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, 1998 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:
Name of each exchange
Title of each class: 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 15, 1999
Common Stock ($3.33 Par Value) 1,951,534 Shares
State the aggregate market value of the voting stock held by non-affiliates
of the registrant - $42,016,554.
Aggregrate market value Based upon reported closing price
of voting stock as supplied by NASDAQ
$48,056,525 March 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit index is on page 55.
<PAGE>
VILLAGE BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings.............................................10
Item 4. Submission Of Matters to Vote of Security Holders.............10
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters...................................10
Item 6. Selected Financial Data.......................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11
Item 7.a. Quantitative and Qualitative Disclosure About Market Risk.....16
Item 8. Financial Statements and Supplementary Data...................18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................39
PART III
Item 10. Directors and Executive Officers of the Registrant............39
Item 11. Executive Compensation........................................42
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................50
Item 13. Certain Relationships and Related Transactions................52
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...........................................53
SIGNATURES ...................................................................54
EXHIBIT INDEX.................................................................55
<PAGE>
PART I
Item 1. Business
Village Bancorp, Inc.
The management of The Village Bank & Trust Company (Bank) 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 the Bank and now operates Liberty's former office as a branch
office of the Bank. 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, 1997 the
Company's only subsidiary was the Bank. On November 11, 1998, the Company and
Webster Financial Corporation ("Webster") announced that they had reached a
definitive agreement, whereby Webster would acquire the Company, for the
equivalent of $23.50 per share in a tax-free, stock-for-stock exchange valued at
approximately $46.4 million, with stockholders permitted to elect to receive
cash-in-lieu of Webster stock for up to 20% of the Company's shares. The
definitive agreement, which has been approved by both companies boards of
directors, is subject to approval by the Company's stockholders and regulatory
authorities. The transaction is expected to close in the second quarter of 1999.
The Village Bank & Trust Company
The Bank 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. With the Company being acquired by
Webster, the Bank's offices will become branches in the Webster Bank network.
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,
Westport 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, 1998, Village had eighty-eight (88) full time equivalent
employees. Of these employees two officers of the Bank provide services to the
Company.
Supervision and Regulation
The Bank is insured by the Federal Deposit Insurance Corporation (FDIC) and is
subject to extensive regulation by the FDIC. The Bank, 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. The
Company, as a bank holding company,
1
<PAGE>
is also subject to regulation by the Federal Reserve Board.
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.
Additional information required pursuant to this Item follows in tabular form:
2
<PAGE>
business
================================================================================
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<CAPTION>
(Dollar amounts in thousands)
1998 1997 1996
====================================================================================================================================
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
====================================================================================================================================
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans(1) $ 150,621 $ 12,934 8.59% $ 135,525 $ 11,708 8.64% $ 121,387 $ 10,472 8.63%
Taxable securities(2) 37,420 2,094 5.60 35,688 2,064 5.78 32,132 1,883 5.86
Tax-exempt securities 11,031 500 4.53 6,836 312 4.56 2,495 121 4.85
Interest bearing deposits 14 1 4.29 50 2 4.00 -- --
Federal funds sold 8,030 416 5.18 7,745 417 5.38 5,994 317 5.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 207,116 $ 15,945 7.70% $ 185,844 $ 14,503 7.80% $ 162,008 $ 12,793 7.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 12,181 9,184 8,004
Bank premises and equipment 5,276 2,760 1,537
Accrued income and other assets 2,928 4,337 2,532
Allowance for loan losses (1,243) (1,333) (1,299)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 226,258 $ 200,792 $ 172,782
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 53,093 646 1.22% $ 42,522 $ 645 1.52% $ 39,029 $ 622 1.59%
Savings deposits 52,745 1,301 2.47 48,035 1,317 2.74 46,200 1,320 2.86
Time deposits 80,357 4,238 5.27 74,730 4,174 5.59 54,990 3,011 5.48
Federal funds purchased 248 17 6.85 15 1 6.67 8 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 186,443 $ 6,202 3.33% $ 165,302 $ 6,137 3.71% $ 140,227 $ 4,953 3.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 21,217 17,773 16,271
Other 1,975 2,061 1,670
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 209,635 185,136 158,168
Stockholders' equity 16,623 15,656 14,614
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 226,258 $ 200,792 $ 172,782
NET INTEREST INCOME $ 9,743 $ 8,366 $ 7,840
====================================================================================================================================
NET YIELD ON INTEREST
EARNING ASSETS 4.70% 4.50% 4.84%
====================================================================================================================================
</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 $502,000, $208,000 and $198,000 in 1998, 1997 and 1996, respectively.
(2) Includes Federal Home Loan Bank stock.
3
<PAGE>
business (continued)
================================================================================
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)
1998 Compared to 1997 1997 Compared to 1996
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 $ 1,293 $ (67) $ 1,226 $ 1,224 $ 12 $ 1,236
Taxable securities 84 (54) 30 199 (18) 181
Tax-exempt securities 190 (2) 188 198 (7) 191
Interest bearing deposits (1) -- (1) 1 1 2
Federal funds sold 98 (99) (1) 94 6 100
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,664 $ (222) $ 1,442 $ 1,716 $ (6) $ 1,710
====================================================================================================================================
Interest expense on:
NOW accounts $ 5 $ (4) $ 1 $ 45 $ (22) $ 23
Savings deposits 3,224 (3,240) (16) (2) (1) (3)
Time deposits 267 (203) 64 1,101 62 1,163
Federal funds purchased 16 -- 16 1 -- 1
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 3,512 $ (3,447) $ 65 $ 1,145 $ 39 $ 1,184
====================================================================================================================================
</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,
1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $ 35,888 $ 42,890 $ 30,218
States and political subdivisions 10,758 10,886 2,639
Other 16 33 47
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 46,662 $ 53,809 $ 32,904
====================================================================================================================================
</TABLE>
4
<PAGE>
business (continued)
================================================================================
The following table sets forth the maturities of securities at December 31, 1998
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>
(Dollar amounts in thousands)
<CAPTION>
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 $ 16,804 4.76% $ 18,724 5.26% $ 360 6.32% $ -- --
States and political
subdivisions 1,458 4.10 2,409 4.46 4,387 4.65 2,504 5.02
Other 14 4.68 2 6.89 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTALS $ 18,276 4.71% $ 21,135 5.17% $ 4,747 4.78% $ 2,504 5.02%
====================================================================================================================================
</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,
1998 1997 1996
=============================================================================================================================
<S> <C> <C> <C>
Real estate - mortgage and home equity, net $ 108,065 $ 108,621 $ 96,345
Real estate - construction and land development 13,620 14,012 7,953
Installment and consumer credit 8,389 7,888 9,917
Commercial and financial 19,312 17,138 12,621
-----------------------------------------------------------------------------------------------------------------------------
TOTALS $ 149,386 $ 147,659 $ 126,836
=============================================================================================================================
</TABLE>
The following table shows the maturity of gross loans (excluding installment and
consumer credit loans) outstanding as of December 31, 1998. 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 $ 9,718 $ 6,592 $ 3,002 $ 19,312
Real estate - construction and land development 12,361 944 315 13,620
Real estate - mortgage and home equity 1,707 3,578 102,780 108,065
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 23,786 $ 11,114 $ 106,097 $ 140,997
====================================================================================================================================
Loans maturing after one year with:
Fixed interest rates $ 319 $ 8,822
Variable interest rates 10,795 97,275
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 11,114 $ 106,097
====================================================================================================================================
</TABLE>
5
<PAGE>
business (continued)
================================================================================
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,
1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C>
Nonaccrual loans $ 1,137 $ 1,299 $ 1,596
Accruing loans past due
90 days or more 151 323 157
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,288 $ 1,622 $ 1,753
====================================================================================================================================
</TABLE>
At December 31, 1998, $1,135,000 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 $116,000, $74,000 and $59,000 of gross
interest income in 1998, 1997 and 1996, 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)
1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C>
Allowance at beginning of year $ 1,309 $ 1,356 $ 1,311
Charge-offs:
Commercial and financial 29 -- --
Installment and consumer credit 23 77 69
Real estate - mortgage -- 42 104
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 52 119 173
====================================================================================================================================
Recoveries:
Commercial and financial 38 1 10
Installment and consumer credit 2 10 7
Real estate - mortgage 4 1 81
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 44 12 98
====================================================================================================================================
Net charge-offs 8 107 75
Provision (credit) for loan losses (1) (123) 60 120
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 1,178 $ 1,309 $ 1,356
====================================================================================================================================
Ratio of net charge-offs (recoveries) during the
year to average loans outstanding .005% .079% .062%
====================================================================================================================================
</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 1999.
6
<PAGE>
business (continued)
================================================================================
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,
1998 1997 1996
====================================================================================================================================
Amount Rate Amount Rate Amount Rate
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing and
demand deposits $ 21,217 $ 17,773 $ 16,271
NOW accounts 53,093 1.22% 42,522 1.52% 39,029 1.59%
Savings deposits 52,745 2.47 48,035 2.74 46,200 2.86
Time deposits 80,357 5.27 74,730 5.59 54,990 5.48
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 207,412 $ 183,060 $ 156,490
====================================================================================================================================
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Time Certificates of Deposit
===============================================================================================================================
<S> <C>
Three months or less $ 4,208
Over three through six months 2,218
Over six through twelve months 4,741
Over twelve months 905
-------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 12,072
===============================================================================================================================
</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,
1998 1997 1996
===============================================================================================================================
<S> <C> <C> <C>
Return on average assets .91% .59% 1.05%
Return on average stockholders' equity 12.40 7.52 12.45
Dividend payout ratio 34.62 59.02 35.26
Equity to assets ratio (1) 7.35 7.80 8.46
===============================================================================================================================
</TABLE>
(1) Ratio is based upon average stockholders' equity and average asset balances.
MARKET RISK
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Any fluctuation in interest rates will impact both the
level of income and expense recorded on a large percentage of the Bank's assets
and liabilities, and the fair value of all interest earning assets. In general,
financial institutions are negatively affected by an increase in interest rates
to the extent that interest-bearing liabilities mature or reprice more rapidly
than interest-earning assets. The Bank does not own any trading assets, nor does
it have any hedging transactions in place such as interest rate swaps and caps.
Based on the nature of the Bank's operations, it is not subject to foreign
exchange or commodity price risk.
The Bank's earnings are primarily dependent on its net interest income which is
the difference (the "spread") between the yields earned on its interest earning
assets, such as loans and investments, and the rates paid on its interest
bearing liabilities, primarily deposits.
7
<PAGE>
business
================================================================================
Asset/liability management is the measurement and analysis of the Bank's
exposure to changes in the interest rate environment. The principal objectives
of the Bank's interest rate risk management activites are to: (a) evaluate the
interest rate risk included in certain balance sheet accounts; (b) determine the
level of risk appropriate given the Bank's business focus, operating
environment, capital and liquidity requirements and performance objectives; and
(c) manage this risk consistent with Board of Director approved guidelines. The
Bank's interest rate management strategy is designed to stabilize the spread and
preserve capital over a broad range of interest rate scenarios, while at the
same time enhancing income. Management realizes certain risks are inherent in
the financial services industry and that the goal is to identify and minimize
these risks. Various strategies are in place to control the Bank's exposure to
interest rate risk. The Bank has an Asset/Liability Committee comprised of
senior management which is primarily responsible for monitoring and determining
methods of managing the rate sensitivity and repricing characteristics of the
balance sheet components. This is done consistent with maintaining acceptable
levels of both risk and net interest income. This committee meets on a regular
basis. Quarterly reports are provided to the Board of Directors for
informational purposes and to ensure compliance with policy.
The following table sets forth the dollar amount, weighted average interest
rates and estimated fair value (see Note 15 to the financial statements) of
selected assets and liabilities that are scheduled to mature within the stated
time frames as of December 31, 1998:
Maturities (dollars in thousands)
<TABLE>
<CAPTION>
Scheduled Maturity dates
1999 2000 2001 2002 2003 Thereafter Total Fair Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities $ 19,176 $ 14,509 $ 2,452 $ 1,152 $ 3,022 $ 7,252 $ 47,563 $ 48,048
Weighted average
interest rate (%) 4.79 5.08 5.48 5.15 5.35 4.86 4.97
Home equity loans 474 695 246 690 688 3,737 6,530 6,530
Weighted average
interest rate (%) 9.13 9.25 9.19 9.11 9.10 9.23 9.20
Real estate loans 13,594 476 777 354 596 99,487 115,155 116,084
Weighted average
interest rate (%) 8.68 8.65 8.48 8.90 8.78 7.90 8.01
Installment and
commercial loans 17,111 3,875 3,048 1,717 772 1,178 27,701 27,701
Weighted average
interest rate (%) 8.88 8.53 8.98 8.89 8.66 9.29 8.85
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 50,355 $ 19,555 $ 6,523 $ 3,913 $ 5,078 $ 111,654 $ 197,078 $ 198,492
====================================================================================================================================
Liabilities:
Non-interest
bearing deposits $ 22,162 $ -- $ -- $ -- $ -- $ -- $ 22,162 $ 22,162
Weighted average
interest rate (%) -- -- -- -- -- -- --
Now, savings &
money market 117,396 -- -- -- -- -- 117,396 117,396
Weighted average
interest rate (%) 1.54 -- -- -- -- -- 1.54
Certificates of deposit 69,758 5,380 1,562 489 430 -- 77,619 77,881
Weighted average
interest rate (%) 4.95 5.65 5.46 6.07 5.31 -- 5.02
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 209,316 $ 5,380 $ 1,562 $ 489 $ 430 $ -- $ 217,177 $ 217,439
====================================================================================================================================
</TABLE>
Although the Bank is subject to interest rate risk as described above, loans and
deposits of the Bank have historically been largely stable and the Company has
not experienced any significant adverse effects on net income in periods of
rapidly changing interest rates. Accordingly, no prepayment, deposit decay rates
or reinvestment assumptions have been reflected in the above table. Management
makes a conscious effort to match the maturities or the repricing time frames of
assets with the liabilities that fund them, to limit the period of time between
repricing on adjustable rate assets in portfolio and to minimize the volume of
fixed-rate assets held.
