SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 4, 1996
HUBCO, INC.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation)
1-10699 22-2405746
(Commission File Number) (IRS Employer Identification No.)
1000 MacArthur Boulevard, Mahwah, New Jersey 07430
(Address of principal executive offices)
(201) 236-2630
(Registrant's telephone number, including area code)
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Item 5. Other Events
This Current Report on Form 8-K reproduces the following documents
(without exhibits) initially filed with the Commission by Westport Bancorp, Inc.
("Westport"), an entity which HUBCO has agreed to acquire:
(1) Amendment No. 1 to Annual Report on Form 10-K/A for the year ended
December 31, 1995.
(2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(3) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(4) Current Report on Form 8-K filed with the Commission on July 3, 1996.
Item 7. Exhibits
99 (1) Westport's Amendment No. 1 to Annual Report on Form 10-K/A for the
year ended December 31, 1995.
99 (2) Westport's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
99 (3) Westport's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.
99 (4) Westport's Current Report on Form 8-K filed with the Commission on
July 3, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUBCO, INC.
Dated: November 4, 1996 By: /S/ D. LYNN VAN BORKULO-NUZZO
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D. Lynn Van Borkulo-Nuzzo,
Executive Vice President
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NO.
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99 (1) Westport's Amendment No. 1 to Annual Report on Form 10-K/A for the
year ended December 31, 1995.
99 (2) Westport's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
99 (3) Westport's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.
99 (4) Westport's Current Report on Form 8-K filed with the Commission on
July 3, 1996.
EXHIBIT 99 (1)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-K on FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________________ to ____________________
Commission file number 0-12936
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Westport Bancorp, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1094350
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
87 Post Road East, Westport, Connecticut 06880
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 222-6911
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1996 was $31,923,877, consisting of shares of the
registrant's Common Stock, par value $.01 per share, and Preferred Stock, par
value $.01 per share, valued as if fully converted into shares of Common Stock
at a conversion ratio of 100 shares of Common Stock for each outstanding share
of Preferred Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
At March 15, 1996, there were 5,638,531 outstanding shares of the Registrant's
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders of
the registrant incorporated in Part III of this Form 10-K.
PART I
Item 1
Business
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General
Westport Bancorp, Inc. ("Bancorp") was organized in 1983 as a Delaware
corporation for the purpose of becoming the holding company of The Westport Bank
& Trust Company (the "Bank") (collectively, the "Company"), a
Connecticut-chartered bank and trust company headquartered in Westport,
Connecticut, the deposit accounts of which are insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation ("FDIC"). Bancorp is regulated
and examined by the Federal Reserve Board. The Bank is regulated by the FDIC and
the Banking Commissioner of the State of Connecticut (the "Commissioner").
Bancorp's principal asset is all of the capital stock of the Bank and Bancorp's
principal business is the business of the Bank. Bancorp is a separate legal
entity from the Bank; the principal sources of its revenues on an unconsolidated
basis are interest and other income received from its investments, including
dividends from the Bank.
The Bank was originally chartered in 1852. Bancorp acquired the Bank on October
9, 1984.
The principal business of the Bank is to provide a broad range of corporate and
individual banking products and services, including commercial banking,
residential mortgage origination, commercial lending, commercial real estate
lending, retail banking and trust services to individuals, and small to medium
size businesses. The Bank's operations are conducted from its home office in
Westport, Connecticut and from branch offices located in the mid-Fairfield
County, Connecticut communities of Weston, Fairfield, Redding/Georgetown, Greens
Farms and Saugatuck. In addition, the Bank's operations center is located in
Shelton, Connecticut.
Principal Market Area
The Bank's branch office network currently consists of six banking offices,
including its main office. The towns in the Bank's market area, which consists
principally of Fairfield County, Connecticut, are primarily bedroom communities
of New York City, although Stamford, Bridgeport and Norwalk are commercial
centers. Two major highways (Interstate 95 and the Merritt Parkway) traverse the
area and a number of regional airports are located within Fairfield County.
Those towns bordering I-95 have had substantial commercial office development,
particularly near the major highway intersections. This market is also
accessible by railway.
Lending Activities
The Bank's principal lending activities include the origination of conventional
and construction mortgage loans on residential, one-to-four family real
properties, as well as commercial and real estate loans to businesses. The Bank
also provides consumer loans, which include home equity credit lines,
installment loans (such as home improvement, automobile and personal loans) and
checking account related loans. See Item 6 of this Form 10-K.
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Residential Mortgage Loans. While the Bank is authorized to make loans secured
by real estate located either within or outside the State of Connecticut, its
past and present policy is to concentrate on loans secured by properties located
within Connecticut, particularly in Fairfield County. Less than 2% of the Bank's
total residential real estate loan portfolio at December 31, 1995 represented
loans on properties located outside the State of Connecticut.
The Bank currently offers adjustable and fixed rate mortgages, the majority of
which are originated to conform with the existing criteria for sale in the
secondary mortgage market. Points are generally charged on residential mortgage
loans. Interest rate adjustments on adjustable rate loans are generally
determined by reference to rates on one-year Treasury obligations published by
the Federal Reserve Board.
Commercial Mortgage Loans. The Bank's commercial mortgage investments consist of
loans made on commercial property and multi-family homes (more than four units).
In general, the Bank lends up to 75% of the appraised value of a commercial
property. Status reports on all commercial mortgage loans are reviewed by the
Bank's Management Loan Committee and Directors' Loan Committee on a regular
basis. Given the general economic downturn and the dramatic decline since the
late 1980's in real estate values in New England, and in Connecticut in
particular, real estate development and construction within the Bank's market
area has dramatically declined over the past several years. During 1995 and
1994, this trend showed signs of stabilizing and the Bank experienced some
increased demand for commercial mortgage loans.
Commercial Loans. The Bank has been engaged in commercial lending activity for
more than fifty years. Term loans to finance machinery, equipment or vehicle
purchases, short term loans for working capital needs, revolving credit
supported by accounts receivable and/or inventory, and lines of credit are
representative of these types of loans in the Bank's portfolio. These loans are
generally secured by collateral other than real property; less than 11% of the
Bank's commercial loan portfolio at December 31, 1995 was unsecured.
Home Equity Loans. Home equity loans consist of lines of credit, which are
collateralized by first or second mortgages on residential one-to-four family
real properties.
Consumer Loans. Consumer loans consist primarily of installment loans, which
include home improvement loans, automobile loans, personal loans and checking
account overdraft protection related loans.
FDIC Loans. In the fourth quarter of 1992, the Bank purchased $18.8 million in
performing commercial business loans from the FDIC, of which $12.6 million
consisted of loans to businesses located in the Bank's primary market area of
Fairfield County, with $6.2 million in the area immediately surrounding
Westport. The loans were acquired at par value; the purchase
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was funded from existing liquidity. The purchase agreement contained a three
year provision (the "put"), which ended on December 7, 1995, that required the
FDIC to repurchase any loans that became nonperforming, at a previously
negotiated price plus sixty days of accrued interest. Losses resulting from
repurchases during the three year period have been minimal due to the loans'
performing status. At December 7, 1995, the outstanding balance of these loans
retained by the Bank was $4.3 million.
Interest Rates. Interest rates charged on loans are primarily determined by the
Bank's cost of funds, comparable investment alternatives available to the Bank
and competitive conditions.
Loan Commitments. Commitments to extend commercial lines of credit and to make
mortgage loans on residential and commercial real property are made for periods
of up to 60 days from the date of commitment. Commitments on residential
transactions are generally made at the market interest rate prevailing at the
time the commitment is made to the customer. Commitments on commercial
transactions are generally made at the market interest rate in effect on or
immediately prior to the date of closing.
Deposits and Other Sources of Funds
Deposits have traditionally been the Bank's major source of funds for
investments and lending and are expected to continue to be in the foreseeable
future. The Bank also derives funds from scheduled loan principal payments, the
sale of residential mortgage loans in the secondary market, loan prepayments,
the sale or maturity of investment securities, interest income and fee income.
Other sources of funds include the sale of investment securities to securities
firms and correspondent banks under repurchase agreements, unsecured lines of
credit with correspondent banks and secured lines of credit with the Federal
Home Loan Bank. See Item 6 of this Form 10-K.
Deposits. The Bank offers a wide range of retail and commercial deposit accounts
designed to attract both short and long-term funds. It has been the Bank's
policy to offer a variety of rates and types of deposit accounts to meet its
customers' requirements. Demand deposits, certificates of deposit, regular
savings, money market deposits and NOW checking accounts have been the primary
source of deposit funds. Certificates of deposit currently offered by the Bank
have maturities which range from seven days to five years.
The Bank encounters competition for deposits from other community banks, the
branch offices of larger commercial banks and thrift institutions. The Bank also
competes for interest-bearing funds with securities firms, mutual funds and
issuers of commercial paper and other securities. Bank management anticipates
that competition for deposits in the Bank's market area will continue to
increase in the foreseeable future due to competition from securities firms,
mutual funds, and as other banks enter the Bank's market area as a result of
changes in the interstate banking law.
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Trust Operations
At December 31, 1995, the Bank's Trust department held, for the account of
others, assets under trust management and in custodial accounts having a market
value of $548.5 million. As allowed by state law, the Bank acts as executor and
administrator of decedents' estates, as trustee of inter-vivos and testamentary
trusts, as guardian and conservator of estates of minors and incapable persons,
as custodian of funds, as investment advisor and as trustee of employee benefit
plans. From its trust and related activities, the Bank generates substantial fee
income. In the trust business, the Bank competes with commercial banks, located
both in and out of state, and with individuals and entities appointed to act
under testamentary and other instruments as fiduciaries, investment managers and
financial advisors. See Item 6 of this Form 10-K.
Employees
At December 31, 1995, the Bank had a total of 133 employees, 105 on a full-time
basis and 28 on a part-time basis. Management considers the Bank's relations
with its employees to be good. The Bank's employees are not represented by any
collective bargaining group.
Competition
Competition in the financial services industry in the Bank's market area is
strong. Numerous commercial banks, savings banks and thrift institutions
maintain home offices in the area and banks headquartered elsewhere maintain
offices in the area. Commercial banks, savings banks, thrift institutions,
mutual funds, mortgage brokers, finance companies, credit unions, insurance
companies, securities firms and private lenders compete with the Bank for
deposits, loans and employees. Many of these competitors have far greater
resources than the Bank does and are able to conduct more intensive and broader
based promotional efforts to reach both commercial and individual customers.
Changes in the financial services industry resulting from fluctuating interest
rates, technological changes and deregulation have resulted in increased
competition, merger activity, failures among banking institutions and customer
awareness of product and service differences among competitors.
Regulation and Supervision
As a Connecticut-chartered state bank whose deposits are insured by the FDIC,
the Bank is subject to extensive regulation and supervision by both the
Commissioner and the FDIC. The Bank is also subject to various Federal Reserve
Board regulatory requirements applicable to FDIC insured financial institutions.
As a bank holding company, Bancorp is regulated by the Federal Reserve Board.
Such governmental regulation is intended to protect depositors, not
stockholders.
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Connecticut Regulation. As a state-chartered capital stock bank, the Bank is
subject to the applicable provisions of Connecticut law and the regulations
adopted thereunder by the Commissioner. The Commissioner administers Connecticut
banking laws, which contain comprehensive provisions for the regulation of
banks. The Bank derives its lending and investment powers from these laws, and
is subject to periodic examination by, and reporting to, the Commissioner.
Connecticut bank and trust companies are empowered by statute, subject to
limitations expressed therein, to accept savings and time deposits, to offer
checking accounts, to pay interest on such deposits and accounts, to make loans
on residential and other real estate, to make consumer and commercial loans, to
invest, with certain limitations, in equity securities and debt obligations of
banks and corporations, to issue credit cards, and to offer various other
banking services to their customers. Connecticut banking laws grant banks broad
lending authority. Such authority is limited, however, to the extent that a
bank's loans to any one obligor may not exceed 25%, if fully secured, and 15%,
if not fully secured, of the total of a bank's equity capital and loan loss
reserves.
The Connecticut Interstate Banking Act permits Connecticut banks and bank
holding companies, with the approval of the Commissioner, to engage in stock
acquisitions of banks and bank holding companies in other states with reciprocal
legislation. Many states have such legislation. Before the Interstate Banking
Act was adopted in March 1990, Connecticut banks and bank holding companies were
allowed to engage in stock acquisitions with banks and bank holding companies in
other New England states with reciprocal legislation, all of which have such
legislation. See "Recent Developments" for a discussion of recent changes to the
regulations relating to interstate banking and branching.
Several interstate mergers involving large Connecticut banks with offices in the
Bank's service area and banks headquartered out-of-state have been completed
during recent years, resulting in increased competition for the Bank. A New York
based institution acquired two failed institutions from the FDIC in the Bank's
market area in 1991 and a New Jersey based institution acquired another bank,
headquartered in the Bank's principal market, in 1993. During 1995 and early
1996, two of the largest commercial banks in the Bank's market area completed
their merger, while numerous smaller institutions were acquired by larger
in-state and out-of-state financial institutions.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the Commissioner, exceed
the total of its net profits for that year combined with its retained net
profits from the preceding two years. These dividend limitations can affect the
amount of dividends payable to Bancorp as the sole stockholder of the Bank, and
therefore affect Bancorp's payment of dividends to its stockholders. During
1995, Bancorp resumed the payment of dividends after all regulatory restrictions
were removed.
Under Connecticut banking law, no person may acquire the beneficial ownership of
more than 10% of any class of voting securities of a bank chartered by the State
of Connecticut or having its principal office in Connecticut or a bank holding
company thereof, unless the Commissioner approves such acquisition.
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Any state-chartered bank meeting statutory requirements may, with the approval
of the Commissioner, establish and operate branches in any town or towns within
the state.
During January 1996, representatives of the Commissioner completed a routine
examination of the Bank as of October 30, 1995. Other than minor suggestions for
improvements, there were no significant examination findings which are believed
to have potentially negative implications for the Bank.
FDIC Regulation. The deposit accounts of the Bank are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 for each insured depositor.
As an insured bank, the Bank is subject to supervision and examination by the
FDIC and 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. The FDIC periodically
examines insured institutions.
In December 1991, the Federal Deposit Insurance Act ("FDIA") was amended with
the enactment of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). Provisions of FDIA, as amended, which may have a material
effect on the Bank and Bancorp include, among others, the following:
1. FDIA classifies banks in one of five categories according to capital
levels. With respect to banks not meeting prescribed minimum capital levels, and
depending on the extent to which a bank is undercapitalized, federal bank
regulators may be required, in certain cases, to take corrective actions against
the bank, including requiring an acceptable capital restoration plan or placing
a bank into conservatorship or receivership. In addition, undercapitalized banks
may be subject to certain restrictions on their activities and operations,
including restrictions on asset growth, rates of interest paid on deposits,
transactions with affiliates, engaging in material transactions not in the
ordinary course of business, and other activities. See "Prompt Corrective
Action" below.
2. FDIA makes it more difficult for undercapitalized banks to borrow funds
from the Federal Reserve's "discount window", thus possibly limiting or
eliminating a source of liquidity for a bank. The Bank is approved to borrow
funds from the "discount window".
3. FDIA can result in higher deposit insurance premiums for banks under a
"risk-based" premium determination, with possible negative effects on a bank's
operating results and financial condition.
4. FDIA limits, with certain exceptions, the ability of banks to engage in
activities or make equity investments that are not permissible for national
banks.
In addition, the FDIC has issued regulations providing for capital guidelines
based upon the ratio of a bank's capital to total assets adjusted for risk.
Under such regulations, a bank's risk-based capital ratio is calculated by
dividing its qualifying total capital base by its risk-weighted assets. Banks
are expected to meet a minimum Tier 1 capital to risk-weighted asset ratio of
4.00% and a total capital to risk-weighted asset ratio of 8.00%. At December 31,
1995, Bancorp's Tier 1 capital to risk-weighted asset ratio was 12.77%, and its
total capital to risk-weighted asset ratio was 14.02%, well above the minimum
requirements. There are no significant differences between Bancorp's and the
Bank's capital ratios at December 31, 1995.
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Prompt Corrective Action. Pursuant to the FDIA, the federal banking agencies
established for each capital measure levels at which an insured institution is
deemed to be well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Federal banking
agencies are required to take prompt corrective action with respect to insured
institutions that fall below minimum capital standards. The degree of required
regulatory intervention for institutions that are not at least adequately
capitalized is tied to an insured institution's capital category, with
increasing scrutiny and more stringent restrictions, including the appointment
of a receiver, being imposed as an institution's capital declines. An insured
institution that falls below the minimum capital standards must submit a capital
restoration plan and could be subject to operating restrictions.
The prompt corrective action regulations are generally based upon an
institution's capital ratios. Under the prompt corrective action regulation
adopted by the FDIC, a bank will be considered to be (i) "well-capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
or core capital to risk-weighted assets ratio of 6% or greater, and a leverage
ratio of 5% or greater (provided that the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure); (ii) "adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite 1 under the CAMEL
rating system in its most recent report of examination); (iii)
"undercapitalized" if the institution has a total risk-based capital ratio that
is less than 8%, a Tier 1 or core capital to risk-weighted assets ratio of less
than 4%, or a leverage ratio that is less than 4% (3% if the institution is
rated composite 1 under the CAMEL rating system in its most recent report of
examination); (iv) "significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a Tier 1 or core capital to
risk-weighted assets ratio that is less than 3%, or a leverage ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or equal to 2%. The
prompt corrective action regulations also permit the FDIC to determine that a
bank institution should be classified in a lower category based on other
information, such as the institution's examination report, after written notice.
Under the FDIC's prompt corrective action regulations, at December 31, 1995, the
Bank was classified as well-capitalized based on its capital ratios.
An institution that is not well-capitalized is prohibited from accepting
deposits through a deposit broker. However, an adequately capitalized
institution can apply for a waiver to accept brokered deposits. Institutions
that receive a waiver are subject to limits on the rates of interest they may
pay on brokered deposits. Undercapitalized institutions are prohibited from
offering rates of interest on insured deposits that significantly exceed the
prevailing rate in their normal market area or the area in which the deposits
would otherwise be accepted. Institutions classified as undercapitalized are
precluded from increasing their assets, acquiring other institutions,
establishing additional branches, or engaging in new lines of business without
an approved capital plan and an agency determination that such actions are
consistent with the plan. Institutions that are significantly undercapitalized
may be required to take one or more of the following actions: (i) raise
additional capital so that the institution will be adequately capitalized; (ii)
be acquired by, or combined with, another institution if grounds exist for
appointing a receiver; (iii) refrain from affiliate transactions; (iv) limit the
amount of interest paid on deposits to the prevailing rates of interest in the
region where the institution is located; (v) further restrict asset growth; (vi)
hold a new election for directors, dismiss any director or senior executive
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officer who held office for more than 180 days immediately before the
institution became undercapitalized, or employ qualified senior executive
officers; (vii) stop accepting deposits from correspondent depository
institutions; and (viii) divest or liquidate any subsidiary that the FDIC
determines is a significant risk to the institution. Critically undercapitalized
institutions are subject to additional restrictions.
Any company that controls an "undercapitalized" institution, must guarantee that
the institution will comply with the plan and provide appropriate assurances of
performance in connection with the submission of a capital restoration plan by
the depository institution. The aggregate liability of any such controlling
company under such guaranty is limited to the lesser of (i) 5% of the
institution's assets at the time it became undercapitalized; or (ii) the amount
necessary to bring the institution into capital compliance at the time the
institution fails to comply with the terms of its capital plan. If the Bank were
to become "undercapitalized", Bancorp would be required to guarantee performance
of any capital restoration plan submitted as a condition to FDIC approval of
that plan pursuant to the FDIA.
Safety and Soundness Guidelines. The federal banking agencies have prescribed
safety and soundness guidelines relating to (i) internal controls, information
systems, and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. Such guidelines impose standards based upon an
institution's asset quality and earnings. The guidelines are intended to set out
standards that the agencies will use to identify and address problems at
institutions before capital becomes impaired. Institutions are required to
establish and maintain a system to identify problem assets and prevent
deterioration of those assets in a manner commensurate with its size and the
nature and scope of their operations. Furthermore, institutions must establish
and maintain a system to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves in a manner
commensurate with their size and the nature and scope of its operation.
Under the guidelines, an institution not meeting one or more of the safety and
soundness guidelines is required to file a compliance plan with the appropriate
federal banking agency. In the event that an institution, such as the Bank, were
to fail to submit an acceptable compliance plan or fail in any material respect
to implement an accepted compliance plan within the time allowed by the agency,
the institution would be required to correct the deficiency and the appropriate
federal agency would be authorized to: (1) restrict asset growth; (2) require
the institution to increase its ratio of tangible equity to assets; (3) restrict
the rates of interest that the institution may pay; or (4) take any other action
that would better carry out the purpose of the corrective action. The Bank was
in compliance with all such guidelines as of December 31, 1995.
Community Reinvestment Act. Under the Community Reinvestment Act (the "CRA") and
the implementing FDIC regulations, which were amended in 1995 to provide for a
performance-based evaluation system, the Bank has a continuing and affirmative
obligation to help meet the credit needs of its local communities, including low
and moderate-income neighborhoods, consistent with the safe and sound operation
of the Bank. The CRA requires that the Board of Directors of the Bank adopt a
CRA statement for each assessment area that, among other things, describes its
efforts to help meet community credit needs and the specific types of credit
that the institution is willing to extend. The FDIC and the Federal Reserve
Board are required to take
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into account the Bank's record of meeting the credit needs of its community in
determining whether to grant approval for certain types of applications
including mergers and acquisitions.
Under CRA, the federal banking agencies established the following ratings: (i)
"outstanding" - an institution in this group has an outstanding record of, and
is a leader in, ascertaining and helping to meet the credit needs of its entire
delineated community, including low and moderate income neighborhoods, in a
manner consistent with its resources and capabilities, (ii) "satisfactory" - an
institution has a satisfactory record of ascertaining and helping to meet the
credit needs of its entire delineated community including low and moderate
income neighborhoods, in a manner consistent with its resources, (iii) "needs to
improve" - an institution in this group needs to improve its overall record of
ascertaining and helping to meet the credit needs of its entire delineated
community, including low and moderate income neighborhoods, in a manner
consistent with its resources, and (iv) "substantial noncompliance" - an
institution in this group has a substantially deficient record of ascertaining
and helping to meet the credit needs of its entire delineated community,
including low and moderate income neighborhoods, in a manner consistent with its
resources and capabilities. The Bank's current CRA rating is satisfactory.
Federal Reserve System. Pursuant to the Depository Institutions Deregulation and
Monetary Control Act of 1980 (the "Deregulation Act"), the Federal Reserve Board
adopted regulations that require the Bank to maintain reserves against its
transaction accounts and non-personal time deposits. At December 31, 1995, these
regulations generally require that reserves of 3% be maintained for aggregate
transaction accounts of up to $52.0 million and that reserves of 10% be
maintained against the portion of transaction accounts in excess of that amount.
The Deregulation Act also gives the Bank authority to borrow from the Federal
Reserve Bank's "discount window".
The Federal Reserve Board has established capital adequacy guidelines for bank
holding companies that are similar to those required by the FDICIA. Bank holding
companies are currently required to comply with the FDICIA's risk-based capital
and minimum leverage capital requirements.
Bancorp is subject to regulation by the Federal Reserve Board as a registered
bank holding company. The Bank Holding Company Act of 1956, as amended (the
"BHCA"), under which Bancorp is registered, limits the types of companies which
Bancorp may acquire or organize and the activities in which it or they may
engage. In general, 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 a proper incident thereto. At this time, Bancorp
has not determined which, if any, of these or other permissible non-banking
activities it might seek to engage in.
Under BHCA, Bancorp is required to obtain the prior approval from the Federal
Reserve Board to acquire, with certain exceptions, more than 5% of the
outstanding voting stock of any bank or bank holding company, to acquire all or
substantially all of the assets of a bank or to merge or consolidate with
another bank holding company.
Under BHCA, Bancorp and the Bank and any other subsidiaries are prohibited from
engaging in certain tying arrangements among Bancorp and its subsidiaries
relating to any extension of
10
<PAGE>
credit or provision of any property or services to third parties. The Federal
Reserve Board relaxed some of these restrictions in 1994. The Bank is also
subject to certain restrictions imposed by the Federal Reserve Board on
extending credit to Bancorp or any of its subsidiaries, or on making investments
in the stock or securities thereof, and on taking such stock or securities as
collateral for loans to any borrower.
Bancorp is required under BHCA to file annually with the Federal Reserve Board a
report on its operations. Bancorp and the Bank and any other subsidiaries are
subject to examination by the Federal Reserve Board.
Pursuant to the Change in Bank Control Act of 1978, as amended, any person must
give 60 days notice to the Federal Reserve Board prior to acquiring control of a
bank holding company such as Bancorp. Control is defined as ownership of 25% of
any class of voting stock of a bank holding company, or the power to direct the
management or policies of the bank holding company. Control is presumed upon
ownership of 10% or more of any class of voting stock if (i) the bank holding
company's shares are registered pursuant to Section 12 of the Securities
Exchange Act of 1934 as amended (as are Bancorp's shares of Common Stock), or
(ii) the acquiring party would be the largest stockholder of the class of voting
stock of the bank holding company. The statute and underlying regulations
authorize the Federal Reserve Board to disapprove a proposed transaction on
certain specified grounds.
In addition to the Change in Bank Control Act, prior approval by the Federal
Reserve Board is required under the BHCA for any "company" to become a bank
holding company and to become subject to regulation as such by the Federal
Reserve Board. A company may become a bank holding company with Federal Reserve
Board approval if the company controls a bank or a bank holding company. A
"company" includes certain trusts, partnerships, corporations and other business
entities, but does not include individuals. For purposes of BHCA, control is
defined as (i) ownership, control or the power to vote 25% or more of any class
of voting securities of a bank or a bank holding company; (ii) control in any
manner of the election of a majority of the directors of a bank or a bank
holding company; or (iii) direct or indirect exercise of a controlling influence
over the management or policies of a bank or a bank holding company, as
determined by the Federal Reserve Board. A company that is required to obtain
prior approval under BHCA to become a bank holding company is exempt from the
prior approval requirement of the Change in Bank Control Act.
Recent Developments. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act, which will remove restrictions on
interstate branching and interstate bank acquisitions. In connection with the
Riegle-Neal Act, the State of Connecticut has enacted legislation that permits
merger transactions between a Connecticut and an out-of-state bank beginning on
September 25, 1995. Moreover, restrictions on interstate branching will be
removed effective on January 1, 1997.
11
<PAGE>
Item 2
Properties
- --------------------------------------------------------------------------------
Bancorp does not directly own or lease any real property. It uses the premises
and equipment of the Bank, without payment of rental fees to the Bank. The table
below sets forth certain information relating to the Bank's properties:
<TABLE>
<CAPTION>
Owned or Leased/
Office Location Expiration Date of Lease
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Main Office 87 Post Road East Owned
Westport, CT 06880
Main Office Annex 101 Post Road East Leased - lease expires
Westport, CT 06660 June 30, 2001 (2)
Main Office Drive-In 100 Post Road East Owned
Westport, CT 06880
Trust Department 107 Post Road East Leased - lease expires
Westport, CT 06880 June 30, 2001 (2)
Fairfield Branch 1312 Post Road Leased - lease expires
Fairfield, CT 06430 April 30, 2000 (2)
Greens Farms Branch 1111 Post Road East Owned
Westport, CT 06880
Georgetown Branch 60 Redding Road Owned
Georgetown, CT 06829
Saugatuck Branch 50 Charles Street Owned
Westport, CT 06880
Weston Branch 190 Weston Road Leased - lease expires
Weston, CT 06883 February 28, 1998
Operations Center 1 Research Drive Leased - lease expires
Shelton, CT 06484 May 31, 2001
Georgetown (1) 58 Redding Road Owned
(adjacent to branch location) Georgetown, CT 06829
1599 Post Road (1) 1599 Post Road East Owned
(acquired through foreclosure Westport, CT 06880
and included in bank premises)
Post Road East (1) 24 Post Road East Leased - lease expires
(formerly bank offices) Westport, CT 06880 April 1, 1997 (2)
<FN>
(1) Not currently used in operations; leased to third parties.
(2) Lease includes renewal option beyond expiration date indicated.
</FN>
</TABLE>
12
<PAGE>
Item 3
Legal Proceedings
- --------------------------------------------------------------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to their business, to which Bancorp or the Bank is a party
or to which any of their property is subject.
Item 4
Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
No matter was submitted to a vote of Bancorp's security holders during the
fourth quarter of 1995.
PART II
Item 5
Market For Bancorp's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
Bancorp's Common Stock trades on the NASDAQ National Market tier of The NASDAQ
Stock Market under the symbol "WBAT". The following table sets forth the high
and low bid prices of the Common Stock as reported by NASDAQ for the periods
indicated. At December 31, 1995, the Company had approximately 658 stockholders
of record and 5,433,665 outstanding shares of Common Stock. The 658 estimated
stockholders does not reflect the number of persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.
Price Range
---------------- Dividends Dividends
Fiscal Year High Low Declared Paid (1)
- -------------------------------------------------------------------------------
1995 First Quarter $ 5 $ 2 7/8 --- ---
Second Quarter 6 4 $.02 $.02
Third Quarter 5 3/4 4 1/2 $.02 $.02
Fourth Quarter 7 4 3/4 $.05 $.025
1994 First Quarter $ 3 1/2 $ 2 1/2 --- ---
Second Quarter 3 1/4 2 1/4 --- ---
Third Quarter 3 1/2 2 1/4 --- ---
Fourth Quarter 3 1/2 2 3/4 --- ---
(1) See Item 1 "Regulation and Supervision -- Connecticut Regulation" and Item
7 "Liquidity" for discussion regarding restriction on payment of
dividends.
13
<PAGE>
Item 6
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
The selected consolidated financial information of the Company set forth below
has been derived from the Company's audited consolidated financial statements
for such periods. This selected financial information should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere herein. Certain prior year amounts have been
reclassified to conform with the 1995 presentation.
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Interest income $20,725 $17,334 $15,709 $16,719 $ 20,616
Interest expense 6,027 4,749 5,684 8,034 12,218
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 14,698 12,585 10,025 8,685 8,398
Provision for loan losses 1,500 1,800 2,890 2,500 6,232
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,198 10,785 7,135 6,185 2,166
Other operating income 4,005 3,928 5,384 4,996 6,207
OREO expense - net 137 319 552 462 1,141
Other operating expense 11,241 11,268 11,017 11,048 13,104
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,825 3,126 950 (329) (5,872)
Income taxes (benefit) (1,005) (1,236) (252) 13 15
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,830 $ 4,362 $ 1,202 $ (342) $(5,887)
=============================================================================================================================
Net income (loss) per
common share -
Primary $ 0.66 $ 0.44 $ 0.12 $(0.16) $ (2.77)
Fully diluted (1) $ 0.65 --- --- --- ---
=============================================================================================================================
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
BALANCE SHEET DATA:
Total assets $312,917 $283,504 $272,657 $251,714 $244,454
Loans (2):
Mortgage 97,808 104,690 78,228 95,398 102,999
Commercial 46,422 51,462 52,841 57,048 39,610
Home equity 24,842 23,019 21,228 21,449 19,935
Consumer and other 8,980 7,477 6,645 7,738 15,709
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 178,052 186,648 158,942 181,633 178,253
Allowance for loan losses 2,854 3,341 3,024 3,998 4,276
Investment securities 85,338 70,396 91,001 29,923 25,736
Other earning assets (3) 14,744 611 2,903 12,247 7,167
Deposits:
Noninterest-bearing 78,421 72,972 57,479 52,337 46,561
Interest-bearing 196,249 180,986 198,037 185,499 182,206
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 274,670 253,958 255,516 237,836 228,767
Stockholders' equity 24,282 16,398 12,405 11,017 6,125
Cash dividends declared
per common share $ .09 --- --- --- ---
Book value per share -
fully diluted (4)(5) $ 2.44 $ 1.86 $ 1.52 $ 1.38 $ 2.89
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data and financial ratios)
<S> <C> <C> <C> <C> <C>
OTHER INFORMATION:
Yield on earning assets 8.0% 7.1% 7.0% 7.7% 9.1%
Cost of funds 2.3 1.9 2.4 3.5 5.1
Interest spread 5.7 5.2 4.6 4.2 4.0
Net interest margin 5.7 5.1 4.5 4.0 3.7
Weighted average number of
common shares and common
stock equivalents utilized in the
earnings per share calculation (6) -
Primary 10,365,000 10,382,000 10,513,000 2,192,000 2,122,000
Fully diluted (1) 10,469,000 --- --- --- ---
Average balances (7):
Loans (2) $181,969 $170,754 $173,182 $165,346 $185,143
Investment securities 74,134 70,859 37,583 42,443 33,324
Other earning assets (3) 2,708 3,458 13,984 8,862 7,316
Deposits:
Noninterest-bearing 67,050 60,539 49,305 42,930 41,224
Interest-bearing 176,841 183,601 183,227 184,368 194,384
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 243,891 244,140 232,532 227,298 235,608
Total assets 283,882 268,118 248,059 241,629 253,244
Stockholders' equity 20,659 13,732 11,630 9,400 8,766
FINANCIAL RATIOS:
Return on average total assets 2.41% 1.63% 0.48% (0.14)% (2.32)%
Return on average
stockholders' equity (4) 33.06 31.77 10.34 (3.64) (67.16)
Average stockholders' equity
to average total assets (4) 7.28 5.12 4.69 3.89 3.46
Dividend payout ratio 13.64 --- --- --- ---
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital to average
assets (leverage ratio) 8.18% 6.13% 4.84% 4.58% 2.60%
Tier 1 capital to
risk-weighted assets 12.77 9.20 8.22 6.74 3.50
Total capital to
risk-weighted assets 14.02 10.45 9.48 8.01 4.90
Nonaccrual loans
to total assets .64 1.52 2.18 4.21 7.30
Allowance for loan losses
to nonaccrual loans 142.99 77.41 50.82 37.73 23.95
Allowance for loan
losses to total loans 1.60 1.79 1.90 2.20 2.40
<FN>
(1) Fully diluted earnings per share were not applicable in 1994, 1993, 1992
and 1991.
