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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-K on FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________________ to ____________________
Commission file number 0-12936
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Westport Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1094350
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
87 Post Road East, Westport, Connecticut 06880
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 222-6911
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1996 was $31,923,877, consisting of shares of the
registrant's Common Stock, par value $.01 per share, and Preferred Stock, par
value $.01 per share, valued as if fully converted into shares of Common Stock
at a conversion ratio of 100 shares of Common Stock for each outstanding share
of Preferred Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
At March 15, 1996, there were 5,638,531 outstanding shares of the Registrant's
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders of
the registrant incorporated in Part III of this Form 10-K.
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PART I
Item 1
Business
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General
Westport Bancorp, Inc. ("Bancorp") was organized in 1983 as a Delaware
corporation for the purpose of becoming the holding company of The Westport Bank
& Trust Company (the "Bank") (collectively, the "Company"), a
Connecticut-chartered bank and trust company headquartered in Westport,
Connecticut, the deposit accounts of which are insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation ("FDIC"). Bancorp is regulated
and examined by the Federal Reserve Board. The Bank is regulated by the FDIC and
the Banking Commissioner of the State of Connecticut (the "Commissioner").
Bancorp's principal asset is all of the capital stock of the Bank and Bancorp's
principal business is the business of the Bank. Bancorp is a separate legal
entity from the Bank; the principal sources of its revenues on an unconsolidated
basis are interest and other income received from its investments, including
dividends from the Bank.
The Bank was originally chartered in 1852. Bancorp acquired the Bank on October
9, 1984.
The principal business of the Bank is to provide a broad range of corporate and
individual banking products and services, including commercial banking,
residential mortgage origination, commercial lending, commercial real estate
lending, retail banking and trust services to individuals, and small to medium
size businesses. The Bank's operations are conducted from its home office in
Westport, Connecticut and from branch offices located in the mid-Fairfield
County, Connecticut communities of Weston, Fairfield, Redding/Georgetown, Greens
Farms and Saugatuck. In addition, the Bank's operations center is located in
Shelton, Connecticut.
Principal Market Area
The Bank's branch office network currently consists of six banking offices,
including its main office. The towns in the Bank's market area, which consists
principally of Fairfield County, Connecticut, are primarily bedroom communities
of New York City, although Stamford, Bridgeport and Norwalk are commercial
centers. Two major highways (Interstate 95 and the Merritt Parkway) traverse the
area and a number of regional airports are located within Fairfield County.
Those towns bordering I-95 have had substantial commercial office development,
particularly near the major highway intersections. This market is also
accessible by railway.
Lending Activities
The Bank's principal lending activities include the origination of conventional
and construction mortgage loans on residential, one-to-four family real
properties, as well as commercial and real estate loans to businesses. The Bank
also provides consumer loans, which include home equity credit lines,
installment loans (such as home improvement, automobile and personal loans) and
checking account related loans. See Item 6 of this Form 10-K.
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Residential Mortgage Loans. While the Bank is authorized to make loans secured
by real estate located either within or outside the State of Connecticut, its
past and present policy is to concentrate on loans secured by properties located
within Connecticut, particularly in Fairfield County. Less than 2% of the Bank's
total residential real estate loan portfolio at December 31, 1995 represented
loans on properties located outside the State of Connecticut.
The Bank currently offers adjustable and fixed rate mortgages, the majority of
which are originated to conform with the existing criteria for sale in the
secondary mortgage market. Points are generally charged on residential mortgage
loans. Interest rate adjustments on adjustable rate loans are generally
determined by reference to rates on one-year Treasury obligations published by
the Federal Reserve Board.
Commercial Mortgage Loans. The Bank's commercial mortgage investments consist of
loans made on commercial property and multi-family homes (more than four units).
In general, the Bank lends up to 75% of the appraised value of a commercial
property. Status reports on all commercial mortgage loans are reviewed by the
Bank's Management Loan Committee and Directors' Loan Committee on a regular
basis. Given the general economic downturn and the dramatic decline since the
late 1980's in real estate values in New England, and in Connecticut in
particular, real estate development and construction within the Bank's market
area has dramatically declined over the past several years. During 1995 and
1994, this trend showed signs of stabilizing and the Bank experienced some
increased demand for commercial mortgage loans.