8
<PAGE>
business
================================================================================
INTEREST RATE SENSITIVITY
The following table sets forth the dollar amount of rate sensitive assets and
liabilities that contractually reprice within the stated time frames at December
31, 1998:
<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) $ 92,835 $ 38,394 $ 18,157 $ 149,386
Federal funds 18,150 -- -- 18,150
Securities1 19,177 21,134 7,252 47,563
- ------------------------------------------------------------------------------------------------------------------------------------
Total 130,162 59,528 25,409 215,099
====================================================================================================================================
Rate Sensitive Liabilities:
Deposits 187,155 7,860 -- 195,015
- ------------------------------------------------------------------------------------------------------------------------------------
Gap (Repricing difference) $ (56,993) $ 51,668 $ 25,409 $ 20,084
====================================================================================================================================
Cumulative gap $ (56,993) $ (5,325) $ 20,084
====================================================================================================================================
Cumulative ratio of rate
sensitive assets to liabilities .70 .97 1.10
====================================================================================================================================
</TABLE>
1 Includes Federal Home Loan Bank Stock
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 contained approximately seven thousand (7,000) square feet of
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 was leasing the
facility to the Bank. The lease expired in the fourth quarter of 1998 and was
not renewed.
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.
9
<PAGE>
Village entered into a lease agreement in May, 1997 for a branch banking
facility at 244 Post Road East, Westport, Connecticut. The leasehold contains
eight thousand seventy-nine (8,079) square feet, of which approximately 6,000 is
used by the Bank for its branch banking office. Currently approximately one
thousand six hundred (1,600) square feet of this space is being sublet. The
lease arrangement is for ten years with one five year extension option that can
be exercised by the Bank. The current annual rental amount is $270,000, not
including tax and maintenance charges.
Village completed the building a three-story, 17,000 square foot building at 2
National Place, Danbury, Connecticut, in July of 1997, which it owns in fee
simple. The first floor contains a full service branch banking office. The
second and third floors are being utilized for loan and deposit back-office
operations.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
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 1998.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
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
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Bid Ask Dividend Bid Ask Dividend
--- --- -------- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 20.50 $ 22.25 $ .09/Share $ 10.50 $ 11.4375 $ .09/Share
2nd Quarter $ 19.75 $ 20.00 $ .09/Share $ 11.00 $ 11.75 $ .09/Share
3rd Quarter $ 19.50 $ 19.875 $ .09/Share $ 12.375 $ 13.50 $ .09/Share
4th Quarter $ 22.625 $ 24.50 $ .09/Share $ 19.25 $ 22.00 $ .09/Share
</TABLE>
As of December 31, 1998 there were 1,188 stockholders of record.
Request for Financial Information
The Company will provide without charge to each stockholder, upon written
request, a copy of the Company's 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.
10
<PAGE>
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years:
<CAPTION>
(In thousands, except per share amounts)
Year Ended December 31,
1998 1997 1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net interest income $ 9,743 $ 8,366 $ 7,840 $ 7,694 $ 7,002
Provision (credit) for loan losses (123) 60 120 210 311
Net income 2,061 1,178 1,820 1,316 707
- ------------------------------------------------------------------------------------------------------------------------------------
Per share data: (1)
Net income - basic earnings $ 1.07 $ .62 $ .96 $ .70 $ .37
Net income - diluted earnings 1.04 .61 .95 .69 .37
Cash dividends declared .36 .36 .335 .24 .315
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet totals:
Average assets $ 226,258 $ 200,792 $ 172,782 $ 161,898 $ 149,505
Average deposits 207,412 183,075 156,498 146,480 135,642
Average stockholders' equity 16,623 15,656 14,614 13,545 13,095
====================================================================================================================================
</TABLE>
The following table sets forth selected quarterly financial data for 1998 and
1997:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 Quarters 1997 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 $ 9,743 $ 2,470 $2,482 $ 2,449 $ 2,342 $ 8,366 $ 2,250 $ 2,106 $ 2,041 $ 1,969
Provision (credit) for loan losses (123) - - (153) 30 60 15 15 15 15
Net income 2,061 477 580 522 482 1,178 223 231 315 409
- ------------------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income - basic earnings $ 1.07 $ .25 $ .30 $ .27 $ .25 $ .62 $ .12 $ .12 $ .17 $ .21
Net income - diluted earnings 1.04 .24 .29 .27 .24 .61 .12 .12 .16 .21
Cash dividends declared .36 .09 .09 .09 .09 .36 .09 .09 .09 .09
====================================================================================================================================
</TABLE>
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 is presented below:
11
<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. On November 11, 1998, the Company
and Webster Financial Corporation (Webster) announced that they had reached a
definitive agreement, whereby Webster would acquire the Company, for the
equivalent of $23.50 per share in a tax-free, stock-for-stock exchange valued at
approximately $46.4 million, with stockholders permitted to elect to receive
cash-in-lieu of Webster stock for up to 20% of the Company's shares. The
definitive agreement, which has been approved by both companies boards of
directors, is subject to approval by Village Bancorp's shareholders and
regulatory authorities. The transaction is expected to close in the second
quarter of 1999. During 1997, the Bank opened full-service branches in Danbury
and Westport, Connecticut. The Westport location was opened in June of 1997 in
leased office space. The Danbury location was opened in July of 1997 in the
Bank's new three-story, 17,000 square foot office building. In November 1994,
Village Bancorp, Inc. acquired Liberty National Bank. 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, 1998, the Bank had 88 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 1998 TO 1997
Financial Condition
The Company had total assets of $237,156,000 on December 31, 1998 as compared to
assets of $222,549,000 on December 31, 1997. The most significant area of
increase over the past year was in cash and cash equivalents, which increased
$20,089,000 (180.1%).
The growth in this area was funded mainly by an increase of $13,369,000 (6.6%)
in the Bank's deposits. The increase in cash and cash equivalents was primarily
attributable to a combination of factors. The growth of the Bank's loan
portfolio only increased $1,727,000 (1.2%) as increased competition kept loan
growth to a minimum. Deposit growth easily outstripped loan growth, with the new
branch offices increasing the Bank's presence in the marketplace, particularly
in Westport, where the branch opened an entirely new market. Finally, because
year end 1997 cash and cash equivalents was historically lower than what has
usually been kept in this area, there was a conscious effort to increase these
balances.
The loan portfolio of the Bank includes $121,685,000 of real estate, home equity
and construction mortgages. This is 81.5% of the Bank's total loan portfolio as
of December 31, 1998. This is in comparison to $122,633,000 (83.1%) in real
estate related loans outstanding on December 31, 1997. 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 7.35% on December 31, 1998 as
compared to 7.80% on December 31, 1997.
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, 1998 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, 1998 were 13.90% total capital ratio and 13.02% Tier 1
capital ratio, which exceed the minimum requirements. These ratios for December
31, 1997 were 13.06% and 12.06%, respectively. Management does not anticipate
any event that would cause the Company to fall below the minimum requirements at
December 31, 1999, and anticipates that the Company will continue to have excess
"risk-based" capital.
12
<PAGE>
management's discussion & analysis of financial condition &
results of operations (continued)
================================================================================
Results of Operations
Net income for 1998 was $2,061,000 as compared to $1,178,000 for 1997. This
increase was primarily the result of an ongoing cost containment program and the
fact that there were expenses incurred in the completion and related move into
the Bank;s new three story office building in Danbury, Connecticut along with
the opening of a new full-service branch office in Westport, Connecticut in
leased office space. Net interest income for 1998 amounted to $9,743,000 as
compared to $8,366,000 for 1997. Net interest income increased primarily as a
result of the increase in interest income on loans.
Income Taxes
The Company's provision for income taxes was $939,000 for 1998 as compared to
$585,000 for 1997. The increase in the Company's provision for income taxes was
primarily the result of the 75% increase in pre-tax income for the 1998 year.
For more information please see Note 10 to the Consolidated Financial
Statements.
Assets and Related Income Analysis
Loans outstanding on December 31, 1998 totaled $149,386,000 as compared to
$147,659,000 outstanding on December 31, 1997. This small increase in the loan
portfolio of $1,727,000 (1.2%) was for the most part attributable to the
increased competition in the Bank's market area. Over the past year the majority
of real estate loans originated have been fixed rate, which the Bank sells in
the secondary market. The majority of loans at the Bank are and have been real
estate related. Loan income increased $1,226,000 from $11,708,000 for 1997 to
$12,934,000 for 1998. This increase is due to an increase in average outstanding
loans from $135,772,000 for 1997 to $150,803,000 for 1998, offset by a decrease
in the average rate earned from 8.62% in 1997 to 8.58% in 1998.
Securities, which consist of securities held-to-maturity and securities
available-for-sale, decreased $7,147,000 (13.3%) from $53,809,000 at December
31, 1997 to $46,662,000 at December 31, 1998. Income from securities increased
$209,000 (9.0%) from $2,329,000 for the 1997 period to $2,538,000 for the 1998
period. This increase resulted primarily from an increase in average dollar
amount outstanding from $41,760,000 for 1997 to $48,451,000 for 1998, offset by
a decrease in average rate earned from 5.58% for 1997 to 5.24% for 1998. In 1998
there were net security gains of $83,000, in 1997 there were no security gains
or losses. 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 increased by and to $18,150,000 at December 31, 1998. Federal
funds sold income decreased $1,000 (.2%) from $417,000 for 1997 to $416,000 for
1998. This decrease resulted primarily from a decrease in the average rate
earned from 5.38% in 1997 to 5.18% in 1998 offset by an increase in the average
dollar amount outstanding from $7,745,000 in 1997 to $8,030,000 in 1998.
Liability and Related Expense Analysis
Deposits increased $13,369,000 (6.6%) from $203,808,000 at December 31, 1997 to
$217,177,000 at December 31, 1998. Interest on deposits increased $65,000 (1.1%)
from $6,137,000 for 1997 to $6,202,000 for 1998. This increase is attributable
to an increase in the average dollar amount outstanding from $183,060,000 for
1997 to $207,412,000 in 1998, offset by a decrease in the average rate paid of
3.35% for 1997 to 2.99% for 1998.
Salary and benefits expenses increased $297,000 (8.3%) from $3,599,000 in 1997
to $3,896,000 in 1998, primarily as a result of the increase in the number of
personnel due to the opening of the two new branch office locations.
Net occupancy expenses increased $175,000 (21.9%) from $800,000 in 1997 to
$975,000 in 1998, furniture and equipment expenses increased $66,000 (20.3%)
from $325,000 in 1997 to $391,000 in 1998, both as result of additional expenses
due to the opening of the full-service branch locations in Westport and Danbury,
Connecticut.
Data processing services increased $186,000 (30.2%) from $615,000 in 1997 to
$801,000 in 1998, as a result of increased use of services offered along with
increased volumes.
Supplies expenses decreased $65,000 (24.5%) from $265,000 in 1997 to $200,000 in
1998, and advertising expense decreased $154,000 (64.2%) from $240,000 in 1997
to $86,000 in 1998 mainly as a result of the ongoing cost containment program.
Provision for Loan Losses
The provision (credit) for loan losses decreased $183,000 (305.0%) from $60,000
for 1997 to a credit of $123,000 for 1998. 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 $1,178,000 to support loan portfolios of $149,386,000, or a loan
loss reserve ratio of .79%. This is in comparison to a ratio of .89% for 1997.
Management believes that the allowance for loan losses is adequate.
13
<PAGE>
management's discussion & analysis of financial condition &
results of operations (continued)
================================================================================
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 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 $130,162,000 of repricing assets
compared to $187,155,000 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 $49,518,000, or 20.9% of total
assets, as of December 31, 1998, as compared to $36,762,000 (16.5%) at December
31, 1997. 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.
Year 2000
The Company and the Bank are aware of the significant impact that Year 2000
("Y2K") will have on financial service companies, as such, the Bank has
established a program to address Y2K issues. The Board established a Y2K
Committee to oversee activities of management and others in dealing with Y2K
issues. This committee reports to the Board on a regular basis. The Board of
Directors monitors the project and its ongoing implementation. The potential
problem with year 2000 concerns the inability of information systems, primarily
software programs, to properly recognize and process date sensitive information
for the year 2000 and beyond.
The Bank utilizes the services of a third party service bureau for its
primary data processing needs. This service bureau is well on its way to
addressing the Y2K project and has completed the first and second phase of
testing of its processing system. The Bank has also completed its first two
phases of testing on all the applications that are provided by the third party.
This first phase tested the actual change of dates from December, 1999 to
January, 2000. The second phase tested month end, quarter end and odd date (i.e.
February 29, 2000) processing.
The Bank has developed contingency plans to deal with the possibility that
our third party processor will not be Y2K compliant on January 1, 2000. One plan
takes into account our role in the contingency plan that has been adopted by our
processor. The second plan which the Bank has developed will deal with
processing if our third party processor is not able to.
The Bank has completed the planned upgrade of the teller and platform
systems in all branch offices. This upgrade included enhancements to the back
office operational areas as well. All of these upgrades were Y2K compliant. All
personal computers currently in use at the Bank have been tested to ensure Y2K
compliance. In addition, all critical software used at the Bank not directly
involved with system processing by the Bank's third party processor have been
verified as being Y2K compliant.
