines that it is more likely than not that a portion or all
of the deferred tax asset will not be realized. The valuation allowance is
subject to ongoing adjustments based on changes in circumstances that
affect management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense.
F-8
<PAGE>
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to future taxable income. The effect on deferred tax
assets and liabilities of an enacted change in tax rates is recognized in
income tax expense in the period that includes the enactment date of the
change.
EARNINGS PER SHARE
SFAS No. 128, Earnings per Share, specifies the computation, presentation
and disclosure requirements for earnings per share ("EPS") for entities
with publicly-held common stock or potential common stock. SFAS No. 128
requires the presentation of basic EPS and diluted EPS. Basic EPS is
computed by dividing income available to common shareholders (net income
less dividends on preferred stock, if any) by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock (such as stock options) were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair-
value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method of
accounting for all employee stock compensation plans. SFAS No. 123 permits
entities to continue to measure compensation costs for stock-based
compensation plans using the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Entities that follow APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair-value-based method of accounting prescribed by SFAS
No. 123 had been applied. The Bank has elected to continue to measure
compensation cost for stock-based compensation plans in accordance with the
provisions of APB Opinion No. 25 and has provided the pro forma disclosures
required by SFAS No. 123.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, specifies accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities, and for distinguishing whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured
borrowing. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, except for certain provisions relating to the accounting
for secured borrowings and collateral which became effective on January 1,
1998. SFAS No. 125 has not had a material impact on the Bank's financial
statements.
The Bank enters into transactions with certain of its commercial customers
in which the Bank sells U.S. Treasury and agency securities under
agreements to repurchase the identical securities from the customer at a
later date. These transactions are accounted for as secured borrowings
under SFAS No. 125 since the Bank maintains effective control over the
underlying securities. The transaction proceeds are recorded as borrowed
funds under the caption "Securities sold under agreements to repurchase" in
the statements of condition, and the collateral securities continue to be
carried as assets in the Bank's securities portfolio.
F-9
<PAGE>
SEGMENT INFORMATION
During 1998, the Bank adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires public
companies to report certain financial information about significant
revenue-producing segments of the business for which such information is
available and utilized by the chief operating decision maker. Specific
information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total
assets. As a community-oriented financial institution, substantially all of
the Bank's operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses performance
based on an ongoing review of these community banking operations, which
constitute the Bank's only operating segment for financial reporting
purposes under SFAS No. 131.
(2) CASH RESERVE REQUIREMENTS
The Bank is required to maintain average reserve balances under the Federal
Reserve Act and Regulation D issued thereunder. Such reserves totaled
approximately $247,000 and $317,000 at December 31, 1998 and 1997,
respectively.
(3) SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
values of securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
-----------------
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury $ 501 $ 4 $ -- $ 505
U.S. Agency securities 29,280 253 35 29,498
--------- --------- -------- ---------
Total $ 29,781 $ 257 $ 35 $ 30,003
========= ========= ======== =========
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 5,003 $ 46 $ -- $ 5,049
U.S. Agency securities 4,583 54 17 4,620
Other 75 -- -- 75
--------- --------- -------- ---------
Total $ 9,661 $ 100 $ 17 $ 9,744
========= ========= ======== =========
DECEMBER 31, 1997
-----------------
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury $ 2,499 $ 6 $ -- $ 2,505
U.S. Agency securities 20,106 148 5 20,249
--------- --------- -------- ---------
Total $ 22,605 $ 154 $ 5 $ 22,754
========= ========= ======== =========
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 4,005 $ 30 $ -- $ 4,035
U.S. Agency securities 494 6 -- 500
Other 50 -- -- 50
--------- --------- -------- ---------
Total $ 4,549 $ 36 $ -- $ 4,585
========= ========= ======== =========
</TABLE>
F-10
<PAGE>
The following is a summary of the amortized cost and estimated fair value
of debt securities at December 31, 1998, by remaining period to contractual
maturity. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
SECURITIES SECURITIES
------------------------- ------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 1,000 $ 1,005 $ 3,005 $ 3,029
Due after one year through five years 23,771 23,928 6,606 6,665
Due after five years 5,010 5,070 50 50
--------- --------- ---------- -------
Total $ 29,781 $ 30,003 $ 9,661 $ 9,744
========= ========= ========== =======
</TABLE>
At December 31, 1998 and 1997, securities carried at approximately
$2,701,000 and $3,016,000, respectively, were pledged as collateral for
repurchase agreements with customers. No securities were sold in 1998, 1997
or 1996.
(4) LOANS AND CONCENTRATION OF CREDIT RISK
Most of the Bank's lending activity is with customers located within
Southwestern Fairfield County, Connecticut. At December 31, 1998 and 1997,
loans collateralized by real estate or granted to customers in real estate
related industries aggregated approximately $45,593,000 and $45,063,000,
respectively. While collateral provides assurance as a secondary source of
repayment, the Bank's underwriting standards require that cash flow of the
borrowers be adequate to service their debt at loan origination.
The loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Demand, time and term loans $ 18,046 $ 21,656
Commercial mortgage loans 38,728 44,044
Residential mortgage loans 8,647 8,901
Aircraft loans 2,698 3,424
Installment loans 662 650
Other loans 588 280
-------------- --------------
Total loans 69,369 78,955
Allowance for loan losses (1,733) (1,529)
Deferred loan costs, net 15 3
-------------- --------------
Total loans, net $ 67,651 $ 77,429
============== ==============
</TABLE>
F-11
<PAGE>
A summary of changes in the allowance for loan losses follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 1,529 $ 1,660 $ 1,384
Provisions charged to income 272 116 414
Loans charged off (168) (294) (148)
Recoveries 100 47 10
---------- ----------- -----------
Balance, end of year $ 1,733 $ 1,529 $ 1,660
========== ========== ===========
</TABLE>
The Bank's recorded investment in impaired loans, as defined by SFAS No.
114, is summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans for which impairment allowances of
$43 thousand and $280 thousand were recorded
at December 31, 1998 and 1997, respectively $ 351 $ 486
Impaired loans for which no impairment allowance
or writedown has been recorded 173 2,531
---------------- ---------------
Total impaired loans $ 524 $ 3,017
================ ===============
</TABLE>
Substantially all of these impaired loans were collateral-dependent loans
measured based on the fair value of the collateral in accordance with SFAS
No. 114. The Bank's average recorded investment in impaired loans was
$1,103,000 in 1998, $2,659,000 in 1997 and $1,136,000 in 1996. Interest
income recorded on impaired loans (while such loans were impaired) amounted
to $10,000 in 1998, $13,000 in 1997 and $6,000 in 1996.
Nonaccrual loans (all of which were also classified as impaired loans under
SFAS No. 114) and related interest income data are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans at year-end $ 524 $ 3,017 $ 888
Interest income recorded during the year 10 13 6
Interest income that would have been
recorded during the year under the
original contractual terms 74 313 114
========== ========== ==========
</TABLE>
The increase in nonaccrual loans during 1997 was due primarily to one loan
which was fully recovered in the second quarter of 1998. Interest and fee
income of $454,000 was recognized at the time of recovery, including
approximately $325,000 in prior year interest which had not been accrued.
F-12
<PAGE>
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land $ 695 $ 695
Buildings and improvements 1,953 1,941
Furniture and equipment 2,176 2,165
Vehicles 146 137
-------- --------
Total 4,970 4,938
Less accumulated depreciation and amortization 2,155 1,972
-------- --------
Bank premises and equipment, net $ 2,815 $ 2,966
======== ========
</TABLE>
(6) TIME DEPOSITS
Maturities of time deposits at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Up to 90 days $ 12,062 $ 11,476
91 to 180 days 9,148 7,961
181 days to 1 year 14,993 14,782
Over 1 year, less than 2 years 8,945 5,677
Over 2 years, less than 5 years 7,240 5,854
Greater than 5 years 104 110
-------- --------
Total $ 52,492 $ 45,860
======== ========
</TABLE>
Time deposits of $100,000 or more aggregated approximately $10,490,000 and
$8,458,000 at December 31, 1998 and 1997, respectively.
F-13
<PAGE>
(7) INCOME TAXES
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current $ 955 $ 805 $ 818
Deferred 44 (45) (174)
-------- -------- --------
999 760 644
-------- -------- --------
State:
Current 295 274 282
Deferred 11 12 (25)
-------- -------- --------
306 286 257
-------- -------- --------
Total income tax expense $ 1,305 $ 1,046 $ 901
======== ======== ========
</TABLE>
The following is a reconciliation of income taxes computed using the
Federal statutory rate of 34% to the actual income tax expense for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at Federal statutory rate $ 1,081 $ 840 $ 732
State income tax, net of Federal benefit 202 185 170
Other 22 21 (1)
-------- -------- --------
Actual income tax expense $ 1,305 $ 1,046 $ 901
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 585 $ 505
Interest on nonaccrual loans 123 270
-------- --------
708 775
-------- --------
Deferred tax liabilities:
Net unrealized gain on available-for-sale securities 91 63
Depreciation of premises and equipment 40 43
Other 15 24
-------- --------
146 130
-------- --------
Net deferred tax asset $ 562 $ 645
======== ========
</TABLE>
Based on the Bank's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Bank's
deferred tax assets will be realized.
F-14
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to credit-related financial instruments that involve,
to varying degrees, elements of credit risk and interest rate risk in
addition to the risks associated with loan amounts recognized in the
statements of condition. At December 31, 1998 and 1997, outstanding loan
commitments under unused lines of credit were approximately $8,955,000 and
$7,377,000, respectively, and outstanding letters of credit were
approximately $225,000 and $179,000, respectively. Unused lines of credit
are legally binding agreements to lend a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates or other termination clauses. The
amount of collateral obtained, if deemed necessary by the Bank, is based on
management's credit evaluation of the borrower.
Although the foregoing contractual amounts represent the Bank's maximum
potential exposure to credit loss, they do not necessarily represent future
cash requirements since certain of these instruments may expire without
being funded and others may not be fully drawn upon. Substantially all of
these commitments and letters of credit have been provided to customers
within the Bank's primary lending area described in note 4.
LEASE COMMITMENTS
At December 31, 1998, the Bank was obligated under operating leases for its
four existing branch offices. The leases include various renewal options
and require the Bank to pay applicable costs for utilities, maintenance,
insurance and real estate taxes. Rent expense under branch operating leases
was approximately $215,000, $207,000 and $127,000 for 1998, 1997 and 1996,
respectively. At December 31, 1998, the future minimum rental payments
under operating leases, excluding renewal option periods, were $177,000 for
1999; $146,000 for 2000; $78,000 for 2001; and $24,000 for 2002.
LEGAL PROCEEDINGS
In the normal course of business, the Bank is involved in various
outstanding legal proceedings. In the opinion of management, after
consultation with legal counsel, the outcome of such legal proceedings
should not have a material effect on the Bank's financial condition,
results of operations or liquidity.
(9) RELATED PARTY TRANSACTIONS
Loans made directly or indirectly to the Bank's employees, directors or
principal shareholders were approximately $3,890,000 and $2,900,000 at
December 31, 1998 and 1997, respectively. These amounts include loans
totaling $3,118,000 and $1,721,000 at December 31, 1998 and 1997,
respectively, with balances that exceeded 2.5% of the equity capital
accounts of the Bank (or $375,000 and $333,000, respectively). During 1998,
new loans made directly or indirectly to employees, directors or principal
shareholders totaled $1,855,000 and payments totaled $865,000. These loans
were made in the ordinary course of business at normal credit terms, and do
not represent more than a normal risk of collection.
F-15
<PAGE>
During 1998 and 1997, payments aggregating approximately $128,000 and
$156,000, respectively, were made for materials and services to companies
in which certain Bank directors had an interest. Management believes that
the amounts paid by the Bank are reasonable in relation to the value of
the materials and services provided.
(10) COMPREHENSIVE INCOME
The Bank has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive
income (and its components) in financial statements. Comprehensive income
represents the sum of net income and items of "other comprehensive income"
which are reported directly in stockholders' equity, such as the change
during the period in the after-tax net unrealized gain or loss on
securities available for sale. In accordance with SFAS No. 130, the Bank
has reported its comprehensive income for 1998, 1997 and 1996 in the
statements of changes in stockholders' equity.