Commercial Loans. The Bank has been engaged in commercial lending activity for
more than fifty years. Term loans to finance machinery, equipment or vehicle
purchases, short term loans for working capital needs, revolving credit
supported by accounts receivable and/or inventory, and lines of credit are
representative of these types of loans in the Bank's portfolio. These loans are
generally secured by collateral other than real property; less than 11% of the
Bank's commercial loan portfolio at December 31, 1995 was unsecured.
Home Equity Loans. Home equity loans consist of lines of credit, which are
collateralized by first or second mortgages on residential one-to-four family
real properties.
Consumer Loans. Consumer loans consist primarily of installment loans, which
include home improvement loans, automobile loans, personal loans and checking
account overdraft protection related loans.
FDIC Loans. In the fourth quarter of 1992, the Bank purchased $18.8 million in
performing commercial business loans from the FDIC, of which $12.6 million
consisted of loans to businesses located in the Bank's primary market area of
Fairfield County, with $6.2 million in the area immediately surrounding
Westport. The loans were acquired at par value; the purchase
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was funded from existing liquidity. The purchase agreement contained a three
year provision (the "put"), which ended on December 7, 1995, that required the
FDIC to repurchase any loans that became nonperforming, at a previously
negotiated price plus sixty days of accrued interest. Losses resulting from
repurchases during the three year period have been minimal due to the loans'
performing status. At December 7, 1995, the outstanding balance of these loans
retained by the Bank was $4.3 million.
Interest Rates. Interest rates charged on loans are primarily determined by the
Bank's cost of funds, comparable investment alternatives available to the Bank
and competitive conditions.
Loan Commitments. Commitments to extend commercial lines of credit and to make
mortgage loans on residential and commercial real property are made for periods
of up to 60 days from the date of commitment. Commitments on residential
transactions are generally made at the market interest rate prevailing at the
time the commitment is made to the customer. Commitments on commercial
transactions are generally made at the market interest rate in effect on or
immediately prior to the date of closing.
Deposits and Other Sources of Funds
Deposits have traditionally been the Bank's major source of funds for
investments and lending and are expected to continue to be in the foreseeable
future. The Bank also derives funds from scheduled loan principal payments, the
sale of residential mortgage loans in the secondary market, loan prepayments,
the sale or maturity of investment securities, interest income and fee income.
Other sources of funds include the sale of investment securities to securities
firms and correspondent banks under repurchase agreements, unsecured lines of
credit with correspondent banks and secured lines of credit with the Federal
Home Loan Bank. See Item 6 of this Form 10-K.
Deposits. The Bank offers a wide range of retail and commercial deposit accounts
designed to attract both short and long-term funds. It has been the Bank's
policy to offer a variety of rates and types of deposit accounts to meet its
customers' requirements. Demand deposits, certificates of deposit, regular
savings, money market deposits and NOW checking accounts have been the primary
source of deposit funds. Certificates of deposit currently offered by the Bank
have maturities which range from seven days to five years.
The Bank encounters competition for deposits from other community banks, the
branch offices of larger commercial banks and thrift institutions. The Bank also
competes for interest-bearing funds with securities firms, mutual funds and
issuers of commercial paper and other securities. Bank management anticipates
that competition for deposits in the Bank's market area will continue to
increase in the foreseeable future due to competition from securities firms,
mutual funds, and as other banks enter the Bank's market area as a result of
changes in the interstate banking law.
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Trust Operations
At December 31, 1995, the Bank's Trust department held, for the account of
others, assets under trust management and in custodial accounts having a market
value of $548.5 million. As allowed by state law, the Bank acts as executor and
administrator of decedents' estates, as trustee of inter-vivos and testamentary
trusts, as guardian and conservator of estates of minors and incapable persons,
as custodian of funds, as investment advisor and as trustee of employee benefit
plans. From its trust and related activities, the Bank generates substantial fee
income. In the trust business, the Bank competes with commercial banks, located
both in and out of state, and with individuals and entities appointed to act
under testamentary and other instruments as fiduciaries, investment managers and
financial advisors. See Item 6 of this Form 10-K.
Employees
At December 31, 1995, the Bank had a total of 133 employees, 105 on a full-time
basis and 28 on a part-time basis. Management considers the Bank's relations
with its employees to be good. The Bank's employees are not represented by any
collective bargaining group.