(2) Loans are net of deferred loan fees amounting to $260,000, $400,000,
$337,000, $457,000 and $378,000 for 1995, 1994, 1993, 1992 and 1991,
respectively.
(3) Other earning assets consist of Federal funds sold, securities purchased
under agreement to resell and interest-bearing deposits with banks.
(4) 1995, 1994, 1993 and 1992 amounts include the convertible, noncumulative
preferred shares issued in 1992.
(5) 1995, 1994, 1993 and 1992 include the assumed issuance of additional
Common Stock and the related proceeds from the assumed exercise of certain
stock options and warrants and the assumed conversion of preferred stock.
(6) Assumes the conversion and/or exercise of preferred stock, warrants and
stock options in 1995, 1994 and 1993 using the "treasury stock method".
For 1992 and 1991, this computation excludes stock options, warrants and
preferred stock because their effect would have been antidilutive.
(7) Average balances are averages of daily closing balances.
</FN>
</TABLE>
15
<PAGE>
Item 7
Management's Discussion and
Analysis of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Overview
The following is a discussion and analysis of the Company's financial condition
at the end of 1995 and 1994 and of the results of its operations for the last
three years. This section should be read in conjunction with the consolidated
financial statements included in Item 8.
The Company reported net income for 1995 of $6,830,000, or $0.65 per common
share, fully diluted, as compared to net income of $4,362,000, or $0.44 per
common share, primary, in 1994, an increase of 57.0%. In 1995, primary earnings
per share were $0.66. Contributing to the improved results in 1995 was a decline
in nonperforming assets and related costs, increases in average earning assets,
an improved net interest margin and continued reductions of operating expenses.
Results of operations for 1995 included the recognition of a net deferred tax
asset of $1,122,000 and a net gain on the sale of securities and loans totaling
$58,000. Earnings from core operations (income before income taxes, excluding
non-recurring gains and losses) for 1995 have increased by more than 95% over
last year. As a result of improved operating results, the Company's Tier 1
capital (leverage) ratio increased to 8.18% at December 31, 1995 as compared to
6.13% at December 31, 1994.
At December 31, 1995, the Company had total assets of $312,917,000, an increase
of 10.4% from $283,504,000 at the end of 1994. Assets at December 31, 1994
increased 4.0% from $272,657,000 at December 31, 1993.
Net income for 1994 of $4,362,000 increased 263% over net income for 1993 of
$1,202,000, or $0.12 per common share, primary. Contributing to improved results
in 1994 was a reduction in nonperforming assets, an improvement in net interest
income and a reduction in the provision for loan losses. In addition, in 1994,
stronger fee income from trust fees, mortgage servicing fees and service charges
on deposit accounts contributed to the improved results over 1993. At December
31, 1994, Bancorp's Tier 1 Capital (leverage) ratio was 6.13% as compared to
4.84% at December 31, 1993.
The Company's results for 1995 continued to be impacted by the sluggish regional
economy and real estate market. However, during 1994 and continuing into 1995,
management has seen some positive trends, including the increased stabilization
of the local economy, reduction in vacancy rates, and renewed activity in the
real estate market, which have had a positive effect on earnings. A
deterioration of the economy and/or real estate values would adversely affect
results in 1996 and beyond, and could lead to increased levels of loan
charge-offs, the provision for loan losses and nonaccrual loans and reductions
in income and total capital.
Regulation and Supervision
In December 1994, the Federal Deposit Insurance Corporation (the "FDIC") and the
State of Connecticut Banking Commissioner (the "Commissioner") removed the Order
to Cease and Desist originally imposed on the Bank in October 1991. This action
was the result of a routine examination by the FDIC completed in the fourth
quarter of 1994.
16
<PAGE>
In March 1995, the Federal Reserve Bank of New York ("FRBNY") removed all
restrictions it had imposed on Bancorp in October 1991.
Bancorp resumed the payment of dividends in 1995 after these regulatory orders
were removed. There are certain restrictions on the ability of the Bank to
transfer funds to Bancorp in the form of dividends. See "Liquidity".
The Federal Reserve Board and the FDIC require bank holding companies and banks,
respectively, to comply with guidelines based upon the ratio of capital to total
assets adjusted for risk and the ratio of Tier 1 capital to total quarterly
average assets (leverage ratio).
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at December 31, 1995.
<TABLE>
<CAPTION>
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- ----------------------------------------------------------------------------------
<S> <C> <C>
Total Capital to Risk-Weighted Assets 14.02% 8.0%
Tier 1 Capital to Risk-Weighted Assets 12.77 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 8.18 3.0(1)
<FN>
(1) An additional 1% to 2% is required for all but the most highly rated
institutions.
</FN>
</TABLE>
The Federal Deposit Insurance Act, as amended by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") establishes five classifications
for banks on the basis of their capital levels; well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At December 31, 1995, the Company was "well capitalized" under
FDIA, based upon the above capital ratios. Deterioration of economic conditions
and real estate values could adversely affect future results, leading to
increased levels of loan charge-offs, provision for loan losses and nonaccrual
loans, affecting the ability of the Company to maintain the well capitalized
classification, and resulting in reductions in income and total capital.
Financial Condition
The Company's assets totaled $312,917,000 at December 31, 1995, an increase of
$29,413,000, or 10.4.%, from $283,504,000 at December 31, 1994. Average assets
increased 5.9% during 1995 over the previous year. Total deposits aggregated
$274,670,000 at December 31, 1995, an increase of $20,712,000, from $253,958,000
at December 31, 1994.
Noninterest-bearing deposits totaled $78,421,000 at December 31, 1995, an
increase of $5,449,000, or 7.5% from $72,972,000 at year end 1994.
Interest-bearing deposits increased from $180,986,000 at December 31, 1994 to
$196,249,000 at December 31, 1995, or 8.4%. For municipalities and selected
commercial and retail customers, the Bank also offers secured
17
<PAGE>
borrowings through repurchase agreements which are included in short-term
borrowings. Securities sold under repurchase agreements were $1,050,000 at
December 31, 1995 and $7,800,000 at December 31, 1994.
The Company's entire securities portfolio of $85,338,000 was classified as
available for sale at December 31, 1995. At December 31, 1994, the available for
sale portfolio totaled $27,190,000 and the held to maturity portfolio totaled
$43,206,000. Securities available for sale are carried at fair value, with any
unrealized gains or losses included as a separate component of stockholders'
equity. The portfolio at December 31, 1995 was comprised primarily of fixed rate
U.S. Government Agency debt and mortgage-backed securities.
During the fourth quarter of 1995, the Financial Accounting Standards Board
provided companies with the opportunity to reclassify securities between the
available for sale portfolio and the held to maturity portfolio. The Company
took advantage of this opportunity and reclassified its entire $42,459,000 held
to maturity portfolio to the available for sale portfolio.
Total loans decreased by $8,596,000 or 4.6%, in 1995, to $178,052,000, net of
deferred loan fees. This decline was due, in part, to the sale during 1995 of
$18.6 million in residential mortgage loans. The Bank engages in the origination
of residential mortgage loans and the sale of such loans based upon liquidity
needs and to manage interest rate risk. In addition, the resolution of several
larger nonperforming commercial mortgage loans contributed to the decline in the
portfolio. During 1995, the Bank concentrated its commercial lending efforts on
small and medium size businesses.
18
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and percentages of total loans at December 31, 1995, 1994, 1993,
1992 and 1991. Certain amounts from prior years have been reclassified to
conform with the 1995 presentation.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loan Amount Loan Amount Loans
- ---------------------------------------------------------------------------------------------------------------------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage:
Construction and
land development $ 3.3 1.8% $ 1.1 .6% $ 2.9 1.8% $ 7.4 4.0% $ 8.6 4.8%
Secured by
residential property 52.9 29.7 57.9 31.0 32.9 20.7 49.9 27.4 54.8 30.7
Secured by
commercial property 41.9 23.5 46.1 24.6 42.7 26.8 38.5 21.2 39.9 22.4
Commercial 46.4 26.0 51.5 27.5 51.9 32.6 54.8 30.1 36.4 20.3
Home equity 24.8 13.9 23.0 12.3 21.2 13.3 21.4 11.7 19.9 11.2
Consumer 8.0 4.5 6.4 3.5 6.3 4.0 8.6 4.7 12.7 7.1
Credit card --- --- --- --- --- --- --- --- 4.9 2.7
Other 1.0 .6 1.0 .5 1.3 .8 1.5 .9 1.4 .8
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 178.3 100.0% 187.0 100.0% 159.2 100.0% 182.1 100.0% 178.6 100.0%
===== ===== ===== ===== =====
Less:
Allowance for loan losses 2.8 3.3 3.0 4.0 4.3
Deferred loan fees .3 .4 .3 .5 .3
- ---------------------------------------------------------------------------------------------------------------------------
Loans - net $175.2 $183.3 $155.9 $177.6 $174.0
===========================================================================================================================
</TABLE>
19
<PAGE>
The following schedule reflects the book value, net of deferred loan fees, and
before the allowance for loan losses, of selected loans segregated according to
the shorter of repricing or maturity and the related interest rate sensitivity
at December 31, 1995:
<TABLE>
<CAPTION>
Due in 1 Due Between Due After
Year or Less 1 and 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Mortgage loans $ 62,805 $ 25,768 $ 8,052 $ 96,625
Commercial loans 38,838 6,673 98 45,609
- -------------------------------------------------------------------------------------------------------------------------
Total $101,643 $ 32,441 $ 8,150 $142,234
=========================================================================================================================
Loans due after 1 year with:
Fixed interest rates $ 28,851
Floating or adjustable interest rates 11,740
- -------------------------------------------------------------------------------------------------------------------------
Total $ 40,591
=========================================================================================================================
</TABLE>
The above schedule excludes nonaccrual loans, home equity loans and consumer
loans which amount to $35,818,000.
The following table sets forth the principal portion of loans with principal or
interest payments contractually past due 90 days or more, nonaccrual loans,
impaired loans and other real estate owned at December 31, 1995, 1994, 1993,
1992 and 1991. Certain amounts from prior years have been reclassified to
conform with the 1995 presentation.
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due, on accrual status:
Mortgage:
Secured by residential property $ 5 $ 78 $ 433 $ 377 $ 884
Commercial and other --- --- 323 --- 1,560
Commercial --- 6 17 30 610
Home equity 149 102 --- --- ---
Consumer and other 4 14 46 96 114
- ----------------------------------------------------------------------------------------------------------------------------
158 200 819 503 3,168
- ----------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgage:
Secured by residential property 85 2,659 1,193 3,702 7,639
Commercial and other 1,098 1,098 2,595 3,004 5,237
Commercial 813 500 1,471 2,887 3,512
Home equity --- 59 471 912 1,213
Consumer and other --- --- 220 92 256
- ----------------------------------------------------------------------------------------------------------------------------
1,996 4,316 5,950 10,597 17,857
Impaired accruing loans 447 3,724 5,242 5,035 3,093
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,601 8,240 12,011 16,135 24,118
Other real estate owned --- 352 2,723 5,724 5,047
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 2,601 $ 8,592 $ 14,734 $ 21,859 $ 29,165
============================================================================================================================
</TABLE>
20
<PAGE>
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $2,443,000, of which
$1,996,000 were nonaccrual loans. At December 31, 1995, the valuation allowance
related to all impaired loans totaled $634,000 and is included in the allowance
for loan losses. For the year ended December 31, 1995, the average recorded
investment in impaired loans was approximately $5.2 million. During 1995 total
interest in the amount of $95,000 was recognized on accruing impaired loans.
At December 31, 1995, impaired accruing loans included $.2 million of loans with
below market interest rates. At December 31, 1995, the Company had no
commitments to lend additional funds to borrowers with loans that have been
classified as impaired. The level of nonperforming assets has had a significant
negative impact on the Company's capital and earnings over the last five years.
Although management recognizes that the level of nonperforming assets is still
high, it is encouraged by the downward trend since 1990 and the 70% decline from
December 31, 1994 to December 31, 1995.
It is the Company's policy to discontinue the accrual of interest on loans,
including impaired loans, when, in the opinion of management, a reasonable doubt
exists as to the timely collection of the amounts due. Additionally, regulatory
requirements generally prohibit the accrual of interest on certain loans when
principal or interest is due and remains unpaid for 90 days or more, unless the
loan is both well secured and in the process of collection.
Operating results since 1989 have been adversely impacted by the level of
nonperforming assets as a result of the deterioration of borrowers' ability to
make scheduled interest and principal payments, caused primarily by the decline
in real estate values, a severe slowdown in business activity and a high rate of
unemployment. In addition to foregone revenue, the Company has had to provide a
high level of provision for loan losses and has incurred significant collection
costs and costs associated with the management and disposition of foreclosed
properties. However, during 1994 and continuing into 1995, management has seen
some positive trends, including the increased stabilization of the local
economy, reduction in vacancy rates, and renewed activity in the real estate
market, which have had a positive effect on earnings.
The characteristics of the real estate market since 1989 include a substantial
decline in real estate property values and a significant increase in the amount
of time that properties remain on the market prior to sale. Factors contributing
to the depressed market conditions are an over supply of properties on the
market and a continued sluggish local economy. As a result, the most significant
increases in nonperforming loans since 1989 have been in commercial mortgage
loans, residential mortgage loans and real estate related commercial loans.
Management has seen some recent improvement in the real estate market and the
local economy, which has had a positive effect on its efforts to resolve
nonperforming loans. Management is aggressively pursuing the collection of all
nonperforming loans. Management's efforts to return nonperforming loans to
performing status may be hampered by market factors.
21
<PAGE>
The following table sets forth the activity on nonaccrual loans for the periods
ended December 31, 1995, 1994, and 1993.
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 4,316 $ 5,950 $10,597
- --------------------------------------------------------------------------------
Additions 2,089 2,868 4,160
- --------------------------------------------------------------------------------
Less:
Repayments 2,697 780 2,145
Transfer to OREO --- 450 524
Charge-offs 802 1,924 4,130
Reinstate accruing 910 1,348 2,008
- --------------------------------------------------------------------------------
Total resolved 4,409 4,502 8,807
- --------------------------------------------------------------------------------
Balance, December 31, $ 1,996 $ 4,316 $ 5,950
================================================================================
Included in additions for 1995 are two loans totaling $1.2 million, from one
borrower, which were substantially resolved in the fourth quarter of 1995.
Subsequent to December 31, 1995, loans totaling $.4 million have been placed on
nonaccrual status.
In addition to the loans classified as nonperforming in the preceding table, the
Bank's internal loan review function has identified approximately $1.4 million
of commercial and commercial real estate loans with more than normal credit
risk. While these loans, were performing according to contractual agreement at
December 31, 1995, previous payment history indicates the borrowers may have
difficulty in the future in meeting all of the terms of the contractual
agreements. These loans, as well as nonperforming commercial and commercial real
estate loans, have been considered in the analysis of the adequacy of the
allowance for loan losses.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance for loan losses on a regular
basis by considering various factors, including past loan loss experience,
delinquent and nonperforming loans and the quality and level of collateral
securing these loans, inherent risks in the loan portfolio, and current economic
and real estate market conditions. Management has performed a loan-by-loan risk
assessment of each classified loan and of a substantial portion of the
performing commercial and commercial mortgage portfolios resulting in a specific
reserve based on loss exposure. An additional general reserve is also allocated
to each of these portfolios as well as to the residential mortgage and other
loan portfolios on an overall basis, based upon the risk category and loss
experience of the given portfolio. Based upon this review, management
22
<PAGE>
believes that, in the aggregate, the allowance of $2,854,000 at December 31,
1995 is adequate to absorb probable loan losses inherent in the loan portfolio.
The adverse real estate market in Fairfield County, the Company's past reliance
upon commercial real estate lending, the level of charge-offs during the past
five years and the level of nonperforming loans are factors which are considered
when the adequacy of the allowance for loan losses is reviewed. There is no
assurance that the Company will not be required to make increases to the
allowance in the future in response to changing economic conditions or
regulatory examinations.
The decrease in the allowance for loan losses from $3,341,000 at December 31,
1994 to $2,854,000 at December 31, 1995 reflects the decline in nonperforming
and nonaccruing loans and $2,366,000 of loan charge-offs during the period. The
charge-offs in 1995 primarily relate to loans on which a specific reserve had
been allocated at December 31, 1994 based on anticipated loss exposure.
It is the Company's policy to charge-off loans against the allowance for loan
losses when losses are certain. Such decisions are based upon an analysis of the
loan, a judgment as to the borrower's ability to repay and the adequacy of
collateral.
The following tables summarize other selected loan and allowance for loan losses
information for 1995, 1994, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses $ 2,854 $ 3,341 $ 3,024 $ 3,998 $ 4,276
Nonaccrual loans 1,996 4,316 5,950 10,597 17,857
Nonperforming loans (1) 2,601 8,240 12,011 16,135 24,118
Allowance for loan losses
as a % of nonaccrual loans 143% 77% 51% 38% 24%
Allowance for loan losses
as a % of nonperforming
loans 110 41 25 25 18
Allowance for loan losses
as a % of loans outstanding at
end of year 1.60 1.79 1.90 2.20 2.40
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
Net loans charged-off as a % of
average loans outstanding 1.14% .87% 2.23% 1.68% 4.03%
<FN>
(1) Includes nonaccrual loans, loans accruing 90 days or more past due and
impaired loans.
</FN>
</TABLE>
23
<PAGE>
As the volume of new loans increased and nonaccrual loans declined, the overall
credit quality of the total loan portfolio has improved which has positively
impacted management's estimate of the allowance for loan losses.
The allowance for loan losses ratio for 1994, 1993 and 1992, as a percentage of
outstanding loans, shown on the preceding page, is impacted by the loans
purchased from the FDIC in late 1992. If these loans had not been included, the
allowance-to-loans outstanding ratio would have been 1.87% at December 31, 1994,
2.07% at December 31, 1993 and 2.45% for December 31, 1992. At December 31, 1995
these loans were no longer subject to a repurchase agreement with the FDIC.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of these loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The adoption of SFAS
114 and 118 on January 1, 1995 did not materially affect the Company's financial
statements or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments on nonaccruing impaired loans are recorded as
reductions of loan principal.
Management is aware of its responsibility for maintaining an adequate allowance
for loan losses and an adequate system to identify credit risk and account for
it appropriately. The various recent regulatory examinations of the Company have
not identified significant problem loans not already identified by management.
Management will continue to review the findings of regulatory examinations and
comply with regulatory recommendations.
A deterioration of economic conditions and real estate values could adversely
affect future results, leading to increased levels of loan charge-offs,
provision for loan losses and nonaccrual loans and reductions in income and
total capital.
24
<PAGE>
The following table summarizes the changes in the allowance for loan losses for
the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Allowances for loan losses, January 1, $ 3,341 $ 3,024 $ 3,998 $ 4,276 $ 5,504
- ----------------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Mortgages: (1)
Secured by residential property (347) (344) (1,091) (560) (1,397)
Commercial and other (1,054) (737) (1,153) (182) (912)
Commercial (795) (707) (1,496) (1,992) (4,146)
Home equity (35) (49) (328) (75) (275)
Consumer and other (135) (258) (305) (604) (1,128)
- ----------------------------------------------------------------------------------------------------------------------------
Total loans charged-off (2,366) (2,095) (4,373) (3,413) (7,858)
Recoveries on amounts previously charged-off 290 612 509 635 398
- ----------------------------------------------------------------------------------------------------------------------------
Net loans charged-off (2,076) (1,483) (3,864) (2,778) (7,460)
Provision charged to operating expenses 1,500 1,800 2,890 2,500 6,232
Other (2) 89 --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31, $ 2,854 $ 3,341 $ 3,024 $ 3,998 $ 4,276
============================================================================================================================
<FN>
(1) Includes write-downs of values of loans transferred to other real estate
owned of $94,000, $185,000 $312,000 and $658,000 in 1994, 1993, 1992 and
1991, respectively. No loans were transferred to OREO during 1995.
(2) Transfer from the OREO valuation allowance to the allowance for loan
losses.
</FN>
</TABLE>
25
<PAGE>
The following table sets forth an estimated allocation by loan category of the
Bank's allowance for loan losses at December 31, 1995, 1994, 1993, 1992 and
1991, along with the percentage of loans in each category to total loans.
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage:
Secured by residential property $ 342 29.7% $ 364 31.0%
Commercial and other 988 25.3 1,673 25.2
Commercial 1,145 26.0 1,014 27.5
Home equity 207 13.9 171 12.3
Consumer 172 5.1 119 4.0
- ------------------------------------------------------------------------------------------------------------------------------
$ 2,854 100.0% $ 3,341 100.0%
==============================================================================================================================
1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage:
Secured by residential property $ 177 20.7% $ 316 27.4%
Commercial and other 1,631 28.6 1,218 25.2
Commercial 986 32.6 2,184 31.3
Home equity 104 13.3 102 11.7
Consumer 126 4.8 178 4.4
- ------------------------------------------------------------------------------------------------------------------------------
$ 3,024 100.0% $ 3,998 100.0%
==============================================================================================================================
1991
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage:
Secured by residential property $ 330 30.7%
Commercial and other 888 27.2
Commercial 2,109 22.1
Home equity 305 11.2
Consumer 644 8.8
- ------------------------------------------------------------------------------------------------------------------------------
$ 4,276 100.0%
==============================================================================================================================
</TABLE>
Specific reserves included in the amounts in the above table are $647,000,
$1,494,000, $1,484,000, $2,348,000 and $2,496,000 for 1995, 1994, 1993, 1992 and
1991, respectively. The unallocated portion of the allowance for loan losses was
$2,207,000, $1,847,000, $1,540,000, $1,650,000 and $1,780,000 for 1995, 1994,
1993, 1992 and 1991, respectively. Increases, in 1994 and 1995, of the
unallocated portion is attributable to the reduction in both nonperforming
assets and the specific reserve allocation attributable to these assets.
26
<PAGE>
Other Real Estate Owned
At December 31, 1995, the Company had no other real estate owned properties
("OREO") in its possession. At December 31, 1994, OREO totaled $352,000. OREO
properties are carried at the lower of cost or estimated fair value. During
1995, the Company recorded $171,000 of additional write-downs on real estate
properties and sold real estate properties with a carrying value of $270,000,
which resulted in a net gain of $52,000 during the 1995 period. During 1994, the
Company sold properties with a carrying value of $1,477,000 incurring losses of
$191,000, a portion of which had been previously accrued. In addition, in the
first quarter of 1994, the Company transferred a commercial office building,
carried at $1.3 million, from OREO to banking premises. Subsequent to December
31, 1995 the Company has entered into a contract for the sale of this building
at an amount that approximates book value. The sale is expected to be finalized
during the second quarter of 1996. During the third quarter of 1994, the Bank
acquired two residential properties through foreclosure, carried at $561,000. No
properties were acquired through foreclosure or acquisition during 1995. Further
material declines in the real estate market could cause increases in the level
of OREO, further losses or write-downs.
The following table summarizes the changes in OREO for the years ended December
31, 1995 and 1994.
1995 1994
- -----------------------------------------------------------------
($ in thousands)
Beginning Balance, January 1, $ 352 $ 2,723
- -----------------------------------------------------------------
Additions --- 561
Sales (270) (1,477)
Write-downs (171) (106)
Transfer --- (1,349)
Valuation allowance (1) 89 ---
- -----------------------------------------------------------------
Ending Balance, December 31, $ --- $ 352
=================================================================
(1) Transfer from the OREO valuation allowance to the allowance for loan
losses.
27
<PAGE>
Results of Operations
Overview
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations, including fees
generated by its Trust department. Net interest income is the difference between
interest earned on the loan and investment portfolios and interest paid on
deposits and other sources of funds. Noninterest income is primarily the result
of fees generated by the Trust department, charges related to transaction
activity from commercial and retail checking accounts and gains from loan and
securities sales.
The Company reported net income for 1995 of $6,830,000 or $0.65 per common
share, fully diluted, and $0.66 per common share, primary compared to net income
of $4,362,000 or $0.44 per common share, primary, for 1994. Net income for 1995
included the recognition of additional deferred tax assets of $1,122,000 and net
gains on the sale of loans and securities amounting to $58,000. Earnings from
core operations (income before income taxes, excluding non-recurring gains and
losses) in 1995 amounted to $5,767,000. By contrast, earnings from core
operations in 1994, amounted to $2,948,000. As discussed below, the significant
improvement in results for 1995 was primarily attributable to a reduction in
nonperforming assets, an increase in the net interest margin due, in part, to an
increase in average earning assets and the yield thereon, a reduction in the
provision for loan losses as a result of the overall improvement in the credit
quality of the loan portfolio and the control of operating expenses as the
Company continued to expand in 1995. In addition, stronger income from trust
fees and a reduction in FDIC premiums contributed to improved 1995 earnings.
Negatively impacting earnings for 1995 was an increase in professional fees
related to strategic planning initiatives and an increase in salaries and
benefits due to the implementation, during 1995, of a new bonus and incentive
program, along with revisions to executive benefit plans.
Net income for 1994 of $4,362,000 increased 263% over net income for 1993 of
$1,202,000, or $0.12 per common share, primary. Contributing to improved results
in 1994 was a reduction in nonperforming assets, an improvement in net interest
income and a reduction in the provision for loan losses. In addition, in 1994,
stronger fee income from trust fees, mortgage servicing fees and service charges
on deposit accounts contributed to the improved results over 1993. At December
31, 1994, Bancorp's Tier 1 Capital (leverage) ratio was 6.13% as compared to
4.84% at December 31, 1993.
The past decline in the regional economy, particularly in the local real estate
market, has affected the ability of many of the Bank's borrowers to repay their
loans. Also, since 1989, real estate values in the Company's market area have
declined substantially. While the Bank's residential, commercial and
construction mortgage lending policies have specified a 75% or less
loan-to-value ratio, the decline in values has increased the possibility of loss
in the event of default. Management believes this decline has abated and
improvements were shown during 1994 and 1995.
28
<PAGE>
Net Interest Income
Net interest income is the difference between interest earned on loans and other
investments and interest paid on deposits and other sources of funds. Net
interest income is affected by a number of variables. One such variable is the
interest rate spread, which represents the difference between the yield on total
average interest-earning assets and the cost of total average
noninterest-bearing and interest-bearing liabilities.
During 1995, the interest rate spread improved, from 5.2% in 1994 to 5.7% in
1995, primarily due to the increase in yields earned on accruing loans and
investment securities. The yield on interest-earning assets was positively
impacted by a net increase in the prime rate during 1995, resulting in higher
yields on the Bank's commercial loan portfolio and home equity portfolio. The
yield on investment securities increased in 1995 due to sales of lower yielding
securities, which resulted in a net loss of $229,000, and purchases of higher
yielding securities.
During 1994, the interest rate spread improved to 5.2% as compared to 4.6% in
1993. This increase was due primarily to the decline of interest costs on
deposit accounts and the increase in average noninterest-bearing deposits. The
yield on earning assets was positively impacted in 1994, as compared to 1993, by
an increase in the prime rate, resulting in higher yields on the Bank's
commercial loan portfolio and home equity portfolio.
Net interest margin represents net interest income divided by average
interest-earning assets. The continued high level of nonearning assets in 1993
and 1994 had a negative impact on the net interest margin during those years.
However, the decline in nonaccruing loans and other real estate owned favorably
impacted the net interest margin in 1994 and 1995.
29
<PAGE>
The following table sets forth a three year comparison of average earning
assets, nonaccrual loans, average interest-bearing liabilities and related
interest income and expense. Average balances are averages of daily closing
balances, except for nonaccrual loans in 1993 and 1994, which are averages of
monthly closing balances. Certain amounts have been reclassified to conform with
the 1995 presentation.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Accruing loans $178,055 $16,200 9.1% $165,330 $13,729 8.3% $163,680 $13,482 8.2%
Non-accruing loans 3,914 --- 5,424 --- 9,502 ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 181,969 16,200 8.9 170,754 13,729 8.0 173,182 13,482 7.8
Investment securities 74,134 4,366 5.9 70,859 3,484 4.9 37,583 1,798 4.8
Federal funds sold
and other 2,708 159 5.9 3,458 121 3.5 13,984 429 3.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $258,811 20,725 8.0 $245,071 17,334 7.1 $224,749 15,709 7.0
======== ------ ======== ------ ======== ------
Noninterest-bearing
demand deposits $ 67,050 --- $ 60,539 --- $ 49,305 ---
Interest-bearing
liabilities:
Money market and
NOW 68,124 1,140 1.7 73,337 1,067 1.5 71,692 1,392 1.9
Savings 51,066 1,013 2.0 62,824 1,269 2.0 57,035 1,521 2.7
Certificates of
deposit 57,651 2,918 5.1 47,440 2,079 4.4 53,650 2,695 5.0
Other 16,520 956 5.8 7,842 334 4.3 2,307 76 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 193,361 6,027 3.1 191,443 4,749 2.5 184,684 5,684 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-
bearing deposits and
interest-bearing
liabilities $260,411 6,027 2.3 $251,982 4,749 1.9 $233,989 5,684 2.4
======== ----- ======== ----- ======== -----
Net interest income(1) $14,698 $12,585 $10,025
==================================================================================================================================
Net interest margin(2) 5.7% 5.1% 4.5%
==================================================================================================================================
Interest rate spread (3) 5.7% 5.2% 4.6%
==================================================================================================================================
<FN>
(1) Interest income includes loan fees of $224,000, $295,000 and $266,000 in
1995, 1994, and 1993, respectively.
(2) Net interest margin is net interest income divided by total average
earning assets.
(3) Interest rate spread is the difference between the yield on total average
interest-earning assets and the cost of total average noninterest-bearing
deposits and interest-bearing liabilities.