The Bank's accumulated other comprehensive income, which is included in
stockholders' equity, represents the after-tax net unrealized gain on
available-for-sale securities at the end of the year. The Bank's other
comprehensive income for the years ended December 31, 1998, 1997 and 1996
is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net unrealized holding gains arising
during the year on available-for-
sale securities $ 73 $ 62 $ 74
Related income tax effect (28) (26) (37)
------- ------- -------
Other comprehensive income $ 45 $ 36 $ 37
======= ======= =======
</TABLE>
F-16
<PAGE>
(11) EARNINGS PER SHARE
A summary of the basic and diluted earnings per share calculations for
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
INCOME/(1)/ SHARES/(2)/ PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ----------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
1998
----
Basic EPS $ 1,874 1,117 $1.68
Effect of dilutive stock options -- 53
--------------- -----------------
Diluted EPS $ 1,874 1,170 $1.60
=============== =================
1997
----
Basic EPS $ 1,425 1,106 $1.29
Effect of dilutive stock options -- 42
--------------- -----------------
Diluted EPS $ 1,425 1,148 $1.24
=============== =================
1996
----
Basic EPS $ 1,252 944 $1.33
Effect of dilutive stock options -- 18
--------------- -----------------
Diluted EPS $ 1,252 962 $1.30
=============== =================
</TABLE>
/(1)/ Net income applicable to common stock equaled net income for each
of the periods presented.
/(2)/ The effect of dilutive stock options represents the number of
common-equivalent shares issuable from the assumed exercise of
stock options, computed using the treasury stock method.
(12) STOCK OPTION PLANS AND DIRECTORS' STOCK COMPENSATION PLAN
STOCK OPTION PLANS
The options outstanding under the terms of the Bank's 1986 Incentive and
Nonqualified Stock Option Plan (the "1986 Plan") were transferred to the
1996 Incentive and Nonqualified Stock Option Plan (the "1996 Plan") upon
adoption of the 1996 Plan. The 1996 Plan provides for the issuance of up
to 176,000 shares of the Bank's common stock, reduced by the number of
shares subject to outstanding stock options granted under the 1986 Plan.
The number of options available for issuance under the 1996 Plan was
36,740 as of December 31, 1998. The terms of the 1996 Plan are
substantially the same as the 1986 Plan, except that the 1996 Plan also
provides for the granting of options to directors and the
F-17
<PAGE>
issuance of Stock Appreciation Rights ("SARs"). No SARs have been granted
as of December 31, 1998. Options have a ten-year term and must be granted
at exercise prices equal to the fair value of the Bank's common stock on
the grant date. In addition, all options vest immediately, except for
options granted to directors who, on the date of grant, have fewer than
five years of service as a director of the Bank. Such options become
exercisable beginning on the fifth anniversary of the date on which
service as a director began.
Stock option transactions for 1996, 1997 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ --------------
<S> <C> <C>
Outstanding options as of January 1, 1996 88,000 $ 9.40
Grants:
Incentive 275 9.89
Nonqualified 27,775 9.89
Expirations:
Incentive (12,375) 9.09
Nonqualified (11,000) 9.09
-------
Outstanding options as of December 31, 1996 92,675 9.63
Grants:
Nonqualified 52,360 16.61
Exercises:
Incentive (4,675) 9.09
Nonqualified (3,850) 9.88
-------
Outstanding options as of December 31, 1997 136,510 12.31
Grants:
Nonqualified 3,025 18.98
Exercises:
Nonqualified (275) 14.97
-------
Outstanding options as of December 31, 1998 139,260 $12.47
=======
</TABLE>
Outstanding options at December 31, 1998 consist of 9,350 incentive
options and 129,910 nonqualified options with weighted average exercise
prices of $9.55 and $12.68, respectively.
The following table summarizes additional information regarding stock
options outstanding and exercisable at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998 $9.55 - $18.98 139,260 7.62 years $12.47 137,335 $12.45
1997 $9.55 - $17.61 136,510 9.35 years $12.31 132,935 $12.35
</TABLE>
F-18
<PAGE>
As described in note 1, the Bank measures compensation cost in accordance
with APB Opinion No. 25 and, accordingly, no compensation cost relating
to stock options has been recognized in 1998, 1997 or 1996. Had
compensation cost been determined consistent with the fair-value-based
method of SFAS No. 123, the Bank's net income and earnings per share for
the years ended December 31, 1998, 1997 and 1996 would have been reduced
to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported 1,874 $ 1,425 $ 1,252
Pro forma $ 1,865 1,288 1,219
============= ============= =============
Basic earnings per share:
As reported 1.68 $ 1.29 $ 1.33
Pro forma $ 1.67 1.16 1.25
============= ============= =============
Diluted earnings per share:
As reported 1.60 $ 1.24 $ 1.30
Pro forma $ 1.59 1.13 1.23
============= ============= =============
</TABLE>
The weighted average estimated fair value of options granted during
1998, 1997 and 1996 was $5.10, $4.51 and $2.32, respectively. These fair
values were estimated on the grant dates using the Black-Scholes option-
pricing model and the following weighted-average assumptions: dividend
yield of 2.00%, 2.00% and 2.00%; expected volatility of 25%, 23% and 25%;
expected lives of 5 years; and risk-free interest rates of 4.74%, 5.70%
and 6.10% for 1998, 1997 and 1996, respectively.
DIRECTORS' STOCK COMPENSATION PLAN
Under the Directors' Stock Compensation Plan, nonofficer directors are
compensated for their services in Bank common stock or cash, based on the
annual election made by each qualifying director at the first Board
meeting subsequent to each annual meeting. Under the plan, directors
accumulate credits for attendance at Board and committee meetings
throughout the plan year, which ends with each annual meeting, at rates
set by the Board. Directors who elect to receive stock are issued a whole
number of shares of stock equal to their accumulated credits divided by
the fair value of the Bank's common stock as of the date of each Board
meeting. Such shares are distributed on the last business day of May of
each year. A total of 399 shares, 688 shares and 944 shares were issued
to directors during 1998, 1997 and 1996, respectively.
F-19
<PAGE>
(13) STOCKHOLDERS' EQUITY
DIVIDENDS
On July 16, 1998, the Bank announced a 10% stock dividend which was
distributed on August 31, 1998 to shareholders of record as of July 31,
1998. Under the terms of the dividend, stockholders received a dividend
of one share of common stock for every ten shares owned as of the record
date. A total of 101,552 common shares were issued. An amount equal to
the fair value of these shares was charged to retained earnings, with a
corresponding combined increase in common stock and additional paid-in
capital.
The Bank is statutorily allowed to pay cash dividends in any calendar
year only to the extent of its net profits for that calendar year, if
any, combined with its retained net profits for the preceding two years.
The Bank's net profits retained in 1998 and 1997 (after cash dividends)
totaled approximately $2,644,000.
In October 1995, the Bank initiated a Dividend Reinvestment Plan ("DRIP")
for its shareholders. This plan involves voluntary enrollment by each
shareholder and entitles them to dividend reinvestment and voluntary
purchases of common stock without paying any broker's fees. Shareholders
can invest up to $5,000 in additional shares each quarter. In addition,
cash dividends are automatically reinvested into new shares of the Bank's
common stock at the current trading price. The DRIP resulted in the
issuance of 5,188, 5,620 and 6,853 additional common shares during 1998,
1997 and 1996, respectively.
COMMON STOCK OFFERING AND RELATED TRANSACTIONS
During 1994, the Bank issued an offering circular providing for the sale
of additional shares of common stock, the conversion of preferred stock
then outstanding, and the issuance of nontransferable warrants to
purchase additional common shares. At the conclusion of the offering,
approximately 269,594 shares of common stock were sold. Approximately
250,190 shares of common stock were issued to preferred shareholders who
converted their shares and a conversion incentive payment of
approximately $237,000 was paid. The Board of Directors redeemed the
remaining preferred stock in February 1995. In connection with the
offering, nontransferable warrants were issued to purchase approximately
170,012 shares of common stock after June 30, 1996 but prior to January
1, 1997, at the greater of book value per common share at March 31, 1996
or $12.00 per share. As of December 31, 1996, 137,379 shares of common
stock were purchased through the exercise of warrants.
(14) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory (and possibly
additional discretionary) actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet or exceed specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
F-20
<PAGE>
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain or exceed the minimum capital
amounts and ratios set forth in the table below. These requirements
include ratios of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes that, as
of December 31, 1998 and 1997, the Bank met all capital adequacy
requirements to which it was subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain or exceed the
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
set forth in the table below. There have been no conditions or events
since the most recent notification that management believes have changed
the Bank's capital category. The Bank's actual capital amounts and ratios
are also presented in the table.
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
MINIMUM FOR CAPITAL CAPITALIZED UNDER PROMPT
BANK ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
----------------------------- ---------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
-----------------------
Total Capital (to Risk
Weighted Assets) $ 15,869 19.80% $ 6,411 8.00% $ 8,014 10.00%
Tier 1 Capital (to Risk
Weighted Assets) 14,859 18.54 3,205 4.00 4,808 6.00
Tier 1 Capital (to
Average Assets) 14,859 10.95 5,426 4.00 6,782 5.00
AS OF DECEMBER 31, 1997
-----------------------
Total Capital (to Risk
Weighted Assets) 14,279 17.02 6,712 8.00 8,390 10.00
Tier 1 Capital (to Risk
Weighted Assets) 13,224 15.76 3,356 4.00 5,035 6.00
Tier 1 Capital (to
Average Assets) 13,224 10.81 4,893 4.00 6,117 5.00
</TABLE>
(15) EMPLOYEE BENEFIT PLAN
Effective January 1, 1994, the Bank established a 401(k) Savings Plan
which covers substantially all employees. The Plan provides for matching
contributions by the Bank based upon a percentage of employee
contributions. Total matching contributions by the Bank were $36,000,
$32,000 and $33,000 for 1998, 1997 and 1996, respectively.
F-21
<PAGE>
(16) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires that the Bank disclose estimated fair values for
certain financial instruments. Estimated fair values have been determined
by management using available market information and various valuation
estimation methodologies. Considerable judgment is required to interpret
the effects on fair value of such items as future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. The fair value estimates
presented below are not necessarily indicative of the amounts that the
Bank could realize in a current market exchange. Also, the use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair values.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 27,312 $ 27,312 $ 15,442 $ 15,442
Securities and accrued
interest 40,249 40,332 27,690 27,726
Loans and accrued
interest, net 68,036 71,449 77,892 76,366
======== ========= ======== =========
Financial liabilities:
Deposits without stated
maturities and accrued
interest $ 69,387 $ 69,387 $ 63,046 $ 63,046
Time deposits and accrued
interest 52,658 53,382 46,039 46,183
Securities sold under
agreements to repurchase 2,198 2,198 2,510 2,510
======== ========= ======== =========
</TABLE>
The fair value estimates presented above are based on pertinent
information available to management as of December 31, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued since December 31, 1998 and 1997 and, therefore,
current estimates of fair value may differ significantly from the amounts
presented above.
Fair value methods and assumptions are as follows:
CASH EQUIVALENTS
The estimated fair values of cash equivalents were based on a comparison
to current interest rates for similar assets.
SECURITIES
The fair values of securities were estimated based on quoted market
prices or dealer quotes, if available. If a quote was not available, fair
value was estimated using quoted market prices for similar securities.
F-22
<PAGE>
LOANS
The fair values of fixed rate loans were estimated by discounting
projected cash flows using current rates for similar loans. For other
loans, which reprice frequently to market rates, the carrying amount
represents the estimated fair value. The total amount of loans included
has been reduced by specific and general allowances for losses.
DEPOSITS WITHOUT STATED MATURITIES
Under the provisions of SFAS No. 107, the estimated fair values of
deposits without stated maturities (such as non-interest bearing demand
deposits, savings accounts, NOW accounts and money market accounts) are
equal to the amounts payable on demand.
TIME DEPOSITS
The fair values of time certificates of deposit were estimated based on
the discounted value of contractual cash flows. The discount rates were
based on rates currently offered for deposits with similar remaining
maturities. The excess of the estimated fair value of time deposits over
their carrying amount represents the discounted value of contractual
rates as compared to rates currently being offered.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank's financial instruments with off-balance-sheet risk consist of
the commitments to extend credit and letters of credit described in note
8. If the options are exercised by the prospective borrowers, these
financial instruments will become interest-earning assets of the Bank. If
the options expire, the Bank retains any fees paid by the counterparty in
order to obtain the commitment or guarantee. The fair values of
commitments are estimated based upon fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, the fair value estimates take into consideration
an interest rate risk factor. The fair values of guarantees and letters
of credit are based on fees currently charged for similar agreements. The
fair values of these off-balance-sheet instruments at December 31, 1998
and 1997 approximated the recorded amounts of the related fees, which
were not material. The Bank has not engaged in hedging activities through
the use of instruments such as interest rate futures contracts or
interest rate swaps.
(17) RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which requires entities to recognize all derivatives as
either assets or liabilities in the statement of condition at fair value.