Competition
Competition in the financial services industry in the Bank's market area is
strong. Numerous commercial banks, savings banks and thrift institutions
maintain home offices in the area and banks headquartered elsewhere maintain
offices in the area. Commercial banks, savings banks, thrift institutions,
mutual funds, mortgage brokers, finance companies, credit unions, insurance
companies, securities firms and private lenders compete with the Bank for
deposits, loans and employees. Many of these competitors have far greater
resources than the Bank does and are able to conduct more intensive and broader
based promotional efforts to reach both commercial and individual customers.
Changes in the financial services industry resulting from fluctuating interest
rates, technological changes and deregulation have resulted in increased
competition, merger activity, failures among banking institutions and customer
awareness of product and service differences among competitors.
Regulation and Supervision
As a Connecticut-chartered state bank whose deposits are insured by the FDIC,
the Bank is subject to extensive regulation and supervision by both the
Commissioner and the FDIC. The Bank is also subject to various Federal Reserve
Board regulatory requirements applicable to FDIC insured financial institutions.
As a bank holding company, Bancorp is regulated by the Federal Reserve Board.
Such governmental regulation is intended to protect depositors, not
stockholders.
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Connecticut Regulation. As a state-chartered capital stock bank, the Bank is
subject to the applicable provisions of Connecticut law and the regulations
adopted thereunder by the Commissioner. The Commissioner administers Connecticut
banking laws, which contain comprehensive provisions for the regulation of
banks. The Bank derives its lending and investment powers from these laws, and
is subject to periodic examination by, and reporting to, the Commissioner.
Connecticut bank and trust companies are empowered by statute, subject to
limitations expressed therein, to accept savings and time deposits, to offer
checking accounts, to pay interest on such deposits and accounts, to make loans
on residential and other real estate, to make consumer and commercial loans, to
invest, with certain limitations, in equity securities and debt obligations of
banks and corporations, to issue credit cards, and to offer various other
banking services to their customers. Connecticut banking laws grant banks broad
lending authority. Such authority is limited, however, to the extent that a
bank's loans to any one obligor may not exceed 25%, if fully secured, and 15%,
if not fully secured, of the total of a bank's equity capital and loan loss
reserves.
The Connecticut Interstate Banking Act permits Connecticut banks and bank
holding companies, with the approval of the Commissioner, to engage in stock
acquisitions of banks and bank holding companies in other states with reciprocal
legislation. Many states have such legislation. Before the Interstate Banking
Act was adopted in March 1990, Connecticut banks and bank holding companies were
allowed to engage in stock acquisitions with banks and bank holding companies in
other New England states with reciprocal legislation, all of which have such
legislation. See "Recent Developments" for a discussion of recent changes to the
regulations relating to interstate banking and branching.
Several interstate mergers involving large Connecticut banks with offices in the
Bank's service area and banks headquartered out-of-state have been completed
during recent years, resulting in increased competition for the Bank. A New York
based institution acquired two failed institutions from the FDIC in the Bank's
market area in 1991 and a New Jersey based institution acquired another bank,
headquartered in the Bank's principal market, in 1993. During 1995 and early
1996, two of the largest commercial banks in the Bank's market area completed
their merger, while numerous smaller institutions were acquired by larger
in-state and out-of-state financial institutions.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the Commissioner, exceed
the total of its net profits for that year combined with its retained net
profits from the preceding two years. These dividend limitations can affect the
amount of dividends payable to Bancorp as the sole stockholder of the Bank, and
therefore affect Bancorp's payment of dividends to its stockholders. During
1995, Bancorp resumed the payment of dividends after all regulatory restrictions
were removed.
Under Connecticut banking law, no person may acquire the beneficial ownership of
more than 10% of any class of voting securities of a bank chartered by the State
of Connecticut or having its principal office in Connecticut or a bank holding
company thereof, unless the Commissioner approves such acquisition.
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Any state-chartered bank meeting statutory requirements may, with the approval
of the Commissioner, establish and operate branches in any town or towns within
the state.
During January 1996, representatives of the Commissioner completed a routine
examination of the Bank as of October 30, 1995. Other than minor suggestions for
improvements, there were no significant examination findings which are believed
to have potentially negative implications for the Bank.
FDIC Regulation. The deposit accounts of the Bank are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 for each insured depositor.
As an insured bank, the Bank is subject to supervision and examination by the
FDIC and to FDIC regulations regarding many aspects of its business, including
types of deposit instruments offered, permissible methods for acquisition of
funds, and activities of subsidiaries and affiliates. The FDIC periodically
examines insured institutions.
