UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File number:
0-11786
VILLAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1076844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Prospect Street, Ridgefield, Ct. 06877
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203 438-9551
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Name of each exchange on which registered:
Common Stock ($3.33 Par Value) NASDAQ
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section13 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 report(s), 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 the 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. [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 17, 1997
Common Stock ($3.33 Par Value) 952,317 Shares
State the aggregate market value of the voting stock held by non-affiliates
of the registrant - $17,368,199.
Aggregrate market value Based upon reported closing price
of voting stock as supplied by NASDAQ
$20,236,736 March 17, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1996 are incorporated by reference into parts I, II and IV. Portions of the
Proxy Statement for the Annual Meeting of Stockholders to be held on April 28,
1997 are incorporated by reference into Part III. Exhibit index is on page 6.
<PAGE>
VILLAGE BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.......................................................1
Item 2. Properties.....................................................2
Item 3. Legal Proceedings..............................................2
Item 4. Submission Of Matters to Vote of Security Holders..............3
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters..................................3
Item 6. Selected Financial Data........................................3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................3
Item 8. Financial Statements and Supplementary Data....................3
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................3
PART III
Item 10. Directors and Executive Officers of the Registrant.............3
Item 11. Executive Compensation.........................................3
Item 12. Security Ownership of Certain Beneficial Owners
and Management...............................................3
Item 13. Certain Relationships and Related Transactions.................4
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..........................................4
SIGNATURES .................................................................5
EXHIBIT INDEX...............................................................6
<PAGE>
PART I
Item 1. Business
"Business" on pages 4 through 9 of the Annual Report to Stockholders for the
year ended December 31, 1996 is incorporated herein by reference.
Additional information required pursuant to this Item follows:
Village Bancorp, Inc.
The management of The Village Bank & Trust Company (Village) caused Village
Bancorp, Inc. (Company) to be formed in 1983 to enhance the opportunity for
diversification and expansion, and to allow for greater flexibility in both
banking and non-banking functions which banks are prohibited from entering. On
July 19, 1983, the Bank became a wholly owned subsidiary of the Company. On
November 18, 1994, Liberty National Bank (Liberty), Danbury, Connecticut became
a wholly owned subsidiary of the Company. On June 20, 1995, the Company merged
Liberty into Village and now operates Liberty's former office as a branch office
of Village. As a combination of entities under common control the merger was
accounted for in a manner similiar to a pooling of interests. As such, all
historical financial data presented in the annual report has been restated to
include both entities for all periods presented. As of December 31, 1996 the
Company's only subsidiary was Village.
The Village Bank & Trust Company
The Village Bank & Trust Company was incorporated in 1973 and commenced
operations in 1974. The Bank maintains its headquarters in Ridgefield,
Connecticut where it conducts general banking business as a state chartered
commercial bank as allowed by Sec. 36-57 of the Connecticut General Statutes.
The Bank began offering trust and similiar services in the third quarter of
1993. Liberty was merged into Village in June 1995, with its former office now a
Village branch. The Bank intends to offer services in the future that will allow
the Bank to remain competitive with other financial institutions as regulations
permit.
Patents, Trademarks, Licenses and Concessions Held
There are no patents, trademarks, licenses or concessions held that have a
material importance to the Company.
Seasonal Variations In Business
The Bank experiences little or no seasonal variation in it's business due to the
retail composition of it's customer base.
Dependence Upon Limited Number Of Customers
The Bank is not materially dependent on any single person, group of persons or
organization. The loss of any customer or group of related customers would not
have a materially adverse effect on the continued operation of the Bank.
Competition
The Bank encounters substantial competition for deposits and loans from other
financial institutions. Vigorous competition exists between the Bank and other
branch offices of financial institutions in Danbury, New Milford, Wilton and
Ridgefield, including commercial banks, savings banks and savings and loan
associations. No one financial institution is dominant in any particular
function of the banking market place.
Number of Employees
At December 31, 1996, Village had seventy-seven (77) full time equivalent
employees. Of these employees two officers of Village provide services to the
Company.
Supervision and Regulation
Village is insured by the Federal Deposit Insurance Corporation (FDIC) and is
subject to extensive regulation by the FDIC. Village, as a Connecticut state
chartered bank, is also subject to regulation by the Connecticut State Banking
Commissioner, who is responsible for administering Connecticut banking laws.
(Bancorp, as a bank holding company, is also subject to regulation by the
Federal Reserve Board.)
-1-
<PAGE>
The FDIC has adopted regulations which require FDIC-insured banks to meet
certain minimum capital requirements. Banks that have less than the minimum
required capital are considered to be operating in an unsafe and unsound
condition, and are subject to a number of possible regulatory enforcement
actions, ranging from being required to acquire additional capital up to
termination of the Bank's FDIC deposit insurance.
Until recently most legislation had been aimed at increasing capital levels in
the banking industry and restricting business for those who fail to meet
adequate capital levels. As the Company is well capitalized the majority of this
legislation has had little effect on the operation or financial condition of the
Company. Legislation and proposed legislation most recently has been addressing
the area of risk, specifically interest rate risk. Essentially it is looking for
the banking industry to have a comprehensive risk management process in place,
that effectively identifies, measures, monitors and controls interest rate risk
exposures. Other regulatory actions focus on risk management (i.e. credit risk)
and the proper use of internal controls. Proposed legislation runs a wide gamut
of proposals. It is not possible at this time to predict whether or not any such
proposals will have any adverse effect on the Company, although management does
not expect any material adverse effect on the financial condition of the
Company.
Item 2. Properties
Village owns in fee simple a self contained facility at 25 Prospect Steet,
Ridgefield, Connecticut. The site contains 0.929 acres. The building has two
floors, the first floor which approximates 5,500 square feet is the location of
the general banking area, board room and President's office. The second floor,
which approximates 5,000 square feet, is the location of the administrative
offices, loan operations department, sanitary and employee facilities.
Village entered into a lease agreement on April 5, 1985 for a branch banking
facility at 219 Town Green, Wilton, Connecticut. The leasehold contains two
thousand six hundred forty five (2,645) square feet, that the Bank uses for its
branch banking office. The lease arrangement is for ten years with two five year
extensions options that can be exercised by the Bank. The lease has provisions
for consumer price index increases, and the current annual rental expense is
$75,343 not including property tax and maintenance charges. This facility was
opened November 16, 1985 and is a full service branch banking office.
Village extended a lease agreement on March 31, 1993, for a non-branch
operations (back-office) facility at 96 Danbury Road, Ridgefield, Connecticut.
The leasehold contains approximately six thousand (6,000) square feet of office
space and one thousand (1,000) square feet of storage space. The original lease
arrangement was for five years with provisions for two five year extensions, at
an annual rental of approximately $90,870, not including property tax and
maintenance charges. This lease originally commenced November, 1988, with five
percent annual increases. Four stockholders, two of whom are Directors, are
affiliated with the partnership which is leasing the facility to the Bank.
Village owns in fee simple a self contained facility at 54 Bridge Street, New
Milford, Connecticut. The site contains 0.16 acres. The building has two floors.
The first floor, which approximates 1,700 square feet, is the location of the
general banking office. The second floor, which approximates 1,524 square feet,
will be used for offices and loan originations and closings.
Village has a lease agreement for a branch banking facility at 28 Shelter Rock
Road, Danbury, Connecticut, that extends through October 31, 2001. The leasehold
contains approximately two thousand four hundred sixty (2,460) square feet. The
annual rental is approximately $39,360, not including property and maintenance
charges.
Village is in the process of building a three-story, 17,000 square foot building
on Parcel 3 of the Danbury Redevelopment Area on National Place, in Danbury,
Connecticut, which it will own. Construction is expected to be completed near
the end of the second quarter of 1997. The first floor will contain a full
service branch banking office. The second and third floor will be used for
non-branch operations offices.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
-2-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
"Capital Stock" on page 35 of the Annual Report to Stockholders for the year
ended December 31, 1996 is incorporated herin by reference.
Item 6. Selected Financial Data
"Selected Financial Data" on page 9 of the Annual Report to Stockholders for the
year ended December 31, 1996 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 10 to 13 of the Annual Report to Stockholders for the year
ended December 31, 1996 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes thereto on pages 15 to 32 of the
Annual Report to Stockholders for the year ended December 31, 1996 and the
Independent Auditors' Report on page 14 are incorporated herein by reference.
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
Information relating to directors and executive officers of the Registrant and
Bank and the information required by this item are included in the proxy
statement for the annual meeting of stockholders to be held on April 28, 1997,
on pages 11 through 17 and the information required by this item is herein
incorporated by reference.
Item 11. Executive Compensation
Compensation of directors and officers and the information required by this item
are included in the proxy statement for the annual meeting of stockholders to be
held on April 28, 1997, on pages 18 through 23 and the information required by
this item is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners and
management as required by this item is included in the proxy statement for the
annual meeting of stockholders to be held on April 28, 1997, on pages 6 through
10 and is herein incorporated by reference.
-3-
<PAGE>
Item 13. Certain Relationships and Related Transactions
Information of certain relationships and related transactions is included in the
proxy statement for the annual meeting of stockholders to be held on April 28,
1997, on pages 15 through 18 and is herein incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statements
(a) (1) The following consolidated financial statements and the Independent
Auditors' Report included in the Annual Report to Stockholders of Village
Bancorp, Inc. and Subsidiaries for the year ended December 31, 1996, are
incorporated by reference in Item 8:
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Income - Years Ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996,1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
(a)(2) Schedules to the Consolidated Financial Statements required by
Article 9 of Regulation S-X are not required under the related instructions or
the information is included in the Consolidated Financial Statements or Notes
thereto and has therefore been ommitted.
(a)(3) Exhibits. The exhibits which are filed with this Form 10-K or which
are incorporated herein by reference are set forth in the Exhibit Index on Page
6.
(b) There were no reports on Form 8-K filed for the three months ended
December 31, 1996.
(c) Exhibits.
The exhibits which are filed with this Form 10-K or which are incorporated
herein by reference are set forth in the Exhibit Index on Page 6.
(d) Financial Statement Schedules - None.
-4-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, therunto duly authorized.
Village Bancorp, Inc.