If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. A specific accounting treatment applies to each type of
hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time of adopting SFAS
No. 133. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999, although early adoption is permitted. The Bank is not presently
engaged in derivatives and hedging activities covered by the new standard
and, accordingly, SFAS No. 133 is not expected to have a material impact
on the Bank's financial statements.
F-23
<PAGE>
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134 provides for
the classification of such retained securities as held to maturity,
available for sale, or trading in accordance with SFAS No. 115. Prior
accounting standards limited the classification of these securities to
the trading category. SFAS No. 134 is effective for the fiscal quarter
beginning after December 15, 1998 and is not expected to affect the
Bank's financial statements.
(18) FORMATION OF BANK HOLDING COMPANY
Under an Agreement and Plan of Reorganization (the "Plan") dated August
19, 1998 and approved by the Bank's shareholders on October 21, 1998, the
Bank became a wholly-owned subsidiary of Cornerstone Bancorp, Inc. (the
"Company") on March 1, 1999. The Company is a newly-formed bank holding
company incorporated by the Bank for the purpose of owning all of the
Bank's outstanding common stock. Under the terms of the Plan, each
outstanding share of the Bank's common stock was exchanged on a one-for-
one basis for the Company's common stock (par value $0.01 per share). The
holding company formation was accounted for in a manner similar to a
pooling of interests and, accordingly, it had no effect on the Bank's
financial statements.
F-24
<PAGE>
EXHIBIT 10.4
THIS LEASE, dated the day of November 1998 Between RALPH SANDOLO, 327 Main
Avenue, Norwalk, Connecticut hereinafter referred to as the Landlord, and
CORNERSTONE BANK, a national banking association with offices at 550 Summer
Street, Stamford, Connecticut hereinafter referred to as the Tenant,
WITNESSETH: That the Landlord hereby demises and leases unto the Tenant, and the
Tenant hereby hires and takes from the Landlord for the term and upon the
rentals hereinafter specified, the premises described as follows, situated in
the City of Norwalk County of Fairfield and State of Connecticut.
Approximately 2,200 square feet located at 83 New Canaan Avenue, Norwalk,
Connecticut * formerly accompanied by a bakery as more particularly depicted on
the sketch annexed hereto as Exhibit A
*(the "Building")
The term of this demise shall be for five years beginning on the date that
the Tenant opens for business from the Premises. (The "Commencement Date"). The
rent for the demised term shall be
See Schedule A
The said rent is to be payable monthly in advance on the first day of each
calendar month for the term hereof, in instalments as follows:
See Schedule A
at the office of the Landlord, 327 Main Avenue, Norwalk, Norwalk, CT or as may
be otherwise directed by the Landlord in writing.
THE ABOVE LETTING IS UPON THE FOLLOWING CONDITIONS:
First--The Landlord covenants that the Tenant, on paying the said rental
and performing the covenants and conditions in this Lease contained, shall and
may peaceably and quietly have, hold and enjoy the demised premises for the term
aforesaid.
Second--The Tenant covenants and agrees to use the demised premises as a
bank branch and related activities and such other activities as may be allowed
by zoning.
and agrees not to use or permit the premises to be used for any other purpose
without the prior written consent of the Landlord endorsed hereon, not to be
unreasonably withheld.
*following notice
Third--The Tenant shall, without any previous demand therefor, pay to the
Landlord, or its agent, the said rent at the times and in the manner above
provided. In the event of the non-payment of said rent, or any instalment
thereof, at the times and in the manner above provided, and if the same shall
remain in default for ten days * after becoming due, or if the Tenant shall be
dispossessed for non-payment of rent, or if the leased premises shall be
deserted or vacated, the Landlord or its agents shall have the right to and may
enter the said premises as the agent of the Tenant, and may relet the premises
as the agent of the Tenant, and receive the rent therefor, upon such terms as
shall be satisfactory to the Landlord, and all rights of the Tenant to repossess
the premises under this lease shall be forfeited. Such re-entry by the Landlord
shall not operate to release the Tenant from any rent to be paid or covenants to
be performed hereunder during the full term of this lease. For the purpose of
reletting, the Landlord shall be authorized to make such repairs or alterations
in or to the leased premises as may be necessary to place the same in good order
and condition. The Tenant shall be liable to the Landlord for the cost of such
repairs or alterations, and all expenses of such reletting. If the sum realized
or to be realized from the reletting is insufficient to satisfy the monthly or
term rent provided in this lease, the Landlord, at its option, may require the
Tenant to pay such deficiency month by month, or may hold the Tenant in advance
for the entire deficiency to be realized during the term of the reletting. The
Tenant shall not be entitled to any surplus accruing as a result of the
reletting. ** The Landlord shall have the right, as agent of the Tenant, to take
possession of any furniture, fixtures or other personal property of the Tenant
found in or about the premises, and sell the same at public or private sale and
to apply the proceeds thereof to the payment of any monies becoming due under
this lease, the Tenant hereby waiving the benefit of all laws exempting property
from execution, levy and sale on distress or judgment. The Tenant agrees to pay,
as additional rent, all attorney's fees and other expenses incurred by the
Landlord in enforcing any of the obligations under this lease.
**After judgment,
Fourth--The Tenant shall not sub-let the demised premises nor any portion
thereof, nor shall this lease be assigned by the Tenant without the prior
written consent of the Landlord endorsed hereon, not to be unreasonably withheld
or delayed.
Fifth--The Tenant has examined the demised premises, and accepts them in
their present condition (except as otherwise expressly provided herein) and
without any representations on the part of the Landlord or its agents as to the
present or future condition of the said promises. The Tenant shall keep the
demised premises in good condition, and shall redecorate, paint and renovate the
said premises as may be necessary to keep them in repair and good appearance.
The Tenant shall quit and surrender the premises at the end of the demised term
in as good condition as the reasonable use thereof will permit. The Tenant shall
not make any alternations, additions, or improvements to said premises without
the
<PAGE>
prior written consent of the Landlord not to be unreasonably witheld or delayed.
All erections, alterations, additions and improvements, whether temporary or
permanent in character, which may be made upon the premises either by the
Landlord or the Tenant, except furniture or movable trade fixtures installed at
the expense of the Tenant, shall be the property of the Landlord and shall
remain upon and be surrendered with the premises as a part thereof at the
termination of this Lease, without compensation to the Tenant. The Tenant
further agrees to keep said premises and all parts thereof in a clean and
sanitary condition and free from trash, inflammable material and other
objectionable matter. If this lease covers premises, all or a part of which are
on the ground floor, the Tenant further agrees to keep the sidewalks in front of
such ground floor portion of the demised premises clean and free of obstruction,
snow and ice.
Sixth.--In the event that any mechanics' lien is filed against the premises
as a result of alterations, additions or improvements made by the Tenant, the
Landlord, at its option, after thirty days' notice to the Tenant, may terminate
this lease and may pay the said lien, without inquiring into the validity
thereof, and the Tenant shall forthwith reimburse the Landlord the total expense
incurred by the Landlord in discharging the said lien, as additional rent
hereunder.
Seventh.--The tenant agrees to replace at the Tenant's expense any and all
glass which may become broken in and on the demised premises.
Eighth.--Except as may be caused by the Landlord, its agents, contractors
or employees. The Landlord shall not be responsible for the loss of or damage to
property, or injury to persons, occurring in or about the demised premises, by
reason of any existing or future condition defect, matter or thing in said
demised premises or the property of which the premises are a part, or for the
acts, omissions or negligence of other persons or tenants in and about the said
property. The Tenant agrees to indemnify and save the Landlord harmless from all
claims and liability for losses of or damage to property, or injuries to persons
occurring in or about the demised premises.
Ninth.--Utilities and services furnished to the demised premises for the
benefit of the Tenant shall be provided and paid for as follows: water by the
Tenant; gas by the N/A; electricity by the Tenant; heat by the Tenant; hot
water by the
Except as may be caused by the Landlord, its agents, contractors or employees,
The Landlord shall not be liable for any interruption or delay in any of the
above services for any reason.
Tenth.--The Landlord, or its agents, shall have the right after reasonable
notice to enter the demised premises at reasonable hours in the day or night to
examine the same or to run telephone or other wires, or to make such repairs,
additions or alterations as it shall deem necessary for the safety, preservation
or restoration of the improvements, or for the safety or convenience of the
occupants or users thereof (that being no obligation, however, on the part of
the Landlord to make any such repairs, additions or alterations), or to exhibit
the same to prospective purchasers and put upon the premises a suitable "For
Sale" sign. For three months prior to the expiration of the demised term, the
Landlord, or its agents, may similarly exhibit the premises to prospective
tenants, and may place the usual "To Let" signs thereon.
Eleventh.--In the event of the destruction of the demised premises or the
building containing the said premises by fire, explosion, the elements or
otherwise during the term hereby created, or previous thereto, or such partial
destruction thereof as to render the premises wholly untenantable or unfit for
occupancy, or should the demised premises be so badly injured that the same
cannot be repaired within ninety days from the happening of such injury, then
and in such case the term hereby created shall, at the option of the Landlord,
cease and become null and void from the date of such damage or destruction, and
the Tenant shall immediately surrender said premises and all the Tenant's
interest therein to the Landlord, and shall pay rent only to the time of such
surrender, in which event the Landlord may re-enter and re-possess the premises
thus discharged from this lease and may remove all parties therefrom. Should the
demised premises be rendered untenantable and unfit for occupancy, but yet be
repairable within ninety days from the happening of said injury, the Landlord
may enter and repair the same with reasonable speed, and the rent shall not
accrue after said injury or while repairs are being made, but shall recommence
immediately after said repairs shall be completed. But if the premises shall be
so slightly injured as not to be rendered untenantable and unfit for occupancy,
then the Landlord agrees to repair the same with reasonable promptness and in
that case the rent accrued and accruing shall not cease or determine. The Tenant
shall immediately notify the Landlord in case of fire or other damage to the
premises. The terms of the Lease will be extended in the event of temporary
deprivation of the use or enjoyment of the Premises. The prepaid rent, if any,
shall be proportionately**
Twelfth.--The Tenant agrees to observe and comply with all laws,
ordinances, rules and regulations of the Federal, State, County and Municipal
authorities applicable to the business to be conducted by the Tenant in the
demised premises. The Tenant agrees not to do or permit anything to be done in
said premises, or keep anything therein, which will increase the rate of fire
insurance premiums on the improvements or any part thereof, or on property kept
therein, or which will obstruct or interfere with the rights of other tenants,
or conflict with the regulations of the Fire Department or with any insurance
policy upon said improvements or any part thereof. In the event of any increase
in insurance premiums resulting from the Tenant's occupancy of the premises, or
from any act or omission on the part of the Tenant, the Tenant agrees to pay
said increase in insurance premiums on the improvements or contents thereof as
additional rent.
Thirteenth.--No sign, advertisement or notice shall be affixed to or
placed upon any part of the demised premises by the Tenant, except in such
manner, and of such size, design and color as shall be approved in advance in
writing by the Landlord, which approval shall not be unreasonably withheld or
delayed.
Fourteenth.--Upon Tenant's obtaining a nondisturbance agreement, this lease
is subject and is hereby subordinated to all present and future mortgages, deeds
of trust and other encumbrances affecting the demised premises or the property
of which said premises are a part. The Tenant agrees to execute, at no expense
to the Landlord, any instrument which may be deemed necessary or desirable by
the Landlord to further effect the subordination of this lease to any such
mortgage, deed of trust or encumbrance.
Sixteenth.--The rules and regulations regarding the demised premises,
affixed to this lease, if any, as well as any other and further reasonable rules
and regulations which shall be made by the Landlord, shall be observed by the
Tenant and by the Tenant's employees, agents and customers. The Landlord
reserves the right to rescind any presently existing rules applicable to the
demised premises, and to make such other and further reasonable rules and
regulations as, in its judgement, may from time to time be desirable for the
safety, care and cleanliness of the premises, and for the preservation of good
order therein, which rules, when so made and notice thereof given to the Tenant,
shall have the same force and effect as if originally made a part of this lease.
Such other and further rules shall not, however, be inconsistent with the proper
and rightful enjoyment by the Tenant of the demised premises.
Seventeenth.--In case of violation by the Tenant of any of the covenants,
agreements and conditions of this lease, or of the rules and regulations now or
hereafter to be reasonably established by the Landlord, and upon failure to
discontinue such violation within ten days after notice thereof given to the
Tenant, this lease shall thenceforth, at the option of the Landlord, become null
and void, and the Landlord may re-enter. The rent in such case shall become due,
be apportioned and paid on and up to the day of such re-entry, and the Tenant
shall be liable for all loss or damage resulting from such violation as
aforesaid. No waiver by the Landlord of any violation or breach of condition by
the Tenant shall constitute or be construed as a waiver of any other violation
or breach of condition, nor shall lapse of time after breach of condition by the
Tenant before the Landlord shall exercise its option under this paragraph
operate to defeat the right of the Landlord to declare this lease null and void
and to re-enter upon the demised premises after the said breach or violation.