In December 1991, the Federal Deposit Insurance Act ("FDIA") was amended with
the enactment of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). Provisions of FDIA, as amended, which may have a material
effect on the Bank and Bancorp include, among others, the following:
1. FDIA classifies banks in one of five categories according to capital
levels. With respect to banks not meeting prescribed minimum capital levels, and
depending on the extent to which a bank is undercapitalized, federal bank
regulators may be required, in certain cases, to take corrective actions against
the bank, including requiring an acceptable capital restoration plan or placing
a bank into conservatorship or receivership. In addition, undercapitalized banks
may be subject to certain restrictions on their activities and operations,
including restrictions on asset growth, rates of interest paid on deposits,
transactions with affiliates, engaging in material transactions not in the
ordinary course of business, and other activities. See "Prompt Corrective
Action" below.
2. FDIA makes it more difficult for undercapitalized banks to borrow funds
from the Federal Reserve's "discount window", thus possibly limiting or
eliminating a source of liquidity for a bank. The Bank is approved to borrow
funds from the "discount window".
3. FDIA can result in higher deposit insurance premiums for banks under a
"risk-based" premium determination, with possible negative effects on a bank's
operating results and financial condition.
4. FDIA limits, with certain exceptions, the ability of banks to engage in
activities or make equity investments that are not permissible for national
banks.
In addition, the FDIC has issued regulations providing for capital guidelines
based upon the ratio of a bank's capital to total assets adjusted for risk.
Under such regulations, a bank's risk-based capital ratio is calculated by
dividing its qualifying total capital base by its risk-weighted assets. Banks
are expected to meet a minimum Tier 1 capital to risk-weighted asset ratio of
4.00% and a total capital to risk-weighted asset ratio of 8.00%. At December 31,
1995, Bancorp's Tier 1 capital to risk-weighted asset ratio was 12.77%, and its
total capital to risk-weighted asset ratio was 14.02%, well above the minimum
requirements. There are no significant differences between Bancorp's and the
Bank's capital ratios at December 31, 1995.
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Prompt Corrective Action. Pursuant to the FDIA, the federal banking agencies
established for each capital measure levels at which an insured institution is
deemed to be well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Federal banking
agencies are required to take prompt corrective action with respect to insured
institutions that fall below minimum capital standards. The degree of required
regulatory intervention for institutions that are not at least adequately
capitalized is tied to an insured institution's capital category, with
increasing scrutiny and more stringent restrictions, including the appointment
of a receiver, being imposed as an institution's capital declines. An insured
institution that falls below the minimum capital standards must submit a capital
restoration plan and could be subject to operating restrictions.
The prompt corrective action regulations are generally based upon an
institution's capital ratios. Under the prompt corrective action regulation
adopted by the FDIC, a bank will be considered to be (i) "well-capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
or core capital to risk-weighted assets ratio of 6% or greater, and a leverage
ratio of 5% or greater (provided that the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure); (ii) "adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite 1 under the CAMEL
rating system in its most recent report of examination); (iii)
"undercapitalized" if the institution has a total risk-based capital ratio that
is less than 8%, a Tier 1 or core capital to risk-weighted assets ratio of less
than 4%, or a leverage ratio that is less than 4% (3% if the institution is
rated composite 1 under the CAMEL rating system in its most recent report of
examination); (iv) "significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a Tier 1 or core capital to
risk-weighted assets ratio that is less than 3%, or a leverage ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or equal to 2%. The
prompt corrective action regulations also permit the FDIC to determine that a
bank institution should be classified in a lower category based on other
information, such as the institution's examination report, after written notice.
Under the FDIC's prompt corrective action regulations, at December 31, 1995, the
Bank was classified as well-capitalized based on its capital ratios.