<TABLE>
<CAPTION>
<S> <C>
By /s/ James R. Umbarger March 27, 1997
- ---------------------------------------------------------------------------------------------
James R. Umbarger - Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
DATE
----
/s/ Edward J. Hannafin March 27, 1997
- ---------------------------------------------------------------------------------------------
Edward J. Hannafin - Chairman of the Board & Director
/s/ Nicholas R. DiNapoli March 27, 1997
- ---------------------------------------------------------------------------------------------
Nicholas R. DiNapoli - Vice Chairman of the Board & Director
/s/ Robert V. Macklin March 27, 1997
- ---------------------------------------------------------------------------------------------
Robert V. Macklin - President, Chief Executive Officer & Director
/s/ Enrico J. Addessi March 27, 1997
- ---------------------------------------------------------------------------------------------
Enrico J. Addessi - Secretary of the Board & Director
/s/ Robert Scala March 27, 1997
- ---------------------------------------------------------------------------------------------
Robert Scala - Assistant Secretary of the Board & Director
/s/ Jose P. Boa March 27, 1997
- ---------------------------------------------------------------------------------------------
Jose P. Boa - Director
/s/ Richard O. Carey March 27, 1997
- ---------------------------------------------------------------------------------------------
Richard O. Carey - Director
/s/ Madeline F. Contegni March 27, 1997
- ---------------------------------------------------------------------------------------------
Madeline F. Contegni - Director
/s/ Jeanne M. Cook March 27, 1997
- ---------------------------------------------------------------------------------------------
Jeanne M. Cook - Director
/s/ Carl Lecher March 27, 1997
- ---------------------------------------------------------------------------------------------
Carl Lecher - Director
/s/ Joseph L. Knapp March 27, 1997
- ---------------------------------------------------------------------------------------------
Joseph L. Knapp - Director
/s/ Antonio M. Resendes March 27, 1997
- ---------------------------------------------------------------------------------------------
Antonio M. Resendes - Director
/s/ Thomas F. Reynolds March 27, 1997
- ---------------------------------------------------------------------------------------------
Thomas F. Reynolds - Director
</TABLE>
-5-
<PAGE>
VILLAGE BANCORP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION REFERENCE NUMBERED PAGE
<C> <S> <C> <C>
3(i) Articles of Incorporation Exhibit 3(a) to Registration
Statement No. 2-81879
June 1, 1983
3(ii) By-Laws Exhibit 3(b) to Registration
Statement No. 2-81879
June 1, 1983
4 Specimen Common Exhibit 4 to Form 10-K
Stock Certificate December 31, 1986
10(a) Lease Dated April 18, 1985 Exhibit 10(a) to Form 10-K
December 31, 1986
10(b) Lease Dated March 31, 1988 Exhibit 10(b) to Form 10-K
December 31, 1988
13 Annual Report to Stockholders Filed Herewith 7
for the year ended
December 31, 1996
21 Subsidiaries of the Registrant Filed Herewith 43
</TABLE>
-6-
VILLAGE
BANCORP
[PHOTO] Compass
Table of Contents
2 o Letter to Stockholders
4 o Business
9 o Business/Selected Financial Data
10 o Management's Discussion & Analysis of
Financial Condition & Results of Operations
14 o Independent Auditors' Report
15 o Consolidated Balance Sheets
16 o Consolidated Statements of Income
17 o Consolidated Statements of Changes in Stockholders' Equity
18 o Consolidated Statements of Cash Flows
19 o Notes to Consolidated Financial Statements
33 o Officers, Board of Directors & Advisory Board of Directors
35 o Capital Stock, Annual Meeting, Request for
Financial Information
36 o Banking Office Information
1996 ANNUAL REPORT
-7-
<PAGE>
================================================================================
[PHOTO] Compass
We are very pleased to report that the financial results of our Corpora- tion
for 1996 demonstrate the success of our past expansion efforts and point to an
even brighter future.
Net income for the year 1996 was $1,820,000 or $1.91 per share, a 38% increase
from the 1995 net income of $1,316,000 or $1.38 per share. Besides strong core
earnings, the Corporation's net profit was enhanced by the utilization of tax
loss carry forwards available as a result of the Corporation's 1994 acquisition
of Liberty National Bank.
The Corporation's balance sheet continues to grow. Total consolidated assets on
December 31, 1996 were $179,550,000. Total deposits on that date were
$162,625,000 and total loans outstanding were $126,836,000.
On December 31, 1996, the Corporation's total stockholders' equity was
$15,297,000, or a book value of $16.07 per share. During the year of 1996, the
Corporation paid cash dividends of $ .67 per share, up from the $ .48 per share
paid in 1995.
Construction of the new Danbury City Center office of The Village Bank & Trust
Company is proceeding on schedule. Our fifth banking office, which will be
located on the ground floor of the building, is slated to open in July. It is
believed that this office will quickly add to the Corporation's profitability
because of its strategic location convenient to the city's business, legal and
professional communities.
The year 1996 saw an acceleration in many of the trends that have affected the
banking industry throughout the first half of this decade. Connecticut saw
several mergers and consolidations which resulted in the disappearance of a
number of community banks. As more and more banks are absorbed into large
holding companies based out of state, many businesses and individuals are
realizing just how valuable and desirable a local community bank is.
Village Bancorp, Inc. and The Village Bank & Trust Company are benefiting from
this trend. Being a locally based commercial bank gives us the ability to be a
unique alternative to mammoth out of state financial institutions and is
presenting us with many new and exciting opportunities.
The pace of technological change in our industry is also accelerating. In order
to compete in this new environment, The Village Bank will be introducing a
number of new services and products designed to provide our customers with the
options they expect from their bank.
-8-
<PAGE>
Letter to
Our
Stockholders
Along with these changes, however, the Bank will never lose sight of the fact
that personal service going beyond our customers' expectations provides our
competitive edge over our large competitors. We are proud of our reputation for
this type of service, and work hard every day to maintain it. We believe that
the Corporation's results for 1996 demonstrate that we continue "to navigate a
steady course in a sea of change."
Thank you for investing in Village Bancorp, Inc. We will continue to do all we
can to see that you are pleased with that investment.
[GRAPHIC] Box /s/ Edward J. Hannafin
-----------------------------------
Edward J. Hannafin
Chairman
/s/ Robert V. Macklin
-----------------------------------
Robert V. Macklin
President & Chief Executive Officer
-9-
<PAGE>
================================================================================
Business
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1996 1995 1994
===========================================================================================================================
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans(1) $121,387 $10,472 8.63% $ 116,556 $10,177 8.73% $ 98,908 $7,808 7.89%
Taxable securities(2) 32,132 1,883 5.86 26,912 1,680 6.24 32,839 1,777 5.41
Tax--exempt securities 2,495 121 4.85 2,284 112 4.90 1,979 100 5.05
Federal funds sold 5,994 317 5.29 6,329 371 5.86 6,289 266 4.23
- ---------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 162,008 $12,793 7.90% 152,081 $12,340 8.11% 140,015 $9,951 7.11%
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 8,004 7,722 7,561
Bank premises and equipment 1,537 1,608 1,441
Accrued income and other assets 2,532 1,951 2,070
Allowance for loan losses (1,299) (1,464) (1,582)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $172,782 $ 161,898 $149,505
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 39,029 $ 622 1.59% $ 35,759 $ 622 1.74% $ 38,367 $ 592 1.54%
Savings deposits 46,200 1,320 2.68 44,334 1,230 2.77 52,645 1,233 2.34
Time deposits 54,990 3,011 5.48 50,413 2,761 5.48 30,339 1,124 3.70
Federal funds purchased 8 -- -- 556 33 5.94 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 140,227 $ 4,953 3.53% 131,062 $ 4,646 3.54% 121,351 $2,949 2.43%
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 16,271 15,974 14,291
Other 1,670 1,317 768
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 158,168 148,353 136,410
Stockholders' equity 14,614 13,545 13,095
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $172,782 $ 161,898 $149,505
===========================================================================================================================
NET INTEREST INCOME $ 7,840 $ 7,694 $7,002
===========================================================================================================================
NET YIELD ON INTEREST
EARNING ASSETS 4.84% 5.06% 5.00%
===========================================================================================================================
</TABLE>
(1) For the purposes of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding. Interest income includes fees on
loans of $198,000, $165,000 and $123,000 in 1996, 1995 and 1994, respectively.
(2) Includes Federal Home Loan Bank stock.
-10-
<PAGE>
================================================================================
[LOGO] Compass
VOLUME/RATE ANALYSIS
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rate.
<TABLE>
<CAPTION>
(In thousands)
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to:(1) Increase (Decrease) Due to:(1)
=====================================================================================================================
Volume Rate Net Volume Rate Net
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $ 408 $ (113) $ 295 $ 1,484 $ 885 $ 2,369
Taxable securities 296 (93) 203 (647) 550 (97)
Tax-exempt securities 10 (1) 9 15 (3) 12
Federal funds sold (19) (35) (54) 2 103 105
- ---------------------------------------------------------------------------------------------------------------------
Total $ 695 $ (242) $ 453 $ 854 $ 1,535 $ 2,389
=====================================================================================================================
Interest expense on:
NOW accounts $ -- $ -- $ -- $ (33) $ 63 $ 30
Savings deposits 395 (305) 90 18 (21) (3)
Time deposits 250 -- 250 948 689 1,637
Federal funds purchased (16) (17) (33) 33 -- 33
- ---------------------------------------------------------------------------------------------------------------------
Total $ 629 $ (322) $ 307 $ 966 $ 731 $ 1,697
=====================================================================================================================
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to the
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
SECURITIES PORTFOLIO
The following table sets forth the balance sheet carrying amount of securities
at the dates indicated:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995 1994
=====================================================================================================================
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $ 30,218 $ 32,060 $ 33,222
States and political subdivisions 2,639 2,444 2,323
Corporate bonds -- -- 176
Other 47 58 96
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 32,904 $ 34,562 $ 35,817
=====================================================================================================================
</TABLE>
-11-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Business (continued)
The following table sets forth the maturities of securities at December 31, 1996
and the weighted average yields of such securities (calculated on the basis of
the amortized cost and effective yields weighted for the scheduled maturity of
each security). Tax equivalent adjustments have not been made in calculating
yields on obligations of states and political subdivisions.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Maturing
After One Year But After Five Years But After
Within One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $ 10,286 5.65% $17,751 5.77% $ 2,014 5.94% $ 167 7.40%
States and political
subdivisions 246 5.67 1,431 4.59 812 4.89 150 5.30
Other 12 4.89 35 6.50 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTALS $ 10,544 5.65% $19,217 5.68% $ 2,826 5.64% $ 317 6.41%
===========================================================================================================================
</TABLE>
LOAN PORTFOLIO
The following table shows the Bank's loan distribution (net of deferred loan
fees) at the end of each of the last three years:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Real estate - mortgage and home equity $ 96,345 $ 88,400 $84,756
Real estate - construction and land development 7,953 7,737 4,787
Installment and consumer credit 9,917 10,562 8,130
Commercial and financial 12,621 12,892 8,652
- ---------------------------------------------------------------------------------------------------------------------------
TOTALS $ 126,836 $119,591 $106,325
===========================================================================================================================
</TABLE>
The following table shows the maturity of gross loans (excluding installment and
consumer credit loans) outstanding as of December 31, 1996. Also provided are
the amounts due after one year classified according to sensitivity to changes in
interest rates.
<TABLE>
<CAPTION>
(In thousands)
Maturing
After One Year
Within But Within After
One Year Five Years Five Years Total
===========================================================================================================================
<S> <C> <C> <C> <C>
Commercial and financial $ 6,222 $ 5,691 $ 708 $ 12,621
Real estate - construction and land development 7,557 160 236 7,953
Real estate - mortgage and home equity 873 9,839 85,633 96,345
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 14,652 $ 15,690 $86,577 $ 116,919
===========================================================================================================================
Loans maturing after one year with:
Fixed interest rates $ 4,880 $10,496
Variable interest rates 10,810 76,081
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 15,690 $86,577
===========================================================================================================================
</TABLE>
-12-
<PAGE>
================================================================================
[LOGO] Compass
NONACCRUAL AND PAST DUE LOANS
The following table summarizes the Bank's nonaccrual loans and loans past due 90
days or more:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Nonaccrual loans $1,596 $ 606 $ 240
Accruing loans past due
90 days or more 157 230 314
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $1,753 $ 836 $ 554
===========================================================================================================================
</TABLE>
At December 31, 1996, $1,579,000 of nonaccrual loans were collateralized.
A loan is put on nonaccrual basis when the loan becomes past due ninety days,
except for instances where there are factors known to management which reflect
favorably on the ability of the customer to fulfill the obligation. The Bank
would have recorded an additional $59,000, $51,000 and $55,000 of gross interest
income in 1996, 1995 and 1994, respectively, if nonaccrual loans had been
current.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Allowance at beginning of year $ 1,311 $ 1,551 $ 1,713
Charge-offs:
Commercial and financial - 95 319
Installment and consumer credit 69 183 20
Real estate - mortgage 104 186 177
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs 173 464 516
===========================================================================================================================
Recoveries:
Commercial and financial 10 8 42
Installment and consumer credit 7 6 1
Real estate - mortgage 81 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 98 14 43
===========================================================================================================================
Net charge-offs 75 450 473
Provision for loan losses (1) 120 210 311
- ---------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 1,356 $ 1,311 $ 1,551
===========================================================================================================================
Ratio of net charge-offs (recoveries) during the
year to average loans outstanding .062% .385% .478%
===========================================================================================================================
</TABLE>
(1) The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors which include, but are
not limited to, general economic conditions, loan portfolio composition, prior
loan loss experience and management's estimation of potential losses.