Another risk for the Company would be the temporary business disruptions of
its large borrowers due to their failure to be prepared for Y2K. The Company has
already polled
14
<PAGE>
management's discussion & analysis of financial condition &
results of operations (continued)
================================================================================
these customers to determine their readiness for year 2000, and
has independently assessed their readiness.
The worst case Y2K scenario would involve the breakdown of utility service,
critical system failure and Federal Reserve, Automated Clearing House and
Clearing House failure. In this case, the Bank would have difficulty continuing
operations in a manner approaching normal. The Company has not yet developed a
contingency plan for this scenario, other than for the critical system failure.
It is not expected that this worst case scenario will occur. It is expected that
utilities, the Federal Reserve and the Clearing Houses will be Y2K compliant.
All of these items will be closely monitored and a contingency plan is expected
to be completed prior to the end of the second quarter of 1999.
The Federal Deposit Insurance Corporation ("FDIC") is responsible for
supervising efforts by banks to prepare for the Y2K date change. The FDIC has
been conducting special examinations of insured banks to make sure they are
taking necessary steps to get ready for the Y2K date change. The FDIC is also
closely monitoring the progress that the Bank is making to complete critical
steps as required by Y2K plans.
The costs associated with the implementation of changes to deal with Y2K
issues is not expected to have a material impact on the Company's consolidated
financial statements. Costs will be expensed as incurred. The only expenses
recorded to date are $42,000. The remaining cost expected to be incurred is
approximately $15,000. While every effort is being made to ensure the Bank is
Y2K compliant, there can be no assurances that Y2K will not to some degree
affect the operations of the Bank.
COMPARISON OF 1997 TO 1996
Financial Condition
The Company had total assets of $222,549,000 on December 31, 1997 as compared to
assets of $179,550,000 on December 31, 1996. The most significant area of
increase over the past year was in loans, which increased $20,823,000 (16.4%)
and securities, which increased $20,905,000 (63.5%).
The growth in these two areas was funded mainly by an increase of $41,183,000
(25.3%) in the Bank's deposits. This increase in loans is primarily attributable
to a combination of factors. The Bank continued its increased marketing effort
in this area. The new branch offices increased the Bank's presence in the
market-place, with the Westport branch opening an entirely new market. The sales
force was expanded late in 1996 in both the mortgage and commercial loan areas,
this helped to increase the volume of business. The expanded adjustable rate
product line has been well received. 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 $122,633,000 of real estate, home equity
and construction mortgages. This is 83.1% of the Bank's total loan portfolio as
of December 31, 1997. This is in comparison to $104,298,000 (82.2%) in real
estate related loans outstanding on December 31, 1996. 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 had a leverage ratio of 7.80% on December 31, 1997 as compared to
8.46% on December 31, 1996. On December 31, 1997 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, 1997 were 13.06%
total capital ratio and 12.06% Tier 1 capital ratio, which exceed the minimum
requirements. These ratios for December 31, 1996 were 14.62% and 13.43%,
respectively. Management does not anticipate any event that would cause the
Company to fall below the minimum requirements at December 31, 1998, and
anticipates that the Company will continue to have excess "risk -based" capital.
Results of Operations
Net income for 1997 was $1,178,000 as compared to $1,820,000 for 1996. Net
interest income for 1997 amounted to $8,366,000 as compared to $7,840,000 for
1996. Net interest income increased primarily as a result of the increase in
interest income on loans.
Income Taxes
The Company's provision for income taxes was $585,000 for 1997 as compared to
$471,000 for 1996. The increase in the Company's provision for income taxes was
primarily the result of the 1996 receipt of a tax refund settlement from the
State of Connecticut. For more information please see Note 10 to the
Consolidated Financial Statements.
Assets and Related Income Analysis
Loans outstanding on December 31, 1997 totaled $147,659,000 as compared to
$126,836,000 outstanding on December 31, 1996. The increase in the loan
portfolio of $20,823,000 (16.4%) 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. There was also an increased sales effort
in the commercial loan area which increased the outstanding by $4,517,000. The
majority
15
<PAGE>
management's discussion & analysis of financial condition &
results of operations (continued)
================================================================================
of loans at the Bank are and have been real estate related. Loan income
increased $1,236,000 from $10,472,000 for 1996 to $11,708,000 for 1997. This
increase is due to an increase in average outstanding loans from $121,623,000
for 1996 to $135,772,000 for 1997, coupled with a slight increase in the average
rate earned from 8.61% in 1996 to 8.62% in 1997.
Securities, which consist of securities held-to-maturity and securities
available-for-sale, increased $20,905,000 (63.5%) from $32,904,000 at December
31, 1996 to $53,809,000 at December 31, 1997. Income from securities increased
$329,000 (16.5%) from $2,000,000 for the 1996 period to $2,329,000 for the 1997
period. This increase resulted primarily from an increase in average dollar
amount outstanding from $34,570,000 for 1996 to $41,760,000 for 1997, offset by
a decrease in average rate earned from 5.79% for 1996 to 5.58% for 1997. In 1997
there were no net security gains or losses; there were net security losses of
$17,000 in 1996. 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 $6,600,000 from $6,600,000 at December 31, 1996 to
$0 at December 31, 1997. Federal funds sold income increased $100,000 (31.5%)
from $317,000 for 1996 to $417,000 for 1997. This increase resulted primarily
from a increase in the average dollar amount outstanding from $5,994,000 in 1996
to $7,745,000 in 1997 coupled with an increase in the average rate earned from
5.29% for 1996 to 5.38% in 1997.
Liability and Related Expense Analysis
Deposits increased $41,183,000 (25.3%) from $162,625,000 at December 31, 1996 to
$203,808,000 at December 31, 1997. Interest on deposits increased $1,184,000
(23.9%) from $4,953,000 for 1996 to $6,137,000 for 1997. This increase is
attributable to an increase in the average dollar amount outstanding from
$156,489,000 for 1996 to $183,060,000 in 1997, coupled with an increase in the
average rate paid of 3.17% for 1996 to 3.35% for 1997.
Salary and benefits expenses increased $535,000 (17.5%) from $3,064,000 in 1996
to $3,599,000 in 1997, primarily as a result of the increase in the number of
personnel due to the opening of the two new branch office locations.
Net occupancy expenses increased $218,000 (37.5%) from $582,000 in 1996 to
$800,000 in 1997, furniture and equipment expenses increased $62,000 (23.6%)
from $263,000 in 1996 to $325,000 in 1997, supplies expense increased $89,000
(50.6%) from $176,000 in 1996 to $$265,000 in 1997, mainly as a result of
additional expenses due to the opening of the full-service branch locations in
Westport and Danbury, Connecticut.
Data processing services increased $82,000 (15.4%) from $533,000 in 1996 to
$615,000 in 1997, as a result of increased use of services offered along with
increased volumes.
Provision for Loan Losses
The provision for loan losses decreased $60,000 (100.0%) from $120,000 for 1996
to $60,000 for 1997. 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 $1,309,000 to
support loan portfolios of $147,659,000, or a loan loss reserve ratio of .89%.
This is in comparison to a ratio of 1.06% for 1996. 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. These assets
aggregated $25,689,000, or 14.7% of total assets, as of December 31, 1996, as
compared to $36,762,000 (16.5%) at December 31, 1997.
Item 7.a. Quantitative and Qualitative Disclosure About Market Risk
MARKET RISK
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Any fluctuation in interest rates will impact both the
level of income and expense recorded on a large percentage of the Bank's assets
and liabilities, and the fair value of all interest earning assets. In general,
financial institutions are negatively affected by an increase in interest rates
to the extent that interest-bearing liabilities mature or reprice more rapidly
than interest-earning assets. The Bank does not own any trading assets, nor does
it have any hedging transactions in place such as interest rate swaps and caps.
Based on the nature of the Bank's operations, it is not subject to foreign
exchange or commodity price risk.
The Bank's earnings are primarily dependent on its net interest income which is
the difference (the "spread") between the yields earned on its interest earning
assets, such as loans and investments, and the rates paid on its interest
bearing liabilities, primarily deposits.
16
<PAGE>
Asset/liability management is the measurement and analysis of the Bank's
exposure to changes in the interest rate environment. The principal objectives
of the Bank's interest rate risk management activites are to: (a) evaluate the
interest rate risk included in certain balance sheet accounts; (b) determine the
level of risk appropriate given the Bank's business focus, operating
environment, capital and liquidity requirements and performance objectives; and
(c) manage this risk consistent with Board of Director approved guidelines. The
Bank's interest rate management strategy is designed to stabilize the spread and
preserve capital over a broad range of interest rate scenarios, while at the
same time enhancing income. Management realizes certain risks are inherent in
the financial services industry and that the goal is to identify and minimize
these risks. Various strategies are in place to control the Bank's exposure to
interest rate risk. The Bank has an Asset/Liability Committee comprised of
senior management which is primarily responsible for monitoring and determining
methods of managing the rate sensitivity and repricing characteristics of the
balance sheet components. This is done consistent with maintaining acceptable
levels of both risk and net interest income. This committee meets on a regular
basis. Quarterly reports are provided to the Board of Directors for
informational purposes and to ensure compliance with policy.
The following table sets forth the dollar amount, weighted average interest
rates and estimated fair value (see Note 15 to the financial statements) of
selected assets and liabilities that are scheduled to mature within the stated
time frames as of December 31, 1998:
<TABLE>
<CAPTION>
Maturities (dollars in thousands)
Scheduled Maturity dates
1999 2000 2001 2002 2003 Thereafter Total Fair Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities $ 19,176 $ 14,509 $ 2,452 $ 1,152 $ 3,022 $ 7,252 $ 47,563 $ 48,048
Weighted average
interest rate (%) 4.79 5.08 5.48 5.15 5.35 4.86 4.97
Home equity loans 474 695 246 690 688 3,737 6,530 6,530
Weighted average
interest rate (%) 9.13 9.25 9.19 9.11 9.10 9.23 9.20
Real estate loans 13,594 476 777 354 596 99,487 115,155 116,084
Weighted average
interest rate (%) 8.68 8.65 8.48 8.90 8.78 7.90 8.01
Installment and
commercial loans 17,111 3,875 3,048 1,717 772 1,178 27,701 27,701
Weighted average
interest rate (%) 8.88 8.53 8.98 8.89 8.66 9.29 8.85
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 50,355 $ 19,555 $ 6,523 $ 3,913 $ 5,078 $ 111,654 $ 197,078 $ 198,492
====================================================================================================================================
Liabilities:
Non-interest
bearing deposits $ 22,162 $ -- $ -- $ -- $ -- $ -- $ 22,162 $ 22,162
Weighted average
interest rate (%) -- -- -- -- -- -- --
Now, savings &
money market 117,396 -- -- -- -- -- 117,396 117,396
Weighted average
interest rate (%) 1.54 -- -- -- -- -- 1.54
Certificates of deposit 69,758 5,380 1,562 489 430 -- 77,619 77,881
Weighted average
interest rate (%) 4.95 5.65 5.46 6.07 5.31 -- 5.02
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 209,316 $ 5,380 $ 1,562 $ 489 $ 430 $ -- $ 217,177 $ 217,439
====================================================================================================================================
</TABLE>
Although the Bank is subject to interest rate risk as described above, loans and
deposits of the Bank have historically been largely stable and the Company has
not experienced any significant adverse effects on net income in periods of
rapidly changing interest rates. Accordingly, no prepayment, deposit decay rates
or reinvestment assumptions have been reflected in the above table. Management
makes a concious effort to match the maturities or the repricing time frames of
assets with the liabilities that fund them, to limit the period of time between
repricing on adjustable rate assets in portfolio and to minimize the volume of
fixed-rate assets held.
17
<PAGE>
INTEREST RATE SENSITIVITY
The following table sets forth the dollar amount of rate sensitive assets and
liabilities that contractually reprice within the stated time frames at December
31, 1998:
<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) $ 92,835 $ 38,394 $ 18,157 $ 149,386
Federal funds 18,150 -- -- 18,150
Securities(1) 19,177 21,134 7,252 47,563
- ------------------------------------------------------------------------------------------------------------------------------------
Total 130,162 59,528 25,409 215,099
====================================================================================================================================
Rate Sensitive Liabilities:
Deposits 187,155 7,860 -- 195,015
- ------------------------------------------------------------------------------------------------------------------------------------
Gap (Repricing difference) $ (56,993) $ 51,668 $ 25,409 $ 20,084
====================================================================================================================================
Cumulative gap $ (56,993) $ (5,325) $ 20,084
====================================================================================================================================
Cumulative ratio of rate
sensitive assets to liabilities .70 .97 1.10
====================================================================================================================================
</TABLE>
(1) Includes Federal Home Loan Bank Stock.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes and the Independent Auditors'
Report follow.
18
<PAGE>
independent auditors' report
================================================================================
Deloitte &
Touche
......................................................
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, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 5, 1999
Deloitte Touche
Tohmatsu
19
<PAGE>
consolidated balance sheets
================================================================================
<TABLE>
<CAPTION>
(In thousands, except share amounts)
December 31,
1998 1997
====================================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,092 $ 11,153
Federal funds sold 18,150 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 31,242 11,153
- ------------------------------------------------------------------------------------------------------------------------------------
Securities:
Available-for-sale, at fair value 12,726 19,427
Held-to-maturity, at amortized cost (fair value of $34,421
and $34,554 in 1998 and 1997) 33,936 34,382
Federal Home Loan Bank stock, at cost 901 782
Loans, net of deferred loan fees 149,386 147,659
Allowance for loan losses (1,178) (1,309)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans - net 148,208 146,350
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,874 1,686
Bank premises and equipment - net 5,230 5,256
Accrued income and other assets 3,039 3,513
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 237,156 $ 222,549
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 22,162 $ 20,764
Interest bearing 195,015 183,044
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 217,177 203,808
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes 536 26
Other liabilities 1,914 2,842
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 219,627 206,676
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 5, 14)
STOCKHOLDERS' EQUITY
Common stock, $3.33 par value; authorized, 10,000,000 shares;
issued and outstanding, 1,946,534 shares in 1998 and 1,908,634
in 1997 6,482 6,356
Additional paid-in capital 4,998 4,851
Retained earnings 6,002 4,635
Accumulated other comprehensive income 47 31
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,529 15,873
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 237,156 $ 222,549
====================================================================================================================================
See notes to consolidated financial statements.