An institution that is not well-capitalized is prohibited from accepting
deposits through a deposit broker. However, an adequately capitalized
institution can apply for a waiver to accept brokered deposits. Institutions
that receive a waiver are subject to limits on the rates of interest they may
pay on brokered deposits. Undercapitalized institutions are prohibited from
offering rates of interest on insured deposits that significantly exceed the
prevailing rate in their normal market area or the area in which the deposits
would otherwise be accepted. Institutions classified as undercapitalized are
precluded from increasing their assets, acquiring other institutions,
establishing additional branches, or engaging in new lines of business without
an approved capital plan and an agency determination that such actions are
consistent with the plan. Institutions that are significantly undercapitalized
may be required to take one or more of the following actions: (i) raise
additional capital so that the institution will be adequately capitalized; (ii)
be acquired by, or combined with, another institution if grounds exist for
appointing a receiver; (iii) refrain from affiliate transactions; (iv) limit the
amount of interest paid on deposits to the prevailing rates of interest in the
region where the institution is located; (v) further restrict asset growth; (vi)
hold a new election for directors, dismiss any director or senior executive
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officer who held office for more than 180 days immediately before the
institution became undercapitalized, or employ qualified senior executive
officers; (vii) stop accepting deposits from correspondent depository
institutions; and (viii) divest or liquidate any subsidiary that the FDIC
determines is a significant risk to the institution. Critically undercapitalized
institutions are subject to additional restrictions.
Any company that controls an "undercapitalized" institution, must guarantee that
the institution will comply with the plan and provide appropriate assurances of
performance in connection with the submission of a capital restoration plan by
the depository institution. The aggregate liability of any such controlling
company under such guaranty is limited to the lesser of (i) 5% of the
institution's assets at the time it became undercapitalized; or (ii) the amount
necessary to bring the institution into capital compliance at the time the
institution fails to comply with the terms of its capital plan. If the Bank were
to become "undercapitalized", Bancorp would be required to guarantee performance
of any capital restoration plan submitted as a condition to FDIC approval of
that plan pursuant to the FDIA.
Safety and Soundness Guidelines. The federal banking agencies have prescribed
safety and soundness guidelines relating to (i) internal controls, information
systems, and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. Such guidelines impose standards based upon an
institution's asset quality and earnings. The guidelines are intended to set out
standards that the agencies will use to identify and address problems at
institutions before capital becomes impaired. Institutions are required to
establish and maintain a system to identify problem assets and prevent
deterioration of those assets in a manner commensurate with its size and the
nature and scope of their operations. Furthermore, institutions must establish
and maintain a system to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves in a manner
commensurate with their size and the nature and scope of its operation.
Under the guidelines, an institution not meeting one or more of the safety and
soundness guidelines is required to file a compliance plan with the appropriate
federal banking agency. In the event that an institution, such as the Bank, were
to fail to submit an acceptable compliance plan or fail in any material respect
to implement an accepted compliance plan within the time allowed by the agency,
the institution would be required to correct the deficiency and the appropriate
federal agency would be authorized to: (1) restrict asset growth; (2) require
the institution to increase its ratio of tangible equity to assets; (3) restrict
the rates of interest that the institution may pay; or (4) take any other action
that would better carry out the purpose of the corrective action. The Bank was
in compliance with all such guidelines as of December 31, 1995.
Community Reinvestment Act. Under the Community Reinvestment Act (the "CRA") and
the implementing FDIC regulations, which were amended in 1995 to provide for a
performance-based evaluation system, the Bank has a continuing and affirmative
obligation to help meet the credit needs of its local communities, including low
and moderate-income neighborhoods, consistent with the safe and sound operation
of the Bank. The CRA requires that the Board of Directors of the Bank adopt a
CRA statement for each assessment area that, among other things, describes its
efforts to help meet community credit needs and the specific types of credit
that the institution is willing to extend. The FDIC and the Federal Reserve
Board are required to take
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into account the Bank's record of meeting the credit needs of its community in
determining whether to grant approval for certain types of applications
including mergers and acquisitions.
Under CRA, the federal banking agencies established the following ratings: (i)
"outstanding" - an institution in this group has an outstanding record of, and
is a leader in, ascertaining and helping to meet the credit needs of its entire
delineated community, including low and moderate income neighborhoods, in a
manner consistent with its resources and capabilities, (ii) "satisfactory" - an
institution has a satisfactory record of ascertaining and helping to meet the
credit needs of its entire delineated community including low and moderate
income neighborhoods, in a manner consistent with its resources, (iii) "needs to
improve" - an institution in this group needs to improve its overall record of
ascertaining and helping to meet the credit needs of its entire delineated
community, including low and moderate income neighborhoods, in a manner
consistent with its resources, and (iv) "substantial noncompliance" - an
institution in this group has a substantially deficient record of ascertaining
and helping to meet the credit needs of its entire delineated community,
including low and moderate income neighborhoods, in a manner consistent with its
resources and capabilities. The Bank's current CRA rating is satisfactory.