</FN>
</TABLE>
30
<PAGE>
The following table analyzes the changes attributable to the rate and volume
components of net interest income. Interest income includes loan fees of
$224,000, $295,000 and $266,000 in 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1995 vs 1994 1994 vs 1993
Increase/(decrease) Increase/(decrease)
due to change in (1): due to change in (1):
Total Total
Rate Volume Change Rate Volume Change
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $1,368 $ 1,103 $ 2,471 $ 124 $ 123 $ 247
Investment securities 717 165 882 78 1,608 1,686
Federal funds sold and other 52 (14) 38 34 (342) (308)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,137 1,254 3,391 236 1,389 1,625
- -------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-
bearing liabilities:
Money market and NOW 137 (64) 73 (355) 30 (325)
Savings (35) (221) (256) (372) 120 (252)
Certificates of deposit 355 484 839 (340) (276) (616)
Other 175 447 622 80 178 258
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 632 646 1,278 (987) 52 (935)
- -------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 1,505 $ 608 $ 2,113 $ 1,223 $ 1,337 $ 2,560
===============================================================================================================================
<FN>
(1) Variances were computed as follows:
Variance due to rate = change in rate multiplied by old volume. Variance
due to volume = change in volume multiplied by old rate. Variance due to
rate/volume prorated to rate and volume variances on the basis of gross
value.
</FN>
</TABLE>
31
<PAGE>
Net interest income was $14,698,000 in 1995, compared with $12,585,000 in 1994,
an increase of $2,113,000 or 16.8%. Net interest income for 1994 increased 25.5%
over $10,025,000 in 1993. Contributing factors to the changes in interest income
and expense are discussed below.
Total interest income amounted to $20,725,000 in 1995, compared to $17,334,000
for 1994, an increase of $3,391,000 or 19.6%. A key factor relating to the
higher level of total interest income for 1995, compared to the prior year, was
an increase in average interest-earning assets of $13.7 million or 5.6%, which
positively impacted earnings by $1,254,000. In addition, during this same
period, the average yield on interest-earning assets increased from 7.1% to
8.0%, resulting in an increase in interest income of $2,137,000. Total interest
income of $17,334,000 in 1994 represented an increase of 10.3% over 1993.
Contributing to the improved results in 1994 was an increase of 9.0% in average
interest-earning assets, which positively impacted earnings by $1,389,000. Total
interest income for 1995, 1994 and 1993 was negatively impacted by the level of
nonaccrual loans, averaging $3.9 million, $5.4 million and $9.5 million in 1995,
1994 and 1993, respectively.
Total interest expense for 1995 was $6,027,000, an increase of $1,278,000 or
26.9% from 1994. This increase was, in part, the result of an increase in
interest costs from 1.9% in 1994 to 2.3% in 1995, resulting in an increase in
interest expense of $632,000. Additionally, there was an increase of 1.0% in
interest-bearing liabilities during 1995, to $193,361,000 from $191,443,000 in
1994, resulting in an increase in interest expense of $646,000. Total interest
expense for 1994 declined 16.4% to $4,749,000 from $5,684,000 in 1993. This
decline was primarily the result of a reduction in interest costs from 2.4% in
1993 to 1.9% in 1994, resulting in an expense reduction of $987,000.
Positively impacting the Bank's overall funding costs was an increase of 10.8%
in 1995 and 22.8% in 1994 of average noninterest-bearing liabilities.
Further improvement in net interest income is dependent, in part, upon the
continued resolution of nonperforming assets.
Other Operating Income
The following table sets forth other operating income for the years ended
December 31, 1995, 1994, and 1993 and the percentage change from period to
period.
<TABLE>
<CAPTION>
Years Ended % Change % Change
December 31, 1995 vs 1994 vs
1995 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Trust fees $1,880 $1,637 $1,573 14.8% 4.1%
Service charges on deposit accounts 1,344 1,403 1,284 (4.2) 9.3
Loan sale gains - net 287 175 1,287 64.0 (86.4)
Mortgage servicing fees 141 151 76 (6.6) 98.7
Realized security gains (losses) - net (229) 3 370 N/M (99.2)
Securities held for sale - lower of
aggregate cost or market adjustment --- --- 207 --- N/M
Other 582 559 587 4.1 (4.8)
- -------------------------------------------------------------------------------------------------------------------------------
Total other operating income $4,005 $3,928 $5,384 2.0% (27.0)%
===============================================================================================================================
<FN>
N/M = not measurable or not meaningful.
</FN>
</TABLE>
32
<PAGE>
Total other operating income increased 2.0% in 1995 to $4,005,000 as compared to
$3,928,000 in 1994. In 1994 total other operating income decreased 27.0% from
$5,384,000 in 1993. Contributing factors are discussed below.
Trust fees increased in 1995 to $1,880,000, or 14.8%, from 1994. This increase
is primarily attributed to new wealth management and investment services offered
in 1995 along with an increase in the volume of estate fees. Trust fees
increased in 1994 by 4.1% over 1993 as a result of an increased fee schedule and
an increase in assets held by the Bank's trust department.
Loan sale gains in 1995 were positively impacted by the adoption of Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights". SFAS 122 requires the capitalization of the fair value of
originated mortgage servicing rights in connection with the sale of loans in the
secondary market. During 1995, the Company sold $15.0 million in residential
mortgage loans while retaining the rights to service these loans. Net gains of
$245,000 were realized from the sale of these loans which included the
recognition of a servicing asset (originated mortgage servicing rights) and
origination fees that had been previously collected and deferred in accordance
with Statement of Financial Accounting Standards No. 91. Additionally,
residential mortgage loans totaling $3.6 million were sold in 1995, servicing
released, resulting in realized net gains of $42,000. During 1994, $12.8 million
in residential mortgage loans were sold for a net gain of $175,000. The
reduction in residential mortgage loan sales in 1994, as compared to 1993, was
due, in part, to an increase in the origination of variable rate residential
mortgage loans which the Company generally retains for portfolio as part of its
asset/liability management program.
The other income category increased 4.1% in 1995 to $582,000, primarily the
result of an increase in fees related to wire transfer services, equity lines of
credit and check services. In 1994 the other operating income category decreased
4.8% from 1993 primarily as a result of net gains realized in 1993 as a result
of the sale of a bank property.
Negatively impacting other operating income for 1995 was a net loss of $229,000
on the sale of securities in the available for sale portfolio. The security
losses were incurred primarily in the first quarter of 1995 in connection with
the repositioning of the available for sale portfolio into higher yielding
government agency securities. During 1994 the Bank sold $4.2 million of
government agency securities from the available for sale portfolio resulting in
a net gain of $3,000 as compared to sales in 1993 totaling $28.3 million of
securities from the held for sale portfolio realizing a net gain of $370,000.
Service charges on deposit accounts declined 4.2% to $1,344,000 in 1995 as
compared to $1,403,000 in 1994 due, in part, to a lower volume of insufficient
funds charges. In 1994, service charges on deposit accounts increased 9.3% over
1993 as a result of an increased fee schedule implemented during 1994 and
substantial growth in commercial checking accounts.
Mortgage servicing fees declined in 1995 to $141,000 from $151,000 in 1994 due
to a decline of 5.1% in the average balance of residential mortgage loans
serviced for investors. In 1994, mortgage servicing fees increased 98.7% over
1993. During 1994, the Company became an approved seller/servicer for the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation allowing the Company to retain the servicing rights to residential
mortgage loans sold in the secondary market.
33
<PAGE>
Other Operating Expense
The following table sets forth other operating expense for the periods ended
December 31, 1995, 1994 and 1993 and the percentage change from period to
period.
<TABLE>
<CAPTION>
Years Ended % Change % Change
December 31, 1995 vs 1994 vs
1995 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and benefits $ 5,600 $ 5,416 $ 5,217 3.4% 3.8%
Occupancy - net 1,445 1,484 1,563 (2.6) (5.1)
Professional fees 1,119 941 696 18.9 35.2
Data processing 575 782 742 (26.5) 5.4
FDIC insurance premiums 392 696 679 (43.7) 2.5
Furniture and equipment 292 337 505 (13.4) (33.3)
Other insurance premiums 220 287 329 (23.3) (12.8)
Other real estate owned - net 137 319 552 (57.1) (42.2)
Other 1,598 1,325 1,286 20.6 3.0
- ----------------------------------------------------------------------------------------------------------------------------
Total other operating expense $11,378 $11,587 $11,569 (1.8)% 0.2%
============================================================================================================================
</TABLE>
Total other operating expense declined 1.8% to $11,378,000 in 1995 from
$11,587,000 in 1994. This decline was realized despite the Company's expansion
by opening an additional branch facility during the third quarter of 1995. In
1994 total other operating expense increased 0.2% from $11,569,000 in 1993.
Contributing factors are discussed below.
FDIC insurance premiums declined 43.7% to $392,000 in 1995 from $696,000 in
1994. The decrease is, in part, attributable to a rebate of insurance premiums
from the FDIC during the third quarter of 1995. This action was required due to
statutory limits imposed on the Bank Insurance Fund by the Federal Deposit
Improvement Act of 1991. In addition, the Company's premiums were reduced in
1995 due to improved capital levels. The increase in FDIC insurance premiums of
2.5% in 1994 over 1993 was, in large part due to an increase in deposit levels
partially offset by a reduction in the Company's insurance premium. The Bank has
estimated 1996 FDIC insurance premiums to be approximately $2,000 based on the
current rate structure imposed by the FDIC on banks in the "well capitalized"
category.
Data processing expense declined 26.5% to $575,000 in 1995, primarily due to the
purchase of a new bank-wide hardware and software system during the fourth
quarter of 1994, substantially reducing maintenance and equipment costs. In 1994
data processing expense increased 5.4% over 1993, primarily due to costs
associated with the conversion to the new bank-wide hardware and software
system. During 1996, maintenance and fees related to the computer system are
expected to increase as the warranty period expires.
Other real estate owned expense declined 57.1% in 1995 and 42.2% in 1994 due to
the significant reduction in the levels of foreclosed properties.
Other insurance premiums declined 23.3% in 1995 and 12.8% in 1994 due to lower
premium costs as a result of the Company's improved financial condition and a
continued decline in commercial insurance rates.
34
<PAGE>
Furniture and equipment expense declined 13.4% in 1995 to $292,000 from $337,000
in 1994 as a result of assets becoming fully depreciated, with minimal purchases
of new furniture and equipment. Declines were realized in both furniture and
equipment expense despite additional costs related to the new branch opening.
Furniture and equipment expense declined 33.3% in 1994 from $505,000 in 1993,
primarily due to the purchase of equipment previously leased and reduced
maintenance expenses.
Occupancy expense declined in 1995, by 2.6% or $39,000 and in 1994 by 5.1% from
1993, primarily due to the consolidation of previously leased office space. In
1995 this reduction was offset , in part, by the occupancy costs associated with
the new branch facility.
Offsetting these declines in 1995 was an increase in professional fees of 18.9%
to $1,119,000 from $941,000 in 1994, primarily due to strategic planning
initiatives and costs associated with revisions to executive benefit plans. In
1994, professional fees increased 35.2% over 1993 levels due to corporate legal
costs associated with capital plans, the outsourcing of certain functions and
additional consulting services.
Salaries and benefits increased 3.4% in 1995 as compared to 1994, primarily due
to the implementation of a new bonus and incentive program and an increase in
the Company's contribution to the employee 401(k) Plan. Expenses in 1995 were
also impacted by the addition of staff for the new branch facility. In 1994,
costs associated with a staff reduction program led, in part, to an increase of
3.8% over 1993.
The other expense category increased 20.6% in 1995 to $1,598,000 from $1,325,000
in 1994, primarily the result of advertising costs associated with new Trust
products. In addition, in 1995, expenses associated with forms and supplies
increased due to the conversion of the Bank's hardware and software system, as
well as the opening of a new branch facility. In 1994 the other expense category
increased 3.0% over 1993 primarily due to forms and supplies associated with the
hardware and software system conversion.
Income Taxes
Since January 1, 1993 the Company has accounted for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes". As a result of net operating losses and loss
carryovers, the Company had no regular Federal tax liability for the years 1993
through 1995. The Company paid minimum federal and state income taxes in 1995,
1994 and 1993.
As of December 31, 1995, the Company has aggregate net operating loss
carryforwards of approximately $5.9 million for federal purposes and $6.5
million for state purposes to offset future income for tax return purposes.
At December 31, 1995, the Company recorded a net deferred tax asset of
$2,772,000 representing anticipated future utilization of its net operating loss
carryforwards as an offset against future taxable income. See Note 10 of the
Notes to the Consolidated Financial Statements included at Item 8 of this Form
10-K.
35
<PAGE>
Fourth Quarter Results
The Company recorded net income of $1,463,000 or $0.14 per fully diluted common
share for the fourth quarter of 1995 as compared to $1,213,000 or $0.12 per
fully diluted common share for the same period of 1994.
Results of operations for the fourth quarter of 1995, as compared to the 1994
period, were positively impacted by the continued reduction in nonperforming
assets and operating expenses along with improvements in total interest income
and other operating income. Net income for the fourth quarter of 1994 included
the recognition of an additional deferred tax asset of $200,000 as compared to
no additional deferred tax assets recognized during the same period of 1995. The
Company had previously recognized substantially all of its remaining net
deferred tax assets as of September 30, 1995.
Interest income of $5,374,000 for the fourth quarter of 1995 represented an
increase of 13.1% over the same period in 1994. This improvement in 1995 was
primarily the result of an increase of 6.3% in average interest-earning assets
over the 1994 period.
Interest expense of $1,644,000 for the fourth quarter of 1995 increased
$433,000, or 35.8%, from the 1994 total of $1,211,000. This increase was, in
large part, due to an increase in the cost of funds to 2.5% in the fourth
quarter of 1995 as compared to 1.9% for the same period in 1994. Additionally,
the average balance of interest-bearing liabilities increased 3.7% in 1995 over
the fourth quarter of 1994.
Other operating income for the fourth quarter of 1995 was $1,306,000, as
compared to $1,027,000 for the same period of 1994, an increase of 27.2%. This
increase is primarily the result of an improvement in trust fees due to new
wealth management and investment services offered in 1995. Also, the adoption of
SFAS 122 during the fourth quarter of 1995 resulted in a $171,000 gain.
Other operating expense for the fourth quarter of 1995 was $3,060,000, as
compared to $3,075,000 for the same period of 1994. This decline is due, in
part, to a reduction in other real estate owned expense, data processing expense
and FDIC insurance premiums. Partially offsetting these reductions was an
increase in professional fees due to strategic planning initiatives undertaken
in the fourth quarter of 1995.
Asset/Liability Management
The Bank's asset/liability management program focuses on maximizing net interest
income while minimizing balance sheet risk by maintaining what management
considers to be an appropriate balance between the volume of assets and
liabilities maturing or subject to repricing within the same interval.
Asset/liability management also focuses on maintaining adequate liquidity and
capital. Interest rate sensitivity has a major impact on the Bank's earnings.
Proper asset/liability management involves the matching of short-term interest
sensitive assets and liabilities to reduce interest rate risk. Interest rate
sensitivity is measured by comparing the dollar difference between the amount of
assets maturing or repricing within a specified time period and the amount of
liabilities maturing or repricing within the same time period. This dollar
difference is referred to as the rate sensitivity or maturity "GAP".
36
<PAGE>
Management's goal is to maintain a cumulative one year GAP of under 10% of total
assets. At December 31, 1995, the cumulative one year GAP as a percentage of
total assets was 6.90%. The Bank concentrates on originating adjustable rate
loans to hold in its loan portfolio to reduce interest rate risk. Deregulation
of deposit instruments has allowed the Bank to generate deposit liabilities
whose repricing more closely matches that of its loans.
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at December 31, 1995:
<TABLE>
<CAPTION>
Maturity/Repricing Interval
- ----------------------------------------------------------------------------------------------------------------------------
Over
3 Months
3 Months through 1 to 5 Over 5
or Less 1 Year Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans(1) $ 84,277 $ 48,372 $ 34,505 $ 8,902 $176,056
Investment securities 38,902 24,593 13,927 7,916 85,338
Federal funds sold and other 14,500 --- --- --- 14,500
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 137,679 72,965 48,432 16,818 275,894
- ----------------------------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
Money market and NOW deposits 69,957 --- --- --- 69,957
Savings deposits 45,455 --- --- --- 45,455
Certificates of deposit and other 45,402 20,499 14,936 --- 80,837
Short-term borrowings 7,733 --- --- --- 7,733
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 168,547 20,499 14,936 --- 203,982
- ----------------------------------------------------------------------------------------------------------------------------
Gap $(30,868) $ 52,466 $ 33,496 $ 16,818 $ 71,912
============================================================================================================================
Cumulative Gap $(30,868) $ 21,598 $ 55,094 $ 71,912
============================================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 82% 111% 127% 135%
============================================================================================================================
<FN>
(1) Excludes nonaccrual loans of $1,996,000 and is net of deferred loan fees
of $260,000.
</FN>
</TABLE>
The principal amount of each asset and liability is included in the above table
in the earliest period in which it matures, reprices or is subject to call.
Nonaccrual loans have been excluded from rate-sensitive assets. Regular savings
accounts, money market accounts and NOW deposits have been included in the "3
Months or Less" category. However, these deposits have historically remained
stable and are an integral part of the Bank's funding and asset/liability
management strategy.
Noninterest-bearing demand deposits of $78,421,000 have been excluded from the
table. These deposits, which also have historically been stable, are used to
fund net interest rate sensitive assets beyond three months.
37
<PAGE>
One measure of interest rate sensitivity is the excess or deficiency of assets
that mature or reprice in one year or less. As shown in the preceding table,
rate-sensitive assets that mature or reprice in one year total $210,644,000 and
rate-sensitive liabilities that mature or reprice in one year total
$189,046,000. The resulting positive one year rate-sensitive gap is $21,598,000.
During periods of rising interest rates, a positive gap position can be an
advantage if more rate-sensitive assets than rate-sensitive liabilities reprice
at higher rates, creating a favorable impact on net interest income. This impact
may be mitigated somewhat if the level of nonaccrual loans and other real estate
owned increase, resulting in a decrease in rate-sensitive assets. During a
falling rate environment, a negative rate gap can be an advantage. However, the
impact of rising and falling interest rates on net interest income may not
directly correlate to the Company's GAP position since interest rate changes and
the timing of such changes can be impacted by management's actions as well as by
competitive and market factors. As interest rates change, yields earned on
assets do not necessarily move in parallel with rates paid on liabilities.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of
depositors who want to withdraw funds or borrowers who need assurance that
sufficient funds will be available to meet their credit needs. The objective of
liquidity management is to determine and maintain an appropriate level of liquid
interest-earning assets. Aside from cash on hand and due from banks, the Bank's
more liquid assets are Federal funds sold and securities available for sale. On
a daily basis, the Bank lends its excess funds to other commercial institutions
in need of Federal funds. Such cash and cash equivalents totaled $38,613,000 or
12.3% of total assets at December 31, 1995, as compared with $18,010,000 or 6.4%
of total assets at December 31, 1994. Securities available for sale were
$85,338,000 at December 31, 1995 compared with $27,190,000 at December 31, 1994.
Demand deposits, regular savings, money market accounts and NOW deposits from
consumer and commercial customers are a relatively stable, low cost source of
funds which comprise a substantial portion of funding of the Bank's
interest-earning assets. Other sources of asset liquidity include loan and
mortgage-backed security principal and interest payments, maturing securities
and loans, and earnings on investments.
In addition, the Bank has two unsecured lines of credit with correspondent banks
totaling $5,000,000. The outstanding balance of these lines was $5,000,000 at
December 31, 1995.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At December 31, 1995 these
available lines amounted to $17.1 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. The Bank did not have any borrowings
from the FHLBB at December 31, 1995.
Additional sources of liquidity are available to the Company through the Federal
Reserve Bank's discount window and the sale of certain investment securities to
securities firms and correspondent banks under repurchase agreements. Such
agreements are generally short-term. The outstanding balance of securities sold
under repurchase agreements at December 31, 1995
38
<PAGE>
was $1,050,000. The discount window, if needed, would allow the Company to cover
any short-term liquidity needs without reducing earning assets. At December 31,
1995, the Company did not have any borrowings from the Federal Reserve Bank's
discount window.
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1995 and in the foreseeable future. Bancorp has
minimal operations and therefore does not generate or utilize a significant
amount of funds. Dividends paid by the Company are funded utilizing proceeds
from the exercise of warrants and options and dividends received from the Bank
(although no dividends were paid by the Bank in 1995). Excess proceeds from the
exercise of warrants and options may from time to time result in a loan to the
Bank by Bancorp. At December 31, 1995, Bancorp had loaned a total of $426,000 to
the Bank under such arrangement.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the State of Connecticut
Banking Commissioner, exceed the total of its net profits for that year combined
with its retained net profits from the preceding two years. These dividend
limitations can affect the amount of dividends payable to Bancorp as the sole
stockholder of the Bank, and therefore affect Bancorp's payment of dividends to
its stockholders.
Capital Resources
Stockholders' equity increased by $7,884,000 or 48.1% in 1995 to $24,282,000 as
compared to $16,398,000 at December 31, 1994. This increase is primarily due to
earnings of $6.8 million and the exercise of 1,997,000 warrants by preferred
stockholders, which resulted in additional capital of $1,498,000. Additionally,
a net change of $376,000 in the unrealized appreciation of the securities
available for sale portfolio positively impacted stockholders' equity at
December 31, 1995, as compared to December 31, 1994. Stockholders' equity was
reduced by the payment of $865,000 in dividends, which the Company resumed in
1995.
At December 31, 1995, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 8.18% and its total capital to risk-weighted asset ratio was 14.02%,
exceeding minimum requirements.
In the fourth quarter of 1992, the Company strengthened capital through a rights
offering to existing shareholders. All registered holders of the Company's
Common Stock as of February 21, 1992 were entitled to acquire additional shares
of Common Stock. Prior to the expiration date of May 31, 1994, a total of
$1,117,000, net of expenses of $102,000, was raised through the rights offering.
In February 1992, the Company completed a private placement of 46,700 investment
units, resulting in total proceeds of $4,670,000 and net proceeds, after
expenses, of $4,320,000. Each unit consists of one share of Series A
Noncumulative Convertible Preferred stock and fifty warrants. These warrants
became exercisable on January 1, 1994 at an exercise price of $.75 per share.
During 1995 and 1994 a total of 2,009,500 warrants were exercised, resulting in
total proceeds of $1,507,125 to the Company. At December 31, 1995, there were
325,500 warrants outstanding. There is no assurance as to the number of
warrants, if any, that will be exercised in the future. All warrants expire on
December 31, 1996.
39
<PAGE>
Item 8
Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
December 31,
- -----------------------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 24,113 $ 18,010
Federal funds sold 14,500 ---
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 38,613 18,010
- -----------------------------------------------------------------------------------------------------------------------
Securities available for sale, at market value 85,338 27,190
Securities held to maturity, at cost
(market value: $39,678) --- 43,206
- -----------------------------------------------------------------------------------------------------------------------
Total securities 85,338 70,396
- -----------------------------------------------------------------------------------------------------------------------
Loans 178,052 186,648
Allowance for loan losses (2,854) (3,341)
- -----------------------------------------------------------------------------------------------------------------------
Loans - net 175,198 183,307
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment - net 4,933 5,137
Accrued interest receivable 2,247 1,758
Other real estate owned - net --- 352
Other assets 6,588 4,544
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $312,917 $283,504
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 78,421 $ 72,972
Interest-bearing deposits 196,249 180,986
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 274,670 253,958
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 7,733 10,484
Other liabilities 6,232 2,664
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 288,635 267,106
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies - Note 8
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000 shares; outstanding,
41,850 and 43,950 shares
in 1995 and 1994, respectively 1 1
Common stock - $.01 par value; authorized, 20,500,000
shares; outstanding, 5,433,665 and 3,211,752 shares
in 1995 and 1994, respectively 54 32
Additional paid in capital 22,980 21,459
Retained earnings (deficit) 1,285 (4,680)
Net unrealized depreciation on securities available
for sale, net of tax (38) (414)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,282 16,398
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $312,917 $283,504
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $16,200 $13,729 $13,482
Securities 4,366 3,484 1,798
Federal funds sold and other 159 121 429
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 20,725 17,334 15,709
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 5,110 4,443 5,642
Short-term borrowings 917 306 42
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,027 4,749 5,684
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 14,698 12,585 10,025
Provision for loan losses 1,500 1,800 2,890
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 13,198 10,785 7,135
- -------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 1,880 1,637 1,573
Service charges on deposit accounts 1,344 1,403 1,284
Loan sale gains - net 287 175 1,287
Mortgage service fees 141 151 76
Realized security gains (losses) - net (229) 3 370
Securities held for sale - lower of aggregate
cost or market adjustment --- --- 207
Other 582 559 587
- -------------------------------------------------------------------------------------------------------------------------
Total other operating income 4,005 3,928 5,384
- -------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 5,600 5,416 5,217
Occupancy - net 1,445 1,484 1,563
Professional fees 1,119 941 696
Data processing 575 782 742
FDIC insurance premiums 392 696 679
Furniture and equipment 292 337 505
Other insurance premiums 220 287 329
Other real estate owned - net 137 319 552
Other 1,598 1,325 1,286
- -------------------------------------------------------------------------------------------------------------------------
Total other operating expense 11,378 11,587 11,569
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,825 3,126 950
Income tax benefit (1,005) (1,236) (252)
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,830 $ 4,362 $ 1,202
=========================================================================================================================
Earnings per share:
Primary $ 0.66 $ 0.44 $ 0.12
Fully diluted $ 0.65 --- ---
=========================================================================================================================
Weighted average number of common shares and common equivalent shares
outstanding:
Primary 10,364,606 10,381,834 10,513,188
Fully diluted 10,469,299 --- ---
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
Net Unrealized
Preferred Stock Common Stock Depreciation
-------------------- ------------------- Additional Retained on Securities
Number of Number of Paid in Earnings Available for Sale,
Shares Amount Shares Amount Capital (Deficit) Net of Tax Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 46,200 $ 1 2,865,139 $ 29 $21,231 $(10,244) --- $11,017
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income 1,202 --- 1,202
Issuance of Common Stock - --- --- --- --- --- --- --- ---
1992 Rights Offering --- --- 91,226 1 185 --- --- 186
Stock Conversion (1,250) --- 125,000 1 (1) --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 44,950 1 3,081,365 31 21,415 (9,042) --- 12,405
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 4,362 --- 4,362
Issuance of Common Stock -
Warrants exercised --- --- 12,500 --- 10 --- --- 10
Employee Options exercised --- --- 17,500 --- 35 --- --- 35
1992 Rights Offering --- --- 13 --- --- --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 374 --- --- --- --- ---
Stock Conversion (1,000) --- 100,000 1 (1) --- --- ---
Change in net unrealized
depreciation on securities
available for sale, net of tax --- --- --- --- --- --- $(414) (414)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 43,950 1 3,211,752 32 $21,459 (4,680) (414) 16,398
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 6,830 --- 6,830
Issuance of Common Stock -
Warrants exercised --- --- 1,997,000 21 1,477 --- --- 1,498
Employee Options exercised --- --- 9,750 --- 19 --- --- 19
Stock Conversion (2,100) --- 210,000 1 (1) --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 5,163 --- 26 --- --- 26
Dividends -
Preferred Stock --- --- --- --- --- (380) --- (380)
Common Stock --- --- --- --- --- (485) --- (485)
Change in net unrealized
depreciation on securities
available for sale, net of tax --- --- --- --- --- --- 376 376
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,850 $ 1 5,433,665 $ 54 $22,980 $ 1,285 $ (38) $24,282
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,830 $ 4,362 $ 1,202
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,500 1,800 2,890
Recognition of net deferred tax asset (1,122) (1,300) (350)
Depreciation, amortization and accretion 863 1,021 1,160
Provision and losses on other real estate owned - net 129 191 413
Loan sale gains - net (287) (175) (1,287)
Securities held for sale - lower of aggregate
cost or market adjustment --- --- (207)
Realized security (gains) losses - net 229 (3) (370)
Decrease (increase) in accrued interest receivable (489) 713 (994)
Decrease (increase) in other assets (896) (208) 99
Increase (decrease) in other liabilities 3,568 328 (94)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,325 6,729 2,462
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale 6,500 37,890 27,039
Held to maturity 1,000 12,507 ---
Proceeds from sales of securities -
Available for sale 28,770 4,202 28,294
Principal collected on securities 5,477 1,201 1,961
Purchase of securities held to maturity (4,999) (14,454) (39,697)
Purchase of securities available for sale (51,675) (21,404) (78,171)
Increase in loans - net (13,553) (43,032) (30,728)
Loans repurchased by the FDIC 2,490 1,432 1,893
Proceeds from sales of loans 18,867 12,949 48,486
Purchase of loans (997) (817) (61)
Proceeds from sales of other real estate owned 312 1,393 3,162
Additions to other real estate owned --- (111) (50)
Purchases of premises and equipment (553) (999) (262)
Proceeds from sale of premises --- --- 152
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,361) (9,243) (37,982)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in noninterest-bearing deposits - net 5,449 15,493 5,142
Increase (decrease) in interest-bearing deposits - net 15,263 (17,051) 12,538
Increase (decrease) in short-term borrowings - net (2,751) 8,084 2,067
Proceeds from issuance of Common Stock - net 1,543 45 186
Dividends (865) --- ---
Other - net --- --- (98)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,639 6,571 19,835
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20,603 4,057 (15,685)
Cash and cash equivalents at beginning of year 18,010 13,953 29,638
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 38,613 $ 18,010 $ 13,953
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
WESTPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting and Reporting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Westport Bancorp,
Inc. ("Bancorp") and its subsidiary, The Westport Bank & Trust Company (the
"Bank") (collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles within the banking industry.
In preparing the financial statements, management has made estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated statement of condition and the reported amounts of
revenues and expenses during the reporting period. Actual future results could
differ significantly from these estimates. Estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for loan losses and the valuation of real estate acquired through foreclosures
or in satisfaction of loans. In determining the allowance for loan losses and
the valuation of other real estate owned, independent appraisals are obtained
for significant properties collateralizing loans or other real estate owned.
Future additions to the allowance for loan losses or write-downs of other real
estate owned may be necessary based on changes in economic conditions,
particularly in the Bank's service area, Fairfield County, Connecticut. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and the carrying value
of other real estate owned. Such agencies may recommend that the Bank recognize
additions to the allowance for loan losses or the reserve for other real estate
owned based on their judgments and information available to them at the time of
their examinations.
Securities
Effective January 1, 1994, the Bank adopted Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities". SFAS
115 addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Adoption of SFAS 115 did not have a material effect on the financial
statements.
In accordance with SFAS 115, at the time of purchase, investment securities are
classified as available for sale if the securities are purchased for
asset/liability management and liquidity purposes, or as held to maturity if
management has the intent and ability to hold the securities to maturity.
However, in the fourth quarter of 1995, the FASB provided companies with a one
time opportunity to reclassify securities between the available for sale
portfolio and the held to
44
<PAGE>
maturity portfolio. The Company took advantage of this opportunity and
reclassified its entire $42,459,000 held to maturity portfolio to the available
for sale portfolio. This reclassification resulted in the transfer of $146,000
to the unrealized depreciation on the securities available for sale component of
stockholder's equity, before the related tax effect. This reclassification is
not reflected in the consolidated statement of cash flows because no cash was
involved.
Securities in the available for sale portfolio are carried at fair value, with
unrealized gains and losses net of tax, adjusted for the amortization of
premiums or accretion of purchase discounts, recorded in a separate component of
stockholders' equity. Gains and losses on the sale of securities in the
available for sale portfolio are determined by specific identification and are
included in operations.
Securities which are classified as held to maturity are stated at cost, adjusted
for amortization of premiums or accretion of discounts to the date of maturity
or earlier call date or, in the case of mortgage-backed securities, over the
estimated life of the security. The Company has the ability and intention to
hold these investments until maturity.
If a security held in either the available for sale portfolio or held to
maturity portfolio has experienced a decline that is other than temporary, it is
written down to estimated fair value through a charge to operations.
Prior to the adoption of SFAS 115 on January 1, 1994, securities available for
sale were carried at the lower of aggregate cost or market while securities held
to maturity were carried at cost. In both cases, cost was adjusted for the
amortization of premiums or accretion of discount.
Loans
Effective January 1, 1995, the Bank adopted FASB's Statement of Financial
Accounting Standards No. 114 ("SFAS 114"), "Accounting by Creditors for
Impairment of a Loan", and Statement of Financial Accounting Standards No. 118
("SFAS 118"), "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS 114 and 118 address the accounting by
creditors for impairment of certain loans and the recognition of interest income
on these loans and requires that impairment of certain loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of collateral. The adoption did not
materially affect the Company's consolidated financial statements or the amount
of the allowance for loan losses.