</TABLE>
20
<PAGE>
consolidated statements of income
================================================================================
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
1998 1997 1996
====================================================================================================================================
INTEREST INCOME
<S> <C> <C> <C>
Loans, including fees $ 12,934 $ 11,708 $ 10,472
Securities:
Taxable 2,038 2,017 1,879
Tax-exempt 500 312 121
Federal funds sold 416 417 317
Dividends on Federal Home Loan Bank stock 57 49 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 15,945 14,503 12,793
INTEREST EXPENSE 6,202 6,137 4,953
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 9,743 8,366 7,840
PROVISION (CREDIT) FOR LOAN LOSSES (123) 60 120
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,866 8,306 7,720
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges 349 343 332
Security gains (losses) - net 83 -- (17)
Other operating income 320 225 175
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 752 568 490
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 3896 3,599 3,064
Net occupancy 975 800 582
Other real estate owned 8 4 18
Furniture and equipment 391 325 263
Data processing services 801 615 533
Regulatory assessments 28 20 3
Printing, stationery and supplies 200 265 176
Advertising 86 240 146
Appraisal fees 88 72 55
Postage 114 122 107
Other operating expenses 1,031 1,049 972
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 7,618 7,111 5,919
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,000 1,763 2,291
PROVISION FOR INCOME TAXES 939 585 471
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,061 $ 1,178 $ 1,820
====================================================================================================================================
PER SHARE DATA
Net income - basic earnings $ 1.07 $ .62 $ .96
Net income - diluted earnings 1.04 .61 .95
Cash dividends .36 .36 .335
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
consolidated statements of comprehensive income
================================================================================
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1998 1997 1996
====================================================================================================================================
COMPREHENSIVE INCOME
<S> <C> <C> <C>
Net income $ 2,061 $ 1,178 $ 1,820
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
available-for-sale arising during the period 40 44 (69)
Reclassification adjustment, net of tax,
for net gains realized on available-for-sale
securities that were held at the beginning
of the year (24) - 15
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive
income (loss) 16 44 (54)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,077 $ 1,222 $ 1,766
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
consolidated statements of changes in stockholders' equity
================================================================================
<TABLE>
<CAPTION>
(In thousands, except share data)
Common Stock Accumulated
--------------------------- Additional Other
Number of Paid-In Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 950,317 $ 3,165 $ 7,982 $ 41 $ 2,960
Net income 1,820
Cash dividends declared, $.335 per share (637)
Exercise of options 1,800 6 14
Other comprehensive loss (54)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 952,117 3,171 7,996 (13) 4,143
Net income 1,178
Cash dividends declared, $.36 per share (686)
Exercise of options 2,200 7 33
100% Stock dividend 954,317 3,178 (3,178)
Other comprehensive income 44
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 1,908,634 6,356 4,851 31 4,635
Net income 2,061
Cash dividends declared, $.36 per share (694)
Exercise of options 37,900 126 147
Other comprehensive income 16
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 1,946,534 $ 6,482 $ 4,998 $ 47 $ 6,002
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
consolidated statements of cash flows
================================================================================
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1998 1997 1996
====================================================================================================================================
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,061 $ 1,178 $ 1,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses (123) 60 120
Depreciation and amortization 445 339 242
Accretion of security discounts, net (343) (251) (196)
Deferred income taxes 473 (4) (213)
Security losses (gains), net (83) -- 17
Increase (decrease) in deferred loan fees (75) (59) 16
Origination of loans held for sale (26,730) (10,159) (6,934)
Proceeds from sales of loans 26,861 8,600 7,513
Gains on sales of loans (319) (77) (77)
Decrease (increase) in accrued income and other assets 1 206 (1,492)
Increase (decrease) in other liabilities (418) 1,240 38
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,750 1,073 854
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 5,323 -- 2,307
Proceeds from maturities of securities held-to-maturity 18,946 4,160 6,350
Proceeds from maturities of securities available-for-sale 15,178 9,099 16,719
Purchases of securities held-to-maturity (18,476) (21,245) (9,583)
Purchases of securities available-for-sale (13,382) (12,591) (14,047)
Purchase of Federal Home Loan Bank stock (119) (70) (712)
Net increase in loans (1,660) (20,869) (7,336)
Purchases of premises and equipment (419) (4,086) (201)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 5,391 (45,602) (6,503)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 13,369 41,183 4,086
Cash dividends (694) (686) (637)
Net proceeds from issuance of common stock 273 40 20
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,948 40,537 3,469
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 20,089 (3,992) (2,180)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 11,153 15,145 17,325
- ------------------------------------------------------------------------------------------------------------------------------------
END OF YEAR $ 31,242 $ 11,153 $ 15,145
====================================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid on deposits $ 6,510 $ 5,439 $ 5,202
Income tax payments 460 939 898
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
notes to consolidated financial statements
================================================================================
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 six 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.
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 inherent 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 premiums and accretion of discounts, 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 the 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.
25
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
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 cost or estimated fair value.
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 1998 and 1997 aggregated $99,000 and $203,000,
respectively. Loan costs deferred in 1998 and 1997 aggregated $8,000 and
$18,000, respectively. Net amounts amortized to income aggregated $164,000,
$260,000 and $213,000 in 1998, 1997 and 1996, respectively.
Impaired Loans -- The Company follows the guidance in Statement of Financial
Accounting Standards ("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".
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 of 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. At December 31, 1998 and
1997, other real estate was $0 and $154,000, respectively.
Earnings Per Share -- SFAS No. 128, "Earnings Per Share", requires that "Basic
EPS" exclude dilution and be computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period; "Diluted EPS" reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in the earnings of the entity.
Stock-Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value based method of accounting for
stock-based compensation plans and encourages, but does not require, entities to
adopt that method of accounting for all employee stock compensation plans. SFAS
No. 123 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
26
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
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.
The Company has elected to continue to measure compensation cost for stock-based
compensation plans in accordance with the provisions of APB Opinion No. 25.
Transfers and Servicing of Financial Assets -- SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
specifies accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities and for distinguishing
whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral in
a secured borrowing. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, except for certain provisions (relating to the accounting for secured
borrowings and collateral and the accounting for transfers and servicing or
repurchase agreements, dollar rolls, securities lending and similiar
transactions) which was adopted January 1, 1998 in accordance with SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." Adoption of all of the provisions of SFAS No. 125 has not had any material
effect on the Company's consolidated financial statements.
Comprehensive Income. -- SFAS No. 130 "Reporting Comprehensive Income," requires
that all items that are components of "comprehensive income" be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the "change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." Companies are required to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company adopted SFAS No. 130 as of January 1, 1998,
which resulted only in increased disclosures for 1998 and prior years.
Segments of an Enterprise -- SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," requires that enterprises report certain
financial and descriptive information about operating segments in complete sets
of financial statements and in condensed financial statements of interim periods
issued to stockholders. It also requires that a Company report certain
information about its products and services, geographic areas in which it
operates and its major customers. The Company adopted SFAS No. 131 effective
January 1, 1998 and no additional disclosures were required because the Company
operates solely within the community banking segment of the economy.
Pending Accounting Pronouncement -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires, among other things, that all derivatives be
recognized in the statement of condition, either as assets or as liabilities,
and measured at their fair value and that changes in a derivative's fair value
be recognized in current earnings unless specific hedge accounting criteria are
met. For the Company, SFAS No. 133 will be effective January 1, 2000. The
Company does not anticipate that adoption of this statement will have a material
impact on its financial position or results of operations.
Reclassifications -- Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current presentation.
2. Earnings Per Share
The only dilutive potential common shares were attributable to stock options
outstanding (See Note 9). A summary of the basic and diluted earnings per share
calculations for 1998, 1997 and 1996 is as follows:
Income Shares Per-Share
================================================================================
1998
Basic EPS $2,061,000 1,929,132 $1.07
Effect of
Dilutive Securities -
Stock Options -- 51,567 .03
Diluted EPS $2,061,000 1,980,699 $1.04
1997
Basic EPS $1,178,000 1,905,441 $.62
Effect of
Dilutive Securities -
Stock Options -- 36,389 .01
Diluted EPS $1,178,000 1,941,830 $.61
1996
Basic EPS $1,820,000 1,902,375 $.96
Effect of
Dilutive Securities -
Stock Options -- 16,127 .01
Diluted EPS $1,820,000 1,918,502 $.95
3. Cash and Due from Banks
The Bank is required by Federal regulation to maintain average cash reserve
balances. Throughout 1998, daily cash reserves and compensating balances served
to satisfy this requirement and averaged approximately $4,797,000.
27
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
4. Securities
The aggregate amortized cost and estimated fair values of securities
held-to-maturity and securities available-for-sale at December 31, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
====================================================================================================================================
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
U.S. Treasury securities $ 18,801 $ 183 $ (4) $ 18,980
Mortgage-backed securities of
U.S. Government agencies 4,377 35 (3) 4,409
Obligations of states and political subdivisions 10,758 275 (1) 11,032
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 33,936 $ 493 $ (8) $ 34,421
====================================================================================================================================
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities $ 12,446 $ 98 $ (22) $ 12,522
Mortgage-backed securities of
U.S. Government agencies 186 2 -- 188
Other 16 -- -- 16
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 12,648 $ 100 $ (22) $ 12,726
====================================================================================================================================
<CAPTION>
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
====================================================================================================================================
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
U.S. Treasury securities $ 16,792 $ 23 $ (4) $ 16,811
Mortgage-backed securities of
U.S. Government agencies 6,704 24 (2) 6,726
Obligations of states and political subdivisions 10,886 147 (16) 11,017
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 34,382 $ 194 $ (22) $ 34,554
====================================================================================================================================
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities $ 18,993 $ 54 $ (2) $ 19,045
Mortgage-backed securities of
U.S. Government agencies 346 3 -- 349
Other 33 -- -- 33
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 19,372 $ 57 $ (2) $ 19,427
====================================================================================================================================
</TABLE>
At December 31, 1998, securities with an amortized cost of $1,129,000 and a fair
value of $1,174,000 were pledged to secure public funds and for other purposes
as required by law and banking regulation. Gross gains on sales of securities in
1998, 1997 and 1996 were $83,000, $0 and $5,000, respectively, and gross losses
were $0, $0 and $22,000, respectively.
The amortized cost and fair value of securities at December 31, 1998, 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.
28
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
<TABLE>
<CAPTION>
(In thousands)
December 31, 1998
===============================================================================================================================
Available-for-sale Held-to-maturity
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
===============================================================================================================================
<S> <C> <C> <C> <C>
Within 1 year $ 5,107 $ 5,112 $ 13,164 $ 13,184
After 1 but within 5 years 7,490 7,562 13,572 13,785
After 5 but within 10 years 51 52 4,696 4,825
After 10 years -- -- 2,504 2,627
-------------------------------------------------------------------------------------------------------------------------------
Totals $ 12,648 $ 12,726 $ 33,936 $ 34,421
===============================================================================================================================
</TABLE>
5. Loans
The composition of the loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31,
1998 1997
===============================================================================================================================
<S> <C> <C>
Real estate - mortgage and home equity $ 108,194 $ 108,825
Real estate - construction and land development 13,620 14,012
Installment and consumer credit 8,389 7,888
Commercial and financial 19,312 17,138
-------------------------------------------------------------------------------------------------------------------------------
Total loans 149,515 147,863
Deferred loan fees, net (129) (204)
Allowance for loan losses (1,178) (1,309)
-------------------------------------------------------------------------------------------------------------------------------
Loans - net $ 148,208 $ 146,350
===============================================================================================================================
</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, 1998, existing commitments were as follows:
commitments to originate loans - $18,309,000, unused revolving lines of credit
on residential properties, including home equity - $8,952,000, unused revolving
lines of credit on commercial real estate and construction - $9,046,000, stand
by letters of credit - $2,435,000 and unused consumer lines of credit -
$2,755,000. At December 31, 1997, these commitments were as follows: commitments
to originate loans - $13,459,000, unused revolving lines of credit on
residential properties, including home equity - $8,775,000, unused revolving
lines of credit on commercial real estate and construction - $6,106,000, stand
by letters of credit - $1,939,000 and unused consumer lines of credit
$2,417,000.
29
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
Substantially all of the Bank's 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, lends 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 follow:
(In thousands)
Year Ended December 31,
1998 1997 1996
================================================================================
Balance, beginning of year $ 1,309 $ 1,356 $ 1,311
Provision (credit) for loan losses (123) 60 120
Loans charged off (52) (119) (173)
Recoveries on loans
previously charged off 44 12 98
- --------------------------------------------------------------------------------
Balance, end of year $ 1,178 $ 1,309 $ 1,356
================================================================================
For management purposes, portions of this allowance are allocated to segments of
the loan portfolio based on perceived credit risks. At December 31, 1998,
management allocated $262,000 of the balance in the allowance for loan losses to
specific credit risks, which includes $179,000 of reserves that relate to loans
that are considered impaired, and $916,000 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 8).