The allowance for loan losses is considered adequate by management to cover
known and unknown risk elements in the portfolios. This consideration is
affected by the Bank's real estate lending portfolio which represents the major
portion of the growth in the loan portfolios. Real estate loans are generally
well collateralized, and are therefore reflected as such in the allowance.
Management anticipates no material increase or decrease in charge-off activity
in 1997.
-13-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
BUSSINESS (continued) [PHOTO] Compass
DEPOSITS
The average daily amount of deposits and rates paid on such deposits are
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
Amount Rate Amount Rate Amount Rate
===========================================================================================================================
<S> <C> <C> <C>
Noninterest bearing and
demand deposits $ 16,271 $ 15,974 $ 14,291
NOW accounts 39,029 1.59% 35,759 1.74% 38,367 1.54%
Savings deposits 46,200 2.68 44,334 2.77 52,645 2.34
Time deposits 54,990 5.48 50,413 5.48 30,339 3.70
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $156,490 $146,480 $ 135,642
===========================================================================================================================
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Time Certificates of Deposit
===========================================================================================================================
<S> <C>
Three months or less $ 1,932
Over three through six months 2,763
Over six through twelve months 2,558
Over twelve months 887
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 8,140
===========================================================================================================================
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for each of
the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Return on average assets 1.05% .81% .47%
Return on average stockholders' equity 12.45 9.72 5.40
Dividend payout ratio 35.08 34.78 85.14
Equity to assets ratio (1) 8.46 8.37 8.76
===========================================================================================================================
</TABLE>
(1) Ratio is based upon average stockholders' equity and average asset balances.
-14-
<PAGE>
================================================================================
BUSSINESS / SELECTED FINANCIAL DATA [PHOTO] Compass
INTEREST RATE SENSITIVITY
The following table sets forth the dollar amount of rate sensitive assets and
liabilities that reprice within the stated time frames at December 31, 1996:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Rate Sensitive Assets:
1 Year or less 1 - 5 Years Over 5 Years Total
===========================================================================================================================
<S> <C> <C> <C> <C>
Loans (net of deferred loan fees) $ 105,718 $ 10,090 $ 11,028 $ 126,836
Federal funds 6,600 - -- 6,600
Securities 11,257 19,216 3,143 33,616
- ---------------------------------------------------------------------------------------------------------------------------
Total 123,575 29,306 14,171 167,052
===========================================================================================================================
Rate Sensitive Liabilities:
Deposits 142,107 5,393 -- 147,500
- ---------------------------------------------------------------------------------------------------------------------------
Gap (Repricing difference) $ (18,532) $ 23,913 $ 14,171 $ 19,552
===========================================================================================================================
Cumulative gap $ (18,532) $ 5,381 $ 19,552
===========================================================================================================================
Cumulative ratio of rate
sensitive assets to liabilities .87 1.04 1.13
===========================================================================================================================
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994 1993 1992
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net interest income $ 7,840 $ 7,694 $ 7,002 $ 6,744 $ 6,075
Provision for loan losses 120 210 311 45 154
Net income 1,820 1,316 707 994 861
- ---------------------------------------------------------------------------------------------------------------------------
Per share data: (1)
Net income $ 1.91 $ 1.38 $ .74 $ 1.05 $ .91
Cash dividends declared .67 .48 .63 .52 .37
- ---------------------------------------------------------------------------------------------------------------------------
Balance sheet totals:
Average assets $172,782 $ 161,898 $ 149,505 $ 143,365 $ 131,898
Average deposits 156,498 146,480 135,642 129,752 119,193
Average stockholders' equity 14,614 13,545 13,095 12,824 11,663
===========================================================================================================================
</TABLE>
The following table sets forth selected quarterly financial data for 1996 and
1995:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1996 Quarters 1995 Quarters
Total Fourth Third Second First Total Fourth Third Second First
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 7,840 $1,947 $1,995 $ 1,933 $1,965$ 7,694 $ 1,939 $ 1,937 $ 1,914 $1,904
Provision for loan losses 120 30 30 30 30 210 30 75 55 50
Net income 1,820 549 458 421 392 1,316 397 318 265 336
- ---------------------------------------------------------------------------------------------------------------------------
Per share data: (1)
Net income $1.91 $ .58 $ .48 $ .44 $ .41 $ 1.38 $ .41 $ .34 $ .28 $ .35
Cash dividends declared .67 .18 .17 .17 .15 .48 .15 .11 .11 .11
===========================================================================================================================
</TABLE>
(1) Adjusted to give effect to stock dividends.
-15-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
===============================================================================
Management's Discussion & Analysis of Financial Condition &
Results of Operations
General
Village Bancorp, Inc. (Company) is a Connecticut incorporated bank holding
company and parent corporation of the Village Bank & Trust Company (Village),
which is the only subsidiary of the Company. In January 1994, Village Bancorp,
Inc. and Liberty National Bank (Liberty) jointly announced the signing of an
agreement by which Village Bancorp, Inc. would acquire all of the outstanding
common stock of Liberty. This acquisition took place in November of 1994. In
June of 1995, Liberty National Bank was merged into The Village Bank & Trust
Company. All historical financial data has been restated to include both
entities for all periods presented. The Bank functions as a financial
intermediary acting as depository and lender of funds to its customers, and
generates its income from the interest earned on invested assets less interest
paid on its deposits and interest bearing liabilities. The Bank is a member of
the Federal Deposit Insurance Corporation (FDIC) and the deposits of the Bank
are insured by the FDIC to the extent provided by law. The Bank offers all
general commercial banking services allowed by both State and Federal
regulations. The Company does not engage in any non-banking activities that are
permitted to bank holding companies under enacted regulations. The Bank is
subject to intense competition from various financial institutions and other
companies or firms that engage in similiar activities. Bank holding companies
and banks are extensively regulated under both federal and state law. As of
December 31, 1996, the Bank had 77 full-time equivalent employees. Most
full-time employees are eligible for group life, health and medical and
disability insurance. Village Bank & Trust employees are eligible for
participation in a 401(k) plan after one year of service. The Company is listed
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ") SmallCap Stock Market price quotation service under the symbol
"VBNK". Village began operating a trust department and offering trust services
in the third quarter of 1993.
COMPARISON OF 1996 TO 1995
Financial Condition
The Company had total assets of $179,550,000 on December 31, 1996 as compared to
assets of $174,277,000 on December 31, 1995. The most significant area of
increase over the past year was in loans, which increased $7,245,000 (6.1%).
Loan growth was funded mainly by an increase of $4,086,000 (2.6%) in the Bank's
deposits. This increase in loans is primarily attributable to a combination of
factors. The Bank increased its marketing effort in this area and at the same
time brought on board two loan originators.
In addition the Bank also expanded the adjustable rate product line with a new
selection of choices. These new product lines have been well received, and as
the Bank generally retains adjustable rate loans for its own portfolio, this
contributed to the increase in the mortgage loan area.
The loan portfolio of the Bank includes $104,298,000 of real estate, home equity
and construction mortgages. This is 82.2% of the Bank's total loan portfolio as
of December 31, 1996. This is in comparison to $96,137,000 (80.4%) in real
estate related loans outstanding on December 31, 1995. Due to this high
percentage of real estate loans the management of the Bank is continuously
monitoring real estate values and the general economic conditions in the Bank's
lending areas so that it may take appropriate action when necessary.
Capital Resources
The Company, aware that its capital position is a measure of its ongoing
viability and ability to compete effectively in the highly competitive financial
services industry, strives to maintain a strong capital position. With a strong
capital position, the Company has the ability to effectively compete now and in
the future and to be better able to withstand economic instability or
uncertainty. The Company had a leverage ratio of 8.46% on December 31, 1996 as
compared to 8.37% on December 31, 1995.
In 1989 the Federal Deposit Insurance Corporation approved a final Statement of
Policy on Risk-Based Capital to be implemented over a two-year transition period
beginning at December 31, 1990. Risk weights are assigned to balance sheet and
off-balance sheet items and are used to calculate the Bank's capital ratios. On
December 31, 1996 the required minimum capital was 8.0% of total capital to risk
weighted assets and 4.0% Tier 1 capital to risk weighted assets. The Company's
ratios on December 31, 1996 were 14.62% total capital ratio and 13.43% Tier 1
capital ratio, which exceed the minimum requirements. These ratios for December
31, 1995 were 14.64% and 13.84%, respectively. Management does not anticipate
any event that would cause the Company to fall below the minimum requirements at
December 31, 1997, and anticipates that the Company will continue to have excess
"risk -based" capital.
Results of Operations
Net income for 1996 was $1,820,000 as compared to $1,316,000 for 1995. Net
interest income for 1996 amounted to $7,840,000 as compared to $7,694,000 for
1995. Net interest income increased primarily as a result of the increase in
interest income on loans.
-16-
<PAGE>
================================================================================
[PHOTO] Compass
Income Taxes
The Company's provision for income taxes was $471,000 for 1996 as compared to
$984,000 for 1995. The change in the Company's provision for income taxes was
primarily due to the Company utilizing tax loss carry forwards available as a
result of the 1994 acquisition of Liberty National Bank, along with the receipt
of a tax refund settlement from the State of Connecticut.
An asset and liability approach is used for financial accounting and reporting
for income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a chance in tax rates is recognized in income in the
period the change is enacted.
Assets and Related Income Analysis
Loans outstanding on December 31, 1996 totaled $126,836,000 as compared to
$119,591,000 outstanding on December 31, 1995. The increase in the loan
portfolio of $7,245,000 (6.1%) was for the most part attributable to the
majority of real estate loans originated being variable rate, which the Bank
primarily holds for its own portfolio. The majority of loans at the Bank are and
have been real estate related. Loan income increased $295,000 from $10,177,000
for 1995 to $10,472,000 for 1996. This increase is due to an increase in average
outstanding loans from $116,921,000 for 1995 to $121,623,000 for 1996, offset by
a decrease in the average rate earned from 8.70% in 1995 to 8.61% in 1996.
Securities, which consist of securities held-to-maturity and securities
available-for-sale, decreased $1,658,000 (4.8%) from $34,562,000 at December 31,
1995 to $32,904,000 at December 31, 1996. Income from securities increased
$208,000 (11.6%) from $1,792,000 for the 1995 period to $2,000,000 for the 1996
period. This increase resulted primarily from an increase in average dollar
amount outstanding from $29,196,000 for 1995 to $34,570,000 for 1996, offset by
a decrease in average rate earned from 6.14% for 1995 to 5.79% for 1996. In 1996
there were net security losses of $17,000; there were net security gains of
$70,000 in 1995. The Bank has the positive intent and ability to hold securities
designated as held-to-maturity until maturity and does not engage in trading
activities. Securities available-for-sale are used to compensate for liquidity
forecasting deviations.
Federal funds sold decreased $1,600,000 (19.5%) from $8,200,000 at December 31,
1995 to $6,600,000 at December 31, 1996. Federal funds sold income decreased
$54,000 (14.6%) from $371,000 for 1995 to $317,000 for 1996. This decrease
resulted primarily from a decrease in the average rate earned from 5.86% for
1995 to 5.29% in 1996, coupled with a decrease in average dollar amount
outstanding from $6,329,000 in 1995 to $5,994,000 in 1996.