<PAGE>
Eighteenth.-- All notices and demands, legal or otherwise, incidental to
this lease, or the occupation of the demised premises, shall be in writing. If
the Landlord or its agent desires to give or serve upon the Tenant any notice or
demand, it shall be sufficient to send a copy thereof by mail, addressed to the
Tenant at 550 Summer Street, Stamford, Connecticut or to leave a copy thereof
with a person of suitable age found upon the premises, or to post a copy thereof
upon the door to said premises. Notices from the Tenant to the Landlord shall be
sent by mail or delivered to the Landlord at the place hereinbefore designated
for the payment of rent, or to such party or place as the Landlord may from time
to time designate in writing.
Nineteenth.-- It is further agreed that if at any time during the term of
this lease the Tenant shall make any assignment for the benefit of creditors, or
be decreed insolvent or bankrupt according to law, or if a receiver shall be
appointed for the Tenant, then the Landlord may, at its option, terminate this
lease, exercise of such option to be evidenced by notice to that effect served
upon the assignee, receiver, trustee or other person in charge of the
liquidation of the property of the Tenant or the Tenant's estate, but such
termination shall not release or discharge any payment of rent payable hereunder
and then accrued, or any liability then accrued by reason of any agreement or
covenant herein contained on the part of the Tenant, or the Tenant's legal
representatives.
Twentieth.-- In the event that the Tenant shall remain in the demised
premises after the expiration of the term of this lease without having executed
a new written lease with the Landlord, such holding over shall not constitute a
renewal or extension of this lease. The Landlord may, at its option, elect to
treat the Tenant as one who has not removed at the end of his term, and
thereupon be entitled to all the remedies against the Tenant provided by law in
that situation, or the Landlord may elect, at its option, to construe such
holding over as a tenancy from month to month, subject to all the terms and
conditions of this lease, except as to duration thereof, and in that event the
Tenant shall pay monthly rent in advance at the rate provided herein as
effective during the last month of the demised term.
Twenty-first.-- If the property or any part thereof wherein the demised
premises are located shall be taken by public or quasi-public authority under
any power of eminent domain or condemnation, this lease, at the option of the
Landlord, shall forthwith terminate and the Tenant shall have no claim or
interest in or to any award of damages for such taking. In the event of such
taking, the prepaid rent, if any, shall be rebated to the Tenant
proportionately.
Twenty-fourth.-- No rights are to be conferred upon the Tenant until this
lease has been signed by the Landlord, and an executed copy of the lease has
been delivered to the Tenant.
Twenty-fifth.-- The foregoing rights and remedies are not intended to be
exclusive but as additional to all rights and remedies the Landlord would
otherwise have by law.
Twenty-sixth.-- All of the terms, covenants and conditions of this lease
shall inure to the benefit of and be binding upon the respective heirs,
executors, administrators, successors and assigns of the parties hereto.
However, in the event of the death of the Tenant, if an individual, the Landlord
may, at its option, terminate this lease by notifying the executor or
administrator of the Tenant at the demised premises.
Twenty-seventh.-- This lease and the obligation of Tenant to pay rent
hereunder and perform all of the other covenants and agreements hereunder on
part of Tenant to be performed shall in nowise be affected, impaired or excused
because Landlord is unable to supply or is delayed in supplying any service
expressly or impliedly to be supplied or is unable to make, or is delayed in
making any repairs, additions, alterations or decorations or is unable to supply
or is delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of governmental preemption in connection with
the National Emergency declared by the President of the United States or in
connection with any rule, order or regulation of any department or subdivision
thereof of any governmental agency or by reason of the conditions of supply and
demand which have been or are affected by the war.
Twenty-eighth.-- This instrument may not be changed orally.
See Rider A consisting of paragraphs 1 through 17
attached hereto and made a part hereof.
IN WITNESS WHEREOF, the said Parties have hereunto set their hands and seals the
day and year first above written.
Witness:
----------------------------------(SEAL)
Landlord
/s/ Matthew Forstadt By: /s/ Ralph Sandolo 12/22/98
- -------------------------------- -------------------------------------
/s/ Elizabeth B. Suchy
- -------------------------------- ----------------------------------(SEAL)
Tenant
CORNERSTONE BANK
By: /s/ James P. Jakubek
-------------------------------------
James P. Jakubek, President 12/22/98
<PAGE>
RIDER A TO LEASE AGREEMENT BETWEEN RALPH SANDOLO, ("LANDLORD") AND CORNERSTONE
BANK, ("TENANT") FOR PREMISES LOCATED AT 83 NEW CANAAN AVENUE, NORWALK,
CONNECTICUT
- --------------------------------------------------------------------------------
The following provisions are added to and made a part of the Lease:
1. Landlord's Work. Immediately upon the execution of this Lease, the
---------------
Landlord shall cause to be performed in good workmanlike manner, each of the
items set forth on Schedule B ("Landlord's Work").
2. Tenant's Work. Immediately upon the execution of this Lease and in
-------------
coordination with Landlord's Work, Tenant shall cause to be performed in good
and workmanlike manner all items set forth on Schedule C ("Tenant's Work").
3. Term Expiration Agreement. Upon ascertaining the Commencement Date,
-------------------------
the Landlord and Tenant shall execute a Term Expiration Agreement in the form
annexed hereto as Schedule D.
4. Lease Contingency. This lease is contingent upon the Tenant, at
-----------------
Tenant's sole cost and expense, obtaining all municipal and governmental
approvals for the operation of a bank branch at the Premises including such
approvals as may be required for a drive-up teller window. In the event such
approvals have not been obtained by March 1, 1999, either party may terminate
this Lease upon written notice provided such notice is issued prior to March 30,
1999.
5. Parking. Landlord recognizes and acknowledges that convenient
-------
automobile access, maintenance and use of a drive-up teller window and parking
for Tenant's customers is critical to the useful operation of Tenant's business.
Landlord agrees not to build any buildings on the land of which the premises are
a part otherwise than as are presently situated thereon and that all present
parking shall remain devoted to marked, lighted and paved parking area. Landlord
agrees that all entrances, exits, driveways and service areas will remain
substantially as presently exist. Landlord agrees not to interfere with,
obstruct or otherwise prevent the operation of Tenant's drive-up window.
Landlord will implement and enforce rules applicable to Landlord and all
tenants of the Building requiring those people employed by tenants or occupants
of the Building to park in the rear of the Building.
Landlord shall neither permit nor allow any motor vehicle to be parked for
more than 48 consecutive hours.
The Landlord represents and warrants that there presently exists and there
shall remain through the term of this Lease, including all options, ample
parking for Tenant's employees at the rear of the Premises.
<PAGE>
RIDER A TO LEASE AGREEMENT BETWEEN RALPH SANDOLO, ("LANDLORD") AND CORNERSTONE
BANK, ("TENANT") FOR PREMISES LOCATED AT 83 NEW CANAAN AVENUE, NORWALK,
CONNECTICUT
- --------------------------------------------------------------------------------
Throughout the term of the Lease and any option period, the Tenant reserves
the right to require the Landlord to mark and exclusively designate two (2)
parking areas in front of the Premises for the exclusive use of Tenant's
customers.
Implementation and enforcement of the parking requirements set forth herein
shall be at the sole cost and expense of the Landlord.
The exclusive use of two (2) parking spaces by Tenant's customers shall be
during banking business hours only. At all other times, the two (2) spaces shall
be available to and used in common by Landlord's other tenants and tenants'
customers.
6. Common Areas. Throughout the term of this demise, the Landlord shall
------------
keep the Building and the common areas serving said Building in good condition
and repair, free of debris, ice, filth and refuge. The term "Building" as
utilized herein and in the Lease means the entire structure of which the
Premises are a part.
7. Access. Included in this demise are all rights, privileges, and
------
easements necessary for access to the Premises for Tenant, its employees,
agents, invitees and all those having business with it.
8. Landlord's Covenants. Landlord covenants and warrants that Landlord
--------------------
has full right and lawful authority to enter into this Lease for the full
initial term and all extensions; that Landlord is lawfully seized of the entire
land and Building of which the Premises are a part and that said land and that
said land and Building are free and clear of all encumbrances except a mortgage
to Wilton Bank; that as of the date hereof, the Premises are delivered to the
Tenant and, to the best of the Landlord's knowledge, the Landlord has not
received notice of a violation of applicable laws, ordinances and regulations
including building codes regarding the Premises; that to the Landlord's best
knowledge and belief there are no laws, ordinances, government requirements or
regulations or zoning or other matters which will restrict, limit or prevent
Landlord's use of the Premises for the use contemplated in this Lease.
9. Taxes. Landlord shall pay all taxes, assessments and other charges
-----
which may be levied, assessed or charged against the land and Building including
the Premises, but not with respect to Tenant's personal property upon the
Premises and within the Premises, and will make all payments required to be made
under the terms of any mortgage or deed of trust which is now or hereafter
becomes a lien on the land and building of which the Premises are a part.
10. Laws. Landlord shall, at Landlord's sole cost and expense, comply with
----
all requirements of all county, municipal, state and federal laws and
regulations, now enforced, or which may hereafter be enforced, which pertain to
the physical or
<PAGE>
RIDER A TO LEASE AGREEMENT BETWEEN RALPH SANDOLO, ("LANDLORD") AND CORNERSTONE
BANK, ("TENANT") FOR PREMISES LOCATED AT 83 NEW CANAAN AVENUE, NORWALK,
CONNECTICUT
- --------------------------------------------------------------------------------
environmental condition of the land and Building including the Premises,
including without limitation laws and regulations pertaining to disabled
persons, asbestos, radon and hazardous substances (unless such asbestos, radon
and hazardous substances were caused by Tenant.)
11. If the Rider conflicts in any way with the attached Lease, the
provisions of this Rider shall be controlling.
12. Maintenance of Parking and Common Areas.
---------------------------------------
A. During the entire term of this Lease and any extension thereof,
Landlord shall maintain and repair the Building, parking area and common areas
in good condition and repair. The obligation on the part of the Landlord to
maintain said parking and common areas in good condition and repair shall,
without limiting the generality thereof, include the following:
a. Maintaining the parking and walk-way surfaces in a level, smooth and
evenly covered condition with the type of surfacing materials
originally installed or of similar quality, use and durability;
b. Removing all papers, debris, snow, ice, filth and refuse and
thoroughly sweeping the areas to the extent reasonably necessary to
keep said areas in a neat, clean and orderly condition;
c. Placing, keeping in repair, and replacing any necessary appropriate
direction signs, makers and lines; and operating, keeping in repair
and replacing when necessary such artificial lighting facilities as
shall be reasonably required to keep such areas safe and well-lighted;
d. Maintaining any perimeter walls in a good condition and state of
repair;
e. Maintaining all landscaped areas, making such replacements of shrubs
and other landscaping as is necessary, and keeping said areas at all
times adequately weeded, fertilized and watered.
f. Perform all structural and exterior repairs and replacements, as
needed.
13. Flag. Provided that the same is erected in accordance with zoning, the
----
Tenant shall be privileged to erect and maintain a flag pole for the display of
the American flag at a mutually agreeable location within the common areas of
the Building and the land upon which the Building is located.
<PAGE>
RIDER A TO LEASE AGREEMENT BETWEEN RALPH SANDOLO, ("LANDLORD") AND CORNERSTONE
BANK, ("TENANT") FOR PREMISES LOCATED AT 83 NEW CANAAN AVENUE, NORWALK,
CONNECTICUT
- --------------------------------------------------------------------------------
14. Option to Renew. (a) Upon expiration of the initial term or any
---------------
subsequent term of this Lease for the Demised Premises, provided that the same
is then in full force and effect and Tenant is not in default hereunder, Tenant
may extend such terms for three successive renewal terms of 5 years each by
giving Landlord written notice that it desires such extension. Such notice must
be given no less than 6 months before the initial term expires or such
subsequent term by certified or registered mail but may not be given earlier
than one year prior to the expiration of any such term. The Renewal Terms shall
be upon the same terms, provisions, covenants, and conditions as are contained
in this Lease, except as to the duration of the term, the rental rate and any
other provision herein which by its terms is applicable only to the initial
term.