The principal portion of loans delinquent as to principal or interest for ninety
days or more, including nonaccrual loans, is as follows:
(In thousands)
December 31,
1998 1997
================================================================================
Loans 90 days or more past due:
Real estate-mortgage and home equity $ 1,174 $ 1,557
Commercial and financial 17 -
Installment and consumer credit 97 65
- --------------------------------------------------------------------------------
Total $ 1,288 $ 1,622
================================================================================
30
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
At December 31, 1998 and 1997 there were restructured loans of $831,000. Loans
on which interest is not being accrued aggregated approximately $1,137,000 and
$1,299,000 at December 31, 1998 and 1997, respectively. The Bank would have
recorded an additional $116,000, $74,000 and $59,000 of gross interest income in
1998, 1997 and 1996, respectively, if nonaccrual loans had been current. At
December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans are classified as nonaccrual or were restructured.
The recorded investment in loans that are considered to be impaired at December
31, 1998 and 1997 was $1,275,000 and $1,427,000, respectively. Specific
valuation allowances of $179,000 and $174,000 for 1998 and 1997, respectively,
have been established. During 1998 and 1997 the average recorded investment in
impaired loans was approximately $1,315,000 and $1,418,000, respectively. No
interest income was recognized on impaired or nonaccrual loans. Generally, the
fair value of the above loans was determined using the fair value of the
underlying collateral.
6. Bank Premises and Equipment
Bank premises and equipment, at cost, and accumulated depreciation and
amortization are summarized as follows:
(In thousands)
December 31,
1998 1997
================================================================================
Land $ 175 $ 175
Premises 4,715 4,673
Equipment 2,602 2,606
Leasehold improvements 501 387
- --------------------------------------------------------------------------------
Total 7,993 7,841
Accumulated depreciation and amortization (2,763) (2,585)
- --------------------------------------------------------------------------------
Bank premises and equipment - net $ 5,230 $ 5,256
================================================================================
The Bank completed the construction of a new three story building in Danbury,
Connecticut, in July of 1997. The first floor of this new building contains a
full-service branch office. The second and third floors are being utilized for
the deposit and loan back-office operations of the bank.
7. Deposits
Included in interest bearing deposits are certificates of deposit in
denominations of $100,000 or more. These certificates aggregated approximately
$12,072,000 and $14,647,000 at December 31, 1998 and 1997, respectively. At
December 31, 1998, the scheduled maturities of certificates of deposit were as
follows:
(In thousands)
December 31,
Maturing in 1998
================================================================================
1999 $ 69,686
2000 5,380
2001 1,562
2002 488
2003 and thereafter 430
================================================================================
Total $ 77,546
================================================================================
NOW accounts, included in interest bearing deposit liabilities, were $61,297,000
and $49,107,000 at December 31, 1998 and 1997, respectively.
31
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
8. 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 or exceed 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 or exceed
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, 1998.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain or exceed 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
that follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Minimum
Minimum 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, 1998
Total Capital (to Risk Weighted Assets) $ 18,660 13.90% $ 10,741 >=8.0% N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 17,482 13.02 5,370 >=4.0 N/A N/A
Tier 1 Capital (to Average Assets) 17,482 7.72 9,053 >=4.0 N/A N/A
At December 31, 1997
Total Capital (to Risk Weighted Assets) $ 17,151 13.06% $ 10,505 >=8.0% N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 15,842 12.06 5,253 >=4.0 N/A N/A
Tier 1 Capital (to Average Assets) 15,842 7.17 8,842 >=4.0 N/A N/A
Bank
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998
Total Capital (to Risk Weighted Assets) $ 18,536 13.81% $ 10,735 >=8.0% $ 13,418 >=10.0%
Tier 1 Capital (to Risk Weighted Assets) 17,358 12.94 5,367 >=4.0 8,051 >=6.0
Tier 1 Capital (to Average Assets) 17,358 7.67 9,050 >=4.0 11,313 >=5.0
At December 31, 1997
Total Capital (to Risk Weighted Assets) $ 17,076 13.01% $ 10,499 >=8.0% $ 13,124 >=10.0%
Tier 1 Capital (to Risk Weighted Assets) 15,767 12.01 5,250 >=4.0 7,874 >=6.0
Tier 1 Capital (to Average Assets) 15,767 7.14 8,839 >=4.0 11,049 >=5.0
</TABLE>
32
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
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.
9. Stock Option Plans
The Company and Bank have a stock option plan for their officers and employees
to be granted and issued by the Board of Directors from time to time. The plan,
adopted in 1996, provides for 150,000 shares to be reserved for issuance. In
1998 and 1997, 6,000 and 23,800 shares, respectively, were granted under the
1996 plan to the Bank's officers. There are currently 45,800 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. 1996 share amounts have been adjusted for the 100% stock dividend
issued in 1997.
Stock option transactions under the Plans were as follows:
<TABLE>
<CAPTION>
Shares Underlying Weighted Average
Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding and exercisable Options as of January 1, 1996: 29,200 $ 5.50
Options granted 78,400 9.50
Options exercised (3,600) 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable Options as of December 31, 1996: 104,000 $ 8.52
Options granted 23,800 13.19
Options exercised (4,400) 9.14
Options expired (2,000) 9.50
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable Options as of December 31, 1997: 121,400 9.39
Options granted 6,000 20.46
Options exercised (37,900) 7.20
Options expired (2,000) 9.50
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable Options as of December 31, 1998: 87,500 $11.10
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information regarding options outstanding and
exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Range of Weighted Average Weighted Average
Exercise Prices Number Remaining Life Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$9.50 - $11.13 69,900 2.39 years $ 9.66
$13.50 - $15.625 11,600 3.83 years $ 14.97
$19.50 - $22.125 6,000 4.29 years $ 20.46
====================================================================================================================================
$ 9.50 - $22.125 87,500 2.71 years $ 11.10
</TABLE>
33
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
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 1998 or 1997. 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, 1998
would have been reduced to the pro forma amounts indicated as follows:
1998 1997
- --------------------------------------------------------------------------------
(In thousands, except share data)
Net income As reported $ 2,061 $ 1,178
Pro forma 2,040 989
Basic EPS As reported 1.07 .62
Pro forma 1.06 .52
Diluted EPS As reported 1.04 .61
Pro forma 1.03 .51
The weighted average fair value of options granted under the Plans was $3.45 for
1998 and $7.95 for 1997 and were estimated on the date of the grants using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: dividend yield- 1998 -- 2.51%, 1997 -- 3.12%, expected
volatility- 1998-- 22.57%, 1997-- 24.66%, risk free interest rate- 1998--
4.61-4.64%, 1997-- 5.39 - 5.40%, expected lives of 3 years for both 1998 and
1997.
10. 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,
1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C>
Income tax at 34% of pre-tax income $ 1,020 $ 599 $ 778
Connecticut corporation tax, net of federal tax benefit 95 57 (14)
Effect of tax-exempt income (153) (91) (36)
Change in valuation allowance -- (25) (214)
Other items, net (23) 45 (43)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 939 $ 585 $ 471
====================================================================================================================================
Effective rate 31.3% 33.2% 20.6%
====================================================================================================================================
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31,
1998 1997 1996
====================================================================================================================================
<S> <C> <C> <C>
Current income taxes:
Federal $ 299 $ 454 $ 762
State 167 160 136
- ------------------------------------------------------------------------------------------------------------------------------------
Total 466 614 898
Deferred income tax (benefit) expense
Federal 474 69 (56)
State (1) (73) (157)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 473 (4) (213)
Change in valuation allowance -- (25) (214)
- ------------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 939 $ 585 $ 471
====================================================================================================================================
</TABLE>
34
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
Deferred income tax assets and liabilities at December 31, 1998 and 1997 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:
(In thousands)
December 31,
1998 1997
================================================================================
Deferred tax assets:
Allowance for loan losses $ 254 $ 341
Deferred loan fees 36 66
Deferred compensation 118 80
Net operating loss 600 718
State tax credit 66 103
Other 50 11
- --------------------------------------------------------------------------------
Total 1,124 1,319
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Available for sale securities 31 24
Treasury securities 276 35
Depreciation 137 39
Other -- 61
- --------------------------------------------------------------------------------
Total 444 159
- --------------------------------------------------------------------------------
Valuation allowance (396) (396)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 284 $ 764
================================================================================
The Company has net operating loss carryforwards ("NOL's") for federal income
tax purposes at December 31, 1998 of approximately $1,763,000 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.
11. 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 $54,000, $48,000 and $43,000 were charged
to operating expenses in 1998, 1997 and 1996, respectively.
35
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
12. Village Bancorp, Inc. (Parent Company Only)
Condensed Financial Statements
Condensed balance sheets are as follows:
(In thousands)
December 31,
1998 1997
================================================================================
ASSETS
- --------------------------------------------------------------------------------
Investment in subsidiary $ 17,529 $ 15,798
Other assets - 75
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 17,529 $ 15,873
================================================================================
STOCKHOLDERS' EQUITY $ 17,529 $ 15,873
================================================================================
Condensed operating results are as follows:
(In thousands)
Year Ended December 31,
1998 1997 1996
================================================================================
Dividend income from Bank $ 694 $ 686 $ 637
Equity in undistributed
income of subsidiary 1,367 492 1,183
- --------------------------------------------------------------------------------
Net income $ 2,061 $ 1,178 $ 1,820
================================================================================
Condensed statements of cash flows are as follows:
(In thousands)
Year Ended December 31,
1998 1997 1996
================================================================================
OPERATING ACTIVITIES:
Net income $ 2,061 $ 1,178 $ 1,820
Equity in undistributed
income of subsidiary (1,367) (492) (1,183)
- --------------------------------------------------------------------------------
Net cash provided by
operating activities $ 694 $ 686 $ 637
================================================================================
INVESTING ACTIVITIES:
Investment in subsidiaries $ (273) $ (40) $ (20)
- --------------------------------------------------------------------------------
Net cash used in
investing activities $ (273) $ (40) $ (20)
================================================================================
FINANCING ACTIVITIES:
Cash dividends paid $ (694) $ (686) $ (637)
Net proceeds from issuance of common
stock and capital contribution 273 40 20
- --------------------------------------------------------------------------------
Net cash used in
financing activities $ (421) $ (646) $ (617)
================================================================================
36
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
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 Company 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.
13. 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 $5,119,000 and $5,540,000 at December 31,
1998 and 1997, respectively. During 1998 new loans to related parties aggregated
$11,976,000 and loan payments aggregated $12,397,000. The maximum amount of such
loans outstanding during 1998 and 1997 was $11,179,000 and $11,167,000,
respectively.
Two directors and four stockholders of the Company are partners in a joint
venture which was leasing certain real estate to the Bank. The terms of such
lease which expired in 1998, are described further in Note 14.
14. 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, which have been exercised.
In March 1993, the Bank entered into a five-year noncancelable, office lease
arrangement with related parties (see Note 13). 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. This lease expired and was not renewed during the fourth quarter of
1998.
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 started at $39,360 per year.
In April 1997, the Bank entered into a ten-year noncancelable, branch office
lease arrangement. The lease contains a provision which allows for an annual
increase and provides for a five-year renewal option.
Total rent expense for 1998, 1997 and 1996 was $519,000, $434,000 and $255,000,
respectively, which amounts are net of $55,000, $36,000 and $0 of sublease
income in 1998, 1997 and 1996.Future minimum lease payments at December 31, 1998
are as follows:
Year Ending December 31, Amount
(In thousands)
================================================================================
1999 $ 408
2000 417
2001 353
2002 335
2003 347
Thereafter 1,252
- --------------------------------------------------------------------------------
Total $ 3,112
================================================================================
15. 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, 1998 and 1997 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.
37
<PAGE>
notes to consolidated financial statements (continued)
================================================================================
As of December 31,
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
================================================================================
Assets: (In thousands)
Cash and cash equivalents $ 31,242 $ 31,242 $ 11,153 $ 11,153
Securities 47,563 48,048 54,591 54,763
Loans 149,386 150,315 147,659 148,445
Loans held for sale 1,874 1,902 1,686 1,706
Accrued income receivable 1,649 1,649 1,881 1,881
Liabilities:
Deposits without stated maturities 139,558 139,558 122,341 122,341
Time deposits 77,619 77,881 81,467 81,646
Accrued interest payable 1,302 1,302 1,610 1,610
The fair value estimates presented above are based on pertinent information
available to management as of December 31, 1998 and 1997. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued since
December 31, 1998 and, 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 $1,275,000 and $1,427,000 at December 31, 1998 and 1997,
respectivly,are estimated to have a fair value of approximately $1,096,000 and
$1,254,000. This estimate is net of other specific and general allowances and 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, 1998. 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, 1998 and 1997, 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>
notes to consolidated financial statements (continued)
================================================================================
16. Pending Acquisition
On November 11, 1998, the Company and Webster Financial Corporation ("Webster")
announced that they had reached a definitive agreement, whereby Webster would
acquire the Company, for the equivalent of $23.50 per share in a tax-free,
stock-for-stock exchange valued at approximately $46.4 million, with
stockholders permitted to elect to receive cash-in-lieu of Webster stock for up
to 20% of the Company's shares.
The definitive agreement, which has been approved by both companies' boards of
directors, is subject to approval by the Company's stockholders and regulatory
authorities. The transaction is expected to close in the second quarter of 1999.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth, with respect to each director, his or her
name, age, principal occupation and other business affiliations, the date each
became a director of the Corporation and VBT, the office with the Corporation
and VBT, if any, of each director. Each director has furnished the information
set forth below, with respect to his or her age, other business affiliates,
direct or indirect beneficial ownership of the common stock of the Corporation
and principal occupation.