Liability and Related Expense Analysis
Deposits increased $4,086,000 (2.6%) from $158,539,000 at December 31, 1995 to
$162,625,000 at December 31, 1996. Interest on deposits increased $307,000
(6.6%) from $4,646,000 for 1995 to $4,953,000 for 1996. This increase is
attributable to an increase in the average dollar amount outstanding from
$146,480,000 for 1995 to $156,489,000 in 1996. The average rate paid was 3.17%
for both the 1995 and 1996 period.
Data processing services increased $63,000 (13.4%) from $470,000 in 1995 to
$533,000 in 1996, as a result of increased use of services offered along with
increased volumes.
Advertising increased $21,000 (16.8%) from $125,000 in 1995 to $146,000 in 1996
as a result of an increased emphasis in this area.
Other operating expenses increased $218,000 (28.9%) from $754,000 in 1995 to
$972,000 in 1996. This increase was primarily due to a $152,000 increase in the
legal and professional expense, from $72,000 in 1995 to $224,000 in 1996,
resulting from professional fees incurred in connection with a tax refund
settlement from the State of Connecticut. In addition, director and committee
fees increased $53,000, from $106,000 in 1995 to $159,000 in 1996.
Provision for Loan Losses
The provision for loan losses decreased $90,000 (42.9%) from $210,000 for 1995
to $120,000 for 1996. The economy and the real estate market in the Bank's
market areas are closely monitored by management to maintain an allowance for
loan losses that is considered adequate. The loan loss allowance was $1,356,000
to support loan portfolios of $126,836,000, or a loan loss reserve ratio of
1.07%. This is in comparison to a ratio of 1.10% for 1995. Management believes
that the allowance for loan losses is adequate.
Interest Rate Sensitivity
Financial institutions have become increasingly concerned about matching the
repricing ability of interest-earning assets to the repricing ability of
interest-bearing
-17-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Management's Discussion & Analysis of Financial Condition &
Results of Operations (continued)
liabilities. Interest rate risk occurs when these repricings occur in different
time frames. An interest rate sensitivity "gap" is the difference between the
repricing assets and the repricing liabilities occuring in a given time frame. A
positive "gap" occurs when the asset amount exceeds the liability amount. A
negative "gap" occurs when the liability amount exceeds the asset amount. In a
falling interest rate environment a negative "gap" would tend to increase the
institution's net interest income, while a positive "gap" would have an adverse
effect. In a rising interest rate environment a positive "gap" would tend to
increase the institution's net interest income, while a negative "gap" would
have an adverse effect. Normally institutions attempt to match these repricings
while maintaining an adequate interest rate spread without compromising the
quality of assets. The Bank's interest rate sensitivity for the one year or less
time frame consists of $123,575,000 of repricing assets compared to $142,107,000
of repricing liabilities. For more information please see "Business."
Liquidity
Liquidity is the ability to provide funds for loan requests, unexpected deposit
outflows and meeting other recurring financial obligations. The Bank, as a
financial intermediary, monitors its liquidity position carefully, so that it
might identify trends that could impact its liquidity/cash flow position. The
Bank experiences little in seasonal liquidity fluctuation. Loan commitments are
also closely monitored to assure these commitments do not negatively affect the
Bank's planned liquidity position. Primary liquidity is comprised of cash and
due from banks, interbank overnight federal funds sold and securities maturing
in less than one year. These assets aggregated $25,689,000, or 14.7% of total
assets, as of December 31, 1996, as compared to $37,745,000 (21.7%) at December
31, 1995. The Bank has borrowing capabilities from the Federal Home Loan Bank of
Boston, which is available as a supplemental source of funding for liquidity
purposes. Management closely monitors the Bank's liquidity/cash flow position
and does not anticipate any liquidity problems in the future.
Impact of Inflation
The quantitative impact of inflation is subjective in interpretation and
difficult and imprecise to measure in the financial services industry. Inflation
poses a financial risk as the Bank's assets consist mainly of financial assets
which are funded by deposit liabilities of varying maturities and deposit yields
as opposed to physical or real assets. With few fixed or physical assets, the
Bank has a low degree of operating leverage which mitigates the inflationary
impact. The financial leverage ratio of capital to total assets is the most
effective measure of a financial institution's viability and its ability to
withstand inflationary pressures.
COMPARISON OF 1995 TO 1994
Financial Condition
The Company had total assets of $174,277,000 on December 31, 1995 as compared to
assets of $157,241,000 on December 31, 1994. The most significant area of
increase over the past year was in loans, which increased $13,266,000 (12.5%).
Loan growth was funded by an increase of $15,118,000 (10.5%) in the Bank's
deposits. This increase in loans is primarily due to the fact that the majority
of the loans the Bank originated were variable rate loans which are generally
retained for its own portfolio, as opposed to fixed rate loans which are
generally sold in the secondary mortgage market.
The loan portfolio of the Bank includes $96,137,000 of real estate, home equity
and construction mortgages. This is 80.4% of the Bank's total loan portfolio as
of December 31, 1995. This is in comparison to $89,543,000 (84.2%) in real
estate related loans outstanding on December 31, 1994.
Capital Resources
The Company had a leverage ratio of 8.37% on December 31, 1995 as compared to
8.79% on December 31, 1994. At December 31, 1995, the Company's total capital to
risk weighted assets ratio was 14.68% and its Tier 1 capital to risk weighted
assets ratio was 13.87%. Each of these capital ratios was substantially in
excess of regulatory requirements.
Results of Operations
Net income for 1995 was $1,316,000 as compared to $707,000 for 1994. Net
interest income for 1995 amounted to $7,694,000 as compared to $7,002,000 for
1994. Net interest income increased primarily as a result of the increase in
interest income on loans.
-18-
<PAGE>
================================================================================
[PHOTO] Compass
Income Taxes
The Company's provision for income taxes was $984,000 for 1995 as compared to
$719,000 for 1994.
Assets and Related Income Analysis
Loans outstanding on December 31, 1995 totaled $119,591,000 as compared to
$106,325,000 outstanding on December 31, 1994. The increase in the loan
portfolio of $13,266,000 (12.5%) was for the most part attributable to the
majority of real estate loans originated being variable rate, which the Bank
primarily holds for its own portfolio. The majority of loans at the Bank are and
have been real estate related. Loan income increased $2,369,000 from $7,808,000
for 1994 to $10,177,000 for 1995. This increase is due to an increase in average
outstanding loans from $98,908,000 for 1994 to $116,921,000 for 1995, coupled
with an increase in the average rate earned from 7.81% in 1994 to 8.70% in 1995.
Securities, which consist of securities held-to-maturity and securities
available-for-sale, decreased $1,255,000 (3.5%) from $35,817,000 at December 31,
1994 to $34,562,000 at December 31, 1995. Income from securities decreased
$85,000 (4.5%) from $1,877,000 for the 1994 period to $1,792,000 for the 1995
period. This decrease resulted primarily from a decrease in average dollar
amount outstanding from $34,818,000 for 1994 to $29,196,000 for 1995, offset by
an increase in average rate earned from 5.39% for 1994 to 6.14% for 1995. Net
security gains were $70,000 in 1995; there were none in 1994. The Bank holds
securities held-to-maturity until maturity and does not trade them. Securities
available-for-sale are used to compensate for liquidity forecasting deviations.
Federal funds sold increased $4,950,000 (152.3%) from $3,250,000 at December 31,
1994 to $8,200,000 at December 31, 1995. Federal funds sold income increased
$105,000 (39.5%) from $266,000 for 1994 to $371,000 for 1995. This increase
resulted primarily from an increase in the average rate earned from 4.23% for
1994 to 5.86% in 1995, coupled with a slight increase in average dollar amount
outstanding from $6,289,000 in 1994 to $6,329,000 in 1995.
Liability and Related Expense Analysis
Deposits increased $15,118,000 (10.5%) from $143,421,000 at December 31, 1994 to
$158,539,000 at December 31, 1995. Interest on deposits increased $1,697,000
(57.5%) from $2,949,000 for 1994 to $4,646,000 for 1995. This increase is
attributable to an increase in the average rate paid from 2.43% for 1994 to
3.17% for 1995 period, coupled with an increase in the average dollar amount
outstanding from $135,642,000 for 1994 to $146,480,000 in 1995.
Data processing services increased $45,000 (10.6%) from $425,000 in 1994 to
$470,000 in 1995, as a result of increased use of services offered along with
increased volumes.
Printing, stationery and supplies expense increased $54,000 (32.5%) from
$166,000 in 1994 to $220,000 in 1995, mainly as a result of the merger of
Liberty National Bank.
Provision for Loan Losses
The provision for loan losses decreased $101,000 (32.5%) from $311,000 for 1994
to $210,000 for 1995. The economy and the real estate market in the Bank's
market areas are closely monitored by management to maintain an allowance for
loan losses that is considered adequate. The loan loss allowance was $1,311,000
to support loan portfolio's of $119,591,000, or a loan loss reserve ratio of
1.10%. This is in comparison to a ratio of 1.46% for 1994. Management believes
that the allowance for loan losses is adequate.
Liquidity
Primary liquidity is comprised of cash and due from banks, interbank overnight
federal funds sold and securities maturing in less than one year. This figure
amounted to $37,745,000 or 21.7% of total assets, as of December 31, 1995, as
compared to $30,503,000; or 19.4% of total assets, as of December 31, 1994.
-19-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Independent Auditors' Report [PHOTO] Compass
[LOGO] Deloitte &
Touche LLP
- ----------------- ------------------------------------------------------
Stamford Harbor Park Telephone: (203)708-4000
333 Ludlow Street Facsimile: (203)708-4797
P.O. Box 10098
Stamford, Connecticut 06904
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Village Bancorp, Inc.
We have audited the consolidated balance sheets of Village Bancorp, Inc. and
subsidiary (the "Company") as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996, These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
1994 merger of Village Bancorp, Inc. and Liberty National Bank, which has been
accounted for as a pooling of interests as described in Note I to the
consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Village Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As described in Note I, the Company changed its method of accounting for
securities in 1994.