(b) Renewal Rent Determination. The rents during the renewal terms shall
--------------------------
be equal to the fair rental value of the Demised Premises at the time of
commencement of the renewal period, as determined by agreement between Landlord
and Tenant or by arbitration in accordance with the provisions of the Lease and
this paragraph 14. If Tenant exercises the options in subsection (a), it shall
specify in such notice its evaluation of the fair rental value of the Demised
Premises ("Tenant's Rent") for the period covered by such exercise. Within one
month thereafter, Landlord shall send to Tenant a notice stating either (i)
Landlord's agreement with Tenant's Rent, in which event such amount shall be
fixed as the rent payable by Tenant for the renewal period in issue, or (ii)
Landlord's evaluation of such fair rental value ("Landlord's Rent"). If Landlord
and Tenant are unable to agree upon such fair rental value within one month from
the date of sending the notice described in (ii) above, the matter shall be
determined by arbitration under this Lease. The arbitrators' determination of
the fair rental value of the Demised Premises for the renewal period in issue
may not, in any event, be less than Tenant's Rent nor more than Landlord's Rent.
(c) Continuation of Prior Rent. If for any reason the Renewal Terms
--------------------------
commence before the fixed rent for such term is determined, Tenant, in the
meantime, shall pay the monthly installments of fixed rent (the "Prior Rent") in
effect under this Lease on the last day of the term being renewed. If the fixed
rent for such renewal term is determined to be greater than the Prior Rent,
Tenant, immediately following such determination (in no event later than thirty
days), shall pay to Landlord the difference between the Prior Rent actually paid
and that which should have been paid on the basis of such determination. In no
event shall the rent for the renewal terms be lower than the rent paid by the
Tenant during the last month of the initial lease terms.
<PAGE>
RIDER A TO LEASE AGREEMENT BETWEEN RALPH SANDOLO, ("LANDLORD") AND CORNERSTONE
BANK, ("TENANT") FOR PREMISES LOCATED AT 83 NEW CANAAN AVENUE, NORWALK,
CONNECTICUT
- --------------------------------------------------------------------------------
15. Non-Disturbance. This Lease is contingent upon delivery to the Tenant
---------------
of non-disturbance agreement(s) from all existing and future mortgagees and all
ground or underlying lessors. This Lease shall be superior to and prior in right
to the lien of all subsequent mortgagees, ground or underlying lessors until
such time as Landlord shall deliver to Tenant subsequent non-disturbance
agreements. To facilitate the delivery of all required non-disturbance
agreements, Tenant agrees to execute an attornment agreement in such form as may
reasonable be required by the party issuing the agreement of non-disturbance.
16. Tenant may erect such signs on the Premises, the Building and the
common areas of the Building as Tenant may reasonably require provided that all
such signage must comply with applicable municipal regulations. The Landlord or
any person or entity holding under the Landlord shall also have the right to
erect and place a sign on the Building (other than the Premises) and the common
areas.
In addition, Tenant may erect a United States flag in such area of the
Building or the land upon which the Building is located as shall not interfere
with the parking, driveways or other common areas in accordance with applicable
municipal regulations.
17. In the event the Tenant fails to notify the Landlord or its intention
to exercise any of the option terms within the time period set forth herein,
Tenant's option to extend shall not expire until thirty (30) days after Landlord
notifies Tenant that the time to exercise such option has passed.
18. The Tenant shall maintain a One Million ($1,000,000) liability policy
on the Premises and shall name the Landlord as an additional insured. The Tenant
shall provide to the Landlord a copy of the Certificate of Insurance
simultaneously upon execution of this Lease.
19. Defaults. Tenant and Landlord understand and agree that any one or
--------
more of the following events shall be considered events of default as said term
is used herein:
(a) Tenant shall fail to pay any base Rent within the time period set
forth in Article Third or any Additional Rent or any other charge within thirty
(30) days after demand.
(b) Tenant or Landlord shall fail to keep, observe or perform any of the
other covenants or agreements herein contained to be kept, observed and
performed by Tenant or Landlord, and such failure shall continue for thirty (30)
days after notice thereof in writing to Tenant or Landlord provided, however,
said thirty (30) day period may be extended if the Tenant is diligently pursuing
such cure.
(c) The Tenant's leasehold interest in the Premises are levied upon under
execution or attached by legal process, or a lien is filed with respect to the
Premises or leasehold interest
<PAGE>
which is not released or discharged within thirty (30) days after the date of
filing.
(d) A decree or order appointing a receiver of the leasehold or property
of Tenant shall be made and such decree or order shall not have been vacated or
set aside within sixty (60) days from the date of entry or granting thereof.
(e) Tenant shall vacate or abandon the Premises during the Term or any
extension entered into, (the transfer of a substantial part of the operations,
business and personnel of the Tenant previously located at the Premises to
another location without replacement of same with other operations permitted by
the terms of this Lease, being deemed, without limiting the meaning of the term
"vacates or abandons", to be a vacation or abandonment within the meaning of
this section) whether or not Tenant thereafter continues to pay rent under this
Lease.
(f) Tenant shall more than three (3) times during a 12-month period be
late in the payment of rent or other charges required to be paid hereunder or
shall more than three (3) times during any 12-month period fail to keep,
observe, or perform any other covenants or agreements herein contained to be
kept, observed or performed by Tenant (provided notice of such payment or other
defaults shall have been given to the Tenant, but regardless of whether or not
Tenant shall have timely cured any such payment or other defaults of which
notice was given).
(g) The existence of any uncured event of default defined or provided for
elsewhere in this Lease.
20. Throughout the term of this Lease and any option period, Tenant shall
insure the plate glass at its full insurable value with a company reasonably
satisfactory to the Landlord.
21. In the event that Tenant sublets or assigns this Lease, Tenant agrees
that it will not sublet or assign the Premises for use as a restaurant or
take-out food facility.
LANDLORD: TENANT:
RALPH SANDOLO CORNERSTONE BANK
By /s/ Ralph Sandolo By /s/ James Jakubek
---------------------------- ------------------------------
Ralph Sandolo James Jakubek, President
<PAGE>
[CORNERSTONE BANK NORWALK OFFICE FLOOR PLAN APPEARS HERE]
<PAGE>
SCHEDULE A
RENT
----
1. Base Rent. The rental for the base term of this demise will be
---------
ascertained by causing an architect, surveyor, or other suitable person mutually
agreeable to the Landlord and Tenant to measure the Premises in order to
ascertain the rentable square footage. The floor area of the Premises shall be
determined by measuring from the outside of the exterior walls to the center of
any demising walls. The cost of such measurement shall be shared equally by the
Landlord and Tenant. Such measurements shall be completed within fifteen days of
the Landlord's completion of the Tenant Separation Firewall. The square footage
shall be no less than 2,000 sq ft and no more than 2,200 sq. feet.
Upon ascertaining the square footage, the Tenant shall pay the rental for
the five (5) year term at a rental of $22.00 per square foot in twelve equal
monthly installments. The first annual installment of rental will be due thirty
(30) days after the Commencement Date, as defined in the Lease.
2. Additional Rent. (a) As Additional Rent Tenant shall, within 15 days
---------------
of receipt of demand therefor from Landlord, pay its pro rata share ("Tenant's
Pro Rata Share") of operating and maintaining the common areas of the Land and
Building ("Operating Expense") consisting of the following charges: (i) all
real estate taxes or other taxes or assessments levied against the land upon
which the Premises are situated (the "Land") and against the Building in excess
of the amount levied against the Land and Building during calendar year 1999
(the "Base Year"); (ii) the cost of garbage removal, and the cost of cleaning
and maintaining the interior and exterior of the Premises and the Building;
(iii) the cost of maintaining the Land, including, but not limited to, the cost
of snowplowing, parking lot maintenance and lawn care; (iv) the cost of any
other service or materials supplied by the Landlord to or for the
<PAGE>
benefit of the Premises, the Land or the Building, as long as such service, or
such materials are reasonably necessary to maintain the Premises, the Building
or the Land.
(b) Tenant's Pro Rata Share shall be equal to the ratio of the Square
Footage to the total square foot of the Building ("Tenant's Pro Rata Share").
The square footage of the Building is ________________.
Landlord shall keep records showing all expenditures incurred as Operating
Expenses for each year for a period of three (3) years following each year, and
such records shall be made available for inspection by Tenant and/or its agents
during ordinary business hours in the city in which the Premises are located.
Any dispute with respect to Landlord's calculations of Operating Expenses
under this Lease shall be resolved by the parties through consultation in good
faith within thirty (30) days. However, if the dispute can not be resolved
within such period, the Tenant may request an audit of the disputed matter from
an independent, certified public accountant selected by both Landlord and
Tenant, whose decision shall be final and binding on the parties. Where there is
a variance of 8% percent or more between said decision and the Landlord's
determination of Tenant's Pro Rata Share of Operating Expenses, Landlord's
Insurance and Real Property Taxes, Landlord shall pay the costs of said audit
and shall credit any overpayment toward the next rent payment due or pay such
over payment to Tenant. If the variance is less than 8% percent Tenant shall pay
the cost of said audit.
<PAGE>
SCHEDULE B
----------
LANDLORD'S WORK:
1. Deliver a "plain vanilla box" with all former equipment (ovens,
exhaust fan, display cases, walk-in-cooler, etc.) removed.
2. Remove wall around existing stairwell to reach outside wall, provide
rough flooring over stairwell to outside wall.
3. Remove wall around oven including exhaust fan, replace ceiling.
4. Repair, replace, and add ceiling and ceiling tiles as needed.
5. Build new "tenant separation firewall" to divide bank space, taped and
ready to paint.
6. Separate HVAC to service bank space only, balanced heat and air, and
ducts where needed, clean HVAC duct. Guarantee the HVAC is in good working
order.
7. Separate electrical to service bank space only, with separate meter
serving only the Premises.
8. Paint exterior of that portion of the Building of which the Premises
are a part.
9. Landlord will cause Landlord's Work to be completed to the reasonable
satisfaction of Tenant on or before February 1, 1999. In the event Landlord has
not completed Landlord's Work in the manner required on or before said date,
Tenant shall have the option to cancel this Lease to be exercised on or before
March 1, 1999.
<PAGE>
SCHEDULE C
----------
TENANT'S WORK:
1. All interior remodeling including design, required permits and all
construction.
2. Construction to include ADA bathroom, emergency fire exit, drive-up
window, ATM, night depository, teller counter and interior walls as outlined in
architect's draft.
3. Exterior signage on Building and pylon. Tenant shall, at its sole
cost and expense, obtain all necessary local, state or other governmental
approvals in connection with such Building and pylon signage, prior to the
erection of the same.
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of, July 1, 1998, by and between CORNERSTONE BANK,
a Connecticut state chartered bank (the "Bank") with its principal executive
offices at 550 Summer Street, Stamford, Connecticut 06901, and NORMAN H. READER
(the "Employee"), residing at 121 Red Fox Road Stamford, Connecticut 06903.
WHEREAS, the Bank and the Employee desire to enter into an agreement on the
terms and conditions set forth herein, relating to the employment of the
Employee for an extended period and to payment of retirement benefits
thereafter.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as President of the Bank. As an
----------
executive officer of the Bank, the Employee shall render executive, policy, and
other management services to the Bank of the type customarily performed by
persons serving in similar executive officer capacities with banks engaging in
the business of the Bank. The Employee shall also perform such duties as the
Board of Directors of the Bank (the "Board") may from time to time reasonably
direct. During the term of this Agreement, there shall be no material increase
or decrease in the duties and responsibilities of the Employee otherwise than as
provided herein, unless the parties otherwise agree in writing. During the term
of this Agreement, the Employee shall not be required to relocate more than 25
miles from Stamford, Connecticut, in order to perform the services hereunder.
Should the Employee be required to relocate more than 25 miles from Stamford in
order to maintain his position or compensation at at least its present level,
then the Employee's employment shall be considered as involuntarily terminated
without cause for purposes of Section 8 of this Agreement unless the Employee
provides the Bank with a written waiver of his rights to consider his employment
as involuntarily terminated.
In recognition that the Bank desires to maintain the employment of the
Employee for as long as possible, while the Employee desires to begin reducing
the scope of his commitment through a reduction in his responsibilities to the
Bank, the Bank and the Employee have agreed that the Employee's responsibilities
shall be reduced on a mutually agreeable basis commencing July 1, 1998, and that
the Employee's compensation shall be reduced in recognition of his reduced
responsibilities in the manner set forth in Section 2.
The Bank and the Employee intend that the Employee's schedule shall be
flexible, and agree to cooperate in scheduling the Employee's time so that the
interest of the Bank and the needs of the Employee are best served.
1
<PAGE>
2. Compensation. The Bank agrees to pay the Employee during the term of
this agreement an initial reduced salary at an annual rate equal to $154,250.