INFORMATION AS TO DIRECTORS IN OFFICE
VBT Bancorp
Director Director Term
Name Age Since Since Expires
ENRICO J. ADDESSI 69 1982 1975 1999
JOSE P. BOA 45 1994 1995 2000
RICHARD O. CAREY 67 1982 1974 2001
JEANNE M. COOK 69 1989 1989 1999
NICHOLAS R. DINAPOLI 70 1982 1974 2001
EDWARD J. HANNAFIN 63 1982 1974 1999
CARL LECHER 63 1984 1984 2001
JOSEPH L. KNAPP 69 1982 1974 1999
ROBERT V. MACKLIN 51 1990 1990 2000
ANTONIO M. RESENDES 47 1994 1995 2000
THOMAS F. REYNOLDS 50 1993 1993 1999
ROBERT SCALA 63 1982 1974 2001
JAMES R. UMBARGER, JR. 48 1997 1996 2000
39
<PAGE>
BUSINESS EXPERIENCE
ENRICO J. ADDESSI: Age 69. Mr. Addessi has been a Director of Bancorp since
1982 and of VBT since 1975. His present term expires in 1999. Mr. Addessi is
Secretary of the Board of Directors of Bancorp and VBT. He is the President of
Addessi Jewelers of Ridgefield, Inc. located in Ridgefield, Connecticut.
JOSE P. BOA: Age 45. Mr. Boa was appointed a Director of Bancorp in 1994
and a Director of VBT in 1995. His present term expires in 2000. Mr. Boa served
as a Director, Chairman and Vice Chairman of the Board of Directors of Liberty
National Bank ("LNB"), which subsequently was acquired and merged into VBT, from
1989 to 1995. Mr. Boa is President and owner of Diversified Maintenance
Corporation of Danbury, Connecticut.
RICHARD O. CAREY: Age 67. Mr. Carey has been a Director of Bancorp since
1982 and of VBT since 1974. His present term of office expires in 2001. Mr.
Carey is owner of The Connecticut Land Company, a real estate brokerage company,
and is a licensed real estate broker, located in Washington, Connecticut.
JEANNE M. COOK: Age 69. Mrs. Cook has been a Director of Bancorp and VBT
since 1989. Her present term of office expires in 1999. Mrs. Cook is a travel
industry consultant and was the owner of Jeanne Cook Travel Service, a travel
agency in Ridgefield, Connecticut.
NICHOLAS R. DINAPOLI: Age 70. Mr. DiNapoli has been a Director of Bancorp
since 1982 and VBT since 1974. He has been Vice Chairman of the Board of
Directors of Bancorp and VBT since 1988. His term of office expires in 2001. He
is President of DiNapoli Development Co., Inc., a building contracting and real
estate development firm having an office in Ridgefield, Connecticut.
EDWARD J. HANNAFIN: Age 63. Mr. Hannafin has been a Director of Bancorp
since 1982 and VBT since 1974. He has been Chairman of the Board of Directors of
Bancorp and VBT since 1988. His term of office expires in 1999. He was a
Director of LNB from 1994 to 1995. He was formerly Vice Chairman of the Board of
Directors of Bancorp and VBT from 1982 to 1988. He is an attorney at law and a
principal of the Law Firm of Collins, Hannafin, Garamelia, Jaber & Tuozzolo,
P.C. of Danbury, Connecticut.
JOSEPH L. KNAPP: Age 69. Mr. Knapp has been a member of the Board of
Directors of Bancorp since 1982 and of VBT since 1974. His present term of
office expires in 1999. Mr. Knapp is an officer of Knapp Brothers, Inc.,
arborist, having an office in Ridgefield, Connecticut.
CARL LECHER: Age 63. Mr. Lecher has been a Director of Bancorp and VBT
since 1984. His present term of office expires in 2001. He is President of Carl
Lecher, Incorporated, a real estate contracting and development firm, having an
office in Ridgefield, Connecticut.
ROBERT V. MACKLIN: Age 51. Mr. Macklin has been a Director, President and
Chief Executive Officer of Bancorp and VBT since 1990. His present term as a
Director expires in 2000. He was formerly Executive Vice President of Bancorp
(1984 to 1990) and VBT (1979 to 1990). He was a Director of LNB from 1994 to
1995.
ANTONIO M. RESENDES: Age 46. Mr. Resendes was appointed a Director of
Bancorp in 1994. He was appointed a Director of VBT in 1995. Mr. Resendes served
as a Director and Chairman of the Board of Directors of LNB from 1989 to 1995.
His present term expires in 2000. Mr. Resendes has been a Department Head of
Henry Abbott Technical School in Danbury, Connecticut, since 1987. He was a Vice
President of DaSilva Fuel Company, Inc. of Danbury, Connecticut from 1979 to
1987.
40
<PAGE>
THOMAS F. REYNOLDS: Age 49. Mr. Reynolds has been a Director of Bancorp and
VBT since 1993. His present term expires in 1999. He is a certified public
accountant, who is a partner in the accounting firm of Reynolds & Rowella, CPA,
having its principal office in Ridgefield, Connecticut.
ROBERT SCALA: Age 63. Mr. Scala has been a Director of Bancorp since 1982
and of VBT since 1974. He is Assistant Secretary of Bancorp and VBT. His present
term expires in 2001. He is retired. He was formerly Vice President of the Elms
Inn, Inc., a restaurant and hotel company, with a place of business in
Ridgefield, Connecticut.
JAMES R. UMBARGER, JR.: Age 47. Mr. Umbarger has been the Executive Vice
President of Bancorp since 1994, VBT since 1995, a Director of VBT since 1996
and a Director of Bancorp since 1997. His present term expires in 2000. Prior to
that he was the Senior Vice President and Treasurer of Bancorp and VBT. He was
President, Chief Executive Officer and a Director of Liberty National Bank in
1995.
There is no arrangement or understanding between the directors and other
person or persons; except the Directors and Officers acting solely in that
capacity. There is no family relationship between any Director, Executive
Officer of either Bancorp or VBT.
EXECUTIVE OFFICERS
The Executive Officers of Bancorp and VBT are listed below, together with their
age, position and office, principal occupation and their term and period during
which they have served as such:
Position, Office & Term and
Name and Age Principal Occupation Period
ROBERT V. MACKLIN
Age 51 President, Chief Executive 1990 to date
Officer, and Director of
Bancorp and VBT; formerly
Executive Vice President of
Bancorp and VBT (VBT
1979-1990; Bancorp 1984 to
1990).
JAMES R. UMBARGER, JR. Executive Vice-President 1990 to date
Age 48 of Bancorp and VBT,
Director of VBT (1996 to
date); Director of Bancorp
(1997 to date), President of
LNB (1995); Sr. Vice-
President and Treasurer of
Bancorp and VBT (1982 to
1990) and Executive
Vice-President of VBT (1990
to 1995).
The salaries of Bancorp officers are paid by VBT.
41
<PAGE>
There are no arrangements or understandings between the Officers and any
other persons pursuant to which he is to be selected as an officer. There is no
family relationship between any Director, Executive Officer or person chosen to
be a Director or Executive Officer. There are no employment contracts,
compensation plans or arrangements with the Executive Officers other than their
respective interests in the Corporations 401(k) Incentive Savings and Salary
Reduction Plan, Stock Option Plan, insurance and an agreement regarding
termination resulting from a change in control of Bancorp or VBT. (See Item 11.)
Item 11. Executive Compensation
REMUNERATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
There are no Directors or Executive Officers of VBT or Bancorp (other than
the President, Robert V. Macklin and the Executive Vice President, James R.
Umbarger, Jr.), who individually received a total annual salary and bonus
remuneration from VBT or Bancorp in excess of $100,000 in 1998. There is no
compensation paid by Bancorp to its Directors or Officers. All compensation to
them is paid by VBT. See "Remuneration of Directors and Certain Business
Relationships." The following table sets forth the 1998 remuneration for VBT's
highest paid Executive Officers and Directors as a group.
VBT
Name of individual or Capacities in Cash Remuneration
number of persons in which served
group
(14) Director & Excutive $ 508,808
Officers as a group
(26) Officers as a group $1,608,934
1. The term "Director" does not include salaried employees who do not
receive fees as a Director. The term "Directors" does include the Chairman,
Vice-Chairman and Secretary of the Board of Directors. The term "Executive
Officers" and eligible "Officers" includes the President and Executive
Vice-President.
2. Officers of the Corporation receive life, health, hospitalization and
medical insurance as part of a group plan, which does not discriminate in scope,
term or operation in favor of officers or directors, and is generally available
to all salaried employees. The personal benefits to any officer, which are not
directly related to job performance or those provided to broad categories of
employees and which do not discriminate in their favor, of Officers or
Directors, do not exceed either $50,000 or 10% of their cash compensation as set
forth in the Summary Compensation Table. Certain of the Executive Officers of
the Corporation utilize Corporation automobiles in the ordinary course of its
business. Any personal use of Corporate automobiles is minimal.
3. Includes payments under Employee Incentive Thrift Plan. See "Incentive
Savings and Salary Reduction Plan".
4. Includes bonus payments. All the employees earned a bonus at year end in
1996, 1997 and 1998. The entire bonus amount was: 1996($60,090);
1997($64,461.00); 1998($63,992.00). Executive Officers did not participate in
these bonuses.
42
<PAGE>
INCENTIVE SAVINGS AND SALARY REDUCTION PLAN
VBT has a 401(k) Incentive Savings and Salary Reduction Plan. The Plan is
available to all eligible employees The Plan is designed to be a qualified
pension plan under Section 401 and 501 of the Internal Revenue Code. The Plan
provides for 50% matching contributions to be made by VBT if the employee
voluntarily agrees to contribute to the Plan by a salary reduction election. An
employee may contribute no more than the maximum IRS. index amount to the Plan;
however the Company only matches contributions up to 6% of the employee's
eligible salary. The entire amount of contributions made by the employee and VBT
and credited to the account of the participating employee is fully vested within
five (5) years. Withdrawals from the Plan are only allowed upon retirement,
disability, separation from service, attainment of the age of 59 1/2 or in the
event of financial hardship as defined by the Internal Revenue Service. The
employee's election to participation is revocable. Directors are not eligible
for participation in the Plan other than in their capacity as an employee. (The
President, Robert V. Macklin, and Executive Vice-President, James R. Umbarger,
Jr., who are also Directors, participate in the Plan as employees).
The total amount contributed by VBT to the Plan in the past three (3) years
is set forth in the following table.
1996 1997 1998
Robert V. Macklin, President
and Chief Executive Officer
of Bancorp and VBT. $ 4,224 $ 4,410 $ 4,665
James R. Umbarger, Jr., Executive
Vice-President of Bancorp
and VBT. $ 3,782 $ 3,612 $ 4,073
Executive Officers as a Group $ 8,006 $ 8,022 $ 8,738
Employees as a Group
(excluding executive officers) $34,973 $39,977 $45,638
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name & Other
Principal Annual
Position Year Salary($) Bonus($) Compensation($)
Robert V Macklin
President & Chief 1998 164,950 27,000 9,000
Executive Officer: 1997 186,506 27,000 9,000
Director 1996 141,400 24,000 9,000
James R Umbarger
Executive Vice- 1998 127,520 18,000 4,000
President: 1997 121,291 18,000 4,000
Director 1996 116,502 16,000 4,000
43
<PAGE>
LONG TERM COMPENSATION
AWARDS AWARDS PAYOUTS
Name & Restricted All
Principal Stock Options/ TIP Other
Position Year Awards($) SARs($) Payouts($) Comp.($)
Robert V Macklin
President & Chief 1998 0 0 0 4,665
Executive Officer: 1997 0 0 0 4,410
Director 1996 0 20,000 0 4,224
James R Umbarger
Executive Vice- 1998 0 0 0 4,073
President: 1997 0 0 0 3,612
Director 1996 0 15,000 0 3,782
Notes:
SALARY: The amounts shown for Mr. Macklin and Mr. Umbarger under all other
compensation include amounts deferred under Section 401K of the Internal Revenue
Code. See "Incentive Savings and Salary Reduction Plan". The amount shown for
Mr. Macklin in 1997 includes $38,448 for his initiation, membership, and
enrollment in a local country club to be used for business purposes.
BONUS: Bonuses were paid to the Executive Officers as determined by The
Board of Directors after consideration of financial performance, including cash
flow, profitability, return on capital, growth, administration, compliance and
regulatory reports of the Bank. See "Compensation Committee Report of Executive
Compensation".
OTHER ANNUAL COMPENSATION: Mr. Macklin and Mr. Umbarger utilize Corporation
automobiles in the ordinary course of business. Any personal use is minimal.
They receive life, health, hospitalization and medical insurance as part of a
group plan; which does not discriminate in scope, term or operation in favor of
officers and is generally available to all salaried employees. These perquisites
and other benefits do not exceed the lesser of $50,000 or 10% of their
respective total annual salary and bonuses. The amounts shown are deferred
income. See "Directors and Officers Deferred Income Plan".
OPTIONS/SARs: In 1993 and 1996 Stock Options were granted.
ALL OTHER COMPENSATION: Mr. Macklin and Mr. Umbarger received employer
contributions under its 401K Plan. See "Incentive Savings and Salary Reduction
Plan".
OPTIONS
There were no options granted to executive officers in 1998.
The following table sets forth information with respect to the named
Executive Officers concerning the exercise of options during 1998 and the
unexercised options held as of December 31, 1998.
<TABLE>
Aggregated Option/SAR Exercises in Last Year
and Fiscal Year-End Option/SAR Values.
<CAPTION>
Number Value of
Unexercised Unexercised
Options/SAR's Options/SAR/s
Shares At FY-End (#) FY-End ($)
Acquired On Value Exercisable/ Exercisable/
Exercise($) Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert V Macklin 9,800 151,900 20,000/0 270,000/0
James R Umbarger 7,800 109,200 15,000/0 202,500/0
</TABLE>
44
<PAGE>
The options were granted under the "Stock Option Reserve Plan".