/s/ Deloitte & Touche
- ------------------------
January 24, 1997
[LOGO] Deloitte Touche
Tohmatsu
International
-20-
<PAGE>
================================================================================
Consolidated Balance Sheets [PHOTO] Compass
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
===================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,545 $ 9,125
Federal funds sold 6,600 8,200
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents 15,145 17,325
- ---------------------------------------------------------------------------------------------------
Securities:
Available-for-sale, at fair value 15,706 20,482
Held-to-maturity, at amortized cost (fair value of $17,135
and $14,294 in 1996 and 1995) 17,198 14,080
Federal Home Loan Bank stock, at cost 712 --
Loans, net of deferred loan fees 126,836 119,591
Allowance for loan losses (1,356) (1,311)
- ---------------------------------------------------------------------------------------------------
Loans - net 125,480 118,280
- ---------------------------------------------------------------------------------------------------
Loans held for sale 50 552
Bank premises and equipment - net 1,509 1,550
Accrued income and other assets 3,750 2,008
- ---------------------------------------------------------------------------------------------------
Total Assets $ 179,550 $ 174,277
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 15,125 $ 17,265
Interest bearing 147,500 141,274
- ---------------------------------------------------------------------------------------------------
Total deposits 162,625 158,539
- ---------------------------------------------------------------------------------------------------
Income taxes 275 78
Other liabilities 1,353 1,512
- ---------------------------------------------------------------------------------------------------
Total liabilities 164,253 160,129
- ---------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 12)
STOCKHOLDERS' EQUITY
Common stock, $3.33 par value; authorized, 2,000,000 shares; issued and
outstanding, 952,117 shares in 1996 and 950,317 in 1995 3,171 3,165
Additional paid-in capital 7,996 7,982
Retained earnings 4,143 2,960
Net unrealized gains (losses) on securities available-for-sale, net of tax (13) 41
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 15,297 14,148
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 179,550 $ 174,277
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE>
================================================================================
Consolidated Statements of Income [PHOTO] Compass
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
1996 1995 1994
========================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 10,472 $10,177 $7,808
Securities:
Taxable 1,879 1,680 1,777
Tax-exempt 121 112 100
Federal funds sold 317 371 266
Dividends on Federal Home Loan Bank stock 4 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 12,793 12,340 9,951
INTEREST EXPENSE 4,953 4,646 2,949
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,840 7,694 7,002
PROVISION FOR LOAN LOSSES 120 210 311
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,720 7,484 6,691
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges 332 359 406
Security (losses) gains - net (17) 70 --
Other operating income 175 138 194
- ------------------------------------------------------------------------------------------------------------------------
Total other income 490 567 600
- ------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 3,064 2,991 2,849
Net occupancy 582 547 514
Other real estate owned 18 37 32
Furniture and equipment 263 290 294
Data processing services 533 470 425
Regulatory assessments 3 148 341
Printing, stationery and supplies 176 220 166
Advertising 146 125 98
Appraisal fees 55 51 68
Postage 107 118 107
Other operating expenses 972 754 971
- ------------------------------------------------------------------------------------------------------------------------
Total other expenses 5,919 5,751 5,865
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,291 2,300 1,426
PROVISION FOR INCOME TAXES 471 984 719
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,820 $ 1,316 $ 707
========================================================================================================================
PER SHARE DATA
Net income $ 1.91 $ 1.38 $ .74
Cash dividends $ .67 $ .48 $ .63
========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE>
===============================================================================
Consolidated Statements of Changes in Stockholders' Equity [PHOTO} Compass
<TABLE>
<CAPTION>
(In thousands, except share data)
Net Unrealized
Common Stock Additional Gains (Losses)
Number of Paid-In on Securities Retained
Shares Amount Capital Available-For-Sale Earnings
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 942,609 $ 3,139 $ 7,931 $ 1,936
Effect of adoption of SFAS No. 115 $ 20
Net income 707
Cash dividends declared, $.63 per share (544)
Exercise of options 4,340 14 28
Change in net unrealized gains (losses) on
securities available-for-sale, net of tax (177)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 946,949 3,153 7,959 (157) 2,099
Net income 1,316
Cash dividends declared, $.48 per share (455)
Exercise of options 3,999 14 21
Retirement of stock (631) (2) 2
Change in net unrealized gains (losses) on
securities available-for-sale, net of tax 198
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 950,317 3,165 7,982 41 2,960
Net income 1,820
Cash dividends declared, $.67 per share (637)
Exercise of options 1,800 6 14
Change in net unrealized gains (losses) on
securities available-for-sale, net of tax (54)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 952,117 $ 3,171 $ 7,996 $ (13) $ 4,143
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
-23-
<PAGE>
===============================================================================
Consolidated Statements of Cash Flows [PHOTO} Compass
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1996 1995 1994
===============================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,820 $ 1,316 $ 707
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 120 210 311
Depreciation and amortization 242 262 242
(Accretion)/amortization of security discounts/premiums, net (196) (194) (118)
Deferred income tax (benefit) provision (213) -- 94
Security losses (gains), net 17 (70) --
Increase (decrease) in deferred loan fees 16 (134) 170
Origination of loans held for sale (6,934) (5,295) (7,431)
Proceeds from sales of loans 7,513 4,790 8,772
Gains on sales of loans (77) (47) (108)
(Increase) decrease in accrued income and other assets (1,492) 85 246
Increase (decrease) in other liabilities 38 824 (172)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 854 1,747 2,713
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 2,307 8,535 --
Proceeds from maturities of securities held-to-maturity 6,350 10,598 20,651
Proceeds from maturities of securities available-for-sale 16,719 4,600 8,317
Purchases of securities held-to-maturity (9,583) (1,088) (12,570)
Purchases of securities available-for-sale (14,047) (20,900) (10,680)
Purchase of Federal Home Loan Bank stock (712) -- --
Net increase in loans (7,336) (13,582) (13,024)
Purchases of premises and equipment (201) (176) (366)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,503) (12,013) (7,672)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 4,086 15,118 4,475
Cash dividends (637) (455) (544)
Net proceeds from issuance of common stock 20 35 42
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,469 14,698 3,973
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,180) 4,432 (986)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 17,325 12,893 13,879
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,145 $ 17,325 $ 12,893
===============================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid on deposits $ 5,202 $ 3,787 $ 3,010
Income tax payments 898 896 653
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE>
===============================================================================
Notes to Consolidated Financial Statements [LOGO] Compass
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations - Village Bancorp, Inc. and its subsidiary, The Village
Bank & Trust Company (the "Bank"), collectively the "Company", are engaged in
the business of commercial banking. Headquartered in Ridgefield, the Company
operates four branch offices in Fairfield and Litchfield counties in
Connecticut. The Company principally is engaged in lending and deposit gathering
activities within these counties. The Company's future prospects are largely
dependent on its ability to compete with entities having greater resources and
on the performance of the local economy. A wide range of loan and deposit
products and trust services are offered to the customer. Customer convenience
and responsive service are emphasized. Over 80% of loans are collateralized by
real estate located in Fairfield, Litchfield and adjacent counties. Within this
area employment levels and related economic activity generally are not
materially dependent on any one employer.
Organization - In November of 1994, Village Bancorp, Inc. acquired Liberty
National Bank (Liberty). Each share of Liberty stock was converted into .1149
shares of Village Bancorp, Inc. common stock. This transaction was accounted for
using the pooling-of-interests method and, accordingly, all historical financial
data has been restated to include both entities for all periods presented. On
June 20, 1995, the Company merged Liberty into the Bank and now operates
Liberty's former office as a branch office. In this transaction, Liberty was
combined with the Bank as a combination of entities under common control and,
accordingly, was accounted for in a manner similiar to a pooling of interests.
Basis of Financial Statement Presentation - The Company's consolidated financial
statements include the Bank and have been prepared in accordance with generally
accepted accounting principles and conform with predominant practices used
within the banking industry. All significant intercompany accounts and
transactions are eliminated in consolidation. In preparing such financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and the revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans and the
valuation allowance for deferred tax assets. In connection with the
determination of the allowance for loan losses and real estate owned, management
obtains independent appraisals for significant properties.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize possible loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Bank's service area, Fairfield and Litchfield
Counties, Connecticut. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may recommend to the Bank that it recognize additions to
the allowance based on their judgements of information available to them at the
time of their examination.
Allowance for Loan Losses - The allowance for loan losses is sustained by
charges to operating expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely; recoveries of previously charged off loans are restored to the
allowance. The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the loan portfolio and other pertinent factors, including, but not
limited to, past loan loss experience, composition of the loan portfolio and
current economic factors.
Consolidated Statements of Cash Flows - For purposes of presenting the
consolidated statements of cash flows, cash equivalents include amounts due from
banks and federal funds sold. Generally, federal funds sold have one day
availability.
Securities - Securities held-to-maturity are stated at cost, adjusted for
accumulated amortization of premium and accretion of discount, which is
calculated on a method that approximates the interest method. Securities
available-for-sale are stated at estimated fair value. The determination to
include debt securities as securities held-to-maturity or securities
available-for-sale is made at the time of purchase and is based on such factors
as overall interest rate sensitivity of the Company, projected liquidity needs,
and the Company's long-term investment strategies. The Bank does not acquire
securities for the purpose of engaging in trading activities. When sales occur,
gains or losses on the sale of securities are recognized using the specific
identification method. The Bank has the positive intent and ability to hold its
securities classified as held-to-maturity for their economic life. Prior to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", on January
1, 1994, the Company stated all securities at amortized cost.
-25-
<PAGE>
================================================================================
Notes to Consolidated Financial Statements [PHOTO] Compass
Loans - Interest income on loans is recognized based on rates applied to
principal amounts outstanding. Loans are placed on nonaccrual status when
management believes that interest or principal on such loans may not be
collected in the normal course of business. Interest payments received on loans
in nonaccrual status are applied, based on management's judgement as to the
collectibility of loan principal, either as a reduction of principal or as
interest income. Such loans are restored to accrual status when there is no
longer doubt concerning collectibility and the borrower has performed in
accordance with the terms of the loan. Loans held for sale are stated at the
lower of fair value or cost.
Loan origination and commitment fees, net of certain loan origination costs, are
deferred and the net amount amortized as an adjustment of the related loan's
yield. Loan fees deferred in 1996 and 1995 aggregated $274,000 and $282,000,
respectively. Loan costs deferred in 1996 and 1995 aggregated $18,000 and
$20,000, respectively. Net amounts included in income aggregated $213,000,
$433,000 and $93,000 in 1996, 1995 and 1994, respectively.
Impaired Loans - The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures", as of January 1,
1995. Adoption of these statements did not result in any adjustment to the
allowance for loan losses as of January 1, 1995.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the contractual terms of the
loan. When a loan is considered impaired, it is placed on nonaccrual status.
Income is recorded using the income recognition principles outlined above.
Measurement of impairment is based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. Small homogeneous loans such as residential mortgages,
home equity loans, installment loans and consumer credit are not separately
reviewed for impaired status. These loans typically are for maturities less than
five years and require monthly payments. Separate allocations to the allowance
for loan losses are made based upon trends and prior loss experience and
composition of credit risk in these types of loans. This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant change.
If the fair value of an impaired loan is less than the related recorded amount,
a specific valuation allowance is established or the write down is charged
against the allowance for loan losses if the impairment is considered to be
permanent.
Bank Premises and Equipment - Bank premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method based upon estimated useful lives or
the lease term, if shorter, up to 39 years for premises and 15 years for
equipment.
Income Taxes - An asset and liability approach is used for financial accounting
and reporting for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period the change is enacted.
Other Real Estate - Other real estate includes properties which are foreclosed
or received in settlement of a loan, and real property not used in trade or
business. The properties are recorded at the lower of cost or fair value (net of
estimated costs of disposition) at the date transferred. Losses arising at the
time of acquisition of such properties are charged against the allowance for
loan losses. Subsequent write-downs of the carrying value of these properties
may be required and would be charged to operations. There was no other real
estate at December 31, 1996 and 1995.
Net Income Per Share - Net income per share is based on the weighted average
number of common shares outstanding. The weighted average number of common and
common equivalent shares was, 963,410 shares in 1996, 956,937 shares in 1995,
and 950,190 shares in 1994. Common stock equivalents, which consist of common
stock options, have only a minor dilutive effect (less than 3%) in 1996, 1995
and 1994.
Stock-Based Compensation - In October 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation," was issued. SFAS No. 123 establishes a fair value
based method of accounting for stock-based compensation plans and encourages,
but does not require, entities to adopt that method of accounting for all
employee stock compensation plans. SFAS No. 123 also establishes fair value as
the measurement basis for transactions in which an entity acquires goods or
services from non-employees in exchange for equity instruments. However, SFAS
No. 123 permits entities to continue to measure compensation costs for
stock-based compensation plans using the instrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and present proforma disclosure of
net income and earnings per share, as if the fair value based method of
accounting prescribed by SFAS No. 123 had been applied. Effective January 1,
1996, the Bank adopted SFAS No. 123 and has elected to continue to measure
compensation cost for stock-based compensation plans in accordance with the
provisions of APB Opinion No. 25.
-26-
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued) [PHOTO] Compass
Pending Accounting Pronouncement - SFAS No. 125, "Accounting for Transfers and
Servic-ing of Financial Assets and Extinguishments of Liabilities," specifies
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities and for distinguishing whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except for
certain provisions (relating to the accounting for secured borrowings and
collateral and the accounting for transfers and servicing or repurchase
agreements, dollar rolls, securities lending and similiar transactions) which
have been deferred until January 1, 1998 in accordance with SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." The Adoption of these standards is not expected to have a material impact
of the Bank's financial statements.