Interest income on loans is accrued based on rates applied to principal amounts
outstanding and includes loan fees, net of direct origination costs, which are
amortized over the term of the loan using the interest method. The accrual of
interest is discontinued when: 1) it appears that future collection of interest
or principal may be doubtful, or 2) when principal or interest is due and
remains unpaid for ninety days or more, unless the loan is both well secured and
in the process of collection. At the time a loan is placed on nonaccrual status,
interest accrued but not collected is generally reversed. Nonaccrual loans that
commence repayment are returned to accrual status only when, in management's
opinion, there has been demonstrated performance for a reasonable period and
continued timely repayment according to loan terms is reasonably
45
<PAGE>
assured. Restructured loans represent loans formally renegotiated as to
maturity, or at interest rates lower than market rates at the time of
restructure. To the extent these loans are currently performing and the interest
rate remains below market, they are presented as impaired accruing loans and are
included in the consolidated financial statements as nonperforming assets.
Allowance for Loan Losses
The provision for loan losses is the amount deemed appropriate by management to
maintain the allowance for loan losses at a level adequate to absorb probable
losses in the loan portfolios. The allowance for loan losses is based on
estimates; actual losses may vary from the current estimates. In estimating
losses, consideration is given to the performance of the loan, the financial
condition of the borrower or guarantor, an analysis of the borrower's cash flow,
estimates of the current value of the underlying collateral based on appraisals
or recent sale prices (net of costs of disposal), the overall risk
characteristics of the Company's portfolios, past credit experience, current
economic and real estate market conditions, and other relevant factors.
Management monitors these factors and adjustments are reported in earnings in
the period in which they become known.
When losses on specific loans are judged by management to be certain, the
portion deemed uncollectible is charged to the allowance for loan losses.
Subsequent recoveries, if any, are credited to the allowance.
In accordance with SFAS 114 and 118, effective January 1, 1995 the Company
revised the method by which the allowance for loan losses is determined for
impaired loans. The impact of this change was not material.
Mortgage Banking Activities
The Bank originates residential mortgage loans, some of which are held in
portfolio and others of which are sold to investors. Loans originated for sale
but not yet sold are carried at the lower of cost or market. Origination and
commitment fees, net of direct origination costs, relating to sold loans are
recognized as a component of the gain on loan sales. The Bank serviced, on
behalf of investors, approximately $50.7 million, $41.3 million and $45.9
million of residential mortgage loans at December 31, 1995, 1994 and 1993,
respectively.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights". SFAS 122 addresses the accounting for mortgage servicing
rights for purchased as well as originated mortgages by a servicer.
Additionally, SFAS 122 requires the capitalization of the fair value of mortgage
servicing rights and amortization of these rights in proportion to the net
servicing income over the period during which servicing income is expected. The
Company adopted SFAS 122 in the fourth quarter of 1995. The adoption of SFAS 122
resulted in the recognition of a servicing asset of $171,000, which amount is
included in 1995 loan sale gains on the statement of income.
46
<PAGE>
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure. OREO properties are recorded at the lower of cost or fair value,
less estimated disposal costs, at the date transferred to OREO. Losses arising
at the time of transfer to OREO are charged against the allowance for loan
losses. Subsequent write-downs of the carrying value of these properties may be
required to reflect the properties at the lower of cost (market value at the
date of transfer to OREO) or market value and are charged to operations.
Realized gains and losses from the sale of OREO are also included in operations.
Transfers of loans to OREO of $450,000 and $524,000 in 1994 and 1993,
respectively, are not reflected in the consolidated statement of cash flows
because no cash was involved in these transfers. No loans were transferred to
OREO during 1995. The 1994 transfer of an OREO property, valued at $1,349,000,
to bank-owned premises is also not reflected in the consolidated statement of
cash flows because no cash was involved in the transfer.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on the
straight-line method over the estimated useful life of each type of asset,
ranging from 3 to 30 years, or the lease term, if shorter.
Income Taxes
In January 1993, the Company adopted Statement of Financial Accounting Standards
No. 109 ("SFAS 109"), "Accounting for Income Taxes". The adoption of SFAS 109
changed the Company's method of accounting for income taxes from the deferred
method (APB Opinion No. 11) to an asset and liability approach. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities.
Adoption of SFAS 109 had no effect on the Company's consolidated financial
statements due to the tax position of the Company at that time.
Earnings Per Share
Primary and fully diluted earnings per share were computed by dividing earnings
(adjusted, if applicable) by the weighted average number of common shares and
common share equivalents outstanding. For primary earnings per share, common
share equivalents are computed using the average closing price of the Company's
common stock for the period. For fully diluted earnings per share, common share
equivalents are computed using the closing price of the Company's common stock
at the end of the period. Fully diluted earnings per share were not applicable
in 1994 and 1993.
For the year ended December 31, 1995 and 1994, the computation includes
4,706,250 and 3,148,913 weighted average common shares outstanding and 1,483,337
and 2,787,921 weighted average common equivalent shares, (fully diluted for
1995), respectively, computed under the treasury stock method. The earnings per
share computations also include 4,279,712 and 4,445,000 weighted average common
shares in 1995 and 1994, respectively, issuable upon the adjusted conversion of
preferred stock. Adjusted earnings consist of net income and the interest effect
of the assumed reduction in short-term borrowings, computed under the treasury
stock method.
47
<PAGE>
Other
For purposes of presenting the consolidated statements of cash flows, cash
equivalents include due from banks, interest-bearing deposits with banks and
Federal funds sold, all of which have original maturities of three months or
less.
Trust income is recorded on an accrual basis. Assets held in a fiduciary or
agency capacity for customers are not included in the consolidated statements of
condition since such items are not assets of the Bank.
Certain amounts from prior years have been reclassified to conform with the 1995
presentation.
Note 2
Regulatory Matters
The Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC)
require bank holding companies and banks, respectively, to comply with capital
guidelines based upon the ratio of capital to total assets adjusted for risk.
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at December 31, 1995.
Regulatory
Bancorp Minimum
- --------------------------------------------------------------------------------
($ in thousands)
Tier 1 leverage ratio 8.18% 3.00%(1)
Tier 1 leverage capital $23,903 $8,766
Tier 1 risk-based ratio 12.77% 4.00%
Tier 1 risk-based capital $23,903 $7,487
Total risk-based ratio 14.02% 8.00%
Total risk-based capital $26,249 $14,973
Risk-weighted assets $187,167 ---
(1) An additional 1% to 2% and the corresponding additional capital is
required for all but the most highly rated institutions.
The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), classifies banks in
one of five categories according to capital levels. At December 31, 1995, the
Company was "well capitalized" under FDIA, as amended, based upon the above
capital ratios. Deterioration of economic conditions and real estate values
could adversely affect future results, leading to increased levels of loan
charge-offs, provision for loan losses and nonaccrual loans, affecting the
ability of the Company to maintain the well capitalized classification, and
resulting in reductions in income and total capital.
48
<PAGE>
Note 3
Investment Securities
In accordance with SFAS 115 and as discussed in Note 1, during the fourth
quarter of 1995, the Company's held to maturity portfolio was reclassified as
available for sale.
Securities Available for Sale
The aggregate amortized cost and estimated market value of securities available
for sale at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Market Unrealized Market
Cost Losses Value Cost Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $85,397 $(64) $85,333 $27,604 $(414) $27,190
Other 5 --- 5 --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Total $85,402 $(64) $85,338 $27,604 $(414) $27,190
============================================================================================================================
</TABLE>
Sales of securities available for sale during 1995 consisted of $28.8 million of
U.S. Government Agency securities. During 1994, sales of securities from the
available for sale portfolio consisted of $4.2 million of U.S. Government Agency
securities. Gains of $59,000 and $3,000 for 1995 and 1994, respectively, were
realized on the sales of these securities. Losses of $288,000 were realized on
the sale of securities during 1995. No losses were realized in 1994 from sales
of securities.
The following represents the contractual maturities and weighted average yields
of securities available for sale at December 31, 1995. Expected maturities may
differ from contractual maturities due to prepayments.
<TABLE>
<CAPTION>
After 1 After 5
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $ 5,057 4.8% $64,431 6.1% $ 4,457 5.5% $11,388 6.7% $85,333 6.0%
Other 5 5.5 --- --- --- --- --- --- 5 5.5
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 5,062 4.8% $64,431 6.1% $ 4,457 5.5% $11,388 6.7% $85,338 6.0%
===============================================================================================================================
</TABLE>
49
<PAGE>
Securities Held to Maturity
The table below summarizes the aggregate financial statement carrying value and
market value of securities held to maturity at December 31, 1994. The Company
had no securities in the held to maturity portfolio at December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------
Financial Gross Gross
Statement Unrealized Unrealized Market
Carrying Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $26,993 $ --- $ (2,255) $24,738
Mortgage-backed
securities 16,208 --- (1,273) 14,935
Other 5 --- --- 5
- ------------------------------------------------------------------------------------------------------
Total $43,206 $ --- $ (3,528) $39,678
======================================================================================================
</TABLE>
Note 4
Restricted Assets
At December 31, 1995, securities with a carrying value of $12,652,000 were
pledged to secure treasury deposits, municipal deposits and repurchase
agreements.
Cash and due from banks of $5,488,000 was subject to withdrawal and usage
restrictions as of December 31, 1995, as a result of Federal Reserve
requirements to maintain certain average balances.
50
<PAGE>
Note 5
Loans
The composition of the Bank's loan portfolio at December 31, 1995 and 1994 was
as follows:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------
Percent Percent
of of
Total Total
Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Mortgage:
Construction and
land development $ 3,234 1.8% $ 1,079 .6%
Secured by
residential property 52,931 29.7 57,937 31.0
Secured by
commercial property 41,903 23.5 46,076 24.6
Commercial 46,422 26.0 51,462 27.5
Home equity 24,842 13.9 23,019 12.3
Consumer 7,982 4.5 6,451 3.5
Other 998 .6 1,026 .5
- ---------------------------------------------------------------------------------------------------------------
Total loans 178,312 100.0% 187,050 100.0%
===== =====
Less:
Allowance for loan losses 2,854 3,341
Deferred loan fees 260 402
- ---------------------------------------------------------------------------------------------------------------
Loans - net $175,198 $183,307
===============================================================================================================
</TABLE>
51
<PAGE>
Changes in the allowance for loan losses for the years ended December 31, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
($ in thousands)
Allowance for loan losses, January 1, $ 3,341 $ 3,024 $ 3,998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans charged-off:
Mortgage:
Secured by residential property (347) (344) (1,091)
Commercial and other (1,054) (737) (1,153)
Commercial (795) (707) (1,496)
Home equity (35) (49) (328)
Consumer and other (135) (258) (305)
- -----------------------------------------------------------------------------------------------------------
Total loans charged-off (2,366) (2,095) (4,373)
- -----------------------------------------------------------------------------------------------------------
Recoveries on amounts previously charged-off:
Mortgage:
Secured by residential property 51 23 45
Commercial and other 51 7 106
Commercial 118 400 199
Home equity 16 20 59
Consumer and other 54 162 100
- -----------------------------------------------------------------------------------------------------------
Total recoveries 290 612 509
- -----------------------------------------------------------------------------------------------------------
Net loans charged-off (2,076) (1,483) (3,864)
Provision charged to operating expenses 1,500 1,800 2,890
Other (1) 89 --- ---
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31, $ 2,854 $ 3,341 $ 3,024
===========================================================================================================
<FN>
(1) Transfer from the OREO valuation allowance to the allowance for loan
losses.
</FN>
</TABLE>
52
<PAGE>
Nonperforming assets at December 31, 1995 and 1994 were as follows:
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Loans 90 days or more past due on accrual status:
Mortgage:
Secured by residential property $ 5 $ 78
Commercial and other --- ---
Commercial --- 6
Home equity 149 102
Consumer and other 4 14
- -------------------------------------------------------------------------------
Total 158 200
- -------------------------------------------------------------------------------
Nonaccrual loans:
Mortgage:
Secured by residential property 85 2,659
Commercial and other 1,098 1,098
Commercial 813 500
Home equity --- 59
Consumer and other --- ---
- -------------------------------------------------------------------------------
Total 1,996 4,316
- -------------------------------------------------------------------------------
Impaired accruing loans 447 3,724
- -------------------------------------------------------------------------------
Total nonperforming loans 2,601 8,240
Other real estate owned --- 352
- -------------------------------------------------------------------------------
Total nonperforming assets $ 2,601 $ 8,592
===============================================================================
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $2,443,000, of which
$1,996,000 were nonaccrual loans. At December 31, 1995, the valuation allowance
related to all impaired loans totaled $634,000 and is included in the allowance
for loan losses on the statement of condition. For the year ended December 31,
1995, the average recorded investment in impaired loans was approximately $5.2
million. During 1995, total interest of $95,000 was recognized on accruing
impaired loans.
The Bank would have recorded an additional $214,000, $183,500 and $382,000 of
interest income in the years ended December 31, 1995, 1994 and 1993,
respectively, if loans on nonaccrual status at each year end had been current
throughout the year. At December 31, 1995, the Bank has no commitments to lend
additional funds to borrowers whose loans are classified as nonaccrual or
impaired. The Bank would have recorded an additional $7,700, $27,000 and
$113,000 of interest income during 1995, 1994 and 1993 if accruing restructured
loans had made payments in accordance with the original repayment terms.
53
<PAGE>
Certain directors, executive officers and affiliates of the Bank had loans
outstanding aggregating approximately $511,000 and $1,579,000, at December 31,
1995 and 1994,respectively. Such loans were made on substantially the same terms
as comparable loans to others and were performing in 1995 and 1994. Changes in
loans outstanding to such parties during 1995 and 1994 were as follows:
December 31,
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 1,579 $ 1,324
Additional loans 205 637
Loans repaid (1,273) (244)
Other --- (138)
- -------------------------------------------------------------------------------
Balance, December 31, $ 511 $ 1,579
===============================================================================
The "other" amount primarily represents loans to directors and officers
(including members of their immediate families or associates) who resigned,
retired or changed qualifying employment status during the year ended December
31, 1994.
Note 6
Premises and Equipment
Premises and equipment and accumulated depreciation and amortization are
summarized as follows:
December 31,
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Land $ 572 $ 572
Premises 3,817 3,847
Equipment 2,482 2,971
Leasehold improvements 1,018 1,027
- -------------------------------------------------------------------------------
Total 7,889 8,417
Less: Accumulated depreciation
and amortization (2,956) (3,280)
- -------------------------------------------------------------------------------
Premises and equipment - net $ 4,933 $ 5,137
===============================================================================
54
<PAGE>
Note 7
Deposits and Short-term Borrowings
Deposits by major classifications were as follows:
December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Demand $ 78,421 $ 72,972 $ 57,479
NOW 47,816 51,861 55,047
Savings 45,455 56,854 61,944
Money market 22,141 27,541 28,393
Certificates of deposit and other 80,837 44,730 52,653
- --------------------------------------------------------------------------------
Total deposits $274,670 $253,958 $255,516
================================================================================
Included in the table above are certificates of deposit in denominations of
$100,000 or more. These certificates and their remaining maturities were as
follows:
December 31,
1995 1994
- --------------------------------------------------------------------------------
($ in thousands)
Three months or less $34,733 $ 1,436
Three through twelve months 1,771 1,133
Over twelve months 1,150 1,568
- --------------------------------------------------------------------------------
Total $37,654 $ 4,137
================================================================================
Interest expense on certificates of deposit with denominations of $100,000 or
more was $887,000, $138,000 and $125,000 in 1995, 1994, and 1993, respectively.
Short-term borrowings aggregated $7,733,000 and $10,484,000 at December 31, 1995
and 1994, respectively. Such borrowings include securities sold under agreements
to repurchase of $1,050,000 and $7,800,000 in 1995 and 1994, respectively, and
U.S. Treasury note obligations related to treasury, tax and loan deposits in the
amount of $1,683,000 in 1995 and $2,684,000 in 1994. The weighted average
interest cost of short-term borrowings was 5.94% and 4.95% at December 31, 1995
and 1994, respectively, and the terms of the agreements ranged from one to seven
days.
In addition to the securities sold under repurchase agreements and U.S. Treasury
note obligations, the Bank entered into two unsecured Federal fund line of
credit arrangements with correspondent banks totaling $5,000,000. At December
31, 1995, the outstanding balance of these lines was $5,000,000.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At December 31, 1995 these
available lines amounted to $17.1 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. During 1995, borrowings under these
lines were immaterial. The Bank did not have any borrowings from the FHLBB at
December 31, 1995.
55
<PAGE>
The following table summarizes the average balances, weighted average interest
rates and the maximum month end outstanding amounts of short-term borrowings for
1995, 1994 and 1993.
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Federal funds purchased and securities sold under agreements to repurchase:
Average balance $13,778 $ 6,172 $ 1,420
Weighted average interest rate 6.0% 4.5% 2.6%
Maximum month end outstanding amount $28,230 $19,289 $ 3,648
U.S. Treasury note obligation related
to treasury, tax and loan deposits:
Average balance $ 1,657 $ 668 ---
Weighted average interest rate 5.6% 4.6% ---
Maximum month end outstanding amount $ 3,613 $ 3,193 ---
The Bank paid approximately $5,670,000, $4,799,000 and $5,744,000 in interest on
deposits and short-term borrowings during 1995, 1994 and 1993, respectively.
Note 8
Commitments and Contingencies
Long-term Leases
All noncancellable leases are operating leases at December 31, 1995, 1994 and
1993. The Bank has leases for administrative and branch offices with terms
(including renewal options) ranging from one to ten years. Under most lease
arrangements, the Bank pays property taxes, insurance, maintenance and expenses
related to the leased property. Total rental expense under operating leases was
$779,000 in 1995, $761,000 in 1994 and $844,000 in 1993.
Minimum future obligations on leases (including base rents and common area
charges) in effect at December 31, 1995 were:
Operating Leases
- --------------------------------------------------------------------------------
($ in thousands)
1996 $ 784
1997 753
1998 706
1999 710
2000 663
Thereafter 280
- --------------------------------------------------------------------------------
Total minimum obligations $3,896
================================================================================
56
<PAGE>
Employment Contracts
At December 31, 1995, the Bank was committed under employment agreements with
various key officers requiring aggregate annual salary payments of approximately
$532,000 for the terms of the contracts which expire at various dates through
1998. These agreements provide that if the key officers are terminated following
a change in control (as defined) of Bancorp, they are entitled to receive lump
sum severance payments and to continue to participate in certain benefit plans
for three years.
Legal Proceedings
There are no material pending legal proceedings, other than routine litigation
incidental to their business, to which Bancorp or the Bank is a party or to
which any of their property is subject.
Note 9
Stockholders' Equity
Preferred Stock and Warrants
In February 1992, Bancorp completed a private placement of 46,700 investment
units (the "Private Placement"). Each unit consisted of 1 share of Series A
Noncumulative Convertible Preferred Stock (each share being convertible into 100
shares of Common Stock) and 50 Warrants (each Warrant being exercisable
commencing in 1994 for 1 share of Common Stock at an exercise price of $.75 per
share). Holders of record of the Series A Preferred Stock are entitled to
dividends, when and if declared by Bancorp's Board of Directors, at a rate to be
determined by Bancorp's Board of Directors. Holders of shares of Series A
Preferred Stock vote together as a class with holders of the Common Stock for
the election of directors and all other matters as to which holders of the
Common Stock are entitled to vote. Each share of Series A Preferred Stock is
entitled to 100 votes. All warrants expire on December 31, 1996.
Dividends
Connecticut banking law prohibits the Bank from paying dividends except from its
net profits, which are defined as the remainder of all earnings from current
operations. The total of all dividends declared by the Bank in any calendar year
may not, unless specifically approved by the State of Connecticut Banking
Commissioner, exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years. These dividend limitations can
affect the amount of dividends payable to Bancorp as the sole stockholder of the
Bank, and therefore affect Bancorp's payment of dividends to its stockholders.
Dividend Reinvestment and Stock Purchase Plan
Bancorp introduced a Dividend Reinvestment and Stock Purchase Plan on January 1,
1989. Under the terms of the plan, participating stockholders were allowed to
purchase additional shares of Common Stock by reinvesting their cash dividends.
Such plan participants could also make optional cash payments, up to $3,000 per
quarter, to purchase additional shares. Shares purchased through the plan
directly from Bancorp were priced at 95% of the average market value at the time
of purchase; shares purchased in the open market were priced at cost. Bancorp
discontinued the Dividend Reinvestment and Stock Purchase Plan in 1996.
57
<PAGE>
Stockholder Rights Offering
In the fourth quarter of 1992, holders of Bancorp's Common Stock received rights
to acquire additional shares of Common Stock. The rights entitled each
shareholder to purchase one share of Common Stock for every two shares owned as
of February 21, 1992. The purchase price was initially set at $1.50 per share
and increased to $2.00 on December 1, 1992 and $3.00 on June 1, 1993. Prior to
its expiration on May 31, 1994, the rights offering raised $1,117,000, net of
expenses. Bancorp contributed a total of $1,000,000 of the net proceeds during
1993 and 1994 to the capital of the Bank.
Stock Option Agreements
On December 17, 1992, Bancorp's Board of Directors conditionally granted certain
executive officers options to purchase a total of up to 725,000 shares of
Bancorp's Common Stock at an exercise price of $2.00 per share, which was the
fair market value of the stock on that date. The grants became effective upon
approval by the shareholders of Bancorp at the 1993 Annual Meeting of Bancorp's
shareholders. These stock options become exercisable gradually over a five year
period and expire within ten years following the date of the conditional grant.
All unexpired options become immediately exercisable if a change in control (as
defined) of Bancorp occurs.
Incentive Stock Option Plans
Under the 1995 Incentive Stock Option Plan (the "1995 Plan"), the Board of
Directors may grant options to purchase a total of up to 200,000 shares of
Bancorp's Common Stock to key employees of Bancorp and the Bank. Under the 1985
Incentive Stock Option Plan (the "1985 Plan"), for which the authority to grant
options expired on December 31, 1995, the Board was authorized to grant options
to purchase a total of up to 300,000 shares of Bancorp's Common Stock to key
employees of Bancorp and the Bank. The exercise price of options granted under
the Plans are set at the market price of Bancorp's Common Stock on the date of
the grant. Each option may be exercised as to one-half of the total number of
shares covered by such option after one year of continuous employment, and, as
to the other one-half, after two years of continuous employment. Options, in
both Plans, expire ten years after the date of their grant. No options have been
granted under the 1995 Plan.
58
<PAGE>
Activity for the 1985 Plan for the years ended December 31, 1995, 1994 and 1993
was as follows:
1995 1994 1993
- -------------------------------------------------------------------------------
Options outstanding, January 1, 276,550 274,310 129,310
Options granted 5,000 37,200 150,000
Options exercised (9,750) (17,500) ---
Options canceled --- (9,960) (5,000)
Options expired (4,850) (7,500) ---
- -------------------------------------------------------------------------------
Options outstanding, December 31, 266,950 276,550 274,310
===============================================================================
Options exercisable, December 31, 243,350 164,350 68,810
===============================================================================
Price per share of options $2.00 $2.00 $2.00
outstanding, December 31, to to to
$3.50 $19.75 $19.75
===============================================================================
At the discretion of Bancorp's Board of Directors, all outstanding unexercisable
options under the 1985 Plan may become exercisable if a change in control (as
defined) of Bancorp occurs.
Note 10
Income Taxes
At December 31, 1995, 1994 and 1993, the Company had recorded net deferred tax
assets (included in Other Assets) of $2,772,000, $1,650,000 and $350,000,
respectively, for anticipated future utilization of net operating loss
carryforwards ("NOL's") and the tax effect of other temporary differences. At
December 31, 1995, the Company has recognized substantially all of the financial
statement benefit of its deferred tax assets.
The provision (benefit) for income taxes was comprised of the following:
Years ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Federal - current $ 103,000 $ 48,000 $ 23,000
State - current 14,000 16,000 75,000
Federal - deferred (benefit) (1,122,000) (1,300,000) (350,000)
- --------------------------------------------------------------------------------
$(1,005,000) $(1,236,000) $(252,000)
================================================================================
Cash payments for income taxes were $111,000, $78,000 an $89,000 in 1995, 1994
and 1993, respectively.
59
<PAGE>
A reconciliation of the statutory federal income tax provision to the reported
income tax benefit for the years ended December 31, 1995, 1994 and 1993 is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Statutory income tax provision at 34% $ 1,981 $ 1,063 $ 323
Reversal of deferred tax valuation
allowance to:
Eliminate the current year's Federal regular
tax provision through utilization of the NOL (1,981) (1,063) (323)
Recognize the benefit of a portion of the Federal and State
NOL expected to be realized in future years (1,122) (1,300) (350)
Alternative minimum federal tax 103 48 23
State income tax 14 16 75
- ----------------------------------------------------------------------------------------------------------------
Income tax benefit $(1,005) $(1,236) $ (252)
================================================================================================================
</TABLE>
In addition, $470,000 and $256,000 of state taxes (net of the related federal
tax benefit) were not provided in 1995 and 1994, respectively, because of the
utilization of state NOL's.
The components of and changes in the deferred tax asset during 1995, 1994 and
1993, were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
Deferred Deferred Deferred
January 1, (Expense) December 31, (Expense) December 31, (Expense) December 31,
1993 Benefit 1993 Benefit 1994 Benefit 1995
- ------------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax effect of net operating loss
carryforwards:
Federal $ 4,855 $ (1) $ 4,854 $ (756) $ 4,098 $ (2,102) $ 1,996
State 1,142 --- 1,142 (183) 959 (468) 491
Other tax effected temporary
differences resulting in deferred
tax:
Assets 974 (348) 626 (91) 535 90 625
Liabilities (67) (256) (323) (117) (440) 98 (342)
Stockholders' equity --- --- --- --- --- 27 27
- ------------------------------------------------------------------------------------------------------------------------------------
Gross tax effected temporary
differences 6,904 (605) 6,299 (1,147) 5,152 (2,355) 2,797
Valuation allowance (6,904) 955 (5,949) 2,447 (3,502) 3,477 (25)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ --- $ 350 $ 350 $ 1,300 $ 1,650 $ 1,122 $ 2,772
====================================================================================================================================
</TABLE>
At December 31, 1995, the only temporary difference which gives rise to a
significant portion of the tax effected temporary differences shown above was
the loan loss allowance, which resulted in a deferred liability of approximately
$340,000.
60
<PAGE>
As of December 31, 1995, the Company has aggregate NOL's of approximately $5.9
million for federal purposes and $6.5 million for state purposes which are
available to offset future income for tax return purposes. The NOL's are
scheduled to expire as follows:
Federal State
- --------------------------------------------------------------------------------
2006 - $5.8 million 1996 - $6.4 million
2007 - $0.1 million 1997 - $0.1 million
Note 11
Employee Benefit Plans
The Bank has a qualified noncontributory defined benefit pension plan (the
"Pension Plan") covering all employees over the age of 21 who have worked at
least 1,000 hours per year. The Pension Plan was temporarily frozen, effective
January 1, 1992, resulting in no additional benefits for future service since
that date. The Bank also has a non-qualified supplemental executive retirement
plan (the "Supplemental Plan") for certain senior officers. Under the terms of
the Supplemental Plan, if participants are terminated on or after their early
retirement date following a change in control (as defined) of Bancorp, they are
entitled to receive certain additional benefits. During 1995, several
participants were discontinued from the Supplemental Plan, resulting in a
curtailment gain.
The following table sets forth the funded status of the plans and the amounts
shown in the accompanying consolidated statements of condition at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
Pension Supplemental
Plan Plan
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 1,196 $ 955 $ 1,371 $ 895
Nonvested benefits 27 47 --- 471
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 1,223 1,002 1,371 1,366
Effect of anticipated future
compensation levels --- --- 155 128
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 1,223 1,002 1,526 1,494
Fair value of plan assets (2,053) (1,969) --- ---
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation over
plan assets (excess assets) (830) (967) 1,526 1,494
Unamortized prior service cost --- --- (169) (291)
Net unrecognized (loss) gain from past
experience different than assumed (649) (544) (25) 36
Unamortized asset at transition 117 156 --- ---
- --------------------------------------------------------------------------------------------------------------------------------
Pension (asset) liability included in
the consolidated statement of condition $(1,362) $(1,355) $ 1,332 $ 1,239
================================================================================================================================
</TABLE>
61
<PAGE>
Pension (benefit) expense for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost of the current period $ --- $ --- $ --- $ 141 $ 156 $ 116
Interest cost of the projected benefit
obligation 79 83 76 117 101 100
Return on plan assets (173) (178) (189) --- --- ---
Amortization of unrecognized
net asset (22) (22) (22) --- --- ---
Settlement loss due to lump
sum payments 78 --- --- --- --- ---
Amortization of prior
service cost --- --- --- 79 75 75
Curtailment gain --- --- --- (117) --- ---
Amortization of loss 31 27 --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------
Pension (benefit) expense $ (7) $ (90) $(135) $ 220 $ 332 $ 291
==============================================================================================================================
</TABLE>
Key assumptions used in the above calculations at December 31, 1995, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount
rate used to measure the
projected benefit obligation 7.50% 8.25% 7.00% 7.50% 8.25% 7.00%
Rate of increase in
future compensation levels N/A N/A N/A 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 8.50% 9.00% 8.50% N/A N/A N/A
</TABLE>
Pension Plan assets are primarily invested in fixed income and equity
securities. The net unrecognized loss from past experience different than
assumed is being amortized on a straight line basis over 12 years. The Bank uses
the straight-line method of amortization for prior service cost (over 10.8
years) and unrecognized gains and losses (over 12 years) which aggregate more
than 10% of the value of plan assets.
The Bank also has a qualified Employee Stock Ownership Plan ("ESOP") and,
commencing in 1992, a 401(k) Plan covering all eligible employees. Contributions
to the ESOP are at the discretion of the Board of Directors of the Bank; no
contributions were made in 1995, 1994 or 1993. Participants in the 401(k) Plan
are entitled to contribute up to 20% of their compensation, subject to Internal
Revenue Service annual limitations. The Bank contributed 25% in 1993 and 1994
and 50% of annual employee contributions in 1995, up to 6% of a participants'
compensation. Employees are fully vested in the Bank's contributions after five
years of service. The Bank contributed $91,000, $49,000 and $20,000 to the
401(k) Plan in 1995, 1994 and 1993, respectively.
62
<PAGE>
Note 12
Related Party Transactions
The Bank purchases insurance from an insurance brokerage firm owned by a
director of the Bank and Bancorp. This director is the president of the
insurance firm. During 1995, the Bank made insurance payments of $364,062 to
this firm. Payments to this firm for insurance premiums were $326,791 and
$475,462 during 1994 and 1993, respectively.
The Bank leases office space from a trust of which a director of the Bank and
Bancorp serves as trustee. Rental payments of $54,584, $53,740 and $53,527 for
this office space were paid during 1995, 1994 and 1993, respectively.
The Bank also leases office space from a trust which benefits a family member of
a director of the Bank and Bancorp. The Bank made rental payments totaling
$194,196, $195,000 and $184,141 during 1995, 1994 and 1993, respectively,
relating to this office space.
Note 13
New Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 applies to financial statements for
fiscal years beginning after December 15, 1995. Bancorp does not anticipate that
adoption of this pronouncement will have a material impact on its consolidated
financial statements.
In October 1995, FASB issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 is effective for fiscal years beginning after
December 15, 1995. Bancorp does not anticipate that adoption of this
pronouncement will have a material impact on its consolidated financial
statements.