The salary of the Employee shall be further decreased during the term of this
Agreement in accordance with the following schedule:
Effective Date Salary
July 1, 1999 $141,500
July 1, 2000 $128,650
July 1, 2001 $116,000
July 1, 2002 $103,250
July 1, 2003 $ 90,500
July 1, 2004 $ 77,750
Participation in deferred compensation, discretionary bonus, retirement and
other employee benefit plans and in fringe benefits shall not reduce the salary
then in effect payable to the Employee under this Section 2. The salary under
this Section 2 shall be payable to the Employee not less frequently than
monthly. The Employee shall not be entitled to receive fees for serving as a
director of the Bank or for serving as a member of any committee of the Board.
3. Discretionary Bonuses. During the term of this Agreement, the Employee
---------------------
shall be entitled to participate in such discretionary bonus arrangements as may
be authorized by the Board. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as authorized by the Board.
4. Participation In Retirement and Employee Benefit Plans:
------------------------------------------------------
Fringe Benefits; Automobile. The Employee shall be entitled to participate in
- ---------------------------
any plan of the Bank relating to stock options, stock purchases, pension,
thrift,, profit sharing, group life insurance, supplemental life insurance,
medical coverage, disability, education, or other retirement or employee
benefits which the Bank has adopted or may adopt for the benefit of its
executive employees. The Employee shall also be entitled to participate in any
other fringe benefits which are now or may become applicable to the Bank's
executive employees, including the payment of reasonable business related
expenses and expenses for attending annual and periodic meetings of trade
associations, and any other benefits which are commensurate with other duties
and responsibilities to be performed by the Employee under this Agreement. The
Employee shall also be entitled to payment by the Bank of annual country club
dues and to the use of an automobile which shall be provided by the Bank and as
to which the Bank shall bear all expenses of operation, including but not
limited to repairs, fuel, and parking charges.
2
<PAGE>
5. Term. The term of employment under this Agreement shall be for the
----
period commencing as of July 1, 1998 and ending on June 30, 2005, or if earlier,
upon the first to occur of: (i) the Employee's death or disability, (ii) the
Employee's voluntary termination of employment, or (iii) the termination of the
Employee's employment by the Bank (either for cause or otherwise), all as herein
provided. For the purposes of this Agreement, "Disability" shall mean the
absence of the Employee from the Employee's duties with the Bank as specified in
this Agreement, for 180 consecutive business days, as a result of incapacity
owing to mental or physical illness which is determined to be total and
permanent by a physician selected by the Bank or its insurers and acceptable to
the Employee or the Employee's legal representative.
6. Standards. (a) The Employee shall perform the Employee's duties and
---------
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Board. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the banking industry.
(b) Performance of duties as an officer, director, or
employee of a holding company organized by the Bank pursuant to Conn. Gen Stats.
Sec. 36a-181 or performance of acts to effect organization of such a holding
company shall not be considered to violate any duty Employee may have to the
Bank.
7. Voluntary Absences: Vacations. The Employee shall be entitled, without
-----------------------------
loss of pay, to be absent voluntarily for reasonable periods of time from the
performance of Employee's duties and responsibilities under this Agreement. All
such voluntary absences shall be considered paid vacation time, unless the Board
otherwise approves. The Employee shall be entitled to an annual paid vacation of
at least 3 weeks per year or such longer period as the Board may approve. The
timing of paid vacations shall be scheduled in a reasonable manner by the
Employee. The Employee shall not be entitled (i) to receive any additional
compensation from the Bank on account of failure to take a paid vacation, or
(ii) to accumulate unused paid vacation time from one fiscal year to the next.
8. Termination of Employment.
-------------------------
(a) (i) The Board may terminate the Employee's employment at any
time. The Employee shall have no right to receive compensation or other benefits
for any period after termination for cause. The term "termination for cause,,
shall mean termination by the Bank because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of
3
<PAGE>
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
banking industry; provided, that it shall be the Bank's burden to prove the
alleged acts and omissions and the prevailing nature of the standards the Bank
shall have alleged are violated by such acts and/or omissions.
(ii) The parties acknowledge and agree that damages which will result
to Employee from termination by the Bank without cause shall be extremely
difficult or impossible to establish or prove, and agree that, unless the
termination is voluntary or for cause, the Bank shall be obligated, concurrently
with such termination, to make a lump sum cash payment to the Employee as
liquidated damages of an amount equal to the present value as of the date of
termination of the sum of(i) the as yet unpaid salary amounts set forth in
Section 2 of this Agreement, each reduced by $65,000, and (ii) an amount deemed
paid each remaining year of the term of this Agreement, equal to the highest
discretionary bonus paid to the Employee at any during the term of this
Agreement. Employee agrees that, except for such other payments and benefits to
which the Employee may be entitled as expressly provided by the terms of this
Agreement, such liquidated damages shall be in lieu of all other claims which
Employee may make by reason of such termination.
(iii) In addition to the liquidated damages above described that are
payable to the Employee for termination without cause, the following shall apply
(the applicable period being referred to herein as the "Benefits Continuation
Period") (x) for 12 months following any termination without cause and (y) for
36 months following termination due to change in control (for purposes of any
employee benefit plans the Employee shall be treated as entitled to compensation
for the period set forth in this subsection (iii)):
(1) the Employee shall continue to participate in, and accrue
benefits under, all retirement, pension, profit sharing, employee stock
ownership, thrift, and other deferred compensation plans of the Bank as if the
termination of employment of the Employee had not occurred (with the Employee
being deemed to receive annually for the purposes of such plans the Employee's
then current salary (at the time of Employee's termination) under Section 2 of
this Agreement), except to the extent that such continued participation and
accrual is expressly prohibited by law, or if such plan constitutes a "qualified
plan" (a "Qualified Plan") under section 401 of the Internal Revenue Code of
1986, as
4
<PAGE>
amended (the "Code"), to the extent such continued participation and accrual is
expressly prohibited by the terms of the Qualified Plan.
(2) the Employee shall be entitled to continue to receive all
other employee benefits and then existing fringe benefits referred to in
Section 4 hereof as if the termination of employment had not occurred, provided
however, that life, health, and disability coverage will terminate upon the
Employee becoming eligible for comparable benefits in connection with the
Employee's full-time employment by another employer, and further provided, that
if the Employee dies during the Benefits Continuation Period and prior to
becoming eligible for comparable benefits in connection with the Employee's
full-time employment by another employer, the health coverage provided to
Employee's spouse and dependents shall be continued, at the Bank's expense,
throughout the period ending with the last day of the calendar month in which
occurs the second anniversary of the Employee's death;
(3) the Bank shall, on the date of the Employee's termination,
establish an irrevocable trust that meets the guidelines set forth in Revenue
Procedure 92-64 published by the Internal Revenue Service (as the same may be
modified or supplemented from time to time) (the "Trust"), the assets of which
will be held, subject to the claims of judgement creditors of the Bank, solely
to fund the benefits that the Employee is entitled under this Section 8 (a)
(iii) and Sections 9 and 10, and the Bank shall transfer to the Trust and amount
sufficient to fund such benefits at the time of the Employee's termination of
employment
(4) all insurance or other provisions for indemnification,
defense or hold-harmless of officers or officers or directors of the Bank which
are in effect on the date the notice of termination is sent to the Employee
shall continue for the benefit of the Employee with respect to all of the
Employee's acts and omissions while an officer or director as fully and
completely as if such termination had not occurred, and until the final
expiration or running of all periods of limitation against action which may be
applicable to such acts or omissions.
(5) Employee may, at the expense of the Bank, hire an accounting
firm, law firm and/or financial planning firm, selected by the Employee, to
provide the Employee with advice with respect to the Employee's benefits under
this Agreement.
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8 (e) or 8 (g) of the federal Deposit Insurance Act, or any successor
statutes thereto, the Bank's obligations under this Agreement shall be suspended
as of the
5
<PAGE>
date of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i) pay the Employee all or
part of the compensation withheld while such contractual obligations were
suspended, and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
section 8(e) or 8 (g) of the Federal Deposit Insurance Act or any successor
statutes thereof, all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
parties shall not be affected.
(d) Notwithstanding any other provision in this Agreement, the Bank may
terminate or suspend this Agreement and the employment of the Employee
hereunder, as if such termination were for cause under Section 8(a) (i), to the
extent required by the laws of the State of Connecticut related to banking, by
applicable federal law relating to deposit insurance or by regulations or orders
issued by the Banking Commission of the State of Connecticut or the Federal
Deposit Insurance Corporation, or any successor to any of the foregoing;
provided that it shall be the burden of the Bank to prove that any such action
was so required.
(e) In the event the employment of the Employee is terminated by the Bank
without cause under Section 8 (a) hereof or the Employee's employment is
terminated voluntarily or involuntarily in accordance with Subsection 8 (g)
hereof, and the Bank fails to make timely payment of the amounts then owed to
the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred by
the Employee in taking action to collect such amounts or otherwise to enforce
this Agreement, plus interest on such amounts at the rate of one percent above
the prime rate (defined as the base rate on corporate loans at large U.S. money
center commercial banks as published by The Wall Street Journal), compounded
monthly, for the period from the date of employment termination until payment is
made to the Employee. Such reimbursement and interest shall be in addition to
all rights to which the Employee is otherwise entitled under this Agreement.
(f) During the one-year period following termination of employment for any
reason, the Employee may not (i) solicit the employment of any person who was,
at the time of such termination, or during the one-year period preceding the
Employee's termination, an employee of the Bank, or (ii) disclose or use in any
manner confidential information of the Bank.
6
<PAGE>
(g) Change in Control; If, either (x) during the term of this Agreement,
there is a change in control of the Bank, or (y) the Bank seeks to terminate
this Agreement following a potential change in control, but prior to the
potential change in control being terminated, the Employee shall be entitled to
the benefits set forth above with respect to a termination of employment without
cause, and to compensation in a single lump sum equal to three (3) times the
highest annual salary provided under this Agreement plus three (3) times the
highest discretionary bonus paid to the Employee at any time during the term of
this Agreement.
A "change in control", for purposes of this Agreement, shall be
deemed to have taken place if any of the following events (the Events) occur:
(i) any person or group of persons with a unity of interest or other affiliation
sufficient for them to act in concert becomes the beneficial owner of 25 percent
or more of the total number of voting shares of the Bank; (ii) any person (other
than the persons named as proxies solicited on behalf of the Board) holds
revocable or irrevocable proxies, as to the election or removal of directors of
the Bank for 25 percent or more of the total number of voting shares of the
Bank; (iii) any person has entered into an agreement or received an option for
the acquisition of, beneficial ownership of 25 percent or more of the total
number of voting shares of the Bank, whether or not the requisite approval for
such acquisition has been received under applicable laws or the respective
regulations issued thereunder; or (iv) as the result of, or in connection with,
any cash tender or exchange offer, merger, or other business combination, sale
of assets or contested election, or any combination of the foregoing
transactions, the persons who were directors of the Bank before such transaction
shall cease to constitute at least two-thirds of the Board of Directors of the
Bank or any successor corporation. For purposes of this Subsection 8(g), a
"person" includes an individual, corporation, partnership, trust, association,
joint venture, pool, syndicate, unincorporated organization, joint-stock company
or similar organization or group acting in concert. For purposes of this
Subsection 8(g), a person shall be deemed to be a beneficial owner as that term
is used in Rule 13d-3 under the Securities Exchange Act of 1934. Notwithstanding
the foregoing, a "change in control" shall not include the acquisition of the
Bank's voting stock by a holding company organized by the Bank pursuant to Conn.
Gen. Stat. Sec. 36a-181 (Holding Company), unless one or more of the Events
described in the preceding paragraph occurs prior to the organization of a
Holding Company or as part of a plan which involves the organization of a
Holding Company. Furthermore, should the Bank organize a Holding Company, and
should one of the Events described in the preceding paragraph occur with respect
to the Holding Company (instead of the Bank), then a change in control shall be
deemed to have taken place.
7
<PAGE>
A "potential change in control", for the purposes of this
Agreement, shall be deemed to have taken place, if: (i) any person commences a
tender offer which, if consummated, would result in such person being the
beneficial owner of at least 25 percent of the Bank's voting shares; (ii) the
Bank enters into an agreement the consummation of which will constitute a change
in control; (iii) proxies are solicited by anyone other than the Board; or (iv)
any other event occurs which is deemed by the Board to be a potential change in
control. Notwithstanding the foregoing, a "potential change in control" shall
not include actions or events which are part of the acquisition of the Bank's
voting stock by a Holding Company organized by the Bank pursuant to Conn. Gen.
Stat. Sec. 36a-181, unless the Board deems these actions or events to be a
potential change in control.