Reclassifications - Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current presentation.
2. Cash and Due from Banks
The Bank is required by Federal regulation to maintain average cash reserve
balances. Throughout 1996, daily cash reserves and compensating balances served
to satisfy this requirement and averaged approximately $2,402,000.
3. Securities
The aggregate amortized cost and fair values of securities held-to-maturity and
securities available-for-sale at December 31, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
===========================================================================================================================
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
U.S. Treasury securities $ 9,824 $ 31 $ (96) $ 9,759
Mortgage--backed securities of
U.S. Government agencies 4,735 15 (34) 4,716
Obligations of states and
political subdivisions 2,639 37 (16) 2,660
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 17,198 $ 83 $ (146) $ 17,135
===========================================================================================================================
SECURITIES AVAILABLE--FOR--SALE
U.S. Treasury securities $ 15,250 $ 6 $ (27) $ 15,229
Mortgage--backed securities of
U.S. Government agencies 430 -- -- 430
Other 48 -- (1) 47
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 15,728 $ 6 $ (28) $ 15,706
===========================================================================================================================
</TABLE>
-27-
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
1995
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
===========================================================================================================================
<S> <C> <C> <C>
SECURITIES HELD--TO--MATURITY
U.S. Treasury securities $ 6,054 $ 124 $ (1) $ 6,177
Mortgage--backed securities of
U.S. Government agencies 5,582 59 (8) 5,633
Obligations of states and political subdivisions 2,444 53 (13) 2,484
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 14,080 $ 236 $ (22) $ 14,294
===========================================================================================================================
SECURITIES AVAILABLE--FOR--SALE
U.S. Treasury securities $ 16,325 $ 56 $ -- $ 16,381
Mortgage--backed securities of U.S.
Government agencies 4,029 28 (14) 4,043
Other 59 -- (1) 58
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 20,413 $ 84 $ (15) $ 20,482
===========================================================================================================================
</TABLE>
At December 31, 1996, securities with an amortized cost of $1,140,000 and a fair
value of $1,121,000 were pledged to secure public funds and for other purposes
as required by law and banking regulation. Gross gains on sales of securities in
1996 and 1995 were $5,000 and $77,000, respectively, and gross losses were
$22,000 and $7,000, respectively. There were no gains or losses on securities
transactions in 1994.
The amortized cost and fair value of securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1996
===========================================================================================================================
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Maturity Cost Value Cost Value
===========================================================================================================================
<S> <C> <C> <C> <C>
Within 1 year $ 8,890 $ 8,887 $ 1,657 $ 1,674
After 1 but within 5 years 5,501 5,492 13,725 13,644
After 5 but within 10 years 1,234 1,224 1,602 1,599
After 10 years 103 103 214 218
- ---------------------------------------------------------------------------------------------------------------------------
Totals $ 15,728 $ 15,706 $ 17,198 $ 17,135
===========================================================================================================================
</TABLE>
In December 1995, the Company transferred a security having a fair value of
$353,000 (carrying value of $336,000) from its "held-to-maturity" securities to
its portfolio of "available-for-sale" securities. This was done to respond to
changes in the interest rate environment and to align the Companys's interest
rate gap position. This transfer was made in accordance with FASB's "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" issued in November 1995. Concurrent with the adoption of
this guidance, corporations were permitted through December 31, 1995, to
reclassify their "available-for-sale" and "held-to-maturity" securities without
calling into question the past intent of an entity to hold securities to
maturity. As this security was sold before year-end 1995, the gain on the sale
was reflected in the Company's results of operations in that year.
-28-
<PAGE>
================================================================================
[PHOTO] Compass
4. Loans
The composition of the loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
===========================================================================================================================
<S> <C> <C>
Real estate - mortgage and home equity $ 96,608 $ 88,647
Real estate - construction and land development 7,953 7,737
Installment and consumer credit 9,917 10,562
Commercial and financial 12,621 12,892
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 127,099 119,838
Deferred loan fees (263) (247)
Allowance for loan losses (1,356) (1,311)
- ---------------------------------------------------------------------------------------------------------------------------
Loans - net $ 125,480 $ 118,280
===========================================================================================================================
</TABLE>
In the normal course of business there are outstanding various commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the financial statements. Such commitments involve
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet. The Bank controls these risks through credit
approvals, limits and monitoring procedures. 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. At December 31, 1996, existing commitments were as follows:
commitments to originate loans - $13,740,000, unused revolving lines of credit
on residential properties, including home equity - $10,455,000, unused revolving
lines of credit on commercial real estate and construction - $5,373,000, stand
by letters of credit - $1,843,000 and unused consumer lines of credit -
$2,241,000. At December 31, 1995, these commitments were as follows: commitments
to originate loans - $10,901,000, unused revolving lines of credit on
residential properties, including home equity - $10,564,000, unused revolving
lines of credit on commercial real estate and construction - $5,822,000, stand
by letters of credit - $2,081,000 and unused consumer lines of credit
$2,055,000.
Substantially all of the Bank commercial and residential lending activities are
with customers located in Fairfield and Litchfield counties, Connecticut.
Although lending activities are diversified, a substantial portion of many Bank
customers' net worth is dependent on local real estate values.
The Bank has established credit policies applicable to each type of lending
activity in which it engages, evaluates the credit-worthiness of each customer
and, in most cases, lend up to 80% of the fair value of the collateral,
depending on the Bank's evaluation of the borrowers' creditworthiness. The fair
value of collateral is monitored on an ongoing basis and additional collateral
is obtained when warranted. Real estate is the primary form of collateral. While
collateral provides assurance as a secondary source of repayment, the Bank
ordinarily requires the primary source of repayment to be based on the
borrower's ability to generate continuing cash flows.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Balance, beginning of year $ 1,311 $ 1,551 $ 1,713
Provision for loan losses
charged to operating expense 120 210 311
Loans charged off (173) (464) (516)
Recoveries on loans
previously charged off 98 14 43
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,356 $ 1,311 $ 1,551
===========================================================================================================================
</TABLE>
-29-
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued)
For management purposes, portions of this allowance are allocated to segments of
the loan portfolio based on perceived credit risks. At December 31, 1996,
management allocated $395,000 of the balance in the allowance for loan losses to
specific credit risks and $961,000 is considered to be an unallocated or general
allowance. Based on regulatory constraints all or a portion of this allowance is
considered to be capital for purposes of determining compliance with certain
regulatory capital standards (see Note 7).
The principal portion of loans delinquent as to principal or interest for ninety
days or more, including nonaccrual loans, is as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
===========================================================================================================================
<S> <C> <C>
Loans 90 days or more past due:
Real estate-mortgage and home equity $ 1,629 $ 686
Installment and consumer credit 124 150
Commercial and financial -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,753 $ 836
===========================================================================================================================
</TABLE>
At December 31, 1996 and 1995 there were no restructured loans. Loans on which
interest is not being accrued aggregated approximately $1,596,000 and $606,000
at December 31, 1996 and 1995, respectively. The Bank would have recorded an
additional $59,000, $51,000 and $55,000 of gross interest income in 1996, 1995
and 1994, respectively, if nonaccrual loans had been current. Furthermore,
another $8,000 would have been recorded on restructured loans in 1994. At
December 31, 1996, there were no commitments to lend additional funds to
borrowers whose loans are classified as nonaccrual or were restructured.
As described in Note 1, effective January 1, 1995, the Company adopted a new
accounting standard which defines when certain loans are considered to be
impaired and requires such loans to be measured at fair value. The recorded
investment in loans that are considered to be impaired at December 31, 1996 and
1995 was $1,576,000 and $636,000, respectively. Specific valuation allowances of
$215,000 and $180,000 for 1996 and 1995, respectively, have been established.
During 1996 and 1995 the average recorded investment in impaired loans was
approximately $791,000 and $496,000, respectively. No interest income was
recognized on impaired loans, either on the accrual or on the cash basis method
of interest recognition. During 1995, one impaired loan had a partial write-off
totaling $51,000. Generally, the fair value of the above loans was determined
using the fair value of the underlying collateral.
5. Bank Premises and Equipment
Bank premises and equipment, at cost, and accumulated depreciation and
amortization are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
===========================================================================================================================
<S> <C> <C>
Land $ 175 $ 175
===========================================================================================================================
Premises 1,646 1,577
Equipment 1,628 1,792
Leasehold improvements 441 359
- ---------------------------------------------------------------------------------------------------------------------------
Total 3,890 3,903
Accumulated depreciation and amortization (2,381) (2,353)
- ---------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment - net $ 1,509 $ 1,550
===========================================================================================================================
</TABLE>
The Bank is in the process of constructing a new building in Danbury,
Connecticut. Costs incurred relating to the construction in process aggregated
$1,181,000 as of December 31, 1996, and such costs are included in other assets.
-30-
<PAGE>
================================================================================
[PHOTO] Compass
6. Deposits
Included in interest bearing deposits are certificates of deposit in
denominations of $100,000 or more. These certificates and their remaining
maturities are as follows:
<TABLE>
<CAPTION>
(In Thousands)
December 31,
1996 1995
===========================================================================================================================
<S> <C> <C>
Three months or less $ 1,932 $ 1,452
Over three through six months 2,763 2,696
Over six through twelve months 2,558 1,389
Over twelve months 887 844
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 8,140 $ 6,381
===========================================================================================================================
</TABLE>
NOW accounts, included in interest bearing deposit liabilities, were $43,321,000
and $36,928,000 at December 31, 1996 and 1995, respectively.
7. Stockholders' Equity
The Company and Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines, and, with respect to the Bank,
the regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitatve measures of the
Company's and the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about capital components, risk weightings and other
factors.
Capital adequacy regulations require the Company and Bank to maintain minimum
amounts and ratios (set forth in the tables below) of Total and Tier 1 Capital
(as defined in the regulations) to risk weighted assets (as defined), and Tier 1
capital (as defined) to average assets (as defined). Management believes that
the Company and Bank meet all capital adequacy requirements to which it is
subject, and is considered well capitalized under regulatory guidelines, as of
December 31, 1996.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company's and Bank's capital amounts and ratios are presented in the table
on the next page:
-31-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued) [PHOTO] Compass
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Company Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1996
Total Capital (to Risk Weighted Assets) $ 16,666 14.62% $9,120 []8.0% N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 15,310 13.43 4,560 []4.0 N/A N/A
Tier 1 Capital (to Average Assets) 15,310 8.80 6,960 []4.0 N/A N/A
At December 31, 1995
Total Capital (to Risk Weighted Assets) $ 14,927 14.64% 8,154 []8.0% N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 14,107 13.84 4,077 []4.0 N/A N/A
Tier 1 Capital (to Average Assets) 14,107 8.44 6,689 []4.0 N/A N/A
Bank
- --------------------------------------------------------------------------------------------------------------------------
At December 31, 1996
Total Capital (to Risk Weighted Assets) $ 16,585 14.56% $9,114 []8.0% $ 11,393 []10.0%
Tier 1 Capital (to Risk Weighted Assets) 15,229 13.37 4,557 []4.0 6,836 []6.0
Tier 1 Capital (to Average Assets) 15,229 8.76 6,957 []4.0 8,696 []5.0
At December 31, 1995
Total Capital (to Risk Weighted Assets) $ 14,852 14.58% $8,148 []8.0% $ 10,185 []10.0%
Tier 1 Capital (to Risk Weighted Assets) 14,032 13.78 4,074 []4.0 6,111 []6.0
Tier 1 Capital (to Average Assets) 14,032 8.40 6,686 []4.0 8,357 []5.0
</TABLE>
Capital ratios are computed excluding unrealized gains or losses on
available-for-sale securities, net of tax effect, which is included as a
component of stockholders' equity for financial reporting purposes.