63
<PAGE>
Note 14
Westport Bancorp, Inc. (Parent Company Only)
Condensed Financial Statements
<TABLE>
<CAPTION>
Condensed statements of condition information was as follows:
December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 229 $ 87
Investment in and advances to subsidiary 24,318 16,560
Other assets 4 ---
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $24,551 $16,647
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and other liabilities $ 269 $ 249
Stockholders' equity (net of unrealized depreciation on
securities available for sale of subsidiary) 24,282 16,398
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,551 $16,647
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed statements of income information was as follows:
Years Ended December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest income $ 22 $ 4 $ 6
Other expenses 148 156 133
- ----------------------------------------------------------------------------------------------------
Loss before increase in undistributed
equity of subsidiary (126) (152) (127)
Increase in undistributed equity of subsidiary 6,956 4,514 1,329
- ----------------------------------------------------------------------------------------------------
Net income $ 6,830 $ 4,362 $ 1,202
====================================================================================================
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Condensed cash flow information was as follows:
Years Ended December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,830 $ 4,362 $ 1,202
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary (6,956) (4,514) (1,329)
Other - net 16 40 37
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (110) (112) (90)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Increase in investment in and advances to subsidiary (426) --- (190)
Net decrease in securities --- --- 248
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (426) --- 58
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Gross proceeds from issuance of Common Stock 1,543 45 186
Dividends (865) --- ---
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 678 45 186
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 142 (67) 154
Cash and cash equivalents at beginning of year 87 154 ---
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 229 $ 87 $ 154
==========================================================================================================
</TABLE>
There are various restrictions which limit the ability of a bank subsidiary to
transfer funds in the form of cash dividends, loans or advances to its parent
company. The Bank is prohibited by Connecticut banking law from paying dividends
except from its net profits, which are defined as the remainder of all earnings
from current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the Commissioner, exceed
the total of its net profits for that year combined with its retained net
profits from the preceding two years. These dividend limitations can affect the
amount of dividends payable to Bancorp as the sole stockholder of the Bank, and
therefore affect Bancorp's payment of dividends to its stockholders.
In addition, the Bank is subject to restrictions under Section 23A of the
Federal Reserve Act. These restrictions limit the transfer of funds to a parent
company, in the form of loans or extensions of credit, investments and purchases
of assets. Such transfers are limited to 10% of the Bank's capital and surplus.
These transfers are also subject to various collateral requirements.
Note 15
Financial Instruments with Off-Balance
Sheet Risk and Concentrations of Credit Risk
The Bank is a party to financial instruments with off-balance sheet risk entered
into in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
(unfunded loans and unused lines of credit) and standby letters of credit.
65
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of these commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments and evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of credit
is based on management's credit evaluation of the borrower. Collateral held
varies, but may include real estate, accounts receivable, inventory, property
and securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued at the customer's request to support various personal and/or
business obligations. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The amount of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include real estate, accounts
receivable, inventory, property, securities and certificates of deposit.
The Bank's maximum exposure to credit loss from outstanding loan commitments and
standby letters of credit at December 31, 1995 was:
($ in thousands)
Loan commitments:
Residential mortgage $ 2,588
Commercial mortgage 260
Residential construction 1,276
- --------------------------------------------------------------------------------
Total 4,124
- --------------------------------------------------------------------------------
Lines of Credit commitments:
Commercial 15,352
Home equity 16,865
Personal 2,333
- --------------------------------------------------------------------------------
Total 34,550
- --------------------------------------------------------------------------------
Standby letters of credit 1,532
- --------------------------------------------------------------------------------
Total commitments and letters of credit $ 40,206
================================================================================
The Bank grants residential, commercial and consumer loans to customers,
principally in the town of Westport and the Fairfield County area of
Connecticut. Although the loan portfolio is diversified, a substantial portion
of its debtors' ability to honor their contracts is dependent upon the economic
conditions in the area, especially in the real estate sector. There are no other
concentrations of loans exceeding 10% of total loans.
66
<PAGE>
Note 16
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
about Fair Value of Financial Instruments", requires disclosure of the estimated
fair value of financial instrument assets, liabilities, commitments and
guarantees. Approximately 96% of the Company's assets and 99% of its liabilities
are considered financial instruments as defined in SFAS 107. Many of the
Company's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. In addition, the majority of the Company's financial instruments,
such as loans and deposits, are held to maturity and are realized or paid
according to the contractual agreement with the customer.
Significant estimations and present value calculations were used by the Company
for the purposes of this disclosure. The estimation methodologies used, the
estimated fair values, and financial statement balances at December 31, 1995 and
1994 ($ in thousands) are shown below.
Financial instrument assets actively traded in a secondary market have been
valued at quoted available market prices. For short-term financial instruments,
the financial statement balance equals fair market value.
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $24,113 $24,113 $18,010 $18,010
Investment securities 85,338 85,338 66,868 70,396
Federal funds sold 14,500 14,500 --- ---
Accrued interest receivable 2,247 2,247 1,758 1,758
</TABLE>
The following financial instrument liabilities with stated maturities have been
valued using a present value discounted cash flow with a discount rate
approximating current market rates for similar liabilities:
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Time deposits with stated
maturities $81,062 $80,837 $48,306 $44,730
Short-term borrowings 7,733 7,733 10,484 10,484
</TABLE>
67
<PAGE>
The following financial instrument liabilities with no stated maturities have
been valued at an estimated fair value equal to both the amount payable on
demand and the financial statement balance:
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing deposits $ 78,421 $ 78,421 $ 72,972 $ 72,972
Interest-bearing deposits 115,412 115,412 136,256 136,256
</TABLE>
The loan portfolio has been valued using a combination of quoted market prices
and recent comparable sales data for both home equity credit lines and
residential mortgages and discounted cash flow for commercial mortgages,
consumer loans and business loans. The discount rate used in these calculations
are current market rates for similar items.
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loans $177,585 $175,198 $181,968 $183,307
</TABLE>
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
Management is concerned that reasonable comparability between financial
institutions may not be possible due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values.
All off-balance sheet items are believed to relate to quality assets. There are
no off-balance sheet items that relate to adversely classified assets. The fees
charged for off-balance sheet items are at fair values for similar transactions.
See Note 15 for further information on off-balance sheet items.
68
<PAGE>
Note 17
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Results of operations during the indicated quarters are presented below:
Quarter Ended
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 5,114 $ 5,080 $ 5,157 $ 5,374
Interest expense 1,408 1,497 1,478 1,644
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,706 3,583 3,679 3,730
Provision for loan losses 375 375 375 375
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,331 3,208 3,304 3,355
Other operating income 720 988 991 1,306
Other operating expense 2,834 2,729 2,755 3,060
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,217 1,467 1,540 1,601
Income taxes (benefit) (443) (115) (585) 138
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,660 $ 1,582 $ 2,125 $ 1,463
================================================================================================================================
Net income per common share (1)(2) $ 0.16 $ 0.15 $ 0.20 $ 0.14
================================================================================================================================
Weighted average number of
common shares and common
equivalent shares outstanding: 10,276,000 10,377,000 10,474,000 10,528,000
================================================================================================================================
1994
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 3,894 $ 4,084 $ 4,606 $ 4,750
Interest expense 1,222 1,157 1,159 1,211
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,672 2,927 3,447 3,539
Provision for loan losses 450 450 450 450
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,222 2,477 2,997 3,089
Other operating income 957 929 1,015 1,027
Other operating expense 2,920 2,786 2,806 3,075
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 259 620 1,206 1,041
Income taxes (benefit) 8 (320) (752) (172)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 251 $ 940 $ 1,958 $ 1,213
================================================================================================================================
Net income per common share (1)(2) $ 0.03 $ 0.09 $ 0.19 $ 0.12
================================================================================================================================
Weighted average number of
common shares and common
equivalent shares outstanding: 10,550,000 10,292,000 10,247,000 10,270,000
================================================================================================================================
<FN>
(1) Primary and fully diluted earnings per share are the same for each quarter
in 1995. In 1994, fully diluted earnings per share were not applicable.
(2) The total of each quarter does not equal the primary earnings per common
share for the years 1995 and 1994 due to rounding.
</FN>
</TABLE>
69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Westport Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
Westport Bancorp, Inc. (a Delaware corporation) and subsidiary as of December
31, 1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Westport Bancorp,
Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
New York, New York
January 25, 1996
70
<PAGE>
Item 9
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
Item 10
Directors and Executive Officers of the Registrant
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions "Election
of Directors -- Information about Nominees," "Management -- Executive Officers"
and "Management -- Section 16(a) Compliance" in Bancorp's definitive Proxy
Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such information is
hereby incorporated by reference herein and specifically made a part hereof by
reference.
Item 11
Executive Compensation
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions
"Management -- Executive Compensation," "Management -- Option Exercises and
Holdings," "Management -- Pension and Retirement Plans," "Management --
Supplemental Executive Retirement Plan," "Management -- Split Dollar Life
Insurance," "Management -- Compensation of Directors," "Management -- Agreements
With Certain Executive Officers," and "Management -- Compensation Committee
Interlocks and Insider Participation" in Bancorp's definitive Proxy Statement
for Bancorp's 1996 Annual Meeting of Stockholders. Such information is hereby
incorporated by reference herein and specifically made a part hereof by
reference.
Item 12
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The information required by this item is set forth under the caption "Security
Ownership of Management and Certain Beneficial Owners" in Bancorp's definitive
Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such
information is hereby incorporated by reference herein and specifically made a
part hereof by reference.
71
<PAGE>
Item 13
Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions
"Management -- Compensation Committee Interlocks and Insider Participation" and
"Management -- Certain Other Transactions" in Bancorp's definitive Proxy
Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such information is
hereby incorporated by reference herein and specifically
made a part hereof by reference.
PART IV
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
- --------------------------------------------------------------------------------
Financial Statements.
The following financial statements are included in Item 8 of this Form 10-K:
(a) Westport Bancorp, Inc. Consolidated Statements of Condition as
at December 31, 1995 and 1994.
(b) Westport Bancorp, Inc. Consolidated Statements of Income for
years ended December 31, 1995, 1994 and 1993.
(c) Westport Bancorp, Inc. Consolidated Statements of Changes In
Stockholders' Equity as at December 31, 1995, 1994, and 1993
and January 1, 1993.
(d) Westport Bancorp, Inc. Consolidated Statements of Cash Flows
for years ended December 31, 1995, 1994, and 1993.
(e) Westport Bancorp, Inc. Notes to Consolidated Financial
Statements.
(f) Report of Independent Public Accountants, on Westport Bancorp,
Inc.'s Consolidated Financial Statements for 1995, 1994 and
1993.
Financial Statement Schedules.
Schedules are omitted either because they are not applicable or because the
information is included at Item 8 in this Form 10-K.
Exhibits.
The exhibits which are filed with this Form 10-K or which are incorporated
herein by reference are set forth below:
72
<PAGE>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-12936 ("1991 Form
10-K"), and incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible
Preferred Stock of Bancorp. (Filed as Exhibit 3(b) to 1991
Form 10-K, and incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c)
to Annual Report on Form 10-K for the year ended December
31, 1995, File No. O-12936 ("1995 Form 10-K"), and
incorporated (herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-12936 ("1992 Form 10-K"), and incorporated
herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to
1991 Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to
Registration Statement on Form S-1, File No. 2- 93773, and
incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and
Weston Shopping Center Associates, as amended by
Modification dated July 1, 1993. (Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 0-12936, and as Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and
incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the
Bank and John Sherwood, Trustee. (Filed as Exhibit 10(e) to
1992 Form 10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank
and William L. Gault, Trustee. (Filed as Exhibit 10(f) to
1992 Form 10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991
between the Bank and One Research Drive Associates Limited
Partnership. (Filed as Exhibit 10(h) to 1991 Form 10-K, and
incorporated herein by reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the
Bank and C.A.T.F. Limited Partnership. (Filed as Exhibit
10(f) to 1995 Form 10-K, and incorporated herein by
reference.)
10(g) Employment Agreement among Michael H. Flynn, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
73
<PAGE>
10(i) Employment Agreement among Richard T. Cummings, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp
and the Bank dated April 23, 1996 (Filed herewith).
10(k) Employment Agreement among Richard L. Card, Bancorp and the
Bank dated November 15, 1993, and as amended November 13,
1995. (Filed as Exhibit 10(i)(4) to 1993 Form 10-K and
Exhibit 10(k) to 1995 Form 10-K, respectively, and
incorporated herein by reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989, as amended December 17, 1991. (Filed
as Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated
herein by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3)
to 1992 Form 10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5)
to 1993 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp
dated November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993
Form 10-K, and incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B.
Laudano, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(r) to 1995 Form 10-K, and incorporated
herein by reference.)
10(s) Split Dollar Insurance Agreement between Richard T.
Cummings, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(s) to 1995 Form 10-K, and incorporated
herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card
and the Bank dated as of December 1, 1995. (Filed as
Exhibit 10(t) to 1995 Form 10-K, and incorporated herein by
reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated
November 13, 1995, as amended November 29, 1995, January
18, 1996, and May 16, 1996. (Plan dated November 13, 1995
and amendments dated November 29, 1995 and January 18, 1996
filed as Exhibit 10(u) to 1995 Form 10-K, and incorporated
herein by reference) (Amendment dated May 16, 1996 filed
herewith).
10(v) Trust under Supplemental Executive Retirement Plan between
the Bank and People's Bank, Trustee. (Filed as Exhibit
10(v) to 1995 Form 10-K, and incorporated herein by
reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit
10(m) to 1992 Form 10-K, and incorporated herein by
reference.)
10(x) 1985 Incentive Stock Option Plan 1990 Restatement of
Bancorp. (Filed as Exhibit 10(n) to 1992 Form 10-K, and
incorporated herein by reference.)
10(y) Amended and Restated 1995 Incentive Stock Option Plan of
Bancorp (Filed herewith).
74
<PAGE>
11 Statement Regarding Computation of Per Share Earnings.
(Filed as Exhibit 11 to 1995 Form 10-K, and incorporated
herein by reference.)
21 Subsidiary of Bancorp. (Filed as Exhibit 22 to 1991 Form
10-K, and incorporated herein by reference.)
23 Consent of Arthur Andersen LLP (Filed herewith).
27 Financial Data Schedule (Filed herewith).
Reports on Form 8-K.
Bancorp did not file any reports on Form 8-K during the fourth quarter of 1995.
75
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[] 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 0-12936
Westport Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1094350
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
87 Post Road East, Westport, Connecticut 06880
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 222-6911
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At April 30, 1996, there were 5,643,531 outstanding shares of Westport Bancorp,
Inc.'s common stock, par value $.01 per share.
<PAGE>
Part I -- Financial Information
Item 1 -- Financial Statements.
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
March 31, December 31,
1996 1995
-----------------------------------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash due from banks $ 20,040 $ 24,113
Federal funds sold 11,000 14,500
-----------------------------------------
Cash and cash equivalents 31,040 38,613
-----------------------------------------
Securities available for sale, at market value 86,744 85,338
-----------------------------------------
Loans 180,551 178,052
Allowance for loan losses (3,011) (2,854)
-----------------------------------------
Loans - net 177,540 175,198
-----------------------------------------
Premises and equipment - net 4,773 4,933
Accrued interest receivable 2,200 2,247
Other assets 5,531 6,588
-----------------------------------------
TOTAL ASSETS $307,828 $312,917
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 69,685 $ 78,421
Interest-bearing deposits 185,764 196,249
-----------------------------------------
Total deposits 255,449 274,670
-----------------------------------------
Short-term borrowings 25,084 7,733
Other liabilities 2,834 6,232
-----------------------------------------
Total liabilities 283,367 288,635
-----------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000
shares; outstanding 40,100 shares a1 March 31, 1996, 1 1
41,850 at December 31, 1995
Common stock - $.01 par value; authorized 2,500,000
shares; outstanding, 5,638,531 shares at March 31, 1996
5,433,665 shares at December 31, 1995 56 54
Additional paid in capital 23,014 22,980
Retained earnings 1,927 1,285
Net unrealized depreciation on securities
available for sale, net of tax (537) (38)
-----------------------------------------
Total stockholders' equity 24,461l 24,282
-----------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $307,828 $312,917
=========================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
1996 1995
- -------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 4,009 $ 4,142
Securities 1,309 963
Federal funds sold and other 26 9
- -------------------------------------------------------------------------------
Total interest income 5,344 5,114
- -------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 1,459 1,086
Short-term borrowings 178 322
- -------------------------------------------------------------------------------
Total interest expense 1,637 1,408
- -------------------------------------------------------------------------------
Net interest income 3,707 3,706
Provision for loan losses 300 375
- -------------------------------------------------------------------------------
Net interest income after provision for
loan losses 3,407 3,331
- -------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 456 404
Service charges on deposit accounts 329 342
Realized security gains (losses) - net --- (210)
Loan sale gains - net 85 17
Mortgage service fees 32 31
Other 178 136
- -------------------------------------------------------------------------------
Total other operating income 1,080 720
- -------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 1,509 1,414
Occupancy - net 397 359
Professional fees 274 203
Data processing 147 140
Furniture and equipment 78 76
Other insurance premiums 44 57
Other real estate owned - net --- 65
FDIC insurance premiums 1 176
Other 362 344
- -------------------------------------------------------------------------------
Total other operating expense 2,812 2,834
- -------------------------------------------------------------------------------
Income before income taxes 1,675 1,217
Income taxes (benefit) 695 (443)
- -------------------------------------------------------------------------------
NET INCOME $ 980 $ 1,660
===============================================================================
Earnings Per Share $ 0.09 $ 0.16
===============================================================================
Weighted average number of common shares
and common equivalent shares outstanding 10,567,618 10,276,231
===============================================================================
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
(unaudited)
Net
Unrealized
Depreciation
Preferred Stock Common Stock Additional Retained on Securities
Number of Number of Paid in Earnings Available for Sale,
Shares Amount Shares Amount Capital (Deficit) Net of Tax Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 43,950 $ 1 3,211,752 $ 32 $21,459 $ (4,680) $ (414) $16,398
- --------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 1,660 --- 1,660
Issuance of Common Stock -
Warrants exercised --- --- 75,000 1 55 --- --- 56
Employee Options exercised --- --- 6,000 --- 12 --- --- 12
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- 240 240
-------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 43,950 $ 1 3,292,752 $ 33 $21,526 $ (3,020) $ (174) $18,366
===============================================================================================================================
-------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 41,850 $ 1 5,433,665 $ 54 $22,980 $ 1,285 $ (38) $24,282
-------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 980 --- 980
Issuance of Common Stock -
Conversion of Preferred Stock (1,750) --- 175,000 2 (2) --- --- ---
Warrants exercised --- --- 25,500 --- 19 --- --- 19
Dividend Reinvestment and
Stock Purchase Plan --- --- 1,116 --- 7 --- --- 7
Employee Options exercised --- --- 3,250 --- 10 --- --- 10
Dividends
Preferred Stock --- --- --- --- --- (140) --- (140)
Common Stock --- --- --- --- --- (198) --- (198)
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- (499) (499)
-------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 40,100 $ 1 5,638,531 $ 56 $23,014 $ 1,927 $ (537) $24,461
===============================================================================================================================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
Three Months Ended
March 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 980 $ 1,660
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300 375
Deferred tax provision (benefit) 662 (468)
Depreciation, amortization and accretion 220 229
Provision for and losses on other real estate owned - net --- 60
Loan sale gains - net (85) (17)
Realized security losses - net --- 210
Decrease (increase) in accrued interest receivable 47 (290)
Decrease (increase) in other assets 727 (198)
Decrease in other liabilities (3,381) (238)
- -----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (530) 1,323
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale 16,995 ---
Held to maturity --- ---
Proceeds from sales of securities -
Available for sale --- 14,754
Principal collected on securities 943 900
Purchases of securities -
Available for sale (20,229) (10,005)
Held to maturity --- (4,999)
Increase in loans - net (7,414) (1,979)
Loans repurchased by the FDIC --- 351
Proceeds from sales of loans 4,857 2,961
Proceeds from sales of other real estate owned --- 1
Purchases of premises and equipment (23) (119)
- -----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (4,871) 1,865
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Decrease in noninterest-bearing deposits - net (8,736) (6,514)
Decrease in interest-bearing deposits - net (10,485) (10,515)
Increase in short-term borrowings - net 17,351 12,812
Proceeds from issuance of Common Stock - net 36 68
Dividends (338) ---
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,172) (4,149)
- -----------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (7,573) (961)
Cash and cash equivalents at beginning of year 38,613 17,924
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,040 $ 16,963
=================================================================================================================
See notes to consolidated financial statements.
</TABLE>
WESTPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Unaudited Financial Statements
The accompanying unaudited consolidated financial statements include the
accounts of Westport Bancorp, Inc. ("Bancorp") and its subsidiary, The Westport
Bank & Trust Company (the "Bank") (collectively, the "Company"). The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In preparing interim financial statements, management has made estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated statements of condition and the reported amounts of
revenues and expenses for the periods. Actual future results could differ
significantly from these estimates. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
Note 2 - Regulatory Matters
During January 1996, representatives of the State of Connecticut Bank
Commissioner completed a routine examination of the Bank as of October 30, 1995.
Other than minor suggestions for improvements, there were no significant
examination findings which are believed to have potentially negative
implications for the Bank.
The Federal Reserve Board and the Federal Deposit Insurance Corporation ("FDIC")
require bank holding companies and banks, respectively, to comply with
guidelines based upon the ratio of capital to total assets adjusted for risk,
and the ratio of Tier 1 capital to total quarterly average assets (leverage
ratio).
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at March 31, 1996.
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- --------------------------------------------------------------------------------
Total Capital to Risk-Weighted Assets 14.41% 8.0%
Tier 1 Capital to Risk-Weighted Assets 13.16 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 8.45 3.0 (1)
(1) An additional 1% to 2% is required for all but the most highly rated
institutions.
The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), establishes five
classifications for banks on the basis of their capital levels: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At March 31, 1996, the Company
was "well capitalized" under FDIA, as amended, based upon the above capital
ratios. Deterioration of economic conditions and real estate values could
adversely affect future results, leading to increased levels of loan
charge-offs, provision for loan losses and nonaccrual loans, affecting the
ability of the Company to maintain the well capitalized classification, and
resulting in reductions in income and total capital.
Note 3 - Income Taxes
Effective January 1, 1996, the Company is providing income taxes at regular
federal and state tax rates, having fully recognized the financial statement
benefit of its net operating loss carryforwards in 1995. The Company's current
federal and state income tax provision for the first quarter of 1996, totaled
$700,000; cash payments for income taxes during the period totaled $43,000. The
Company's tax provision for the first quarter of 1995 included a current federal
and state tax provision totaling $25,000 and a $468,000 benefit resulting from
the reversal of a portion of the previously established deferred tax valuation
allowance. For the three month period ended March 31, 1995, the Company made
cash payments for income taxes totaling $4,000.
As of March 31, 1996, the Company has aggregate net operating loss carryforwards
of approximately $5.1 million for federal purposes and $5.7 million for state
purposes to offset future income for tax return purposes.
At March 31, 1996, the Company had a net deferred tax asset of $2.46 million
representing anticipated future utilization of its net operating loss
carryforwards as an offset against future taxable income and other temporary
differences.
The $.4 million tax effect relating to the unrealized loss on available for sale
securities during the first quarter of 1996 is excluded from the consolidated
statement of cash flows because no cash was involved.
Note 4 - Earnings Per Share
Earnings per share are computed by dividing adjusted earnings by the weighted
average number of common shares and common share equivalents outstanding. For
the periods ended March 31, 1996 and 1995, the computation includes 5,569,634
and 3,249,474 weighted average shares outstanding and 937,434 and 2,631,757
weighted average common equivalent shares, respectively, under the treasury
stock method. The earnings per share computations also include 4,060,549 and
4,395,000 weighted average shares in 1996 and 1995, respectively, issuable upon
the assumed conversion of preferred stock. Adjusted earnings, in 1995, consist
of net income and the interest effect of the assumed reduction in short-term
borrowings, computed under the treasury stock method. There was no difference
between primary and fully diluted earnings per share in the first quarter of
1996 or 1995.
Note 5 - New Accounting Standards
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS 121 did not have an impact on the Company's
consolidated financial statements.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The adoption of SFAS 123 did not have an impact on
the Company's consolidated financial statements.
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Overview
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations, including fees
generated by its Trust department. Net interest income is the difference between
interest earned on the loan and investment portfolios and interest paid on
deposits and other sources of funds. Noninterest income is primarily the result
of fees generated by the Trust department, charges related to transaction
activity from commercial and retail checking accounts and gains from loan and
securities sales.
The Company reported net income for the first quarter of 1996 of $980,000, or
$0.09 per common share, compared to net income of $1,660,000 or $0.16 per common
share for the comparable 1995 period. There was no difference between primary
and fully diluted earnings per share in the first quarter of 1996 or 1995.
Excluding non-recurring gains and losses, the Company's pretax earnings from
core operations were $1.6 million for the three months ended March 31, 1996, an
increase of 13% from first quarter 1995 core earnings of $1.4 million. Effective
January 1, 1996, the Company is providing income taxes at regular federal and
state tax rates, having fully utilized the financial statement benefit of its
net operating loss carryforwards in 1995. The 1996 first quarter tax provision
of $0.7 million compares with a $0.5 million tax benefit recognized in 1995's
first quarter.
Contributing to the improved pre-tax results for the first quarter of 1996, as
compared to 1995, was a 52% decline in nonperforming assets, a reduction in the
provision for loan losses as a result of the overall improvement in the credit
quality of the loan portfolio, increases in average earning assets, the
elimination of realized security losses and the continued control of operating
expenses. In addition, stronger income from Trust fees and a reduction in FDIC
insurance premiums contributed to improved 1996 pre-tax earnings.
Earnings for the first quarter of 1996 were reduced by an increase in the cost
and volume of average interest-bearing liabilities, an increase in salaries and
benefits associated with the opening of a new branch facility during the third
quarter of 1995 and an increase in professional fees related to executive
compensation initiatives.
Bancorp's leverage ratio at March 31, 1996 was 8.45%, and its total capital to
risk-weighted asset ratio was 14.41%, well above current minimum requirements.
See Note 2 to the accompanying consolidated financial statements for further
discussion of regulatory matters.
The Company's results for 1996 continued to be impacted by the sluggish regional
economy and real estate market. However, during 1995 and the first quarter of
1996, management has seen some positive trends, including the increased
stabilization of the local economy, reduction in vacancy rates, and renewed
activity in the real estate market, which have had a positive effect on
earnings. A deterioration of the economy and/or real estate values would
adversely affect results in 1996 and beyond, and could lead to increased levels
of loan charge-offs, the provision for loan losses and nonaccrual loans and
reductions in income and total capital.
Net Interest Income
Net interest income is the difference between interest earned on loans and other
investments and interest paid on deposits and other sources of funds. Net
interest income is affected by a number of variables. One such variable is the
interest rate spread, which represents the difference between the yield on total
average interest-earning assets and the cost of total average
noninterest-bearing and interest-bearing liabilities.
Net interest income was $3,707,000 in the first three months of 1996, compared
with $3,706,000 in the comparable 1995 period. Factors impacting interest income
and expense are discussed below.
Total interest income amounted to $5,344,000 for the first three months of 1996,
compared to $5,114,000 for the same period in 1995, an increase of 4.5%. A key
factor relating to the higher level of total interest income for 1996, compared
to the prior year, was an increase in average earning assets of $13.1 million or
5.1%, to $270,334,000 from $257,199,000. This increase in volume during the 1996
period resulted in an additional $212,000 of interest income. Investment
securities, as a component of earning assets, experienced the most significant
increase from $69,021,000 in 1995 to $87,418,000 in 1996, an increase of 26.7%.
During the first quarter of 1996, the yield on average interest-earning assets
decreased slightly to 7.9% from 8.0% in 1995.
Total interest expense for the three months ended March 31, 1996 was $1,637,000,
an increase of 16.3% from $1,408,000 for the same period in 1995. This increase
is, in part, the result of a 1.1% increase in average interest-bearing
liabilities. For the first quarter of 1996, average interest-bearing liabilities
increased to $198,817,000 from $196,594,000 for the comparable 1995 period,
resulting in an increase in interest expense of $113,000. Additionally impacting
interest expense, average interest costs increased from 2.9% to 3.3% on
interest-bearing liabilities resulting in increased interest expense of
$116,000. Positively impacting results during the first quarter of 1996 was an
increase of 5.7% in the average balance of noninterest-bearing liabilities as
compared to the first quarter of 1995.
Net interest margin represents net interest income divided by average
interest-earning assets. For the first quarter of 1996, the net interest margin
declined to 5.5% from 5.8% in the comparable 1995 period. The net interest
margin was impacted by the increase in average interest-earning assets, the
increase in the cost and volume of interest-bearing liabilities, offset in part,
by the increase in noninterest-bearing liabilities.
Total interest income for the comparable periods of 1996 and 1995 was negatively
impacted by the level of nonaccrual loans, averaging $2.3 million and $4.2
million for the first quarter of 1996 and 1995, respectively. Further
improvement in net interest income is dependent, in part, upon the continued
resolution of nonperforming assets.
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related
interest-income and expense for the three months ended March 31, 1996 and 1995.
Average balances are averages of daily closing balances.
<TABLE>
<CAPTION>
Three Months Ended March 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Accruing loans $178,648 $4,009 9.0% $183,313 $4,142 9.1%
Non-accruing loans 2,276 --- --- 4,240 --- ---
- -------------------------------------------------------------------------------------------------------------
Total loans 180,924 4,009 8.9 187,553 4,142 8.9
Investment securities 87,418 1,309 5.9 69,021 963 5.6
Federal funds sold
and other 1,992 26 5.3 625 9 6.0
- -------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $270,334 5,344 7.9 $257,199 5,114 8.0
======== ----- ======== -----
Noninterest-bearing
demand deposits $ 68,928 --- $ 65,235 ---
Interest-bearing
liabilities:
NOW and Money market 68,896 303 1.8 69,424 263 1.5
Savings 45,414 224 2.0 56,735 278 2.0
Certificates of deposit 70,233 923 5.3 47,300 536 4.6
Other 14,274 187 5.3 23,135 331 5.7
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 198,817 1,637 3.3 196,594 1,408 2.9
- -------------------------------------------------------------------------------------------------------------
Total noninterest-
bearing deposits and
interest-bearing
liabilities $267,745 1,637 2.4 $261,829 1,408 2.2
======== ----- ======== -----
Net interest income(1) $3,707 $3,706
=============================================================================================================
Net interest margin(2) 5.5% 5.8%
=============================================================================================================
Interest rate spread(3) 5.5% 5.8%
=============================================================================================================
(1) Interest income includes fees on loans of $72,000 and $57,000 for 1996 and 1995, respectively.
(2) Net interest margin is net interest income divided by total
average earning assets.
(3) Interest rate spread is the difference between the yield on total average interest-earning assets and the
cost of total average noninterest-bearing deposits and interest-bearing liabilities.
</TABLE>
The following table analyzes the changes attributable to the rate
and volume components of net interest income.
Three Months Ended March 31,
-------------------------------------------------------------------------------
1996 vs 1995
Increase/(decrease)
due to change in(1):
Total
Rate Volume Change
-------------------------------------------------------------------------------
($ in thousands)
Interest Income
Loans $ (56) $ (77) $ (133)
Investment securities 75 271 346
Federal funds sold and other (1) 18 17
----------------------------------------------------------------------------
Total interest income 18 212 230
----------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-
bearing liabilities:
NOW and Money market 42 (2) 40
Savings 2 (56) (54)
Certificates of deposit 99 288 387
Other (27) (117) (144)
----------------------------------------------------------------------------
Total interest expense 116 113 229
----------------------------------------------------------------------------
Change in Net Interest Income $ (98) $ 99 $ 1
============================================================================
(1) Variances were computed as follows:
Variance due to rate = change in rate multiplied by old
volume. Variance due to volume = change in volume multiplied
by old rate.
Variance due to rate/volume prorated to rate and volume
variances on the basis of gross value.
Nonperforming Assets
The following table sets forth the principal portion of loans with principal or
interest payments contractually past due 90 days or more, nonaccrual loans,
impaired loans and other real estate owned at March 31, 1996, December 31, 1995
and March 31, 1995.