1. The President of VBT, Robert V. Macklin, was granted an option in 1993
to purchase 9,800 shares of common stock of Bancorp at a price of $5.50 per
share to be exercised on or before October 14, 1998. In 1996 he was granted an
option to purchase 20,000 shares of common stock at $9.50 per share to be
exercised on or before April 8, 2001 under the 1996 Stock Option Plan for Key
Employees. See footnotes 3, 4, and 5.
2. The Executive Vice-President of VBT, James R. Umbarger, Jr. was granted
an option in 1993 to purchase 7,800 shares of common stock of Bancorp, at a
price of $5.50 per share to be exercised on or before October 14, 1998. In 1996
he was granted an option to purchase l5,000 shares of common stock under the
1996 Stock Option Plan for Key Employees at $9.50 per share to be exercised on
or before April 8, 2001. See footnotes 3, 4, and 5.
3. In 1993, Bancorp granted options to purchase 32,600 shares of its common
stock to sixteen (16) of VBT's officers. The officers and the number shares
granted to them varied from 200 shares to 9,800 shares, including Robert V.
Macklin (9,800 shares) and James R. Umbarger, Jr. (7,800 shares). The purchase
price is $5.50 per share and is subject to adjustment for stock dividends, stock
splits and issuance of additional shares. The expiration date is October 14,
1998; but sooner expire upon the expiration of fourteen (14) days from the date
on which the respective officers employment is terminated or three (3) calendar
months from date of death during employment to be exercised by personal
representatives. These options are granted by the Board of Directors under the
Stock Option Reserve Plan.
4. In 1996, Bancorp granted options to purchase 78,400 shares of its common
stock to Key Employees under the 1996 Stock Option Plan for Key Employees. The
Officers and number of shares granted to them varied from 200 to 20,000 shares
including Robert V. Macklin (20,000 shares) and James R. Umbarger (15,000
shares).
5. In 1997, Bancorp granted options to purchase 23,800 shares of its common
stock to Key Employees under the 1996 Stock Option Plan for Key Employees. The
Officers and number of shares granted to them varied from 200 to 6,000 shares.
6. In 1998, Bancorp granted options to purchase 6,000 shares of its common
stock to Key Employees under the 1996 Stock Option Plan for Key Employees. The
Officers and number of shares granted to them varied from 1,000 to 2,000 shares.
7. The market value of the October 14, 1993 grants were the last known
sales price of Bancorp as represented by NASDAQ, and the market value of grant
made under the 1996 Stock Option Plan was the last known sales price of Bancorp
as represented by NASDAQ. The number of shares were increased by the two (2) for
one (1) stock dividend in November, 1997.
REMUNERATION OF DIRECTORS
AND CERTAIN BUSINESS RELATIONSHIPS
Members of the Board of Directors of Bancorp, who are not employees, do not
receive any remuneration except for attendance at meetings. In 1998, members of
the Board of Directors of Bancorp and VBT received the sum of $550 each for
attendance at the joint meetings of the Board of Directors and $150 each for
attendance at committee meetings of the Board of Directors. In 1999, members of
the Board of Directors of Bancorp and VBT will receive the same compensation
each for attendance at the joint meeting of the Board of Directors of Bancorp
and VBT and for attendance at committee meetings of the Board of Directors. In
1998, each member of the Board of Directors received a bonus of $1,000.00. The
Chairman of the Board of Directors receives additional compensation of $10,000
per annum for his additional work and services provided to the Corporation
during the course of the year and will receive the same additional compensation
for the additional work and services in 1999. Mr. Macklin and Mr. Umbarger do
not receive remuneration as members of the Board of Directors for attendance at
Director and Committee meetings.
Edward J. Hannafin, who is Chairman of the Board of Directors of VBT and
Bancorp, is a principal in the Law Firm of Collins, Hannafin, Garamella, Jaber &
Tuozzolo, P. C., which is counsel to the Corporation and VBT. The Law Firm
received a total remuneration for ordinary and extraordinary fees to the
Corporation and VBT in 1996 of $53,816.00, in 1997 of $40,452.00 and in 1998 of
$41,234.00. The Law Finn has been retained as counsel to Bancorp and VBT for
services to be rendered in the ordinary course of business in 1999 for the sum
of $600 per month (an annual aggregate amount of $7,200).
45
<PAGE>
Mr. Nicholas R. DiNapoll and Mr. Carl Lecher are partners in Skylands
Associates, a Connecticut partnership, which leases real estate to VBT at 96
Danbury Road, Ridgefield, Connecticut. The premises contain approximately 7000
sq. ft. of office space with parking. VBT paid $114,251.00 to Skylands in 1996,
$111,499.00 in 1997 and $82,122.00 in 1998. The lease expired in 1998 and was
not renewed.
Jose P. Boa is President and Owner of Diversified Maintenance Corporation
of Danbury, Connecticut, which provides cleaning and janitorial services to VBT
and received fees of $40,035.00 in 1996, $46,537.00 in 1997 and $60,458.00 in
1998. Diversified Maintenance Corporation is providing cleaning and janitorial
services in 1999 to VBT.
Carl Lecher provided construction supervision for VBT's new office building
in Danbury, Connecticut, and received $22,500.00 in compensation in 1996, and
$24,000.00 in 1997 for this service.
Other Directors have minimal or no business contact with the Corporations.
DIRECTORS AND EXECUTIVE OFFICERS DEFERRED INCOME PLAN
In 1986, the Corporation adopted a voluntary deferred income plan for
Directors which permits Directors to defer receipt of a part of their director's
fees. There are presently eleven (11) Directors eligible for the plan. Robert V.
Macklin and James R. Umbarger, Jr., are not eligible for the Directors Deferred
Income Plan as Mr. Macklin is the President and Chief Executive Officer of the
Corporation and Mr. Umbarger is Executive Vice President of the Corporation and
are members of active management. Five (5) Directors have elected to participate
in the plan.
The Corporation has adopted a deferred income plan for Robert V. Macklin
and James R. Umbarger, Jr., (Executive Officer). Under this program, the
participants elect to defer a portion of their salary. The amount deferred is
used by VBT to purchase life insurance on the lives of the participants. The
life insurance proceeds will be used to reimburse VBT for the benefit payments
made under the program. The amounts referred were: Robert V. Macklin - 1998
$9,000, 1997 $9,000, 1996 $9,000; James R. Umbarger - 1998 $4,000, 1997 $4,000,
1996 $4,000.
Under the programs, a Director or Officer may elect to have all or a
portion of their director's fees or officer salary deferred. These deferred
awards are paid out ill one hundred twenty (120) monthly installments at the age
selected by the participant. The amount of the benefit varies with the amount
deferred, the participant's age at time of commencement and time of termination,
and the circumstances of the termination. The program also includes special
provisions for payment to the beneficiary of the participant who dies while
participating in the Plan. The right to the amount deferred vests immediately on
payment. The right to additional sums will vary and vest at different times in
accordance with the amount deferred, age of participant and length of
participation.
The amount deferred is used by VBT to purchase life insurance on the lives
of the deferring participants. The proceeds from the insurance will he used to
reimburse VBT for the benefit payments made under the program. The insurance is
designed so that if the assumptions made as to mortality experience, policy
dividends, and other factors are realized, the proceeds paid VBT will be at
least equal to all the premium payments.
TERMINATION OF EMPLOYMENT: CHANGE IN CONTROL
In 1993, the Board of Directors of VBT entered into an agreement with
Robert V. Macklin, its President and Chief Executive Officer, and James R.
Umbarger, Jr., its Executive Vice-President (both individually referred to as
"Executives"), which provides for compensation in the event their employment is
terminated or resigns for any reason, or dies or is disabled after a change in
control of VBT or Bancorp. This Agreement was amended in 1996 and in 1997. The
agreements provide for a salary continuation in the amount equal to a multiple
of 2.99 times their average annual salary for the previous five (5) calendar
years for a period of two (2) years in the event of termination within one (1)
year of the change in control or in the amount equal to a multiple of 1.99 times
their average annual salary for the previous five (5) calendar years for a
period of one (1) year in the event of termination within the second (2nd) year
after change in control. The agreement also provides for salary continuation in
the event of salary reduction during the first two (2) years following a change
in control. These payments may be terminated in the event the Executives'
employment is terminated for cause. The agreement terminates
46
<PAGE>
January 1, 2000. In 1996 The Board of Directors of VBT entered into a similar
change of control agreement with Senior Vice-President George W. Hermann and
Senior Vice-President Gerard Shpunt providing for one (1) year compensation if
terminated within the first year and in 1997, the Board of Directors of VBT
entered into a similar agreement with its Senior Vice-President Kenneth M.
Griffin.
In 1996, The Board of Directors adopted a change of control Severance
Policy for directors and employees of VBT and Bancorp in the event their
employment is terminated after a change of control of Bancorp or VBT. The policy
for Directors provides for a continuation of directors compensation equal to
2.99 times the annual compensation received by the respective director for the
preceding two (2) years, based on a percentage determined by the number of years
in service, payable monthly on the date directors are customarily compensated.
The Compensation for employees shall equal three (3) weeks average salary and is
prorated on a formula based on a percentage of the number of years of
employment. The compensation for any employee or director shall at no times
exceed 2.99 times their annualized compensation for the most recent five (5)
year taxable years ending before the date on which the change in control or
ownership occurs of control.
The Officers Agreement defines a "change in control" as (a) a purchase,
sale, or exchange, legally or equitably, of more than fifty (50%) percent of the
outstanding shares of the Corporation, with a corresponding change of forty
(40%) percent or more of the Directors of the Corporations Board of Directors in
any one (1) year; (b) the appointment or election of fifty (50%) percent or more
of new members to the Board of Directors of the Corporation in any one (1) year;
(c) the purchase, sale or exchange of thirty (30%) or more of the outstanding
shares of the Corporation by one person, one entity, or related person and/or
entities with a corresponding change of forty (40%) percent or more of the
Directors of the Corporations Board of Directors, in any one (1) year period;
(d) an event under (a) or (c) above where the Executives employment is
terminated other than for cause within two (2) years of the event or (e) a
merger, consolidated of dissolution of the Corporation.
All payments are paid as salary or compensation in the same increments and
payment schedule as the Corporation pays its Directors management, or employers
in the regular cause of business.
Notwithstanding, the aggregate present value of all payments in the nature
of compensation, such as cash advances, cash benefits, severance plan, etc.
which are made or to be made to the individual, shall not exceed 2.99 times the
average base amount If the aggregate present value of such payment exceed 2.99
times the individuals base amount, the aggregate present value of such amount
shall be reduced to an amount equal to 2.99 times the individuals base amount.
The purpose of the limitation is to prevent any part of the compensation from
being treated as an "excess parachute payment" under the provisions of Section
280 of the Internal Revenue Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors acts as the Compensation Committee. All
Directors had and have transactions with Bancorp as noted in "Transactions With
Management". Edward J. Hannafin, Chairman of the Board of Directors, Nicholas R.
DiNapoli, Vice-Chairman of the Board of Directors, and Jose P. Boa and Carl
Lecher members of the Board of Directors, had certain business relations with
Bancorp and VBT during 1998. See "Remuneration of Directors and Certain Business
Relationships", "Transactions With Management", and "Compensation Committee
Report of Executive Compensation".
COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION
Neither Bancorp nor VBT has a compensation committee. This function is
performed by their respective Boards of Directors. The Board of Directors sets
the compensation for the members of the Board of Directors and the
President/Chief Executive Officer and Executive Vice President. See
"Compensation Committee Report of Executive Compensation".
The Board of Directors acts as the Compensation Committee with respect to
compensation for Robert V. Macklin, President and Chief Executive Officer and
James R. Umbarger, Jr., Executive Vice President.
47
<PAGE>
Robert V. Macklin and James R. Umbarger, Jr., who are also members of the
Board of Directors, do not participate as board members relative to discussion,
determination, policies and review of executives and executive compensation. See
"Compensation Committee Interlocks and Insider Participation."
The Committee reviewed the Bank's earnings on assets, return on equity and
growth, administration, compliance and regulatory reports of the corporations,
development and maintenance of business and customers, the development and
opening of offices in Westport and Danbury and the general economic industry
conduct The Bank enjoyed an increase in profits. It is noted the increase is
principally from earnings and not extraordinary profit basis. The public stock
sale price has increased significantly. The Committee reviewed the institutions
stockholder value, analyzation, the effort and analysis of sale or merger of the
Bank, and the negotiations with Webster Bank.
The profits of The Village Bank & Trust Company are estimated at
approximately $2.0 million. This was after start-up cost for Westport, Danbury
and the further development of the Trust Department. While peer banks in Western
Conecticut have similiar or better performance on the average, the solid
performance has permitted the Board of Directors to continue to pay dividends
while the Bank grew.
The Committee reviewed known compensation packages of executives at peer
banking institutions located in Western and Southwestern Connecticut. This is a
self selected group of comparable size and banking business. The salaries
provided to Bancorp and VBT executives are targeted at a competitive median
range of these peer groups.
In addition, the Board considered the overall performance of VBT and
Bancorp for the past three (3) years, the continued profitability of Bancorp,
the earnings per share, the continued executive efforts to improve the Bank and
the corresponding results, the competitive environment, earnings on assets,
return on equity, growth, administration, compliance and regulatory reports, the
initiation of a new development team, development of business, customers, the
the Trust Department and the expansion of the Bank with related costs. The
criteria are typically subjective and not specifically specified, however,
certain performance measures are available.
The Board determined the executive compensation paid in 1998 to be fair and
reasonable. It believes the issuance of stock options are an incentive to a
continuing profitability and a vehicle for retention of qualified personnel. An
Employee Stock Option Plan was adopted in 1996.