8. Stock Option Plans
The Company and Bank have two stock option plans for their officers and
employees to be granted and issued by the Board of Directors from time to time.
The first plan, adopted in 1988, provides for 21,016 shares to be reserved for
issuance. The second plan, adopted in 1996, provides for 75,000 shares to be
reserved for issuance. There are currently 4,716 shares available for issuance
under this 1988 plan. In 1996, 39,200 shares were granted under the 1996 plan to
twenty of the Bank's officers. There are currently 35,800 shares available for
issuance under the 1996 plan. Options issued under the plans must be granted at
the fair value of the Company's common stock on the date of grant and expire
five years from the grant date. In addition, all grants vest immediately upon
issuance.
Stock option transactions under the Plans were as follows:
-32-
<PAGE>
================================================================================
[PHOTO] Compass
<TABLE>
<CAPTION>
Shares Underlying Weighted Average
Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding and exercisable Options as of January 1, 1995: 21,663 $ 11.06
Options exercised 3,999 8.67
Options expired 3,064 14.22
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable Options as of December 31, 1995: 14,600 11.00
Options granted 39,200 19.00
Options exercised 1,800 11.00
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable Options as of December 31, 1996: 52,000 $ 17.03
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information regarding options outstanding and
exercisable as of December 31, 1996:
<TABLE>
<CAPTION>
Range of Weighted Average Weighted Average
Exercise Prices Number Remaining Life Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.00 - $ 19.00 52,000 3.65 years $ 17.03
</TABLE>
As described in Note 1, the Bank continues to apply APB Opinion No. 25 and
related Interpretations in accounting for the Plans, and accordingly, no
compensation cost has been recognized in 1996 or 1995. If compensation cost for
the Plans had been determined consistent with the method of SFAS No. 123, the
Bank's net income and earnings per share for the year ended December 31, 1996
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net income As reported $ 1,820
Pro forma $ 1,696
Earnings per share As reported $ 1.91
Pro forma $ 1.78
</TABLE>
The weighted average fair value of options granted under the Plans during 1996
of $3.16 was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used:
dividend yield of 3.46%, expected volatility of 22.26%, risk free interest rate
of 5.95% and expected lives of 3 years.
-33-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
As described in Note 1, the Company adopted SFAS No. 109 as of January 1, 1993.
SFAS No. 109 establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes.
A reconciliation of the income tax provision to the amount computed using the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Income tax at 34% of pre-tax income $ 778 $ 782 $ 484
Connecticut corporation tax, net of federal tax benefit (14) 171 133
Effect of tax-exempt income (36) (38) (31)
Merger expenses -- 5 69
Change in valuation allowance (214) -- (59)
Net difference in book and tax bases of bank's assets -- -- 67
Other items, net (43) 64 56
- ---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 471 $ 984 $ 719
===========================================================================================================================
Effective rate 20.6% 42.7% 50.4%
===========================================================================================================================
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Current income taxes:
Federal $ 762 $ 725 $ 494
State 136 259 190
- ---------------------------------------------------------------------------------------------------------------------------
Total 898 984 684
Deferred income tax (benefit) expense
Federal (56) -- 81
State (157) -- 13
- ---------------------------------------------------------------------------------------------------------------------------
Total (213) -- 94
Change in valuation allowance (214) -- (59)
- ---------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 471 $ 984 $ 719
===========================================================================================================================
</TABLE>
Deferred income tax assets and liabilities at December 31, 1996 and 1995 reflect
the impact of temporary differences between values recorded as assets and
liabilities for financial reporting purposes and values utilized for
remeasurement in accordance with the tax laws. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities are
as follows:
-34-
<PAGE>
================================================================================
[PHOTO] Compass
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
=======================================================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 360 $ 394
Deferred loan fees 103 115
Deferred compensation 72 48
Net operating loss 647 730
Net unrealized gains on securities 9 0
State tax credit 148 0
Other 0 9
- -------------------------------------------------------------------------------------------------------
Total 1,339 1,296
- -------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Net unrealized losses on securities 0 28
Treasury securities 76 148
Depreciation 70 177
Other 37 0
- -------------------------------------------------------------------------------------------------------
Total 183 353
- -------------------------------------------------------------------------------------------------------
Valuation allowance (421) (635)
- -------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 735 $ 308
=======================================================================================================
</TABLE>
The Company has net operating loss carryforwards ("NOL's") for federal income
tax purposes at December 31, 1996 of approximately $1,900,000 expiring in years
2003 through 2008. The NOL's relate to the acquisition of Liberty in 1994. Due
to limitations on their use, a valuation allowance has been established to
reduce the NOL's to the amount that, more likely than not, will be realized.
10. Employee Benefit Plan
The Bank has an incentive savings plan under Section 401(k) of the Internal
Revenue Code. Employees are eligible to participate after one year of continuous
service. The plan allows participating employees to defer up to 15% of their
compensation on a pre-tax basis, within code limitations, through contributions
to the plan. In accordance with the provisions of the plan, the Bank matches up
to 6% of the employee contributions with a percentage determined by the Board of
Directors. Matching contributions of $43,000, $38,600 and $53,300 were charged
to operating expenses in 1996, 1995 and 1994, respectively.
11. Village Bancorp, Inc. (Parent Company Only) Condensed Financial Statements
Condensed balance sheets are as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1996 1995
=======================================================================================================
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------------
Investment in subsidiary $ 15,222 $ 14,073
Other assets 75 75
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 15,297 $ 14,148
=======================================================================================================
STOCKHOLDERS' EQUITY $ 15,297 $ 14,148
=======================================================================================================
</TABLE>
-35-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued)
Condensed operating results are as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Dividend income from Bank $ 637 $ 455 $ 1,344
Equity in undistributed income of subsidiary 1,183 861 (712)
Income tax benefit from NOL carryforwards -- -- 75
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,820 $ 1,316 $ 707
===========================================================================================================================
<CAPTION>
Condensed statements of cash flows are as follows:
(In thousands)
Year Ended December 31,
1996 1995 1994
===========================================================================================================================
OPERATING ACTIVITIES:
Net income $ 1,820 $ 1,316 $ 707
Equity in undistributed income of subsidiary (1,183) (861) 712
Income tax benefit from NOL carryforwards -- -- (75)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 637 $ 455 $ 1,344
===========================================================================================================================
INVESTING ACTIVITIES:
Investment in subsidiaries $ (20) $ (35) $ (842)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (20) $ (35) $ (842)
===========================================================================================================================
FINANCING ACTIVITIES:
Cash dividends paid $ (637) $ (455) $ (544)
Net proceeds from issuance of common
stock and capital contribution 20 35 42
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities $ (617) $ (420) $ (502)
===========================================================================================================================
</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 the parent
company. Under Connecticut law, the approval of the primary regulator is
required if the dividend declared by the bank in any year exceeds the net
profits of that year combined with its retained net profits of the preceding two
years.
In addition, the Bank is subject to restrictions under the Federal Reserve Act.
These restrictions limit the transfer of funds to the parent company, in the
form of loans or extensions of credit, investments and purchases of assets. Such
transfers are limited in amount to 10% of the bank's capital and surplus. These
transfers are also subject to various collateral requirements.
12. Related Party Transactions
Certain directors and executive officers, including their immediate families and
companies in which they are principals, are loan customers of the Bank. Loans to
these persons aggregated approximately $4,644,000 and $5,044,000 at December 31,
1996 and 1995, respectively. During 1996 new loans to related parties aggregated
$9,222,000 and loan payments aggregated $9,622,000. The maximum amount of such
loans outstanding during 1996 and 1995 was $10,220,000 and $10,394,000,
respectively.
Two directors and four stockholders of the Company are partners in a joint
venture which is leasing certain real estate to the Bank. The terms of such
lease are described further in Note 13.
-36-
<PAGE>
================================================================================
[PHOTO] Compass
13. Commitments and Contingent Liabilities
In July 1985, the Bank entered into a five-year noncancelable, branch office
lease arrangement. The lease contains a provision which allows for an annual
adjustment to the minimum payment to reflect changes in the Consumer Price Index
and a provision for two five-year renewal options.
In March 1993, the Bank entered into a five-year noncancelable, office lease
arrangement with related parties (see Note 12). Minimum payments under this
operating lease started at $82,400 a year. The lease contains a provision which
allows for a five percent annual increase and provides for two five-year renewal
options.
The Bank is leasing space for its Shelter Rock Road, Danbury office under a
lease agreement that extends through October 31, 2001. Minimum payments under
this lease start at $39,360 per year.
Total rent expense for 1996, 1995 and 1994 was $255,000, $248,000 and $221,000,
respectively, which amounts are net of $19,000 and $20,000 of sublease income in
1995 and 1994.
Future minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
(in thousands)
================================================================================
<S> <C> <C>
1997 $ 228
1998 215
1999 131
2000 85
2001 33
- --------------------------------------------------------------------------------
Total $ 692
================================================================================
</TABLE>
14. Estimated Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the estimated fair values of certain financial instruments.
Estimated fair values are as of December 31, 1996 and 1995 and have been
determined using available market information and various valuation estimation
methodologies. Considerable judgment is required to interpret the effects on
fair value of such items as future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. The estimates presented herein are not necessarily indicative of the
amounts that the Company would realize in a current market exchange. Also, the
use of different market assumptions and/or estimation methodologies may have a
material effect on the determination of the estimated fair values.
<TABLE>
<CAPTION>
As of December 31,
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
====================================================================================================================
Assets: (In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,145 $ 15,145 $ 17,325 $ 17,325
Securities 33,616 33,553 34,562 34,776
Loans 123,884 124,275 117,674 118,660
Accrued income receivable 1,401 1,401 1,275 1,275
Liabilities:
Deposits without stated maturities 106,625 106,625 100,907 100,907
Time deposits 56,000 55,972 57,632 57,618
Accrued interest payable 912 912 1,160 1,160
====================================================================================================================
</TABLE>
-37-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
Notes to Consolidated Financial Statements (continued) [PHOTO] Compass
The fair value estimates presented above are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued since
December 31, 1996 and, therefore, current estimates of fair value may differ
significantly from the amounts presented above.
Fair value methods and assumptions are as follows:
Cash and Cash Equivalents, Accrued Income Receivable and Accrued Interest
Payable - The carrying amount is a reasonable estimate of fair value.
Securities - The fair value of securities was estimated based on quoted market
prices or dealer quotes, if available. If a quote is not available, fair value
is estimated using quoted market prices for similar securities.
Loans - The fair value of fixed rate loans has been estimated by discounting
projected cash flows using current rates for similar loans. For loans which
reprice to market rates or mature within a one year time frame, the carrying
amount is a reasonable estimate of fair value. The value of impaired loans of
approximately $1,576,000 and $636,000 at December 31, 1996 and 1995,
respectivly,are estimated to have a fair value of approximately $1,361,000 and
$456,000. This estimate is very subjective and may not be indicative of what
would be realized in a liquidation situation.
Deposits Without Stated Maturities - Under the provisions of SFAS No. 107, the
estimated fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings accounts, NOW accounts, money market and
checking accounts, is equal to the amount payable on demand.
Time Deposits - The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Off Balance Sheet Risk -As described in Note 4, the Company was a party to
financial instruments with off-balance sheet risk at December 31, 1996. Such
financial instruments consist of commitments to extend permanent financing and
letters of credit. If the options are exercised by the prospective borrowers,
these financial instruments will become interest-bearing assets of the Company.