In the event that any payment or benefit received by the Employee
under this Subsection 8(g) shall constitute an "excess parachute payment" within
the meaning of Section 280G(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), the Bank shall pay the Employee such amount or amounts
(collectively, the "indemnification amount") as are equal to the amount of any
income, excise or other tax or taxes assessed against the Employee as a result
of the Employee's receipt of the "excess parachute payment" whether assessed
under Section 4999 of the Code or under any other Federal or state tax laws.
9. Retirement Benefits. Upon expiration of the term of this Agreement
--------------------
beginning on July 1, 2005, or upon earlier termination without cause or earlier
termination by reason of a change of control or a potential change in control,
or by reason of Disability, but not in the event of voluntary termination of the
Employee prior to the expiration of the term of this Agreement, the Bank shall
pay to Employee, in equal monthly installments, a supplemental retirement
benefit equal to $65,000 per year until June 30, 2011. In the event of the
Employee's Disability, this supplemental retirement benefit shall commence at
the end of the 180-day period described in Section 5.
If termination shall occur during a calendar year in which
Employee has received compensation from the Bank for services as provided under
Section 2 hereof, the Employee shall receive one-twelfth (1/12) of $65,000 for
each month during such year for which Employee has not been paid at least such
amount for services rendered.
10. Death Benefits. In the event the Employee shall die before the last
--------------
monthly payment under Section 9 hereof, all remaining payments shall be paid to
the beneficiary or beneficiaries most recently designated by the Employee in
writing filed with the Bank. In the event no beneficiary designation is on file,
all
8
<PAGE>
payments shall be made to the Employee's spouse, or if she does not survive him,
to the Employee's estate.
It is intended by the parties hereto, in the event of the
Employee's death prior to the expiration of the term set forth in Section 5
hereof, that, in lieu of any compensation as set forth in Section 2, these death
benefits shall commence in the month following Employee's death and continue for
the full term stated in Section 9.
11. No Assignment. This Agreement is personal to each of the parties
-------------
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto. However,
in the event of the death or the Employee all rights to receive payments
hereunder shall become rights of the Employee's estate.
12. Other Contracts. The Employee shall not, during the term of this
---------------
Agreement, have any other paid employment other than with an affiliate of the
Bank, except with the prior approval of the Board.
13. Amendments or Additions Action by Board. No amendments or additions
---------------------------------------
to this Agreement shall be binding unless in writing and signed by all parties
hereto. The prior approval by a two-thirds affirmative vote of the full Board
shall be required in order for the Board to authorize any amendments or
additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement, including any
termination of employment with or without cause under section 8(a) hereof.
14. Section Headings. The section headings used in this Agreement are
----------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
-------------
state of Connecticut to the extent applicable and otherwise by the laws of the
United States.
CORNERSTONE BANK
/s/ Norman H. Reader By: /s/ Melvin Maisel
- ---------------------------- ---------------------------
NORMAN H. READER Name and Title
9
<PAGE>
I, Norman H. Reader being of sound mind and body wish that in the event of my
death any and all payments to be received by me as stipulated in my employment
agreement effective July 1, 1998 will be distributed to my beneficiaries as
----
follows:
All payments shall go to my wife Joan C. Reader.
In the event that my wife dies before the last monthly payment under Section 9
of my employment agreement, I wish that all remaining payments be equally
divided between Janis Reader Forgotson and Paul H. Reader.
Dated: July 1, 1998.
Norman H. Reader
/s/ Norman H. Reader
10
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
AGREEMENT, dated as July 15, 1998, by and among CORNERSTONE BANK, a
Connecticut State chartered bank (the "Bank") with its principal executive
offices at 550 Summer Street, Stamford, Connecticut 06901, and JAMES P. JAKUBEK
(the "Employee"), residing at 41 Rockwood Lane, Monroe, CT 06468.
WHEREAS, the Bank and the Employee desire to enter into an employment
agreement on the terms and conditions set forth herein.
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT. The employee is employed as Executive Vice President of
----------
the Bank. As an executive officer of the Bank, the Employee shall
render executive, policy, and other management services to the Bank of
the type customarily performed by persons serving in similar executive
officer capacities with banks engaging in the business of the Bank.
The Employee shall also perform such duties as the Board of Directors
of the Bank (the "Board") may from time to time reasonably direct.
During the term of this agreement, there shall be no material increase
or decrease in the duties and responsibilities of the Employee
otherwise than as provided herein, unless the parties otherwise agree
in writing. During the term of this Agreement, the Employee shall not
be required to relocate more than 25 miles from Stamford, Connecticut,
in order to perform the services hereunder. Should the Employee be
required to relocate more than 25 miles from Stamford in order to
maintain his position or compensation at at least its present level,
then the employee's employment shall be considered as involuntarily
terminated without cause for purposes of sections 8 and 9 of this
Agreement unless the Employee provides the Bank with a written waiver
of his rights to consider his employment as involuntarily terminated
2. COMPENSATION. The Bank agrees to pay the Employee during the term of
------------
this Agreement an initial salary at an annual rate equal to $125,000,
with the salary to be increased as determined by the Board. At least
once during each calendar year during the period in which this
Agreement is in effect, the Board shall consider increasing the
employee's salary then in effect; provided, however, that the Board
shall be under no obligation to grant any such increase. In
considering salary increases, the Board shall take into account
increases in the cost of living and shall also consider
1
<PAGE>
performance or merit increases. The salary of the Employee shall not be
decreased at any time during the term of this Agreement from the amount
then in effect, unless the Employee otherwise agrees in writing.
Participation in deferred compensation, discretionary bonus, retirement,
and other employee benefit plans and in fringe benefits shall not reduce
the salary then in effect, payable to the Employee under this Section 2.
The salary under this Section 2 shall be payable to the Employee not less
frequently than monthly. The Employee shall not be entitled to receive fees
for serving as a director of the Bank or for serving as a member of any
committee of the Board.
3. DISCRETIONARY BONUSES. During the term of this Agreement, the Employee
---------------------
shall be entitled to participate in such discretionary bonus arrangements
as may be authorized by the Board. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such bonuses when and as authorized by the Board.
4. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS; FRINGE BENEFITS;
------------------------------------------------------------------------
AUTOMOBILE. The Employee shall be entitled to participate in any plan of
----------
the Bank relating to stock options, stock purchases, pension, thrift,
profit sharing, group life insurance, supplemental life insurance, medical
coverage, disability, education, or other retirement or employee benefits
which the Bank has adopted or may adopt for the benefit of its executive
employees. The Employee shall also be entitled to participate in any other
fringe benefits which are now or may become applicable to the Bank's
executive employees, including the payment of reasonable business related
expenses and expenses for attending annual and periodic meetings of trade
associations, and any other benefits which are commensurate with the duties
and responsibilities to be performed by the Employee under this Agreement.
The Employee shall also be entitled to the use of an automobile which shall
be provided by the Bank and as to which the Bank shall bear all expenses of
operation, including but not limited to repairs, fuel, and parking charges.
5. TERM. The term of employment under this Agreement shall be for the period
----
commencing on the date of execution hereof and ending on the first to occur
of (i) the Employee's death or Disability, (ii) the Employee's voluntary
termination employment, or (iii) the termination of the Employee's
employment by the Bank (either for cause or otherwise), all as herein
provided. For the purposes of this
2
<PAGE>
Agreement, "Disability" shall mean the absence of the Employee from the
Employee's duties with the Bank on a full-time basis for 180 consecutive
business days, as a result of incapacity owing to mental or physical
illness which is determined to be total and permanent by a physician
selected by the Bank or its insurers and acceptable to the Employee or
Employee's legal representative.
6. STANDARDS. (a) The Employee shall perform the Employee's duties and
---------
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Board. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the banking industry.
(b) Performance of duties as an officer, director or employee of
a holding company organized by the Bank pursuant to Conn. Gen. Sec. 36a-181
or performance of acts to effect organization of such a holding company
shall not be considered to violate any duty Employee may have to the Bank.
7. VOLUNTARY ABSENCES. VACATIONS. The Employee shall be entitled, without loss
------------------- ----------
of pay, to be absent voluntarily for reasonable periods of time from the
performance of Employee's duties and responsibilities under this Agreement.
All such voluntary absences shall be considered paid vacation time, unless
the Board otherwise approves. The Employee shall be entitled to an annual
paid vacation of at least 3 weeks-per year or such longer period as the
Board may approve. The timing of paid vacations shall be scheduled in a
reasonable manner by the Employee. The Employee shall not be entitled (i)
to receive any additional compensation from the Bank on account of failure
to take a paid vacation or (ii) to accumulate unused paid vacation time
from one fiscal year to the next.
8. TERMINATION OF EMPLOYMENT.
-------------------------
(A)
(i) The board may terminate the Employee's employment at any time. The
Employee shall have no right to receive compensation or other benefits
for any period after termination for cause or after voluntary
termination by the
3
<PAGE>
Employee except as provided in Section 9. The term
"termination for cause" shall mean termination by the Bank
because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar
offenses) or final cease-and desist order, or material
breach of any provision of this Agreement. In determining
incompetence, the acts or omissions shall be measured
against standards generally prevailing in the banking
industry; provided, that it shall be the Bank's burden to
--------
prove the alleged acts and omissions and the prevailing
nature of the standards the Bank shall have alleged are
violated by such acts and/or omissions.
(ii) The parties acknowledge and agree that damages which will
result to Employee for termination by the Bank without
cause shall be extremely difficult or impossible to
establish or prove, and agree that, unless the termination
is voluntary or for cause, the Bank shall be obligated,
concurrently with such termination, to make a lump sum
cash payment to the Employee as liquidated damages of an
amount equal to the sum of (x) 1 times the Employee's then
current annual salary under Section 2 of this Agreement,
plus (y) 1 times the highest bonus awarded to the Employee
under Section 3 of this Agreement at any time during the
36-month period ending with the date of termination.
Employee agrees that, except for such other payments and
benefits to which the Employee may be entitled as
expressly provided by the terms of this Agreement, such
liquidated damages shall be in lieu of all other claims
which Employee may make by reason of such termination.
(iii) In addition to the liquidated damages above described that
are payable to the Employee for termination without cause,
the following shall apply (the applicable period being
referred to herein as the "Benefits continuation Period")
(x) for 12 months following any termination without cause
and (y) for 36 months following the period referred to in
Section 9(a) (iii) hereof:
4
<PAGE>
(1) the Employee shall continue to participate in, and accrue
benefits under, all retirement, pension, profit-sharing, employee
stock ownership, thrift, and other deferred compensation plans of
the Bank as if the termination of Employment of the Employee had
not occurred (with the Employee being deemed to receive annually
for the purposes of such plans the Employee's then current salary
(at the time of Employee's termination) under Section 2 of this
Agreement), except to the extent that such continued
participation and accrual is expressly prohibited by law, or if
such plan constitutes a "qualified plan" (a "Qualified Plan")
under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"), to the extent such continued participation
and accrual is expressly prohibited by the terms of the Qualified
Plan;
(2) the Employee shall be entitled to continue to receive all other
employee benefits and then existing fringe benefits referred to
in Section 4 hereof as if the termination of employment had not
occurred, provided however, that life, health, and disability
coverage will terminate upon the Employee becoming eligible for
comparable benefits in connection with the Employee's full-time
employment by another employer and further provided, that if the
Employee dies during the Benefits Continuation Period and prior
to becoming eligible for comparable benefits in connection with
the Employee's full-time employment by another employer, the
health coverage provided to Employee's spouse and dependents
shall be continued, at the Bank's expense, throughout the period
ending with the last day of the calendar month in which occurs
the second anniversary of the Employee's death;
(3) the Bank shall, on the date of the Employee's termination of
employment, establish an irrevocable trust that meets the
guidelines set forth in Rev. Proc. 92-64 published by the
Internal Revenue Service (as the same may be modified or
supplemented from time
5
<PAGE>
to time)(the "Trust"), the assets of which will be held, subject to
the claims of judgment creditors of the Bank, solely to fund the
benefits that the Employee is entitled to under this Section 8(a)
(iii), and the Bank shall transfer to the Trust an amount sufficient
(x) to fund any benefit accrued by the Employee under any defined
benefit pension plan maintained by the Bank to the extent that such
defined benefit pension plan is not fully funded on a termination
basis, as determined under the rules and regulations published by the
Pension Benefit Guaranty Corporation, at the time of termination of
the Employee's employment; and (y) to fund fully all benefits accrued
by the Employee under any defined contribution plan maintained by the
Bank to the extent that such benefits are not fully funded at the time
of termination of the Employee's employment;
(4) all insurance or other provisions for indemnification, defense or
hold-harmless of officers or directors of the Bank which are in effect
on the date the notice of termination is sent to the Employee shall
continue for the benefit of the Employee with respect to all of
Employee's acts and omissions while an officer or director as fully
and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against
action which may be applicable to such acts or omissions;
(5) the Bank shall, at its sole expense as incurred, provide the Employee
with outplacement services, the scope and provider of which shall be
selected by the Bank in Bank's sole, reasonable discretion; and
(6) the Employee may, at the expense of the Bank, hire an accounting firm,
law firm and/or financial planning firm, selected by the Employee, to
provide the Employee with advice with respect to the Employee's
benefits under this Agreement.