<TABLE>
<CAPTION>
% Change % Change
March 31, March 31,
1996 vs 1996 vs
March 31, Dec. 31, March 31, Dec. 31, March 31,
1996 1995 1995 1995 1995
---------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past
due, on accrual status:
Mortgage:
Secured by residential
property $ 265 $ 5 $ 4 N/M N/M
Commercial and other --- --- --- --- ---
Commercial --- --- 1 --- (100)%
Home equity --- 149 112 (100)% (100)
Consumer and other --- 4 12 (100) (100)
---------------------------------------------------------------------------------------------------------------------
265 158 129 68 105
---------------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgage:
Secured by residential
property $ 677 $ 85 $ 2,547 N/M (73)
Commercial and other 995 1,098 1,098 (9) (9)
Commercial 782 813 500 (4) 56
Home equity 98 --- --- 100 100
---------------------------------------------------------------------------------------------------------------------
2,552 1,996 4,145 28 (38)
Impaired accruing loans 502 447 2,374 12 (79)
---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,319 2,601 6,648 28 (50)
Other real estate owned --- --- 291 --- (100)
---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,319 $ 2,601 $ 6,939 28% (52)%
=====================================================================================================================
N/M = not measurable or not meaningful.
</TABLE>
The increase in nonperforming loans at March 31, 1996 as compared to December
31, 1995 is primarily attributable to the addition of five loans totaling $.8
million which are secured by residential property. Management believes these
loans are well secured and is aggressively pursuing the collection of these
loans.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of these loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The adoption of SFAS
114 and 118 on January 1, 1995 has not materially affected the Company's
financial statements or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments received on nonaccruing impaired loans are recorded as
reductions of loan principal.
At March 31, 1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $3,054,000, of which
$2,552,000 were nonaccrual loans. At March 31, 1996, the valuation allowance
related to all impaired loans totaled $650,000 and is included in the allowance
for loan losses. For the three months ended March 31, 1996, the average recorded
investment in impaired loans was approximately $2.8 million. Total interest in
the amount of $11,900 was recognized on accruing impaired loans during the
quarter.
At March 31, 1996, the Company had no commitments to lend additional funds to
borrowers with loans that have been classified as impaired. The level of
nonperforming assets has had a significant negative impact on the Company's
capital and earnings over the last five years. Although management recognizes
the level of nonperforming assets is still high, it is encouraged by the
downward trend since 1990 and the 52% decline from March 31, 1995 to March 31,
1996.
It is the Company's policy to discontinue the accrual of interest on loans,
including impaired loans, when, in the opinion of management, a reasonable doubt
exists as to the timely collection of the amounts due. Additionally, regulatory
requirements generally prohibit the accrual of interest on certain loans when
principal or interest is due and remains unpaid for 90 days or more, unless the
loan is both well secured and in the process of collection.
Operating results since 1989 have been adversely impacted by the level of
nonperforming assets caused by the deterioration of borrowers' ability to make
scheduled interest and principal payments caused primarily by the decline in
real estate values, a severe slowdown in business activity and a high rate of
unemployment. In addition to foregone revenue, the Company has had to provide a
high level of provision for loan losses and has incurred significant collection
costs and costs associated with the management and disposition of foreclosed
properties. However, during 1994 and 1995 and continuing into 1996, management
has seen some positive trends including the increased stabilization of the local
economy, reduction in vacancy rates, and renewed activity in the real estate
market, which have had a positive effect on earnings.
The characteristics of the real estate market since 1989 include a substantial
decline in real estate property values and a significant increase in the amount
of time that properties remain on the market prior to sale. Factors contributing
to the depressed market conditions are an over supply of properties on the
market and a continued sluggish local economy. As a result, the most significant
increases in nonperforming loans since 1989 have been in commercial mortgage
loans, residential mortgage loans and real estate related commercial loans.
Management has seen some recent improvement in the real estate market and the
local economy, which has had a positive effect on its efforts to resolve
nonperforming loans. Management is aggressively pursuing the collection of all
nonperforming loans. Management's efforts to return nonperforming loans to
performing status may be hampered by market factors.
<PAGE>
The following table summarizes the activity on nonaccrual loans for the periods
ended March 31, 1996 and 1995.
% Change
March 31,
1996 vs
March 31,
1996 1995 1995
-------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 1,996 $ 4,316 (54)%
-------------------------------------------------------------------
Additions 1,180 --- N/M
-------------------------------------------------------------------
Less:
Repayments 291 27 N/M
Charge-offs 171 60 185
Reinstate accruing 162 84 93
-------------------------------------------------------------------
Total resolved 624 171 265
-------------------------------------------------------------------
Balance, March 31, $ 2,552 $ 4,145 (38)%
===================================================================
N/M = not measurable or not meaningful
Included in the additions for the first quarter of 1996 are four
loans totaling $.6 million which are secured by residential
properties. Management believes these loans are well secured and is
aggressively pursuing the collection of these loans.
In addition to the loans classified as nonperforming in the
preceding table, the Bank's internal loan review function has
identified approximately $1.7 million of loans with more than
normal credit risk. Management believes the payment history of
these loans indicates the borrowers may have difficulty in the
future in meeting all of the terms of the contractual agreements.
These loans, as well as nonperforming loans, have been considered
in the analysis of the adequacy of the allowance for loan losses.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance for loan losses on a regular
basis by considering various factors, including past loan loss experience,
delinquent and nonperforming loans and the quality and level of collateral
securing these loans, inherent risks in the loan portfolio, and current economic
and real estate market conditions. Management has performed a loan-by-loan risk
assessment of each classified loan and of a substantial portion of the
performing commercial and commercial mortgage portfolios resulting in a specific
reserve based on loss exposure. An additional general reserve is also allocated
to each of these portfolios as well as to the residential mortgage and other
loan portfolios on an overall basis, based upon the risk category and loss
experience of the given portfolio. Based upon this review, management believes
that, in the aggregate, the allowance of $3,011,000 at March 31, 1996 is
adequate to absorb probable loan losses inherent in the loan portfolio. The
adverse real estate market in Fairfield County, the Company's past reliance upon
commercial real estate lending, the level of charge-offs during the past five
years and the level of nonperforming loans are factors which are considered when
the adequacy of the allowance for loan losses is reviewed. There is no assurance
that the Company will not be required to make increases to the allowance in the
future in response to changing economic conditions or regulatory examinations.
The increase in the allowance for loan losses from $2,854,000 at December 31,
1995 to $3,011,000 at March 31, 1996 reflects $257,000 of loan charge-offs
during the period, a provision for loan losses of $300,000 and recoveries of
$114,000. The charge-offs in 1996 primarily relate to loans on which a specific
reserve had been allocated at December 31, 1995 based on anticipated loss
exposure.
It is the Company's policy to charge-off loans against the allowance for loan
losses when losses are certain. Such decisions are based upon an analysis of the
loan, a judgment as to the borrower's ability to repay and the adequacy of
collateral.
<PAGE>
The following table summarizes other selected loan and allowance for loan losses
information at March 31, 1996, December 31, 1995 and March 31, 1995.
March 31, March 31,
December 31,
1996 1995 1995
-----------------------------------------------------------------------------
Allowance for loan losses $ 3,011 $ 2,854 $ 3,125
Nonaccrual loans 2,552 1,996 4,145
Nonperforming loans (1) 3,319 2,601 6,648
Allowance for loan losses
as a % of nonaccrual loans 118% 143% 75%
Allowance for loan losses
as a % of nonperforming loans 91% 110% 47%
Allowance for loan losses
as a % of loans outstanding 1.67% 1.60% 1.69%
(1) Includes nonaccrual loans, impaired loans and loans accruing 90 days or more
past due
Management is aware of its responsibility for maintaining an
adequate allowance for loan losses and an adequate system to
identify credit risk and account for it appropriately. The various
regulatory examinations of the Company have not identified
significant problem loans not already identified by management.
Management will continue to review the findings of regulatory
examinations and comply with regulatory recommendations.
A deterioration of economic conditions and real estate values would
adversely affect future results, leading to increased levels of
loan charge-offs, provision for loan losses and nonaccrual loans
and reductions in income and total capital.
The following table sets forth the activity in the allowance for
loan losses for three months ended March 31, 1996 and 1995.
1996 1995
-------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $2,854 $3,341
-------------------------------------------------------------------------
Loans charged-off:
Mortgage:
Secured by residential property 5 27
Commercial and other 161 422
Commercial 68 32
Home equity --- 35
Consumer and other 23 115
-------------------------------------------------------------------------
Total loans charged-off 257 631
Recoveries on amounts previously charged-off:
Mortgage:
Secured by residential property 3 ---
Commercial and other --- ---
Commercial 28 15
Home equity 10 4
Consumer and other 73 21
- -------------------------------------------------------------------------
Total recoveries 114 40
Net loans charged-off 143 591
Provision charged to operating expenses 300 375
- -------------------------------------------------------------------------
Balance, March 31, $3,011 $3,125
=========================================================================
Other Real Estate Owned
At March 31, 1996, the Company had no other real estate owned properties
("OREO") in its possession. At March 31, 1995 OREO totaled $291,000. OREO
properties are carried at the lower of cost or estimated fair value. During the
first quarter of 1995, the Bank recorded $60,000 of additional write-downs on
real estate properties. No other significant activity occurred during this
period. No properties were acquired, through foreclosure or acquisition, during
the first three months of 1996 and 1995, respectively.
Further material declines in the real estate market could cause increases in the
level of OREO, further losses or writedowns.
The following table summarizes the changes in OREO for three months ended March
31, 1996 and 1995.
1996 1995
- ------------------------------------------------------------
($ in thousands)
Balance, January 1, $ --- $ 352
- ------------------------------------------------------------
Write-downs --- (60)
Other --- (1)
- ------------------------------------------------------------
Balance, March 31, $ --- $ 291
============================================================
Other Operating Income
The following table sets forth other operating income for the three month
periods ended March 31, 1996 and 1995 and the percentage change from period to
period.
Three Months Ended % Change
March 31, 1996 vs
1996 1995 1995
- ------------------------------------------------------------------------------
($ in thousands)
Trust fees $ 456 $ 404 12.9%
Service charges on deposit accounts 329 342 (3.8)
Realized security gains (losses) - net --- (210) N/M
Loan sale gains - net 85 17 N/M
Mortgage servicing fees 32 31 3.2
Other 178 136 30.9
- ------------------------------------------------------------------------------
Total other operating income $ 1,080 $ 720 50.0%
==============================================================================
N/M = not measurable or not meaningful
Total other operating income for the first quarter of 1996 increased 50% from
the comparable period in 1995. This increase was due, in part, to a net loss of
$210,000 realized on the sale of securities in the available for sale portfolio
during 1995. The security losses were incurred in connection with the
repositioning of the available for sale portfolio into higher yielding
government agency securities. Excluding the securities loss in 1995, total other
operating income for the first three months of 1996 increased 16.1% over the
1995 period. Contributing factors are discussed below.
Trust fees increased $52,000, or 12.9%, to $456,000 in the first three months of
1996, primarily attributable to new wealth management and investment services
offered in the second quarter of 1995.
The other income category also increased $42,000 or 30.9% in 1996, as compared
to the same period in 1995, primarily due to the increase in letter of credit
fees and commissions collected from checkbook orders.
Loan sale gains in 1996 were positively impacted by the adoption of Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights" in the fourth quarter of 1995. SFAS 122 requires the
capitalization of the fair value of originated mortgage servicing rights in
connection with the sale of loans in the secondary market. During 1996, the
Company sold $3.1 million in residential mortgage loans while retaining the
rights to service these loans. Net gains of $66,000 were realized from the sale
of these loans which included the recognition of a servicing asset (originated
mortgage servicing rights) and origination fees that had been previously
collected and deferred in accordance with Statement of Financial Accounting
Standards No. 91. Additionally, residential mortgage loans totaling $1.7 million
were sold in the first quarter of 1996, servicing released, resulting in
realized net gains of $19,000. During the first quarter of 1995, $2.9 million in
residential mortgage loans were sold for a net gain of $17,000. The Company
utilizes loan sales as part of its asset/liability management program.
Negatively impacting total other operating income was a decline of 3.8% in the
first three months of 1996 in service charges on deposit accounts as compared to
the first three months of 1995. This decline is due, primarily, to a reduction
in fees related to commercial checking accounts.
Other Operating Expense
The following table sets forth other operating expense for the three month
periods ended March 31, 1996 and 1995, and the percentage change from period to
period.
Three Months Ended % Change
March 31, 1996 vs
1996 1995 1995
- ------------------------------------------------------------------------------
($ in thousands)
Salaries and benefits $ 1,509 $ 1,414 6.7%
Occupancy - net 397 359 10.6
Professional fees 274 203 35.0
Data processing 147 140 5.0
Furniture and equipment 78 76 2.6
Other insurance premiums 44 57 (22.8)
Other real estate owned - net --- 65 (100.0)
FDIC insurance premiums 1 176 (99.4)
Other 362 344 5.2
- ------------------------------------------------------------------------------
Total other operating expense $ 2,812 $ 2,834 (0.8)%
==============================================================================
N/M = not measurable or not meaningful
Total other operating expense decreased $22,000 or .8% from $2,834,000 in the
first quarter of 1995 to $2,812,000 in the first quarter of 1996. This decline
was realized despite the Company's expansion by opening an additional branch
facility during the third quarter of 1995. Contributing factors are discussed
below.
FDIC insurance premiums declined to minimum levels in 1996 based on the current
rate structure imposed by the FDIC and the Bank's classification as well
capitalized. The FDIA, as amended, establishes classifications for banks on the
basis of their capital levels. This classification, along with statutory limits
on the Bank Insurance Fund imposed by FDICIA, impact the amount of insurance
premiums the Company must pay.
During the first quarter of 1996, the Company did not incur any expense related
to other real estate owned as compared to $65,000 in the first quarter of 1995.
This decline was caused by the elimination of foreclosed properties during the
third quarter of 1995.
Other insurance premiums declined 22.8% to $44,000 in 1996 due to lower premium
costs as a result of the Company's improved financial condition and the
continued decline in commercial insurance rates.
Offsetting these decreases was an increase in salaries and benefits of 6.7% in
the first quarter of 1996, as compared to 1995, primarily as a result of
additional staffing added in the third quarter of 1995 for the new branch
facility, along with an increase in employee benefit costs.
Professional fees increased 35% to $274,000 in the first three months of 1996 as
compared to 1995 primarily as a result of costs associated with executive
compensation initiatives.
Occupancy expense increased 10.6% or $38,000 in the first quarter of 1996, over
1995, primarily due to expenses associated with the new branch facility which
opened during the third quarter of 1995. Data processing expense increased 5%
for the same period primarily due to outsourcing certain tax functions for the
Trust division.
In addition, the other expense category increased 5.2% in 1996 over the
comparable 1995 period primarily as a result of the reinstatement, during the
second quarter of 1995, of fees paid for directors services.
Income Taxes
Effective January 1, 1996, the Company is providing income taxes at regular
federal and state tax rates, having fully utilized the financial statement
benefit of its net operating loss carryforwards during 1995. See Note 3 to the
accompanying unaudited consolidated financial statements for further discussion.
Financial Condition
Total assets at March 31, 1996 aggregated $307,828,000 compared with
$312,917,000 at December 31, 1995. Total loans were $180,551,000 at March 31,
1996, versus $178,052,000 at December 31, 1995. Noninterest-bearing deposits
decreased to $69,685,000 at March 31, 1996, compared with $78,421,000 at
December 31, 1995. Interest-bearing deposits totaled $185,764,000 at March 31,
1996 versus $196,249,000 at December 31, 1995. The balance of short-term
borrowings was $25,084,000 at March 31, 1996 and $7,733,000 at December 31,
1995. For municipalities and selected commercial and retail customers, the Bank
also offers secured borrowings through repurchase agreements which are included
in short-term borrowings. Securities sold under repurchase agreements were
$10,775,000 at March 31, 1996 and $1,050,000 at December 31, 1995. The decline
at March 31, 1996 in noninterest and interest-bearing deposits, as compared to
December 31, 1995, can primarily be attributed to the seasonal increase in
deposits at year end, and the cyclical decline during the first quarter. As a
result of the decline in deposits at March 31, 1996, short-term borrowings
increased to $25,084,000 from $7,733,000 at December 31, 1995 to meet the
Company's funding requirements.
At March 31, 1996, the Company's available for sale securities portfolio totaled
$86,744,000 as compared to $85,338,000 at December 31, 1995. Securities
available for sale are carried at fair value, with any unrealized gains or
losses included as a separate component of stockholder's equity. The portfolio
at March 31, 1996 was comprised primarily of fixed rate U.S. Government Agency
debt and mortgage-backed securities.
Beginning December 31, 1992, banks were required to have a minimum risk-based
capital ratio of 8.00%. The Company's total capital as a percentage of
risk-weighted assets was 14.41% at March 31, 1996, as compared to 14.02% at
December 31, 1995.
An additional capital requirement is a minimum leverage ratio of Tier 1 capital
to total quarterly average assets (leverage ratio), which is intended to
supplement the risk-based capital guidelines. As discussed in Note 2 to the
accompanying unaudited consolidated financial statements, banks are expected to
meet a minimum Tier 1 leverage ratio of 3.00%. The Company's leverage ratio at
March 31, 1996 was 8.45%, exceeding the minimum requirements.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of
depositors who want to withdraw funds or borrowers who need assurance that
sufficient funds will be available to meet their credit needs. The objective of
liquidity management is to determine and maintain an appropriate level of liquid
interest-earning assets. Aside from cash on hand and due from banks, the Bank's
more liquid assets are Federal funds sold and securities available for sale. On
a daily basis, the Bank lends its excess funds to other commercial institutions
in need of Federal funds. Such cash and cash equivalents totaled $31,040,000 or
10.1% of total assets at March 31, 1996, as compared with $38,613,000 or 12.3%
of total assets at December 31, 1995. Securities available for sale were
$86,744,000 at March 31, 1996 compared with $85,338,000 at December 31, 1995.
Demand deposits, regular savings, money market accounts and NOW deposits from
consumer and commercial customers are a relatively stable, low cost source of
funds which comprise a substantial portion of funding of the Bank's
interest-earning assets. Other sources of asset liquidity include loan and
mortgage-backed security principal and interest payments, maturing securities
and loans, and earnings on investments.
In addition, the Bank has two unsecured lines of credit with correspondent banks
totaling $5,000,000. There were no borrowings under these lines at March 31,
1996.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At March 31, 1996, these
available lines amounted to $17.6 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. The Bank had $12.0 million in
short-term borrowings from the FHLBB at March 31, 1996.
Additional sources of liquidity are available to the Company through the Federal
Reserve Bank's discount window and the sale of certain investment securities to
securities firms and correspondent banks under repurchase agreements. Such
agreements are generally short-term. The outstanding balance of securities sold
under repurchase agreements at March 31, 1996 was $10,775,000. The discount
window, if needed, would allow the Company to cover any short-term liquidity
needs without reducing earning assets. At March 31, 1996, the Company did not
have any borrowings from the Federal Reserve Bank's discount window.
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1996 and in the foreseeable future. Bancorp has
minimal operations and therefore does not generate or utilize a significant
amount of funds. Dividends paid by the Company are funded utilizing proceeds
from the exercise of warrants and options and dividends received from the Bank
(although no dividends were paid by the Bank in 1995 or 1996). Proceeds from the
exercise of warrants and options may from time to time result in a loan to the
Bank by Bancorp. At March 31, 1996, Bancorp had loaned a total of $89,000 to the
Bank under such arrangement.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the State of Connecticut
Banking Commissioner, exceed the total of its net profits for that year combined
with its retained net profits from the preceding two years. These dividend
limitations can affect the amount of dividends payable to Bancorp as the sole
stockholder of the Bank, and therefore affect Bancorp's payment of dividends to
its stockholders.
The following table provides a summary of outstanding loan commitments and
standby letters of credit at March 31, 1996.
($ in thousands)
Loan commitments:
Residential mortgage $ 2,196
Commercial mortgage 1,032
Residential construction 1,857
- --------------------------------------------------------------------------------
Total 5,085
- --------------------------------------------------------------------------------
Lines of credit commitments:
Commercial 14,999
Home equity 16,814
Personal 2,351
- --------------------------------------------------------------------------------
Total 34,164
- --------------------------------------------------------------------------------
Commercial letters of credit 107
Standby letters of credit 3,080
- --------------------------------------------------------------------------------
Total commitments and letters of credit $ 42,436
================================================================================
Asset/Liability Management
The Bank's asset/liability management program focuses on maximizing net interest
income while minimizing balance sheet risk by maintaining what management
considers to be an appropriate balance between the volume of assets and
liabilities maturing or subject to repricing within the same interval.
Asset/liability management also focuses on maintaining adequate liquidity and
capital. Interest rate sensitivity has a major impact on the Bank's earnings.
Proper asset/liability management involves the matching of short-term interest
sensitive assets and liabilities to reduce interest rate risk. Interest rate
sensitivity is measured by comparing the dollar difference between the amount of
assets maturing or repricing within a specified time period and the amount of
liabilities maturing or repricing within the same time period. This dollar
difference is referred to as the rate sensitivity or maturity "GAP".
Management's goal is to maintain a cumulative one year GAP of under 10% of total
assets. At March 31, 1996, the cumulative one year GAP as a percentage of total
assets was 14.98%. As a result of the increase in interest rates during the
first quarter of 1996, certain callable investment securities have shifted since
December 31, 1995, from repricing in one year or less to maturing during the one
to five year period, causing the cumulative one year GAP to exceed 10% of total
assets. Although $7.6 million in investment securities mature, reprice or are
subject to call in one year or less, the total investment securities portfolio
of $86.7 million is classified as "available for sale". Therefore, management
has the ability to reposition the portfolio at any time to manage the impact of
interest rate shifts. The Bank concentrates on originating adjustable rate loans
to hold in its loan portfolio in order to reduce interest rate risk.
Deregulation of deposit instruments has allowed the Bank to generate deposit
liabilities whose repricing more closely matches that of its loans.
<PAGE>
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at March 31, 1996:
<TABLE>
<CAPTION>
Maturity/Repricing Intervals
- --------------------------------------------------------------------------------------------------------------------
Over
3 Months
3 Months through 1 - 5 Over 5
or Less 1 Year Years Years Total
- --------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans(1) $ 84,536 $ 47,320 $ 34,055 $ 12,088 $177,999
Investment securities 3,923 3,686 66,254 12,881 86,744
Federal funds sold and other 11,246 --- --- --- 11,246
- --------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 99,705 51,006 100,309 24,969 275,989
- --------------------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
NOW and Money market deposits 71,752 --- --- --- 71,752
Certificates of deposit and other 37,299 16,498 14,018 --- 67,815
Savings deposits 46,197 --- --- --- 46,197
Short-term borrowings 25,084 --- --- --- 25,084
- --------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 180,332 16,498 14,018 --- 210,848
====================================================================================================================
GAP $ (80,627) $ 34,508 $ 86,291 $ 24,969 $ 65,141
====================================================================================================================
Cumulative GAP $ (80,627) $ (46,119) $ 40,172 $ 65,141
====================================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 55% 77% 119% 131%
====================================================================================================================
(1) Excludes nonaccrual loans of $2,552,000, and is net of deferred loan fees of $305,000.
</TABLE>
The principal amount of each asset and liability is included in the above table
in the earliest period in which it matures, reprices or is subject to call.
Nonaccrual loans have been excluded from the rate-sensitive assets. Regular
savings accounts, money market accounts and NOW deposits have been included in
the "3 Months or Less" category. However, these deposits have historically
remained stable and are an integral part of the Bank's funding and
asset/liability management strategy.
Noninterest-bearing demand deposits of $69,685,000 have been excluded from the
table. These deposits, which also have historically been stable, are used to
fund net interest rate sensitive assets beyond three months.
One measure of interest rate sensitivity is the excess or deficiency of assets
that mature or reprice in one year or less. As shown in the preceding table,
rate-sensitive assets that mature or reprice in one year total $150,711,000 and
rate-sensitive liabilities that mature or reprice in one year total
$196,830,000. The resulting negative one year rate-sensitive GAP is $46,119,000.
During periods of declining interest rates, a negative GAP position can be
favorable if more rate-sensitive liabilities than rate-sensitive assets reprice
at lower rates, creating a favorable impact on net interest income. This impact
may be mitigated somewhat if the level of nonaccrual loans and other real estate
owned increases, resulting in a decrease in rate-sensitive assets. During a
rising rate environment, a negative rate GAP can be a disadvantage. However, the
impact of rising and falling interest rates on net interest income may not
directly correlate to the Company's GAP position since interest rate changes and
the timing of such changes can be impacted by management's actions as well as by
competitive and market factors. As interest rates change, rates earned on assets
do not necessarily move in parallel with rates paid on liabilities.
Capital Resources
Stockholders' equity increased to $24,461,000 at March 31, 1996 from $24,282,000
at December 31, 1995, primarily due to earnings of $980,000 offset, in part, by
a $338,000 dividend payment to stockholders and a net change of $499,000 in the
unrealized depreciation of the securities available for sale portfolio.
At March 31, 1996, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 8.45% and its total capital to risk-weighted asset ratio was 14.41%,
exceeding minimum requirements.
In February 1992, the Company completed a private placement of 46,700 investment
units, resulting in total proceeds of $4,670,000 and net proceeds, after
expenses, of $4,320,000. Each unit consists of one share of Series A
Noncumulative Convertible Preferred Stock and fifty warrants. These warrants
became exercisable on January 1, 1994 at an exercise price of $.75 per share. As
of March 31, 1996, 2,035,000 warrants had been exercised, resulting in total
proceeds of $1,526,250 to the Company. At March 31, 1996, there were 300,000
warrants outstanding. There is no assurance as to the number of warrants, if
any, that will be exercised in the future. All warrants expire on December 31,
1996.
Part II - Other Information
Item 1. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to their business, to which Bancorp or
the Bank is a party or to which any of their property is subject.
Item 2. Changes In Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of Bancorp's security holders during
the first quarter of 1996.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits that are filed with this Form 10-Q, or that are incorporated
herein by reference, are set forth below:
Exhibit No. Exhibit Description
- -------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as Exhibit
3(a) to Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-12936 ("1991 Form 10-K"), and incorporated herein by
reference.)
3(b) Certificate of Designation of Series A Convertible Preferred Stock of
Bancorp. (Filed as Exhibit 3(b) to 1991 Form 10-K, and incorporated
herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c) to Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
0-12936 ("1995 Form 10-K"), and incorporated herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to Annual
Report on Form 10-K for the year ended December 31, 1992, File No.
0-12936 ("1992 Form 10-K"), and incorporated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to Registration
Statement on Form S-1, File No. 2-93773, and incorporated herein by
reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate. (Filed as
Exhibit 4(b) to 1991 Form 10-K, and incorporated herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to 1991 Form
10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston Shopping
Center, Inc. (Filed as Exhibit 10(c) to Registration Statement on Form
S-1, File No. 2-93773, and incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and Weston
Shopping Center Associates, as amended by Modification dated July 1,
1993. (Filed as Exhibit 10(e) to Annual Report on Form 10-K for the
year ended December 31, 1989, File No. 0-12936, and as Exhibit 10(c)
to Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and incorporated
herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the Bank and
John Sherwood, Trustee. (Filed as Exhibit 10(e) to 1992 Form 10-K, and
incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank and William
L. Gault, Trustee. (Filed as Exhibit 10(f) to 1992 Form 10-K, and
incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991 between the Bank
and One Research Drive Associates Limited Partnership. (Filed as
Exhibit 10(h) to 1991 Form 10-K, and incorporated herein by
reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the Bank and
C.A.T.F. Limited Partnership. (Filed as Exhibit 10(f) to 1995 Form
10-K, and incorporated herein by reference.)
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
10(g) Employment Agreement among Michael H. Flynn, Bancorp and the Bank
dated August 31, 1989, as amended December 17, 1991, and November 13,
1995. (Filed as Exhibit 10(i)(1) to 1992 Form 10-K and Exhibit 10(g)
to 1995 Form 10-K, and incorporated herein by reference.)
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and the Bank
dated June 16, 1992, and as amended November 13, 1995. (Filed as
Exhibit 10(i)(1) to 1992 Form 10-K and as Exhibit 10(h) to 1995 Form
10-K, and incorporated herein by reference.)
10(i) Employment Agreement among Richard T. Cummings, Jr., Bancorp and the
Bank dated January 12, 1990, as amended December 17, 1991, and
November 13, 1995. (Filed as Exhibit 10(i)(1) to 1992 Form 10-K and as
Exhibit 10(i) to 1995 Form 10-K, and incorporated herein by
reference.)
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp and the
Bank dated February 23, 1995, and as amended November 13, 1995. (Filed
as Exhibit 10(g)(6) to 1994 Form 10-K and as Exhibit 10(j) to 1995
Form 10-K, and incorporated herein by reference.)
10(k) Employment Agreement among Richard L. Card, Bancorp and the Bank dated
November 15, 1993, and as amended November 13, 1995. (Filed as Exhibit
10(i)(4) to 1993 Form 10-K and as Exhibit 10(k) to 1995 Form 10-K, and
incorporated herein by reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated October
16, 1989 and as amended December 17, 1991. (Filed as Exhibit 10(i)(1)
to 1992 Form 10-K, and incorporated herein by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp dated
December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992 Form 10-K, and
incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp dated
December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992 Form 10-K, and
incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992 Form 10-K,
and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and Bancorp
dated September 2, 1993. (Filed as Exhibit 10(i)(5) to 1993 Form 10-K,
and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp dated
November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993 Form 10-K, and
incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B. Laudano, Jr. and
the Bank dated as of December 1, 1995. (Filed as Exhibit 10(r) to 1995
Form 10-K, and incorporated herein by reference.)
Exhibit Description
- --------------------------------------------------------------------------------
10(s) Split Dollar Insurance Agreement between Richard T. Cummings, Jr. and
the Bank dated as of December 1, 1995. (Filed as Exhibit 10(s) to 1995
Form 10-K, and incorporated herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card and the Bank
dated as of December 1, 1995. (Filed as Exhibit 10(t) to 1995 Form
10-K, and incorporated herein by reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated November 13,
1995, as amended November 29, 1995 and January 18, 1996. (Filed as
Exhibit 10(u) to 1995 Form 10-K, and incorporated herein by
reference.)
10(v) Trust under Supplemental Executive Retirement Plan between the Bank
and People's Bank, Trustee. (Filed as Exhibit 10(v) to 1995 Form 10-K,
and incorporated herein by reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit 10(m) to 1992
Form 10-K, and incorporated herein by reference.)
10(x) 1985 Incentive Stock Option Plan of Bancorp, as restated. (Filed as
Exhibit 10(n) to 1992 Form 10-K, and incorporated herein by
reference.)
10(y) 1995 Incentive Stock Option Plan of Bancorp. (Filed as Exhibit 10(y)
to 1995 Form 10-K, and incorporated herein by reference.)
11 Statement Regarding Computation of Per Share Earnings (Filed herewith)
27 Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K
No Form 8-K was filed by Bancorp during the first quarter of 1996.
EXHIBIT 99 (3)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
---------------------
OR
[ ] 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 0-12936
----------
Westport Bancorp, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1094350
--------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
87 Post Road East, Westport, Connecticut 06880
---------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 222-6911
---------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At July 31, 1996, there were 6,068,531 outstanding shares of Westport Bancorp,
Inc.'s common stock, par value $.01 per share.