If the options expire, the Company retains any fees paid by the counterparty in
order to obtain the commitment or guarantee. The fair value of commitments is
estimated based upon fees currently charged to enter into similiar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate commitments, the fair
value estimation takes into consideration an interest rate risk factor. The fair
value of guarantees and letters of credit is based on fees currently charged for
similiar agreements. The fair value of these off-balance sheet items at December
31, 1996 and 1995, respectively, approximates the recorded amounts of the
related fees, which are not material. The Company has not engaged in hedge
transactions such as interest rate futures contracts or interest rate swaps.
-38-
<PAGE>
================================================================================
Officers, Board of Directors & Advisory Board of Directors [LOGO] Compass
- --------------------------------------------------------------------------------
Village Bancorp, Inc.
Officers
Edward J. Hannafin, Chairman of the Board
Nicholas R. DiNapoli, Vice Chairman of the Board
Enrico J. Addessi, Secretary of the Board
Robert V. Macklin, President & Chief Executive Officer
James R. Umbarger, Executive Vice President
Board of Directors
Enrico J. Addessi, President - Addessi of Ridgefield, Inc.
Jose P. Boa, President - Diversified Maintenance Corporation
Richard O. Carey, Owner - Connecticut Land Company
Madeline F. Contegni, Partner - Prudential Prime Properties
Jeanne M. Cook, Owner - Jeanne Cook Travel Services
Nicholas R. DiNapoli, President - DiNapoli Development
Company, Inc.
Edward J. Hannafin, Attorney - (Principal) Cutsumpas,
Collins, Hannafin, Garmella, Jaber & Tuozzolo, P.C.
Joseph L. Knapp, President - Knapp Brothers, Inc.
Carl H. Lecher, President - Carl Lecher, Inc.
Robert V. Macklin, President - Village Bancorp, Inc.
Antonio M. Resendes, Department Head - Henry Abbot
Technical School
Thomas F. Reynolds, Partner - Reynolds & Rowella, CPA
Robert Scala, Private Investor
- --------------------------------------------------------------------------------
The Village Bank & Trust Company
Officers
Edward J. Hannafin, Chairman of the Board
Nicholas R. DiNapoli, Vice Chairman of the Board
Robert V. Macklin, President & Chief Executive Officer
Enrico J. Addessi, Secretary of the Board
Robert Scala, Assistant Secretary of the Board
James R. Umbarger, Executive Vice President & Treasurer
George W. Hermann, Sr. Vice President
Gerard P. Shpunt, Sr. Vice President & Controller
Paul T. Budrow, Vice President
Dennis P. Clark, Vice President
Deborah L. Roche, Vice President
Elizabeth S. Arsenault, Assistant Vice President
Dennis J. Fitzgerald, Assistant Vice President
Kathleen Leach, Assistant Vice President
Dolores F. Mezo, Assistant Vice President
Jane Saunders, Assistant Vice President
Rita Sedor, Assistant Vice President
Richard Fink, Branch Office Administrator
Claudia K. St. John, Assistant Treasurer
Maura E. Saraceno, Assistant Treasurer
Paul M. Schmiedel, Assistant Treasurer
William Gabriele, Banking Officer - Lending
Marc Hirschenfang, Banking Officer - Operations
Board of Directors
Enrico J. Addessi, President - Addessi of Ridgefield, Inc.
Jose P. Boa, President - Diversified Maintenance Corporation
Richard O. Carey, Owner - Connecticut Land Company
Madeline F. Contegni, Partner - Prudential Prime Properties
Jeanne M. Cook, Owner - Jeanne Cook Travel Services
Nicholas R. DiNapoli, President - DiNapoli Development
Company, Inc.
Edward J. Hannafin, Attorney - (Principal) Cutsumpas,
Collins, Hannafin, Garamella, Jaber & Tuozzolo, P.C.
Joseph L. Knapp, President - Knapp Brothers, Inc.
Carl H. Lecher, President - Carl Lecher, Inc.
Robert V. Macklin, President - Village Bancorp, Inc.
Antonio M. Resendes, Dept. Head - Henry Abbot Technical School
Thomas F. Reynolds, Partner - Reynolds & Rowella, CPA
Robert Scala, Private Investor
James R. Umbarger, Executive Vice President - The Village Bank
& Trust Company
-39-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
[PHOTO] Compass
- --------------------------------------------------------------------------------
The Village Bank & Trust Company
(Continued)
Advisory Board of Directors
Lewis J. Finch, Real Estate Investor - Chairman of the Board
Emeritus
James Belote, Teacher- Ridgefield Public Schools
Loretta Brickley, Zoning Enforcement Officer - New Milford
Joseph Brunetti, Retired
Joseph F. Buzaid, Jr., Owner - Powerhouse Appliances
George Catha, President - Data Set Cable Company
George M. Cohan, Attorney - (Partner) Cohan & Kulawitz
Elie S. Coury, Attorney
John F. Coyle, Realtor - John F. Coyle Associates
Paul Dewitt, Owner - Economy Printing
Delfina do Nascimento, Co-Owner - N&T Enterprises
Eric G. Erhardt, President - Ridgefield European Motors, Inc.
Barry Finch, Realtor - Finch Associates
Patrick Fortin, Owner - Pat's Sales & Service, Inc.
Dr. Joshua Friedman, President - Electro-Lite Corporation
Morley M. Goldberg, M.D. - Physician
Clark A. Heydon, Jr., D.D.S. - Orthodontist
Carmine Iapaluccio. Jr., Owner - C. Iapaluccio Co.
Wendy Infurchia, Vice President - DiNapoli Development, Co., Inc.
George Kaufman, President - International Tire Warehouses, Inc.
Paul J. Kuehner, Vice President - Building & Land Technology, Inc.
Nicholas M. LaCava, Owner - Asco Supply Company,
Inc.
Edward J. Manzi, President - Woodbury Insurance
Joseph F. Millett, Owner - The Athletic Club
Fred P. Montanari, Real Estate Investor
Abraham Morelli, Jr., President - Morelli's Inc.
Thomas B. Nash, Publisher - The Acorn Press
Louis Nazzaro, Partner - Nazzaro Contracting
Del Overby, Community Leader
R. David Piersall, Real Estate Investor
Gino B. Polverari, Retired
Deborah Pritchard, Vice President - Chemical Marketing Concepts, Inc.
Gerald A. Rabin, Owner - Ridgefield Hardware Company,Inc.
Octavio Rebelo, Owner - Rebelo's Realty
Henry A. Rost, Jr., President - Realty Seven, Inc.
Perry Salvagne, Owner - Hodge Insurance Agency
Robert J. Sharp, President - Newman/Sharp Racing, Inc.
Jeffery Sienkiewicz, Attorney - (Partner) Sienkiewicz & McKenna
Thomas M. Sinchak, Attorney
Wayne Skelly, Zoning Enforcement Officer - City of Danbury
John Spatola, Self Employed
O.H. Stark, Marketing Consultant
Donald C. Sturges, Partner - Sturges Bros., Inc.
William W. Sullivan, Attorney - (Partner) Sullivan & Biraglia, P.C.
Luis A. Tomas, Owner - European's Furniture
Gino Torcellini, Retired
Valentine Ventura, Owner - Plante Brothers
Gerry Ward, President - Gerry Ward & Associates
-40-
<PAGE>
===============================================================================
Capital Stock, Annual Meeting & [PHOTO] Compass
Request for Financial Information
Capital Stock
Village Bancorp, Inc. stock is listed on the NASDAQ SmallCap Market. The prices
of the Company's common stock as quoted by NASDAQ and the dividends paid during
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Bid Ask Dividend Bid Ask Dividend
--- --- -------- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 18.75 $ 20.25 $.15/Share $ 12.00 $ 12.75 $ .11/Share
2nd Quarter $ 19.00 $ 20.50 $.17/Share $ 12.75 $ 13.50 $ .11/Share
3rd Quarter $ 19.00 $ 20.50 $.17/Share $ 13.375 $ 13.75 $ .11/Share
4th Quarter $ 20.75 $ 22.50 $.18/Share $ 19.25 $ 21.00 $ .15/Share
</TABLE>
As of December 31, 1996 there were 1,235 stockholders of record.
Annual Meeting
The Company's annual meeting will be held on Monday April 28, 1997, 8:00 PM at
The Village Bank & Trust Company, 25 Prospect Street, Ridgefield, Connecticut.
Stockholders who cannot attend are urged to exercise their right to vote by
proxy.
Request for Financial Information
The Company will provide without charge to each stockholder, upon written
request, a copy of the Company's Annual Report on Form 10-K. Written requests
should be directed to Enrico J. Addessi, Secretary, c/o Village Bancorp, Inc.,
P.O. Box 366, Ridgefield, CT 06877.
This Statement has not been reviewed, nor confirmed for accuracy or relevance,
by the Federal Deposit Insurance Corporation.
-41-
Village Bancorp, Inc. o 1996 Annual Report
<PAGE>
================================================================================
The Village Bank & Trust Company [PHOTO] Compass
Branch Locations
Offices Hours
25 Prospect Street Office 9:00 am - 3:00 pm M-W
Ridgefield, CT 06877 9:00 am - 5:00 pm Th
Manager: Richard Fink 9:00 am - 6:00 pm F
(203)438-9551 9:00 am - 12:00pm S
Drive-up 8:00 am - 8:00 pm M-F
9:00 am - 12:00 pm S
- -----------------------------------------------------------------------------
219 Town Green Office 8:00 am - 4:00 pm M-Th
Wilton, CT 06897 8:00 am - 7:00 pm F
Manager: Rita Sedor 9:00 am - 12:00 pm S
(203)762-8409 Drive-up ATM 24 Hours
- -----------------------------------------------------------------------------
54 Bridge Street Office 9:00 am - 3:00 pm M-Th
New Milford, CT 06776 9:00 am - 6:00 pm F
Manager: Maura Saraceno 9:00 am - 12:00 pm S
(860)350-3460 Drive-up 8:00 am - 8:00 pm M-F
9:00 am - 12:00 pm S
- -----------------------------------------------------------------------------
28 Shelter Rock Road Office 9:00 am - 3:00 pm M-W
Danbury, CT 06810 9:00 am - 5:00 pm Th
Manager: Dolores Mezo 9:00 am - 6:00 pm F
(203)798-9696 9:00 am - 12:00 pm S
Drive-up 8:00 am - 8:00 pm M-F
9:00 am - 12:00 pm S
=============================================================================
All offices have 24 hour Village Banker ATMs.
Opening: Summer 1997
CityCenter Danbury Office
National Place
Danbury, CT 06810
-42-
Exhibit 21
Subsidiaries of the Registrant
The Registrant has one wholly owned subsidiary, The Village Bank & Trust
Company, a Connecticut chartered commercial bank.
-43-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,545
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,706
<INVESTMENTS-CARRYING> 17,198
<INVESTMENTS-MARKET> 17,135
<LOANS> 126,836
<ALLOWANCE> 1,356
<TOTAL-ASSETS> 179,550
<DEPOSITS> 162,635
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,628
<LONG-TERM> 0
0
0
<COMMON> 3,171
<OTHER-SE> 12,126
<TOTAL-LIABILITIES-AND-EQUITY> 179,550
<INTEREST-LOAN> 10,472
<INTEREST-INVEST> 2,000
<INTEREST-OTHER> 321
<INTEREST-TOTAL> 12,793
<INTEREST-DEPOSIT> 4,953
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 7,840
<LOAN-LOSSES> 120
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 5,919
<INCOME-PRETAX> 2,291
<INCOME-PRE-EXTRAORDINARY> 2,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,820
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
<YIELD-ACTUAL> 7.66
<LOANS-NON> 1,596
<LOANS-PAST> 157
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,576
<ALLOWANCE-OPEN> 1,311
<CHARGE-OFFS> 173
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 1,356
<ALLOWANCE-DOMESTIC> 1,356
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 961
</TABLE>