6
<PAGE>
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under section 8 (e) or 8 (g) of the Federal Deposit Insurance Act, or
any successor statutes thereto, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or
part of the compensation withheld while such contractual obligations
were suspended, and (ii) reinstate in whole or in part any of the
obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under section 8 (e) or 8 (g) of the Federal Deposit Insurance Act or
any successor statutes thereto, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but
vested rights of the parties shall not be affected.
(d) Notwithstanding any other provision in this Agreement, the Bank may
terminate or suspend this Agreement and the employment of the Employee
hereunder, as if such termination were for cause under Section 8(a)
(i), to the extent required by the laws of the State of Connecticut
related to banking, by applicable federal law relating to deposit
insurance or by regulations or orders issued by the Banking Commission
of the State of Connecticut or the Federal Deposit Insurance
Corporation, or any successor to any of the foregoing, provided that
--------
it shall be the burden of the Bank to prove that any such action was
so required.
(e) In the event the employment of the Employee is terminated by the Bank
without cause under Section 8(a) hereof or the Employee's employment
is terminated voluntarily or involuntarily in accordance with Section
9 hereof, and the Bank fails to make timely payment of the amounts
then owed to the Employee under this Agreement, the Employee shall be
entitled to reimbursement for all reasonable costs, including
attorneys' fees, incurred by the Employee in taking action to collect
such amounts at the rate of one percent above the prime rate (defined
as the base rate on corporate loans at large U.S. money center
commercial banks as published by The Wall Street Journal), compounded
-----------------------
monthly, for the period from the date of employment termination until
payment is made to the Employee. Such
7
<PAGE>
reimbursement and interest shall be in addition to all rights to which the
Employee is otherwise entitled under this Agreement.
(f) During the one-year period following termination of employment for any
reason, the Employee may not (i) solicit the employment of any person who
was, at the time of such termination or during the one-year period
preceding the Employee's termination an employee of the bank, or (ii)
disclose or use in any manner confidential information of the Bank.
9. CHANGE IN CONTROL.
-----------------
(a) If, either (x) during the term of this Agreement, there is a change
in control of the Bank, or (y) the Bank seeks to terminate this
Agreement following knowledge of a potential change in control, but
prior to the potential change in control being terminated, the
Employee shall be entitled to the following:
(i) An adjustment in the Employee's then current salary to
give the Employee cumulative cost of living increases
(based on increases in the Consumer Price Index- "CPI" -
for such period) for the period from the date of execution
of this Agreement through the date of the change in
control ("CPI Adjusted Salary"), and annual increases
based on the CPI on each anniversary of the change in
control.
(ii) The crediting to the Employee for years of service with
the Bank, plus 5 additional years, for purposes of vesting
and calculation of benefits under any benefit plan of the
Bank or of any successor entity.
(iii) 18 months notice of termination of employment (the "18
month period") during which period the Employee shall be
entitled to receive, without offset for any reason, (i)
payment of the Employee's CPI Adjusted Salary plus (ii)
the highest bonus received by the Employee during the
period commencing with the 36/th/ month preceding the
change in control and ending with the date of termination.
The Employee shall be entitled at his option to terminate
his employment with
8
<PAGE>
the Bank prior to the expiration of the 18 month period. If
the Employee does terminate his employment prior to the
expiration of the 18 month period, he shall not be entitled
to salary for the portion of the 18 month period he is not
employed by the Bank, nor shall he be entitled to that
portion of the bonus which corresponds to the period that
the Employee is not employed by the Bank. The portion of the
bonus to which the Employee is not entitled as a result of
his termination of his employment shall be determined by
multiplying the bonus by a fraction, the numerator of which
shall be the number of days of the 18 month period during
which the Employee was not employed by the Bank and the
denominator of which shall be 548. Notwithstanding the
foregoing, the Employee shall under all circumstances, to
include termination of employment at his request prior to
the expiration of the 18 month period, be entitled to the
amounts described in Section 9(a)(iv) below. Should the
Employee elect to terminate his employment prior to the
expiration of the 18 month period, all benefits, rights, and
entitlements of the Employee which would commence at the
conclusion of the 18 month period shall commence at the date
of termination of employment. The 18 month period or such
shorter period as may occur as a result of voluntary
termination in accordance with the preceding provisions of
this subsection shall be referred to elsewhere in this
Agreement as "the period referred to in Section 9(a)(iii)".
(iv) Following the period referred to in (iii) above, at the
Employee's election given in writing to the Bank at least 30
days prior to the end of such period referred to in Section
9(a)(iii), either a lump sum cash payment or 36 monthly
periodic payments, upon termination, or commencing upon
termination, as the case may be, in an amount equal to the
sum of (x) 3 times the Employee's CPI Adjusted Salary, plus
(y) 3 times the highest bonus received by the Employee
during the period commencing with the 36/th/ month preceding
the change in control and ending with the date of
termination.
9
<PAGE>
(b) A "change of control", for purposes of this Agreement, shall be
deemed to have taken place if any of the following events (the
Events) occur: (i) any person or group of persons with a unity of
interest or other affiliation sufficient for them to act in
concert becomes the beneficial owner of 25 percent or more of the
total number of voting shares of the Bank; (ii) any person (other
than the persons named as proxies solicited on behalf of the
Board) holds revocable or irrevocable proxies, as to the election
or removal of directors of the Bank, for 25 percent or more of
the total number of voting shares of the Bank; (iii) any person
has entered into an agreement or received an option for the
acquisition of, beneficial ownership of 25 percent or more of the
total number of voting shares of the Bank, whether or not the
requisite approval for such acquisition has been received under
applicable laws or the respective regulations issued thereunder;
or (iv) as the result of, or in connection with, any cash tender
or exchange offer, merger, or other business combination, sale or
assets or contested election, or any combination of the foregoing
transactions, the persons who were directors of the Bank before
such transaction shall cease to constitute at least two-thirds of
the Board of Directors of the Bank or any successor corporation.
For purposes of this Section 9(b), a "person" includes an
individual, corporation, partnership, trust, association, joint
venture, pool, syndicate, unincorporated organization, joint-
stock company, or similar organization or group acting in
concert. For purposes of this Section 9, a person shall be deemed
to be a beneficial owner as that term is used in Rule 13d-3 under
the Securities Exchange Act of 1934. Notwithstanding the
foregoing, a "change in control" shall not include the
acquisition of the Bank's voting stock by a holding company
organized by the Bank pursuant to Conn. Gen. Stat. Sec. 36a-181
(Holding Company), unless one or more of the Events described in
the preceding paragraph occurs prior to the organization of a
Holding Company or as part of a plan which involves the
organization of a Holding Company. Furthermore, should the Bank
organize a Holding Company, and should one of the Events
described in the preceding paragraph occur with respect to the
Holding Company (instead of the Bank), then a change in control
shall be deemed to have taken place.
(c) A "potential change in control", for the purposes of this
Agreement, shall be deemed to have taken place, if: (i) any
10
<PAGE>
person commences a tender which, if consummated, would result in
such person being the beneficial owner of at least 25% of the
Bank's voting shares; (ii) the Bank enters into an agreement the
consummation of which will constitute a change in control; (iii)
proxies are solicited by anyone other than the Board, or (iv) any
other event occurs which is deemed by the Board to be a potential
change in control. Notwithstanding the foregoing, a "potential
change in control" shall not include events which are part of the
acquisition of the Bank's voting stock by a Holding Company
organized by the Bank pursuant to Conn. Gen. Stat. Section 36a-
181, unless the Board deems these events to be a potential change
in control.
(d) A potential change in control, for purposes of this Agreement,
shall be deemed to have terminated, if the Board determines in
good faith that a change in control is not likely to occur from
such potential change in control.
(e) In the event that any payment or benefit received by the Employee
under this Section 9 shall constitute an "excess parachute
payment" within the meaning of Section 280G(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), the Bank shall pay
the Employee such amount or amounts (collectively, the
"indemnification amount") as are equal to the amount of any
income, excise or other tax or taxes assessed against the
Employee as a result of the Employee's receipt of the "excess
parachute payment", whether assessed under Section 4999 of the
Code or under any other federal or state tax laws.
10. NO ASSIGNMENT. This Agreement is personal to each of the parties hereto. No
-------------
party may assign or delegate any rights or obligations hereunder without
first obtaining the written consent of the other party hereto. However, in
the event of the death of the Employee all rights to receive payments
hereunder shall become rights of the Employee's estate.
11. OTHER CONTRACTS. The Employee shall not, except as provided in Section
---------------
9(a)(iii), during the term of this Agreement, have any other paid
employment other than with an affiliate of the Bank, except with the prior
approval of the Board.
12. AMENDMENTS OR ADDITIONS: ACTION BY BOARD. No amendments or additions to
----------------------------------------
this Agreement shall be binding unless in writing and signed by all parties
hereto. The prior approval by a two-thirds affirmative vote of the
11
<PAGE>
full Board shall be required in order for the Board to authorize any
amendments or additions to this Agreement, to give any consents or waivers
of provisions of this Agreement, or to take any other action under this
Agreement, including any termination of employment with or without cause
under Section 8(a) hereof.
13. SECTION HEADINGS. The section headings used in this Agreement are included
----------------
solely for convenience and shall not affect, or be used in connection with,
the interpretation of this Agreement.
14. SEVERABILITY. The provisions of this Agreement shall be deemed severable
------------
and the invalidity or unenforceability of any provision shall not affect
the validity or enforceability of the other provisions hereof.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the State of
-------------
Connecticut to the extent applicable, and otherwise by the laws of the
United States.
CORNERSTONE BANK
By /s/ Norman H. Reader
---------------------------------
Name and Title:
/s/ James P. Jakubek
-----------------------------------
JAMES P. JAKUBEK
12
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF CORNERSTONE BANCORP, INC.
Name Jurisdiction of Organization
- ---- ----------------------------
Cornerstone Bank Connecticut
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
-------------------------------
The Board of Directors
Cornerstone Bancorp, Inc:
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 333-73129) and Form S-3 (No. 333-73131) of our report dated
January 27, 1999 (except as to note 18, which is as of March 1, 1999) relating
to the statement of condition of Cornerstone Bank (predecessor to Cornerstone
Bancorp, Inc.), and the related statements of income, changes in stockholders'
equity, and cash flows for the year ended December 31, 1998, which report
appears in the December 31, 1998 Annual Report on Form 10-KSB of Cornerstone
Bancorp, Inc.
/s/ KPMG LLP
Stamford, Connecticut
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 4,768 4,927
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 22,544 10,515
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 30,003 22,754
<INVESTMENTS-CARRYING> 9,661 4,549
<INVESTMENTS-MARKET> 9,744 4,585
<LOANS> 69,384 78,958
<ALLOWANCE> 1,733 1,529
<TOTAL-ASSETS> 139,733 125,408
<DEPOSITS> 121,879 108,904
<SHORT-TERM> 2,198 2,510
<LIABILITIES-OTHER> 666 684
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 11 10
<OTHER-SE> 14,979 13,300
<TOTAL-LIABILITIES-AND-EQUITY> 139,733 125,408
<INTEREST-LOAN> 7,563 7,082
<INTEREST-INVEST> 2,123 1,658
<INTEREST-OTHER> 817 557
<INTEREST-TOTAL> 10,503 9,297
<INTEREST-DEPOSIT> 3,607 3,402
<INTEREST-EXPENSE> 3,672 3,460
<INTEREST-INCOME-NET> 6,831 5,837
<LOAN-LOSSES> 272 116
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 4,143 3,874
<INCOME-PRETAX> 3,179 2,471
<INCOME-PRE-EXTRAORDINARY> 1,874 1,425
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,874 1,425
<EPS-PRIMARY> 1.68 1.29
<EPS-DILUTED> 1.60 1.24
<YIELD-ACTUAL> 5.58 5.25
<LOANS-NON> 524 3,017
<LOANS-PAST> 288 313
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,529 1,660
<CHARGE-OFFS> 168 294
<RECOVERIES> 100 47
<ALLOWANCE-CLOSE> 1,733 1,529
<ALLOWANCE-DOMESTIC> 1,733 1,529
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