The Board of Directors acting as the Compensation Committee were:
Enrico J Addessi Nicholas R DiNapoli Antonio Resendes
Jose P Boa Edward J Hannafin Thomas F Reynolds
Richard O Carey Joseph L Knapp Robert Scala
Jeanne M Cook Carl Lecher
TRANSACTIONS WITH MANAGEMENT
Bancorp and VBT have had no transactions and have no proposed transactions
with their Directors, Officers, any of their relatives, or firm, corporation or
other entity, in which they may have an interest, directly or indirectly; except
as noted below.
All Directors and Officers of Bancorp and VBT are depositors of VBT and
several have had credit extended to them in varying degrees in the ordinary
course of business.
VBT has had and expects to have in the future, banking transactions in the
ordinary course of business, with its and Bancorp's Directors, Advisory
Directors, Officers, principal stockholders, their immediate families,
corporations, organizations, and associates, on substantially the same terms,
including interest rates, collateral and repayment terms as those prevailing at
the same time for comparable transactions with others, which do not involve more
than normal risk ofcollectability or present unfavorable features.
See "Remuneration of Directors and Certain Business Relationships" for
further transactions with Directors.
48
<PAGE>
COMPARISON OF TOTAL STOCKHOLDER RETURN
Set forth below is a line graph comparing the five year cumulative total return
of the Company's common stock with that of the SNL Securities Corporation
Performance New England Bank Index Value and the NASDAQ Stock Market (U.S.)
Total Return Index. The graph compares the value of $100 invested on December
31, 1993 in the Company's stock with that of the two indexes. The SNL New
England Bank Index was chosen as it represents a broad market group in which the
company participates, and the NASDAQ Stock Market (U.S.) Total Return Index was
chosen as having a representative peer group of companies. The total return
includes reinvestment of dividends.
<PAGE>
- --------------------------------------------------------------------------------
Village Bancorp, Inc.
Total Return Performance
- --------------------------------------------------------------------------------
[Line Graph Representing the Comparitive Performance of Village Bancorp, Inc.,
NASDAQ and New England Bank Index Over a Five Year Period]
<TABLE>
<CAPTION>
Period Ending
----------------------------------------------------------
Index 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Village Bancorp, Inc. 100.00 114.71 187.11 226.28 398.55 484.93
NASDAQ - Total US 100.00 97.75 138.26 170.01 208.58 293.21
SNL New England Bank Index 100.00 96.10 157.58 214.87 342.02 374.29
</TABLE>
49
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
COMMON STOCK OUTSTANDING
BANCORP
As of March 15, 1999, there were outstanding and entitled to vote 1,951,534
shares of common stock of Bancorp which is its only class of stock. To the best
knowledge and belief of the Officers and Directors of Bancorp, no person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934 is beneficially owner of more than five (5%)
percent of the outstanding voting securities of the Corporation; except as
stated below in the following table. The following table represents the percent
of class based on number of shares outstanding (1,951,534) and the number of
shares subject to options within 60 days (87,500).
Amount & Nature
Name & Address of of Beneficial
Title of Class Beneficial Owner Ownership % of Class
- -------------- ---------------- --------- ----------
Common Austin, Rosow and 189,450 9.88%
Rueckert (Group) -------
167 Old Post Road (A=94,800)
Southport, CT 06490 (B=94,650)
Common John Sheldon Clark 100,110(3) 5.22%
6102 East Mockingbird --------
#622 (A=38,192)
Dallas, TX 75214 (B=14,000)
(C=47,918)
Common Lewis J. Finch 140,411(3) 7.32%
520 Main Street --------
Ridgefield, CT 06877 (A=86,476)
(B=53,935)
The members of the Board of Directors and Directors and Executive Officers of
Bancorp as a group beneficially own securities of Bancorp as follows:
Amount & Nature
Name of of Beneficial
Title of Class Beneficial Owner Ownership 1,2 % of Class
- -------------- ---------------- ------------- ----------
Common Directors and Executive
Officers (as a group) 280,278 13.78%
-------
(A=114,238)
(B= 99,498)
(C= 6,184)
(D= 25,358)
(E= 35,000)
Common Enrico J Addessi 33,064(3) 1.63%
(Director and -------
Secretary) (A=29,640)
(D= 3,424)
Common Jose P Boa 25,776 1.27%
(Director) ------
(A=24,630)
(B= 918)
(C= 228)
50
<PAGE>
Common Richard O Carey 37,186 1.83%
(Director) ------
(A= 4,086)
(B=25,600)
(C= 1,200)
(D= 6,300)
Common Jeanne M Cook 4,840 .24%
(Director) -----
(A=4,840)
Common Nicholas R DiNapoli 49,282(3) 2.42%
(Director & Vice -------
Chairman) (A=23,294)
(B=23,220)
(C= 2,768)
Common Edward J Hannafin 31,310(3) 1.54%
(Director and -------
Chairman) (A=13,074)
(B= 2,060)
(D=16,176)
Common Joseph L Knapp 13,722 .67%
(Director) ------
(A=10,446)
(B= 1,800)
(C= 1,476)
Common Carl Lecher 9,560 .47%
(Director) -----
(A=2,722)
(B=6,838)
Common Robert V Macklin 26,806(3) 1.32%
(Director & Chief -------
Executive Officer) (B= 6,806)
(E=20,000)
Common Antonio Resendes 9,828 .48%
(Director) -----
(B=9,600)
(C= 228)
Common Thomas F Reynolds 280 .01%
(Director) ---
(B=280)
Common Robert Scala 12,632(3) .62%
(Director and -------
Asst. Secretary) (A=1,506)
(B=7,960)
(C= 284)
(D=2,882)
Common James R Umbarger, Jr 25,992(3) 1.28%
(Director and -------
Executive Officer) (B=10,992)
(E=15,000)
(A) equals number of shares with sole voting power.
(B) equals number of shares with shared voting power.
(C) equals number of shares with sole investment power.
(D) equals number of shares with shared investment power.
(E) equals number of shares exercisable by option within sixty (60) days (See
"Options").
51
<PAGE>
1. To the best knowledge and belief of management, there are no shares to
which such persons have the right to acquire beneficial ownership within 60 days
except the President, Robert V. Macklin (20,000); Executive Vice President,
James R. Umbarger, Jr. (15,000) and other employee option shares aggregating
47,500. (See "Options")
2. Includes option to purchase 82,500 shares within sixty (60) days. (see
"Options").
3. The following Directors, Executive Officers, and owners of more than 5%
of voting securities have bought or sold Bancorp securities within the past two
fiscal years. All voting securities reflect a two (2) for one (1) stock dividend
issued in November, 1997.
(a) Lewis J. Finch disposed 2,759 shares on December 15, 1997 which were in
his name and his wife's name.
(b) John Sheldon Clark filed a Schedule 13-D dated February 12, 1998
reporting 100,110 shares are beneficially owned. Mr. Clark reports 38,192 are
personally owned, 47,918 shares are owned by the Trust under the Will of Charles
M. Clark, Jr., of which he is Trustee, and 14,000 shares are owned by his wife
Marquerite J. Clark.
(c) Enrico J. Addessi acquired 1,000 shares on February 27, 1997 and 80
shares on March 5, 1997 in his wife's name.
(d) Nicholas R. DiNapoli acquired beneficial ownership of 200 shares in
February, 1997, all by title in his name and his wife's.
(e) Edward J. Hannafin had held 6,630 shares through a related party, Lloyd
Cutsumpas, who as of January 1, 1998 is no longer a related party.
(f) Robert V. Macklin acquired ownership of 9,800 shares in February 1998
through the exercise of a stock option grant and sold 3,000 shares on February
6, 1998 and sold 1,800 shares in April 1998, all by title in his name and his
wife's name.
(g) Robert Scala acquired ownership of 100 shares in December 10, 1997 in
his name.
(h) James R. Umbarger, Jr., acquired ownership of 7,800 shares in July 1998
through the exercise of a stock option grant.
(i) Certain Directors and/or Officers have or may elect to participate in
the Corporation's Dividend Reinvest Stock Purchases Plan ("DRIP"). This plan
reinvests cash dividends in open market purchases of the Corporation's stock.
American Stock Transfer and Trust, the transfer agent, administers the DRIP.
Item 13. Certain Relationships and Related Transactions
TRANSACTIONS WITH MANAGEMENT
Bancorp and VBT have had no transactions and have no proposed transactions
with their Directors, Officers, any of their relatives, or firm, corporation or
other entity, in which they may have an interest, directly or indirectly; except
as noted below.
All Directors and Officers of Bancorp and VBT are depositors of VBT and
several have had credit extended to them in varying degrees in the ordinary
course of business.
52
<PAGE>
VBT has had and expects to have in the future, banking transactions in the
ordinary course of business, with its and Bancorp's Directors, Advisory
Directors, Officers, principal stockholders, their immediate families,
corporations, organizations, and associates, on substantially the same terms,
including interest rates, collateral and repayment terms as those prevailing at
the same time for comparable transactions with others, which do not involve more
than the normal risk of collectability or present unfavorable features.
There are no arrangements or understandings between the Officers and any
other persons pursuant to which he is to be selected as an officer. There is no
family relationship between any Director, Executive Officer or person chosen to
be a Director or Executive Officer. There are no employment contracts,
compensation plans or arrangements with the Executive Officers other than their
respective interests in the Corporations 401(k) Incentive Savings and Salary
Reduction Plan, Stock Option Plan, insurance and an agreement regarding
termination resulting from a change in control of Bancorp or VBT.
See Item 11 for further information regarding relationships and
transactions.
PART IV
Item 14. Exhibits, Financial Statements
(a) (1) The following consolidated financial statements and the
Independent Auditors' Report included in the Form 10-K of Village Bancorp, Inc.
and Subsidiaries for the year ended December 31, 1998, are incorporated by
reference in Item 8:
Consolidated Balance Sheets - December 31, 1998 and 1997.
Consolidated Statements of Income - Years Ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Comprehensive Income -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(a)(2) Schedules to the Consolidated Financial Statements required by
Article 9 of Regulation S-X are not presented because the information is
included in the Consolidated Financial Statements or Notes thereto.
(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, 1998.
(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.
53
<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.
By /s/ James R. Umbarger March 31, 1999
- ------------------------------------------------------------------------------
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 31, 1999
- ------------------------------------------------------------------------------
Edward J. Hannafin - Chairman of the Board & Director
/s/ Nicholas R. DiNapoli March 31, 1999
- ------------------------------------------------------------------------------
Nicholas R. DiNapoli - Vice Chairman of the Board & Director
/s/ Robert V. Macklin March 31, 1999
- ------------------------------------------------------------------------------
Robert V. Macklin - President, Chief Executive Officer & Director
/s/ Enrico J. Addessi March 31, 1999
- ------------------------------------------------------------------------------
Enrico J. Addessi - Secretary of the Board & Director
/s/ Robert Scala March 31, 1999
- ------------------------------------------------------------------------------
Robert Scala - Assistant Secretary of the Board & Director
/s/ Jose P. Boa March 31, 1999
- ------------------------------------------------------------------------------
Jose P. Boa - Director
/s/ Richard O. Carey March 31, 1999
- ------------------------------------------------------------------------------
Richard O. Carey - Director
/s/ Jeanne M. Cook March 31, 1999
- ------------------------------------------------------------------------------
Jeanne M. Cook - Director
/s/ Carl Lecher March 31, 1999
- ------------------------------------------------------------------------------
Carl Lecher - Director
/s/ Joseph L. Knapp March 31, 1999
- ------------------------------------------------------------------------------
Joseph L. Knapp - Director
/s/ Antonio M. Resendes March 31, 1999
- ------------------------------------------------------------------------------
Antonio M. Resendes - Director
/s/ Thomas F. Reynolds March 31, 1999
- ------------------------------------------------------------------------------
Thomas F. Reynolds - Director
/s/ James R. Umbarger March 31, 1999
- ------------------------------------------------------------------------------
James R. Umbarger - Executive Vice President & Director
54
<PAGE>
VILLAGE BANCORP, INC.
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION REFERENCE NUMBERED PAGE
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
10(c) Lease Dated April 28, 1997 Exhibit 10(c) to Form 10-K
December 31, 1997
21 Subsidiaries of the Registrant Filed Herewith 56
55
Exhibit 21
Subsidiaries of the Registrant
The Registrant has one wholly owned subsidiary, The Village Bank & Trust
Company, a Connecticut chartered commercial bank.
56
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,091
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 18,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,627
<INVESTMENTS-CARRYING> 33,936
<INVESTMENTS-MARKET> 34,421
<LOANS> 149,386
<ALLOWANCE> 1,178
<TOTAL-ASSETS> 237,156
<DEPOSITS> 217,177
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,450
<LONG-TERM> 0
0
0
<COMMON> 6,482
<OTHER-SE> 11,047
<TOTAL-LIABILITIES-AND-EQUITY> 237,156
<INTEREST-LOAN> 12,934
<INTEREST-INVEST> 2,595
<INTEREST-OTHER> 416
<INTEREST-TOTAL> 15,945
<INTEREST-DEPOSIT> 6,185
<INTEREST-EXPENSE> 17
<INTEREST-INCOME-NET> 9,743
<LOAN-LOSSES> (123)
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 7,618
<INCOME-PRETAX> 3,000
<INCOME-PRE-EXTRAORDINARY> 3,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,061
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.70
<LOANS-NON> 1,137
<LOANS-PAST> 151
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,275
<ALLOWANCE-OPEN> 1,309
<CHARGE-OFFS> 52
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,178
<ALLOWANCE-DOMESTIC> 1,178
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 916
</TABLE>