1
<PAGE>
Part I -- Financial Information
Item 1 -- Financial Statements.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
<S> <C> <C>
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS:
Cash and due from banks $ 21,767 $ 24,113
Federal funds sold 13,500 14,500
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 35,267 38,613
- -------------------------------------------------------------------------------------------------------------------------
Securities available for sale, at market value 90,814 85,338
- -------------------------------------------------------------------------------------------------------------------------
Loans 182,680 178,052
Allowance for loan losses (3,121) (2,854)
- -------------------------------------------------------------------------------------------------------------------------
Loans - net 179,559 175,198
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment - net 3,478 4,933
Accrued interest receivable 2,251 2,247
Other assets 5,279 6,588
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $316,648 $312,917
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 78,953 $ 78,421
Interest-bearing deposits 179,938 196,249
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 258,891 274,670
- -------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 29,049 7,733
Other liabilities 3,593 6,232
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,533 288,635
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000
shares; outstanding 39,600 shares at June 30, 1996, 1 1
41,850 at December 31, 1995
Common stock - $.01 par value; authorized 20,500,000 shares; outstanding,
6,068,531 shares at June 30, 1996,
5,433,665 shares at December 31, 1995 60 54
Additional paid in capital 23,485 22,980
Retained earnings 2,495 1,285
Net unrealized depreciation on securities
available for sale, net of tax (926) (38)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,115 24,282
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $316,648 $312,917
=========================================================================================================================
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 4,114 $ 4,033 $ 8,123 $ 8,175
Securities 1,363 984 2,672 1,947
Federal funds sold and other 77 63 103 72
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 5,554 5,080 10,898 10,194
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 1,389 1,162 2,848 2,248
Short-term borrowings 227 335 405 657
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,616 1,497 3,253 2,905
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 3,938 3,583 7,645 7,289
Provision for loan losses 300 375 600 750
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,638 3,208 7,045 6,539
- ----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 490 465 946 869
Service charges on deposit accounts 370 344 699 686
Realized security gains (losses) - net 13 (23) 13 (233)
Loan sale gains - net --- 21 85 38
Mortgage service fees 34 34 65 65
Other 157 147 336 283
- ----------------------------------------------------------------------------------------------------------------------------
Total other operating income 1,064 988 2,144 1,708
- ----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 1,466 1,346 2,975 2,760
Occupancy - net 365 331 762 690
Professional fees 283 209 557 412
Data processing 143 142 290 282
Furniture and equipment 88 63 166 139
Other insurance premiums 46 55 90 112
FDIC insurance premiums 1 177 1 353
Other 395 406 758 815
- ----------------------------------------------------------------------------------------------------------------------------
Total other operating expense 2,787 2,729 5,599 5,563
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,915 1,467 3,590 2,684
Income taxes (benefit) 796 (115) 1,491 (558)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,119 $ 1,582 $ 2,099 $ 3,242
============================================================================================================================
Earnings Per Common Share $ 0.11 $ 0.15 $ 0.20 $ 0.32
============================================================================================================================
Weighted average number of common
shares and common equivalent
shares outstanding 10,579,196 10,377,543 10,556,441 10,191,198
============================================================================================================================
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
(unaudited)
Net
Unrealized
Appreciation/
Preferred Stock Common Stock (Depreciation)
-------------------- ------------------- Additional Retained on Securities
Number of Number of Paid in Earnings Available for Sale,
Shares Amount Shares Amount Capital (Deficit) Net of Tax Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 43,950 $ 1 3,211,752 $ 32 $21,459 $ (4,680) $ (414) $16,398
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 3,242 --- 3,242
Issuance of Common Stock -
Warrants exercised --- --- 1,972,000 20 1,459 --- --- 1,479
Employee Options exercised --- --- 9,000 --- 18 --- --- 18
Conversion of Preferred Stock (1,600) --- 160,000 1 (1) --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 798 --- 4 --- --- 4
Dividends -
Preferred Stock --- --- --- --- --- (85) --- (85)
Common Stock --- --- --- --- --- (107) --- (107)
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- 417 417
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 42,350 $ 1 5,353,550 $ 53 $22,939 $ (1,630) $ 3 $21,366
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 41,850 $ 1 5,433,665 $ 54 $22,980 $ 1,285 $ (38) $24,282
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 2,099 --- 2,099
Issuance of Common Stock -
Conversion of Preferred Stock (2,250) --- 225,000 2 (2) --- --- ---
Warrants exercised --- --- 325,500 3 242 --- --- 245
Dividend Reinvestment and
Stock Purchase Plan --- --- 1,116 --- 7 --- --- 7
Employee Options exercised --- --- 83,250 1 258 --- --- 259
Dividends -
Preferred Stock --- --- --- --- --- (358) --- (358)
Common Stock --- --- --- --- --- (531) --- (531)
Change in net unrealized depreciation
on securities available for sale,
net of tax --- --- --- --- --- --- (888) (888)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 39,600 $ 1 6,068,531 $ 60 $23,485 $ 2,495 $(926) $25,115
====================================================================================================================================
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
Six Months Ended
June 30,
1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,099 $ 3,242
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 600 750
Deferred tax provision (benefit) 1,420 (618)
Depreciation, amortization and accretion 416 420
Provision for and losses on other real estate owned - net --- 120
Loss on sale of bank premises-net 5 ---
Loan sale gains - net (85) (38)
Realized security (gains) losses - net (13) 233
Increase in accrued interest receivable (4) (170)
Decrease (increase) in other assets 479 (1,791)
Increase decrease in other liabilities (2,609) 54
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,308 2,202
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale 20,494 ---
Held to maturity --- 1,000
Proceeds from sales of securities -
Available for sale 6,027 21,399
Principal collected on securities 2,180 2,313
Purchases of securities -
Available for sale (35,748) (18,268)
Held to maturity --- (4,999)
Increase in loans - net (9,733) (3,627)
Loans repurchased by the FDIC --- 1,246
Proceeds from sale of bank premises 1,199 ---
Proceeds from sales of loans 4,857 9,034
Proceeds from sales of other real estate owned --- 161
Purchases of premises and equipment (89) (307)
-----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (10,813) 7,952
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in noninterest-bearing deposits - net 532 (3,747)
Decrease in interest-bearing deposits - net (16,311) (11,563)
Increase in short-term borrowings - net 21,316 13,892
Proceeds from issuance of Common Stock - net 511 1,501
Dividends (889) (192)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,159 (109)
-----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,346) 10,045
Cash and cash equivalents at beginning of year 38,613 17,924
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 35,267 $ 27,969
=======================================================================================================================
See notes to consolidated financial statements.
5
</TABLE>
<PAGE>
WESTPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Unaudited Financial Statements
The accompanying unaudited consolidated financial statements include the
accounts of Westport Bancorp, Inc. ("Bancorp") and its subsidiary, The Westport
Bank & Trust Company (the "Bank") (together, the "Company"). The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In preparing Bancorp's
interim financial statements, management has made estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
consolidated statements of condition and the reported amounts of revenues and
expenses for the periods. Actual future results could differ significantly from
these estimates. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been included.
Operating results are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1995.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
Note 2 - Merger Agreement
On June 21, 1996, Bancorp and the Bank entered into an Agreement and Plan of
Merger (the "Agreement") with HUBCO, Inc. ("HUBCO"). Pursuant to the Agreement,
at the Effective Time (as defined in the Agreement), the Company will be merged
with and into HUBCO (the "Merger") and HUBCO will be the surviving corporation.
At HUBCO's option, at the Effective Time, and simultaneously with the Merger,
the Bank will be merged (the "Bank Merger") with HUBCO's principal Connecticut
bank subsidiary (the "Connecticut Bank") or with another subsidiary of HUBCO, if
HUBCO has no Connecticut bank subsidiary at the Effective Time (the Connecticut
Bank or such other HUBCO subsidiary, sometimes hereinafter referred to as the
"Surviving Bank").
Pursuant to the Agreement, in the Merger, each share of common stock, $.01 par
value, of the Company ("WBI Common Stock"), issued and outstanding immediately
prior to the Effective Time (excluding treasury shares and shares held by HUBCO)
will be converted at the Effective Time into the right to receive 0.3225 of a
share of common stock, no par value, of HUBCO ("HUBCO Common Stock"). Each share
of Series A Convertible Preferred Stock, $.01 par value, of the Company ("WBI
Preferred Stock"), issued and outstanding immediately prior to the Effective
Time (excluding treasury shares, shares held by HUBCO and dissenting shares)
will be converted at the Effective Time into the right to receive one share of a
newly created series of HUBCO preferred stock having terms substantially
identical to those of the WBI
6
<PAGE>
Preferred Stock. All shares of WBI Common Stock and WBI Preferred Stock held by
the Company in its treasury or owned by HUBCO or by any of HUBCO's wholly-owned
subsidiaries, including Hudson United Bank, (other than shares held as trustee
or in a fiduciary capacity and shares held as collateral or in lieu of a debt
previously contracted) immediately prior to the Effective Time shall be
cancelled. Cash will be paid in lieu of fractional shares of HUBCO Common Stock.
Stock options which, as of the Effective Time, are outstanding and fully vested
and exercisable as to all of the shares of WBI Common Stock that are subject to
such option (including options that became exercisable as a result of the
transactions contemplated by the Agreement) (each a "Vested Stock Option") will
be converted at the Effective Time into HUBCO Common Stock, based upon the value
of the Vested Stock Option, to the extent permitted under the plans and
agreements under which such Vested Stock Options were granted (each Vested Stock
Option so converted, a "Converting Stock Option"). If conversion of any Vested
Stock Option is not permitted under the plan or agreement under which such
Vested Stock Option was granted without the consent of the optionee affected
thereby, Bancorp, in consultation with HUBCO, will use its reasonable best
efforts to obtain the consent of the necessary parties to amend such plan and/or
agreement to permit such conversion and to cause Vested Stock Options
outstanding at the Effective Time to be Converting Stock Options. Each stock
option outstanding at the Effective Time (i) which is not a Vested Stock Option
or (ii) which is a Vested Stock Option and which is not a Converting Stock
Option will be converted into an option to purchase HUBCO Common Stock based
upon the value of the stock option.
The Agreement provides that two nominees, designated by the Company and
acceptable to HUBCO (which persons shall be Michael H. Flynn and David A. Rosow,
unless HUBCO and the Company agree in writing to the contrary), will be duly
appointed by the Board of Directors of HUBCO to HUBCO's Board of Directors
effective at the Effective Time. Provision shall have been made such that three
nominees, designated by the Company and acceptable to HUBCO (which persons shall
include Michael H. Flynn and David A. Rosow, unless HUBCO and the Company agree
in writing to the contrary) and one person designated by Josiah T. Austin and
acceptable to HUBCO each shall have been appointed as directors of the Surviving
Bank (or shall continue as directors of the Bank if the Bank Merger is not
consummated at the Effective Time). HUBCO will have caused Michael H. Flynn to
be appointed President of the Connecticut Bank, subject to the condition that
Mr. Flynn amend his employment agreement so that none of Bancorp, the Bank,
HUBCO or any subsidiary of HUBCO will be required to make any payments or
provide any benefits which, if paid or provided, would constitute an "excess
parachute payment" (as defined in Section 280G of the Internal Revenue Code of
1986, as amended). HUBCO will have caused David A. Rosow to be appointed
Chairman of the Executive Committee of the HUBCO Board of Directors.
The Agreement is subject to a number of conditions including, but not limited
to, shareholder approval and approval of regulatory agencies including the State
of Connecticut Bank Commissioner and the Federal Reserve Bank of New York. HUBCO
expects to account for the Merger as a pooling of interests.
Expenses incurred by Bancorp in connection with the Merger will be deferred
pending completion of the Merger. Such expenses amounted to approximately
$100,000 as of June 30, 1996. Bancorp's management anticipates the Merger will
close during the fourth quarter of 1996.
7
<PAGE>
Note 3 - Regulatory Matters
During January 1996, representatives of the State of Connecticut Bank
Commissioner completed a routine examination of the Bank as of October 30, 1995.
Other than minor suggestions for improvements, there were no significant
examination findings which are believed to have potentially negative
implications for the Bank.
The Federal Reserve Board and the Federal Deposit Insurance Corporation ("FDIC")
require bank holding companies and banks, respectively, to comply with
guidelines based upon the ratio of capital to total assets adjusted for risk,
and the ratio of Tier 1 capital to total quarterly average assets (leverage
ratio).
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at June 30, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- -------------------------------------------------------------------------------------------------------------------
Total Capital to Risk-Weighted Assets 14.84% 8.0%
Tier 1 Capital to Risk-Weighted Assets 13.59 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 8.55 3.0(1)
<FN>
(1) An additional 1% to 2% is required for all but the most highly rated institutions.
</FN>
</TABLE>
The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), establishes five
classifications for banks on the basis of their capital levels: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At June 30, 1996, the Company
was "well capitalized" under FDIA, as amended, based upon the above capital
ratios. Deterioration of economic conditions and real estate values could
adversely affect future results, leading to increased levels of loan
charge-offs, provision for loan losses and nonaccrual loans, affecting the
ability of the Company to maintain the well capitalized classification, and
resulting in reductions in income and total capital.
Note 4 - Income Taxes
Effective January 1, 1996, the Company began providing income taxes at regular
federal and state tax rates, having fully recognized the financial statement
benefit of its net operating loss carryforwards in 1995. The Company's federal
and state income tax provision for the first six months of 1996, totaled
$1,491,000; cash payments for income taxes during the period totaled $100,000.
The Company's tax provision for the first six months of 1995 included a current
federal and state tax provision totaling $60,000 and a $618,000 benefit
resulting from
8
<PAGE>
the reversal of a portion of the previously established deferred tax valuation
allowance. For the six month period ended June 30, 1995, the Company made cash
payments for income taxes totaling $65,000.
As of June 30, 1996, the Company has aggregate net operating loss carryforwards
of approximately $3.8 million for federal purposes and $4.4 million for state
purposes to offset future income for tax return purposes.
At June 30, 1996, the Company had a net deferred tax asset of $2.0 million
representing anticipated future utilization of its net operating loss
carryforwards as an offset against future taxable income and other temporary
differences.
The $0.9 million tax effect relating to the unrealized loss on available for
sale securities during the first six months of 1996 is excluded from the
consolidated statement of cash flows because no cash was involved.
Note 5 - Earnings Per Share
Earnings per share are computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding.
For the quarters ended June 30, 1996 and 1995, the computation includes
5,689,465 and 4,763,227 weighted average shares outstanding, respectively, and
890,720 and 1,331,844 weighted average common equivalent shares, respectively,
under the treasury stock method. The earnings per share computations also
include 3,999,011 and 4,282,472 weighted average common shares in 1996 and 1995,
respectively, issuable upon the assumed conversion of preferred stock.
For the six month periods ended June 30, 1996 and 1995, the computation includes
5,629,550 and 4,010,532 weighted average shares outstanding, respectively, and
897,111 and 1,842,241 weighted average common equivalent shares, respectively,
under the treasury stock method. The earnings per share computations also
include 4,029,780 and 4,338,425 weighted average shares in 1996 and 1995,
respectively, issuable upon the assumed conversion of preferred stock.
There was no difference between primary and fully diluted earnings per share in
the second quarters of 1996 and 1995 or in the six month periods ended June 30,
1996 and 1995.
Note 6 - New Accounting Standards
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS 121 did not have an impact on the Company's
consolidated financial statements.
9
<PAGE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The adoption of SFAS 123 did not have an impact on
the Company's consolidated financial statements.
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
---------------------------------------------------------------------------
Results of Operations
Overview
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations, including fees
generated by its Trust department. Net interest income is the difference between
interest earned on the loan and investment portfolios and interest paid on
deposits and other sources of funds. Noninterest income is primarily the result
of fees generated by the Trust department, charges related to transaction
activity from commercial and retail checking accounts and gains from loan and
securities sales.
The Company reported net income for the first six months of 1996 of $2,099,000,
or $0.20 per common share, compared to net income of $3,242,000 or $0.32 per
common share for the comparable 1995 period. Effective January 1, 1996, the
Company began providing income taxes at regular federal and state tax rates,
having fully utilized the financial statement benefit of its net operating loss
carryforwards in 1995. The 1996 second quarter and first six month period tax
provision of $0.8 and $1.5 million, respectively, compares with a $0.1 and $0.6
million tax benefit recognized during the same periods in 1995 . Excluding
non-recurring gains and losses from the sale of loans and/or investment
securities, the Company's pretax earnings from core operations were $3,492,000
for the six months ended June 30, 1996, an increase of 21% from core earnings of
$2,879,000 for the first six months of 1995. Contributing to the improved
pre-tax results for the first six months of 1996, as compared to the same period
in 1995, was a 35% decline in nonperforming assets and an increase in average
earning assets, which resulted in a 7% increase in interest income. In addition,
a reduction in the provision for loan losses as a result of the overall
improvement in the credit quality of the loan portfolio, an increase in Trust
fee income, a reduction in FDIC insurance premiums and the elimination of
realized security losses contributed to improved pre-tax earnings.
During the second quarter of 1996, net income was $1,119,000, or $0.11 per
common share, compared to net income of $1,582,000, or $0.15 per common share
for the comparable 1995 period. Excluding non-recurring gains and losses, the
Company's second quarter pre-tax earnings from core operations were $1,902,000,
which represented a 29% increase from $1,469,000 for the comparable 1995 period.
Contributing to the improvement in results in the second quarter of 1996,
compared to the same period of 1995, was an increase of 9% in average
interest-earning assets, increases in fee income, a reduction in the provision
for loan losses and a reduction in FDIC insurance premiums.
10
<PAGE>
Negatively impacting earnings for the second quarter and first six months of
1996 was an increase in the cost and volume of average interest-bearing
liabilities, an increase in salaries and benefits associated with the opening of
a new branch facility during the third quarter of 1995 and an increase in
professional fees related to executive compensation initiatives and corporate
legal fees.
Bancorp's leverage ratio at June 30, 1996 was 8.55%, and its total capital to
risk-weighted asset ratio was 14.84%, which exceeded current minimum
requirements. See Note 3 to the accompanying consolidated financial statements
for further discussion of regulatory matters.
The Company's results for 1996 continued to be impacted by the sluggish regional
economy and real estate market. However, during 1995 and the first six months of
1996, management has seen some positive trends, including the increased
stabilization of the local economy, reduction in vacancy rates, and renewed
activity in the real estate market, which have had a positive effect on
earnings. A deterioration of the economy and/or real estate values would
adversely affect results in 1996 and beyond, and could lead to increased levels
of loan charge-offs, the provision for loan losses and nonaccrual loans and
reductions in income and total capital.
On June 21, 1996, Bancorp and the Bank entered into the Agreement and Plan of
Merger with HUBCO. See Note 2 to the financial statements for a further
discussion of the Agreement.
Net Interest Income
Net interest income is the difference between interest earned on loans and other
investments and interest paid on deposits and other sources of funds. Net
interest income is affected by a number of variables. One such variable is the
interest rate spread, which represents the difference between the yield on total
average interest-earning assets and the cost of total average
noninterest-bearing and interest-bearing liabilities.
Net interest income was $7,645,000 in the first six months of 1996, compared
with $7,289,000 in the comparable 1995 period, an increase of 4.9% or $356,000.
For the second quarter of 1996, net interest income increased $355,000 to
$3,938,000, or 9.9% over the 1995 second quarter figure of $3,583,000. Factors
impacting interest income and expense are discussed below.
Total interest income amounted to $10,898,000 for the first six months of 1996,
compared to $10,194,000 for the same period in 1995, an increase of 6.9%. A key
factor relating to the higher level of total interest income for the first six
months of 1996, compared to the same period for 1995, was an increase in average
earning assets of $18.4 million or 7.2%, to $274,898,000 from $256,480,000. This
increase in volume during the 1996 period resulted in an additional $615,000 of
interest income. The average balance of investment securities, as a component of
earning assets, experienced the most significant increase from $68,372,000 in
1995 to $88,565,000 in 1996, an increase of 29.5%. During the first six month
period of 1996, the yield on average interest-earning assets decreased slightly
to 7.9% from 8.0% in 1995. Negatively impacting the first six months of 1996 was
a 24.2% increase, from December 31, 1995, in nonaccrual loans. Positively
impacting the second quarter of 1996, average earning assets increased
$23,697,000 to $279,465,000, an increase of 9.3%, increasing interest income by
$390,000. In addition, average non-accruing loans declined 40.4% to $2,635,000
in the second quarter of 1996 from $4,424,000 in the second quarter of 1995.
11
<PAGE>
Total interest expense for the first six months of 1996 was $3,253,000, an
increase of 12.0% from $2,905,000 for the same period in 1995. This increase is,
in part, the result of a 3.7% increase in average interest-bearing liabilities.
For the first six month period of 1996, average interest-bearing liabilities
increased to $201,265,000 from $194,138,000 for the comparable 1995 period,
resulting in an increase in interest expense of $261,000. In addition, average
interest costs on interest-bearing liabilities for the first six month period of
1996 increased to 3.2% from 3.0% for the comparable 1995 period, resulting in
additional interest expense of $87,000. For the second quarter of 1996, interest
expense increased $119,000 or 7.9%, primarily due to the 6.3% increase in
average interest-bearing liabilities. Positively impacting results during the
three and six month periods ended June 30, 1996 was an increase of 10.3% and
8.0%, respectively, in the average balance of noninterest-bearing liabilities as
compared to the same periods in 1995.
Net interest margin represents net interest income divided by average
interest-earning assets. For the first six months of 1996, the net interest
margin declined to 5.6% from 5.7% in the comparable 1995 period. For the second
quarter of 1996, the net interest margin remained unchanged at 5.6% as compared
to the second quarter of 1995. The net interest margin in 1996 was negatively
impacted by the increase in average interest-bearing liabilities and associated
costs offset, in part, by the increase in average interest-earning assets.
Total interest income for the comparable periods of 1996 and 1995 was negatively
impacted by the level of nonaccrual loans, averaging $2,456,000 and $4,333,000
for the first six months of 1996 and 1995, respectively. Further improvement in
net interest income is dependent, in part, upon the continued resolution of
nonperforming assets.
12
<PAGE>
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related
interest-income and expense for the three months ended June 30, 1996 and 1995.
Average balances are averages of daily closing balances.
<TABLE>
<CAPTION>
Three Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Accruing loans $181,244 $4,114 9.1% $179,459 $4,033 9.0%
Non-accruing loans 2,635 --- --- 4,424 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 183,879 4,114 9.0 183,883 4,033 8.8
Investment securities 89,713 1,363 6.1 67,729 984 5.8
Federal funds sold
and other 5,873 77 5.2 4,156 63 6.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $279,465 5,554 8.0 $255,768 5,080 8.0
======== ----- ======== -----
Noninterest-bearing
demand deposits $ 72,927 --- --- $ 66,133 --- ---
Interest-bearing
liabilities:
NOW and Money market 72,710 311 1.7 66,222 273 1.7
Savings 46,424 230 2.0 52,116 257 2.0
Certificates of deposit 66,441 839 5.1 50,106 620 5.0
Other 18,139 236 5.2 23,267 347 6.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 203,714 1,616 3.2 191,711 1,497 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
deposits and interest-
bearing liabilities $276,641 1,616 2.3 $257,844 1,497 2.3
======== ----- ======== -----
Net interest income(1) $3,938 $3,583
==================================================================================================================================
Net interest margin(2) 5.6% 5.6%
==================================================================================================================================
Interest rate spread(3) 5.7% 5.7%
==================================================================================================================================
<FN>
(1) Interest income includes fees on loans of $109,000 and $49,000 for 1996 and 1995, respectively.
(2) Net interest margin is net interest income divided by total average earning
assets.
(3) Interest rate spread is the difference between the yield on total average
interest-earning assets and the cost of total average noninterest-bearing
deposits and interest-bearing liabilities.
</FN>
</TABLE>
13
<PAGE>
The following table sets forth a comparison of average earning assets,
nonaccrual loans, average interest-bearing liabilities and related
interest-income and expense for the six months ended June 30, 1996 and 1995.
Average balances are averages of daily closing balances.
<TABLE>
<CAPTION>
Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Accruing loans $179,946 $8,123 9.1% $181,375 $8,175 9.1%
Non-accruing loans 2,456 --- --- 4,333 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 182,402 8,123 8.9 185,708 8,175 8.9
Investment securities 88,565 2,672 6.0 68,372 1,947 5.7
Federal funds sold
and other 3,931 103 5.2 2,400 72 6.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $274,898 10,898 7.9 $256,480 10,194 8.0
======== ------ ======== ------
Noninterest-bearing
demand deposits $ 70,928 --- --- $ 65,687 --- ---
Interest-bearing
liabilities:
NOW and Money market 70,803 614 1.7 67,814 536 1.6
Savings 45,919 454 2.0 54,413 536 2.0
Certificates of deposit 68,337 1,762 5.2 48,710 1,156 4.8
Other 16,206 423 5.2 23,201 677 5.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 201,265 3,253 3.2 194,138 2,905 3.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
deposits and interest-
bearing liabilities $272,193 3,253 2.4 $259,825 2,905 2.3
======== ----- ======== -----
Net interest income(1) $7,645 $7,289
==================================================================================================================================
Net interest margin(2) 5.6% 5.7%
==================================================================================================================================
Interest rate spread(3) 5.5% 5.7%
==================================================================================================================================
<FN>
(1) Interest income includes fees on loans of $180,000 and $106,000 for 1996 and 1995, respectively.
(2) Net interest margin is net interest income divided by total average earning
assets.
(3) Interest rate spread is the difference between the yield on total
averageinterest-earning assets and the cost of total average
noninterest-bearing deposits and interest-bearing liabilities.
</FN>
</TABLE>
14
<PAGE>
The following table analyzes the changes attributable to the rate and volume
components of net interest income.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 vs 1995 1996 vs 1995
Increase/(decrease) Increase/(decrease)
due to change in(1): due to change in(1):
Total Total
Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 40 $ 41 $ 81 $ (27) $ (25) $ (52)
Investment securities 332 47 379 605 120 725
Federal funds sold and other 18 (4) 14 37 (6) 31
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 390 84 474 615 89 704
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-bearing
liabilities:
NOW & Money market 27 11 38 25 53 78
Savings (28) 1 (27) (81) (1) (82)
Certificate of deposit 206 13 219 502 104 606
Other (72) (39) (111) (185) (69) (254)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 133 (14) 119 261 87 348
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 257 $ 98 $ 355 $ 354 $ 2 $ 356
====================================================================================================================================
<FN>
(1) Variances were computed as follows:
Variance due to rate = change in rate multiplied by old volume. Variance
due to volume = change in volume multiplied by old rate.
Variance due to rate/volume prorated to rate and variance volumes on the basis of gross value.
</FN>
</TABLE>
15
<PAGE>
Nonperforming Assets
The following table sets forth the principal portion of loans with principal or
interest payments contractually past due 90 days or more, nonaccrual loans,
impaired loans and other real estate owned at June 30, 1996, December 31, 1995
and June 30, 1995.
<TABLE>
<CAPTION>
% Change % Change
June 30, June 30,
1996 vs 1996 vs
June 30, Dec. 31, June 30, Dec. 31, June 30,
1996 1995 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due, on accrual status:
Mortgage:
Secured by residential
property $ 50 $ 5 $ 454 N/M% (89)%
Commercial and other 628 --- --- N/M N/M
Home equity --- 149 150 (100) (100)
Consumer and other --- 4 16 (100) (100)
- --------------------------------------------------------------------------------------------------------------------------------
678 158 620 329 9
- --------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgage:
Secured by residential
property 591 85 656 N/M (10)
Commercial and other 950 1,098 1,098 (13) (13)
Commercial 938 813 1,700 15 (45)
- --------------------------------------------------------------------------------------------------------------------------------
2,479 1,996 3,454 24 (28)
- --------------------------------------------------------------------------------------------------------------------------------
Impaired accruing loans 1,048 447 2,373 N/M (56)
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 4,205 2,601 6,447 62 (35)
Other real estate owned 60 --- 71 N/M (15)
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,265 $ 2,601 $ 6,518 64% (35)%
================================================================================================================================
N/M = not measurable or not meaningful.
</TABLE>
The increase in nonperforming loans at June 30, 1996, as compared to December
31, 1995 is, in part, attributable to the addition of four nonaccrual loans
totaling $0.6 million which are secured by residential property. In addition,
one commercial mortgage totaling $0.8 million was added to impaired loans and
two commercial mortgage loans were ninety days past due as of June 30, 1996.
However, management believes all of these loans are well secured and is
aggressively pursuing the collection of these loans.
16
<PAGE>
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of these loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The adoption of SFAS
114 and 118 on January 1, 1995 has not materially affected the Company's
financial statements or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments received on nonaccruing impaired loans are recorded as
reductions of loan principal.
At June 30, 1996, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS 114 and 118 totaled $3,527,000, of which
$2,479,000 were nonaccrual loans. At June 30, 1996, the valuation allowance
related to all impaired loans totaled $790,000 and is included in the allowance
for loan losses. For the three months ended June 30, 1996, the average recorded
investment in impaired loans was approximately $3.7 million. Total interest in
the amount of $24,700 was recognized on accruing impaired loans during the
quarter.
At June 30, 1996, the Company had no commitments to lend additional funds to
borrowers with loans that have been classified as impaired. The level of
nonperforming assets has had a significant negative impact on the Company's
capital and earnings over the last five years. Although management recognizes
that the level of nonperforming assets is still high, it is encouraged by the
downward trend since 1990 and the 35% decline from June 30, 1995 to June 30,
1996.
It is the Company's policy to discontinue the accrual of interest on loans,
including impaired loans, when, in the opinion of management, a reasonable doubt
exists as to the timely collection of the amounts due. Additionally, regulatory
requirements generally prohibit the accrual of interest on certain loans when
principal or interest is due and remains unpaid for 90 days or more, unless the
loan is both well secured and in the process of collection.
Operating results since 1989 have been adversely impacted by the level of
nonperforming assets caused by the deterioration of borrowers' ability to make
scheduled interest and principal payments caused primarily by the decline in
real estate values, a severe slowdown in business activity and a high rate of
unemployment. In addition to foregone revenue, the Company has had to provide a
high level of provision for loan losses and has incurred significant collection
costs and costs associated with the management and disposition of foreclosed
properties. However, during 1994 and 1995 and continuing into 1996, management
has seen some positive trends including the increased stabilization of the local
economy, reduction in vacancy rates, and renewed activity in the real estate
market, which have had a positive effect on earnings.
17
<PAGE>
The characteristics of the real estate market since 1989 include a substantial
decline in real estate property values and a significant increase in the amount
of time that properties remain on the market prior to sale. Factors contributing
to the depressed market conditions are an over supply of properties on the
market and a continued sluggish local economy. As a result, the most significant
increases in nonperforming loans since 1989 have been in commercial mortgage
loans, residential mortgage loans and real estate related commercial loans.
Management has seen some recent improvement in the real estate market and the
local economy, which has had a positive effect on its efforts to resolve
nonperforming loans. Management is aggressively pursuing the collection of all
nonperforming loans. Management's efforts to return nonperforming loans to
performing status may be hampered by market factors.
The following table summarizes the activity on nonaccrual loans for the periods
ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
% Change
June 30,
1996 vs
June 30,
1996 1995 1995
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Balance, January 1, $ 1,996 $ 4,316 (54)%
- -------------------------------------------------------------------------------------------------------------------------
Additions 1,418 1,200 18
- -------------------------------------------------------------------------------------------------------------------------
Less:
Repayments 297 1,379 (78)
Charge-offs 318 160 99
Reinstate accruing 260 523 (50)
Transfer to OREO 60 --- N/M
- -------------------------------------------------------------------------------------------------------------------------
Total resolved 935 2,062 (55)
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, $ 2,479 $ 3,454 (28)%
=========================================================================================================================
N/M = not measurable or not meaningful.
</TABLE>
Included in the additions for the first six months of 1996 are four loans
totaling $0.6 million which are secured by residential properties. Management
believes these loans are well secured and is aggressively pursuing the
collection of these loans.
In addition to the loans classified as nonperforming in the preceding table, the
Bank's internal loan review function has identified approximately $1.4 million
of loans with more than normal credit risk. Management believes the payment
history of these loans indicates the borrowers may have difficulty in the future
in meeting all of the terms of the contractual agreements. These loans, as well
as nonperforming loans, have been considered in the analysis of the adequacy of
the allowance for loan losses.
18
<PAGE>
Allowance for Loan Losses
Management evaluates the adequacy of the allowance for loan losses on a regular
basis by considering various factors, including past loan loss experience,
delinquent and nonperforming loans and the quality and level of collateral
securing these loans, inherent risks in the loan portfolio, and current economic
and real estate market conditions. Management has performed a loan-by-loan risk
assessment of each classified loan and of a substantial portion of the
performing commercial and commercial mortgage portfolios resulting in a specific
reserve based on loss exposure. An additional general reserve is also allocated
to each of these portfolios as well as to the residential mortgage and other
loan portfolios on an overall basis, based upon the risk category and loss
experience of the given portfolio. Based upon this review, management believes
that, in the aggregate, the allowance of $3,121,000 at June 30, 1996 is adequate
to absorb probable loan losses inherent in the loan portfolio. The adverse real
estate market in Fairfield County, the Company's past reliance upon commercial
real estate lending, the level of charge-offs during the past five years and the
level of nonperforming loans are factors which are considered when the adequacy
of the allowance for loan losses is reviewed. There is no assurance that the
Company will not be required to make increases to the allowance in the future in
response to changing economic conditions or regulatory examinations.
The increase in the allowance for loan losses from $2,854,000 at December 31,
1995 to $3,121,000 at June 30, 1996 reflects $469,000 of loan charge-offs during
the period, a provision for loan losses of $600,000 and recoveries of $136,000.
The charge-offs in 1996 primarily relate to loans on which a specific reserve
had been allocated at December 31, 1995 based on anticipated loss exposure.
It is the Company's policy to charge-off loans against the allowance for loan
losses when losses are certain. Such decisions are based upon an analysis of the
loan, a judgment as to the borrower's ability to repay and the adequacy of
collateral.
The following table summarizes other selected loan and allowance for loan losses
information at June 30, 1996, December 31, 1995 and June 30, 1995.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses $ 3,121 $ 2,854 $ 3,041
Nonaccrual loans 2,479 1,996 3,454
Nonperforming loans (1) 4,205 2,601 6,447
Allowance for loan losses
as a % of nonaccrual loans 126% 143% 88%
Allowance for loan losses
as a % of nonperforming loans 74% 110% 47%
Allowance for loan losses
as a % of loans outstanding 1.71% 1.60% 1.70%
(1) Includes nonaccrual loans, impaired loans and loans accruing 90 days or more
past due.
</TABLE>
19
<PAGE>
Management is aware of its responsibility for maintaining an adequate allowance
for loan losses and an adequate system to identify credit risk and account for
it appropriately. The recent regulatory examination of the Company did not
identify significant problem loans not already identified by management.
Management will continue to review the findings of regulatory examinations and
comply with regulatory recommendations.
A deterioration of economic conditions and real estate values would adversely
affect future results, leading to increased levels of loan charge-offs,
provision for loan losses and nonaccrual loans and reductions in income and
total capital.
The following table sets forth the activity in the allowance for loan losses for
the six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
Balance, January 1, $2,854 $3,341
- -----------------------------------------------------------------------------------------------------------------
Loans charged-off:
Mortgage:
Secured by residential property 5 162
Commercial and other 206 648
Commercial 185 150
Home equity 25 35
Consumer and other 48 119
- -----------------------------------------------------------------------------------------------------------------
Total loans charged-off 469 1,114
Recoveries on amounts previously charged-off:
Mortgage:
Secured by residential property 4 ---
Commercial 42 27
Home equity 13 4
Consumer and other 77 33
- -----------------------------------------------------------------------------------------------------------------
Total recoveries 136 64
Net loans charged-off 333 1,050
Provision charged to operating expenses 600 750
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, $3,121 $3,041
=================================================================================================================
</TABLE>
20
<PAGE>
Other Real Estate Owned
Other real estate owned properties ("OREO") totalled $60,000 and $71,000 at June
30, 1996 and 1995, respectively, which amounts are included in Other Assets in
the consolidated statements of condition. During the second quarter of 1996, the
Company acquired a residential property through foreclosure, carried at $60,000.
No other activity occurred in 1996.
During the first six months of 1995, the Bank recorded $120,000 in write-downs
on real estate properties and sold a real estate property with a carrying value
of $161,000, which resulted in a gain of $19,000 during the second quarter of
1995. No other significant activity occurred during this period. No properties
were acquired, through foreclosure or acquisition, during the first six months
of 1995. OREO properties are carried at the lower of cost or estimated fair
value.
Further material declines in the real estate market could cause increases in the
level of OREO, further losses or writedowns.
The following table summarizes the changes in OREO for the six months ended June
30, 1996 and 1995.
1996 1995
- --------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ --- $ 352
- --------------------------------------------------------------------------------
Additions 60 ---
Sales --- (161)
Write-downs --- (120)
- --------------------------------------------------------------------------------
Balance, June 30, $ 60 $ 71
================================================================================
21
<PAGE>
Other Operating Income
The following table sets forth other operating income for the three month and
six month periods ended June 30, 1996 and 1995, and the percentage change from
period to period.
<TABLE>
<CAPTION>
Three Months Ended % Change Six Months Ended % Change
June 30, 1996 vs June 30, 1996 vs
1996 1995 1995 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------------
($ in thousands) ($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Trust fees $ 490 $ 465 5.4% $ 946 $ 869 8.9%
Service charges on deposit accounts 370 344 7.6 699 686 1.9
Realized security gains (losses) - net 13 (23) N/M 13 (233) N/M
Loan sale gains --- 21 (100) 85 38 N/M
Mortgage servicing fees 34 34 --- 65 65 ---
Other 157 147 6.8 336 283 18.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total other operating income $ 1,064 $ 988 7.7% $ 2,144 $ 1,708 25.5%
====================================================================================================================================
N/M = not measurable or not meaningful.
</TABLE>
Total other operating income for the first six months of 1996 increased 25.5%
from the comparable period in 1995. This increase was due, in part, to a net
loss of $233,000 realized on the sale of securities in the available for sale
portfolio during 1995. The security losses were incurred in connection with the
repositioning of the available for sale portfolio into higher yielding
government agency securities. Excluding the securities loss in 1995, other
operating income increased 10.5% in 1996 over the comparable 1995 period. For
the second quarter of 1996, total other operating income increased 7.7% to
$1,064,000 from $988,000 for the same period in 1995. Contributing factors are
discussed below.
Trust fees increased $25,000, or 5.4% to $490,000 in the second quarter of 1996
and 8.9% for the first six months of 1996 as compared to the respective 1995
periods. This increase is primarily attributable to the new wealth management
and investment services offered.
Service charges on deposit accounts increased 7.6% and 1.9% for the second
quarter of 1996 and the first six months of 1996, respectively, as compared to
the same periods in 1995. This increase was due primarily to the increased
volume of insufficient fund charges.
The other income category increased 6.8% and 18.7%, for the three month and six
month periods ended June 30, 1996, respectively, over the same periods in 1995,
primarily due to increased letter of credit fees and commissions collected from
checkbook orders.
Loan sale gains in 1996 were positively impacted by the adoption of Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights" in the fourth quarter of 1995. SFAS 122 requires the
capitalization of the fair value of originated mortgage servicing rights in
connection with the sale of loans in the secondary market. During 1996, the
Company sold $3.1 million in residential mortgage loans while retaining the
rights to service these loans. Net gains of $66,000 were realized from the sale
of these loans which included the recognition of a servicing asset
22
<PAGE>
(originated mortgage servicing rights) and origination fees that had been
previously collected and deferred in accordance with Statement of Financial
Accounting Standards No. 91. Additionally, residential mortgage loans totaling
$1.7 million were sold in the first six months of 1996, servicing released,
resulting in realized net gains of $19,000. During the first six months of 1995,
$9.0 million in residential mortgage loans were sold for a net gain of $38,000.
The Company utilizes loan sales as part of its asset/liability management
program.
Other Operating Expense
The following table sets forth other operating income and other operating
expense for the three month and six month periods ended June 30, 1996 and 1995,
and the percentage change from period to period.
<TABLE>
<CAPTION>
Three Months Ended % Change Six Months Ended % Change
June 30, 1996 vs June 30, 1996 vs
1996 1995 1995 1996 1995 1995
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands) ($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 1,466 $ 1,346 8.9% $ 2,975 $ 2,760 7.8%
Occupancy - net 365 331 10.3 762 690 10.4
Professional fees 283 209 35.4 557 412 35.2
Data processing 143 142 0.7 290 282 2.8
Furniture and equipment 88 63 39.7 166 139 19.4
Other insurance premiums 46 55 (16.4) 90 112 (19.6)
FDIC insurance premiums 1 177 (99.4) 1 353 (99.7)
Other 395 406 (2.7) 758 815 (7.0)
- -------------------------------------------------------------------------------------------------------------------------------
Total other operating expense $ 2,787 $ 2,729 2.1% $ 5,599 $ 5,563 0.6%
===============================================================================================================================
N/M = not measurable or not meaningful.
</TABLE>
For the six months ended June 30, 1996, total other operating expense increased
$36,000 or 0.6% to $5,599,000 from $5,563,000 for the comparable period in 1995.
Total other operating expense, during the second quarter of 1996, increased 2.1%
to $2,787,000 from $2,729,000 during the second quarter of 1995. Impacting both
periods was the Company's expansion by opening an additional branch facility
during the third quarter of 1995. Additional contributing factors are discussed
below.
FDIC insurance premiums declined to minimum levels in 1996 based on the current
rate structure imposed by the FDIC and the Bank's classification as well
capitalized. The FDIA, as amended, establishes classifications for banks on the
basis of their capital levels. This classification, along with statutory limits
on the Bank Insurance Fund imposed by FDICIA, impact the amount of insurance
premiums the Company must pay.
Other insurance premiums declined 16.4% to $46,000 in the second quarter of 1996
and 19.6% for the six month period ended June 30, 1996 due to lower premium
costs as a result of the Company's improved financial condition and the
continued decline in commercial insurance rates.
23
<PAGE>
Offsetting these decreases was an increase in salaries and benefits of 8.9% in
the second quarter of 1996 and 7.8% for the first six month period in 1996, as
compared to the same periods in 1995, primarily as a result of additional
staffing added in the third quarter of 1995 for the new branch facility, along
with an increase in employee benefit costs, and costs associated with incentive
programs.
Professional fees increased 35.4% and 35.2% in the second quarter and first six
months of 1996, respectively, when compared to the same periods in 1995
primarily as a result of costs associated with executive compensation
initiatives and corporate legal fees.
Occupancy expense increased 10.3% or $34,000 in the second quarter of 1996 and
10.4% or $72,000 in the first six months of 1996 over the related periods in
1995, primarily due to expenses associated with the new branch facility which
opened during the third quarter of 1995. Furniture and equipment expense
increased 39.7% and 19.4%, for the three and six month periods ended June 30,
1996, respectively, over comparable 1995 periods, primarily due to property
taxes associated with new data processing equipment purchased in 1995.
Income Taxes
Effective January 1, 1996, the Company began providing income taxes at regular
federal and state tax rates, having fully utilized the financial statement
benefit of its net operating loss carryforwards during 1995. See Note 4 to the
accompanying unaudited consolidated financial statements for further discussion.
Financial Condition
Total assets at June 30, 1996 aggregated $316,648,000 compared with $312,917,000
at December 31, 1995. Total loans were $182,680,000 at June 30, 1996, versus
$178,052,000 at December 31, 1995. Noninterest-bearing deposits increased to
$78,953,000 at June 30, 1996, compared with $78,421,000 at December 31, 1995.
Interest-bearing deposits totaled $179,938,000 at June 30, 1996 versus
$196,249,000 at December 31, 1995. The decline at June 30, 1996 in
interest-bearing deposits, as compared to December 31, 1995, can primarily be
attributed to the seasonal increase in deposits at year end, and the cyclical
decline during 1996. Short-term borrowings were $29,049,000 at June 30, 1996 and
$7,733,000 at December 31, 1995. For municipalities and selected commercial and
retail customers, the Bank also offers repurchase agreements, which are included
in short-term borrowings. Securities sold under repurchase agreements were
$20,469,000 at June 30, 1996 and $1,050,000 at December 31, 1995. As a result of
the decline in deposits at June 30, 1996, short-term borrowings, including
repurchase agreements, increased $21,316,000 from December 31, 1995 to meet the
Company's funding requirements.
At June 30, 1996, the Company's available for sale securities portfolio totaled
$90,814,000 as compared to $85,338,000 at December 31, 1995. Securities
available for sale are carried at estimated fair market value, with any
unrealized gains or losses included as a separate component of stockholder's
equity. The portfolio at June 30, 1996 was comprised primarily of fixed rate
U.S. government agency debt and mortgage-backed securities.
24
<PAGE>
Beginning December 31, 1992, banks were required to have a minimum risk-based
capital ratio of 8.00%. The Company's total capital as a percentage of
risk-weighted assets was 14.84% at June 30, 1996, as compared to 14.02% at
December 31, 1995.
An additional capital requirement is a minimum leverage ratio of Tier 1 capital
to total quarterly average assets (leverage ratio), which is intended to
supplement the risk-based capital guidelines. As discussed in Note 3 to the
accompanying unaudited consolidated financial statements, banks are expected to
meet a minimum Tier 1 leverage ratio of 3.00%. The Company's leverage ratio at
June 30, 1996 was 8.55%, exceeding the minimum requirements.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of
depositors who want to withdraw funds or borrowers who need assurance that
sufficient funds will be available to meet their credit needs. The objective of
liquidity management is to determine and maintain an appropriate level of liquid
interest-earning assets. Aside from cash on hand and due from banks, the Bank's
more liquid assets are Federal funds sold and securities available for sale. On
a daily basis, the Bank lends its excess funds to other commercial institutions
in need of Federal funds. Such cash and cash equivalents totaled $35,267,000 or
11.1% of total assets at June 30, 1996, as compared with $38,613,000 or 12.3% of
total assets at December 31, 1995. Securities available for sale were
$90,814,000 at June 30, 1996 compared with $85,338,000 at December 31, 1995.
Demand deposits, regular savings, money market accounts and NOW deposits from
consumer and commercial customers are a relatively stable, low cost source of
funds which comprise a substantial portion of funding of the Bank's
interest-earning assets. Other sources of asset liquidity include loan and
mortgage-backed security principal and interest payments, maturing securities
and loans, and earnings on investments.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At June 30, 1996, these
available lines amounted to $18.3 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. The Bank had $6.0 million in
short-term borrowings from the FHLBB at June 30, 1996.
In addition, the Bank has two unsecured lines of credit with correspondent banks
totaling $5,000,000. There were no borrowings under these lines at June 30,
1996.
Additional sources of liquidity are available to the Company through the Federal
Reserve Bank's discount window and the sale of certain investment securities to
securities firms and correspondent banks under repurchase agreements. Such
agreements are generally short-term. The outstanding balance of securities sold
under repurchase agreements at June 30, 1996 was $20,469,000. The discount
window, if needed, would allow the Company to cover any short-term liquidity
needs without reducing earning assets. At June 30, 1996, the Company did not
have any borrowings from the Federal Reserve Bank's discount window.
25
<PAGE>
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1996 and in the foreseeable future. Bancorp has
minimal operations and therefore does not generate or utilize a significant
amount of funds. Dividends paid by the Company are funded utilizing proceeds
from the exercise of warrants and options and dividends received from the Bank.
In the second quarter of 1996, the Bank declared a dividend totaling $0.5
million which was paid to Bancorp on July 10, 1996. Proceeds from the exercise
of warrants and options may from time to time result in a loan to the Bank by
Bancorp. At June 30, 1996, Bancorp had loaned a total of $89,000 to the Bank
under such arrangement.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the State of Connecticut
Banking Commissioner, exceed the total of its net profits for that year combined
with its retained net profits from the preceding two years. These dividend
limitations can affect the amount of dividends payable to Bancorp as the sole
stockholder of the Bank, and therefore affect Bancorp's payment of dividends to
its stockholders.
The following table provides a summary of outstanding loan commitments and
standby letters of credit at June 30, 1996.
($ in thousands)
Loan commitments:
Residential mortgage $ 3,630
Commercial mortgage 152
Residential construction 2,358
- ----------------------------------------------------------------------
Total 6,140
- ----------------------------------------------------------------------
Lines of credit commitments:
Commercial 14,004
Home equity 17,389
Personal 2,352
- ----------------------------------------------------------------------
Total 33,745
- ----------------------------------------------------------------------
Commercial letters of credit 26
Standby letters of credit 3,909
- ----------------------------------------------------------------------
Total commitments and letters of credit $ 43,820
======================================================================
Asset/Liability Management
The Bank's asset/liability management program focuses on maximizing net interest
income while minimizing balance sheet risk by maintaining what management
considers to be an appropriate balance between the volume of assets and
liabilities maturing or subject to repricing within the same interval.
Asset/liability management also focuses on maintaining adequate liquidity and
capital. Interest rate sensitivity has a major impact on the Bank's earnings.
Proper asset/liability management involves the matching of short-term interest
sensitive assets and liabilities to reduce interest rate risk. Interest rate
sensitivity is measured by comparing the dollar difference between the amount of
assets maturing or repricing within a specified time period and the amount of
liabilities maturing or repricing within the same time period. This dollar
difference is referred to as the rate sensitivity or maturity "GAP".
26
<PAGE>
Management's goal is to maintain a cumulative one year GAP of under 10% of total
assets. At June 30, 1996, the cumulative one year GAP as a percentage of total
assets was 9.05%. As a result of the increase in interest rates during the first
six months of 1996, certain callable investment securities since December 31,
1995, have shifted from repricing in one year or less to maturing during the one
to five year period, causing the cumulative one year GAP to approach 10% of
total assets. Although $22.7 million in investment securities mature, reprice or
are subject to call in one year or less, the total investment securities
portfolio of $90.8 million is classified as "available for sale". Therefore,
management has the ability to reposition the portfolio at any time to manage the
impact of interest rate shifts. The Bank concentrates on originating adjustable
rate loans to hold in its loan portfolio in order to reduce interest rate risk.
Deregulation of deposit instruments has allowed the Bank to generate deposit
liabilities whose repricing more closely matches that of its loans.
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at June 30, 1996:
<TABLE>
<CAPTION>
Maturity/Repricing Intervals
- ----------------------------------------------------------------------------------------------------------------------------
Over
3 Months
3 Months through 1 - 5 Over 5
or Less 1 Year Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
$ in thousands)
<S> <C> <C> <C> <C> <C>
Loans(1) $ 78,801 $ 49,584 $ 39,437 $ 12,379 $180,201
Investment securities 17,153 5,536 57,859 10,266 90,814
Federal funds sold and other 13,927 --- --- --- 13,927
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 109,881 55,120 97,296 22,645 284,942
- ----------------------------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
NOW and Money market deposits 77,368 --- --- --- 77,368
Certificates of deposit and other 20,198 21,109 15,326 --- 56,633
Savings deposits 45,937 --- --- --- 45,937
Short-term borrowings 29,049 --- --- --- 29,049
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 172,552 21,109 15,326 --- 208,987
============================================================================================================================
GAP $ (62,671) $ 34,011 $ 81,970 $ 22,645 $ 75,955
============================================================================================================================
Cumulative GAP $ (62,671) $ (28,660) $ 53,310 $ 75,955
============================================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 64% 85% 125% 136%
============================================================================================================================
(1) Excludes nonaccrual loans of $2,479,000, and is net of deferred loan fees of $309,000.
</TABLE>
27
<PAGE>
The principal amount of each asset and liability is included in the above table
in the earliest period in which it matures, reprices or is subject to call.
Nonaccrual loans have been excluded from the rate-sensitive assets. Regular
savings accounts, money market accounts and NOW deposits have been included in
the "3 Months or Less" category. However, these deposits have historically
remained stable and are an integral part of the Bank's funding and
asset/liability management strategy.
Noninterest-bearing demand deposits of $78,953,000 have been excluded from the
table. These deposits, which also have historically been stable, are used to
fund net interest rate sensitive assets beyond three months.
One measure of interest rate sensitivity is the excess or deficiency of assets
that mature or reprice in one year or less. As shown in the preceding table,
rate-sensitive assets that mature or reprice in one year total $165,001,000 and
rate-sensitive liabilities that mature or reprice in one year total
$193,661,000. The resulting negative one year rate-sensitive GAP is $28,660,000.
During periods of declining interest rates, a negative GAP position can be
favorable if more rate-sensitive liabilities than rate-sensitive assets reprice
at lower rates, creating a favorable impact on net interest income. This impact
may be mitigated somewhat if the level of nonaccrual loans and other real estate
owned increases, resulting in a decrease in rate-sensitive assets. During a
rising rate environment, a negative rate GAP can be a disadvantage. However, the
impact of rising and falling interest rates on net interest income may not
directly correlate to the Company's GAP position since interest rate changes and
the timing of such changes can be impacted by management's actions as well as by
competitive and market factors. As interest rates change, rates earned on assets
do not necessarily move in parallel with rates paid on liabilities.
Capital Resources
Stockholders' equity increased to $25,115,000 at June 30, 1996 from $24,282,000
at December 31, 1995, primarily due to earnings of $2,099,000 offset by dividend
payments totaling $889,000 to stockholders and a net change of $888,000 in the
unrealized depreciation of the securities available for sale portfolio.
At June 30, 1996, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 8.55% and its total capital to risk-weighted asset ratio was 14.84%,
exceeding minimum requirements.
In February 1992, the Company completed a private placement of 46,700 investment
units, resulting in total proceeds of $4,670,000 and net proceeds, after
expenses, of $4,320,000. Each unit consists of one share of Series A
Noncumulative Convertible Preferred Stock and fifty warrants. These warrants
became exercisable on January 1, 1994 at an exercise price of $.75 per share. As
of June 30, 1996, all warrants totaling 2,335,000 had been exercised, resulting
in total proceeds of $1,751,250 to the Company.
28
<PAGE>
Part II - Other Information
---------------------------------------------------------------------------
Item 1. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to their business, to which Bancorp or
the Bank is a party or to which any of their property is subject.
Item 2. Changes In Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Shareholders of Westport Bancorp, Inc. was
held on May 16, 1996. The following matters were submitted to a vote:
(i) Appointment of Auditors:
The appointment of Arthur Andersen LLP as the independent
auditors for fiscal year ending December 31, 1996 was ratified.
Of 9,648,531 votes entitled to be cast, 8,702,357 were cast -
8,661,547 for, 30,134 against, 10,676 abstained.
(ii) Election of Directors:
The nominees for director set forth in the proxy statement
received the following votes out of 9,648,531 entitled to be
cast.
Name For Withheld
---- --- --------
George H. Damman 8,663,966 38,391
Michael H. Flynn 8,663,903 38,454
William L. Gault 8,663,903 38,454
Kurt B. Hersher 8,663,903 38,454
William E. Mitchell 8,659,266 43,091
David A. Rosow 8,663,903 38,454
William D. Rueckert 8,663,966 38,391
Jay Sherwood 8,663,903 38,454
29
<PAGE>
(iii) Adoption of the proposed amendment to the Restated Certificate
of Incorporation of Bancorp.
The adoption of the proposed amendment to the Restated
Certificate of Incorporation of Bancorp was approved. Of
9,648,531 votes entitled to be cast, 8,702,357 were cast -
8,245,139 for, 72,045 against, 134,720 abstained.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits that are filed with this form 10-Q, or that are incorporated
herein by reference, are set forth below:
30
<PAGE>
Exhibit No. Exhibit Description
------------------------------------------------------------------------
2 Agreement and Plan of Merger dated June 21, 1996 among HUBCO,
Inc., Bancorp and the Bank. (Filed as Exhibit 2 to Form 8-K
filed on July 3, 1996, and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 0-12936 ("1991 Form 10-K"), and
incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible Preferred
Stock of Bancorp. (Filed as Exhibit 3(b) to 1991 Form 10-K, and
incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c) to
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-12936 ("1995 Form 10-K"), and incorporated herein by
reference.)
3(d) Certificate of Amendment of Restated Certificate of
Incorporation, as amended, of Bancorp. (Filed herewith.)
3(e) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to Annual
Report on Form 10-K for the year ended December 31, 1992, File
No. 0-12936 ("1992 Form 10-K"), and incorporated herein by
reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to 1991
Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to Registration
Statement on Form S-1, File No. 2- 93773, and incorporated
herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and Weston
Shopping Center Associates, as amended by Modification dated
July 1, 1993. (Filed as Exhibit 10(e) to Annual Report on Form
10-K for the year ended December 31, 1989, File No. 0-12936, and
as Exhibit 10(c) to Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-12936 ("1993 Form 10-K"),
respectively, and incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the Bank
and John Sherwood, Trustee. (Filed as Exhibit 10(e) to 1992 Form
10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank and
William L. Gault, Trustee. (Filed as Exhibit 10(f) to 1992 Form
10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991 between the
Bank and One Research Drive Associates Limited Partnership.
(Filed as Exhibit 10(h) to 1991 Form 10-K, and incorporated
herein by reference.)
31
<PAGE>
10(f) Fairfield branch lease dated March 20, 1995 between the Bank and
C.A.T.F. Limited Partnership. (Filed as Exhibit 10(f) to 1995
Form 10-K, and incorporated herein by reference.)
10(g) Shelton branch lease dated May 20, 1996 between the Bank and
Robert D. Scinto. (Filed herewith.)
10(h) Employment Agreement among Michael H. Flynn, Bancorp and the
Bank dated April 23, 1996. (Filed as Exhibit 10(g) to Annual
Report on Form 10-K/A for the year ended December 31, 1995, File
No. 0-12936 ("1995 Form 10-K/A"), and incorporated herein by
reference.)
10(i) Employment Agreement among Thomas P. Bilbao, Bancorp and the
Bank dated April 23, 1996. (Filed as Exhibit 10(h) to 1995 Form
10-K/A, and incorporated herein by reference.)
10(j) Employment Agreement among Richard T. Cummings, Bancorp and the
Bank dated April 23, 1996. (Filed as Exhibit 10(i) to 1995 Form
10-K/A, and incorporated herein by reference.)
10(k) Employment Agreement among William B. Laudano, Jr., Bancorp and
the Bank dated April 23, 1996. (Filed as Exhibit 10(j) to 1995
Form 10-K/A, and incorporated herein by reference.)
10(l) Employment Agreement among Richard L. Card, Bancorp and the Bank
dated November 15, 1993, as amended November 13, 1995. (Filed as
Exhibit 10(i)(4) to 1993 Form 10-K and Exhibit 10(k) to 1995
Form 10-K, respectively, and incorporated herein by reference.)
10(m) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989, as amended December 17, 1991. (Filed as
Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated herein by
reference.)
10(n) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992 Form
10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992 Form
10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3) to
1992 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5) to
1993 Form 10-K, and incorporated herein by reference.)
10(r) Stock Option Agreement between Richard L. Card and Bancorp dated
November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993 Form 10-K,
and incorporated herein by reference.)
10(s) Incentive Stock Option Agreement between Michael H. Flynn and
Bancorp dated May 16, 1996. (Filed herewith.)
32
<PAGE>
10(t) Incentive Stock Option Agreement between Thomas P. Bilbao and
Bancorp dated May 16, 1996. (Filed herewith.)
10(u) Split Dollar Insurance Agreement between William B. Laudano, Jr.
and the Bank dated as of December 1, 1995. (Filed as Exhibit
10(r) to 1995 Form 10-K, and incorporated herein by reference.)
10(v) Split Dollar Insurance Agreement between Richard T. Cummings,
Jr. and the Bank dated as of December 1, 1995. (Filed as Exhibit
10(s) to 1995 Form 10-K, and incorporated herein by reference.)
10(w) Split Dollar Insurance Agreement between Richard L. Card and the
Bank dated as of December 1, 1995. (Filed as Exhibit 10(t) to
1995 Form 10-K, and incorporated herein by reference.)
10(x) Supplemental Executive Retirement Plan of Bancorp dated November
13, 1995, as amended November 29, 1995, January 18, 1996 and May
16, 1996. (Plan dated November 13, 1995 and amendments dated
November 29, 1995 and January 18, 1996 filed as Exhibit 10(u) to
1995 Form 10-K, and incorporated herein by reference).
(Amendment dated May 16, 1996 filed as Exhibit 10(u) to 1995
Form 10-K/A, and incorporated herein by reference.)
10(y) Trust under Supplemental Executive Retirement Plan between the
Bank and People's Bank, Trustee, as amended June 20, 1996.
(Trust dated November 13, 1995 filed as Exhibit 10(v) to 1995
Form 10-K, and incorporated herein by reference.) (Amendment
dated June 20, 1996 filed herewith.)
10(z) Directors Retirement Plan of Bancorp. (Filed as Exhibit 10(m) to
1992 Form 10-K, and incorporated herein by reference.)
10(aa) 1985 Incentive Stock Option Plan 1990 Restatement of Bancorp.
(Filed as Exhibit 10(n) to 1992 Form 10-K, and incorporated
herein by reference.)
10(bb) Amended and Restated 1995 Incentive Stock Option Plan of
Bancorp. (Filed as Exhibit 10(y) to 1995 Form 10-K/A, and
incorporated herein by reference.)
11 Statement Regarding Computation of Per Share Earnings. (Filed
herewith.)
27 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K
Bancorp filed a Form 8-K on July 3, 1996 with respect to an Agreement and
Plan of Merger by and among HUBCO, Inc., the Bank and Bancorp dated as of
June 21, 1996.
33
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Pursuant to Section 13, or 15(d) of the Securities Exchange Act
of 1934 Date of Report (Date of earliest
event reported) June 21, 1996
WESTPORT BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 0-12936 06-1094350
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
87 Post Road East, Westport, Connecticut 06880
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 222-6911
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 1. Changes in Control of Registrant.
---------------------------------
On June 21, 1996, Westport Bancorp, Inc. (the "Company") entered into
an Agreement and Plan of Merger (the "Agreement") by and among HUBCO, Inc.
("HUBCO"), the Company and The Westport Bank & Trust Company (the "Bank").
Pursuant to the Agreement, at the Effective Time (as defined in the Agreement),
the Company shall be merged with and into HUBCO (the "Merger") and HUBCO shall
be the surviving corporation. At HUBCO's option, at the Effective Time, and
simultaneously with the Merger, the Bank shall be merged (the "Bank Merger")
with HUBCO's principal Connecticut bank subsidiary (the "Connecticut Bank" or
the "Surviving Bank").
Pursuant to the Agreement, in the Merger, each share of common stock,
$.01 par value, of the Company ("WBI Common Stock"), issued and outstanding
immediately prior to the Effective Time (other than dissenting shares and
excluding treasury shares and shares held by HUBCO) shall be converted at the
Effective Time into the right to receive 0.3225 of a share of common stock, no
par value, of HUBCO ("HUBCO Common Stock"). Each share of Series A Convertible
Preferred Stock, $.01 par value, of the Company ("WBI Preferred Stock"), issued
and outstanding immediately prior to the Effective Time (excluding treasury
shares, shares held by HUBCO and dissenting shares) shall be converted at the
Effective Time into the right to receive one share of a newly created series of
HUBCO preferred stock having terms substantially identical to those set forth on
Exhibit 2.1(a) to the Agreement. Cash shall be paid in lieu of fractional shares
of HUBCO Common Stock.
Stock options which, as of the Effective Time, are outstanding and
fully vested and exercisable as to all of the shares of WBI Common Stock that
are subject to such option (including options that became exercisable as a
result of the transactions contemplated by the Agreement) (each a "Vested Stock
Option") shall be converted at the Effective Time into HUBCO Common Stock to the
extent permitted under the plans and agreements under which such Vested Stock
Options were granted (each Vested Stock Option so converted, a "Converting Stock
Option"). Each stock option outstanding at the Effective Time (i) which is not a
Vested Stock Option or (ii) which is a Vested Stock Option and which is not a
Converting Stock Option shall be converted into an option to purchase HUBCO
Common Stock. At the Effective Time, each warrant to purchase shares of WBI
Common Stock which is outstanding at the Effective Time shall be converted into
a like warrant to purchase HUBCO Common Stock.
The Agreement provides that two nominees, designated by the Company and
acceptable to HUBCO (which persons shall be Michael H. Flynn and David A. Rosow,
unless HUBCO and the Company shall agree in writing to the contrary),
<PAGE>
shall be duly appointed by the Board of Directors of HUBCO to HUBCO's Board of
Directors effective at the Effective Time. Provision shall have been made such
that three nominees, designated by the Company and acceptable to HUBCO (which
persons shall include Michael H. Flynn and David A. Rosow, unless HUBCO and the
Company agree in writing to the contrary) and one person designated by Josiah T.
Austin and acceptable to HUBCO each shall have been appointed as directors of
the Surviving Bank (or shall continue as directors of the Bank if the Bank
Merger is not consummated at the Effective Time). HUBCO also shall cause Michael
H. Flynn to be elected President of the Connecticut Bank and David A. Rosow to
be appointed Chairman of the Executive Committee of the HUBCO Board of
Directors.
The Agreement is attached as Exhibit 2 hereto, and incorporated by
reference herein.
Item 7. Financial Statements and Exhibits.
----------------------------------
c. Exhibits
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Exhibit No. Description
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2 Agreement and Plan of Merger