Federal Reserve System. Pursuant to the Depository Institutions Deregulation and
Monetary Control Act of 1980 (the "Deregulation Act"), the Federal Reserve Board
adopted regulations that require the Bank to maintain reserves against its
transaction accounts and non-personal time deposits. At December 31, 1995, these
regulations generally require that reserves of 3% be maintained for aggregate
transaction accounts of up to $52.0 million and that reserves of 10% be
maintained against the portion of transaction accounts in excess of that amount.
The Deregulation Act also gives the Bank authority to borrow from the Federal
Reserve Bank's "discount window".
The Federal Reserve Board has established capital adequacy guidelines for bank
holding companies that are similar to those required by the FDICIA. Bank holding
companies are currently required to comply with the FDICIA's risk-based capital
and minimum leverage capital requirements.
Bancorp is subject to regulation by the Federal Reserve Board as a registered
bank holding company. The Bank Holding Company Act of 1956, as amended (the
"BHCA"), under which Bancorp is registered, limits the types of companies which
Bancorp may acquire or organize and the activities in which it or they may
engage. In general, Bancorp and its subsidiaries are prohibited from engaging
in, or acquiring direct control of any company engaged in, non-banking
activities unless such activities are so closely related to banking or managing
or controlling banks as to be a proper incident thereto. At this time, Bancorp
has not determined which, if any, of these or other permissible non-banking
activities it might seek to engage in.
Under BHCA, Bancorp is required to obtain the prior approval from the Federal
Reserve Board to acquire, with certain exceptions, more than 5% of the
outstanding voting stock of any bank or bank holding company, to acquire all or
substantially all of the assets of a bank or to merge or consolidate with
another bank holding company.
Under BHCA, Bancorp and the Bank and any other subsidiaries are prohibited from
engaging in certain tying arrangements among Bancorp and its subsidiaries
relating to any extension of
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credit or provision of any property or services to third parties. The Federal
Reserve Board relaxed some of these restrictions in 1994. The Bank is also
subject to certain restrictions imposed by the Federal Reserve Board on
extending credit to Bancorp or any of its subsidiaries, or on making investments
in the stock or securities thereof, and on taking such stock or securities as
collateral for loans to any borrower.
Bancorp is required under BHCA to file annually with the Federal Reserve Board a
report on its operations. Bancorp and the Bank and any other subsidiaries are
subject to examination by the Federal Reserve Board.
Pursuant to the Change in Bank Control Act of 1978, as amended, any person must
give 60 days notice to the Federal Reserve Board prior to acquiring control of a
bank holding company such as Bancorp. Control is defined as ownership of 25% of
any class of voting stock of a bank holding company, or the power to direct the
management or policies of the bank holding company. Control is presumed upon
ownership of 10% or more of any class of voting stock if (i) the bank holding
company's shares are registered pursuant to Section 12 of the Securities
Exchange Act of 1934 as amended (as are Bancorp's shares of Common Stock), or
(ii) the acquiring party would be the largest stockholder of the class of voting
stock of the bank holding company. The statute and underlying regulations
authorize the Federal Reserve Board to disapprove a proposed transaction on
certain specified grounds.
In addition to the Change in Bank Control Act, prior approval by the Federal
Reserve Board is required under the BHCA for any "company" to become a bank
holding company and to become subject to regulation as such by the Federal
Reserve Board. A company may become a bank holding company with Federal Reserve
Board approval if the company controls a bank or a bank holding company. A
"company" includes certain trusts, partnerships, corporations and other business
entities, but does not include individuals. For purposes of BHCA, control is
defined as (i) ownership, control or the power to vote 25% or more of any class
of voting securities of a bank or a bank holding company; (ii) control in any
manner of the election of a majority of the directors of a bank or a bank
holding company; or (iii) direct or indirect exercise of a controlling influence
over the management or policies of a bank or a bank holding company, as
determined by the Federal Reserve Board. A company that is required to obtain
prior approval under BHCA to become a bank holding company is exempt from the
prior approval requirement of the Change in Bank Control Act.
Recent Developments. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act, which will remove restrictions on
interstate branching and interstate bank acquisitions. In connection with the
Riegle-Neal Act, the State of Connecticut has enacted legislation that permits
merger transactions between a Connecticut and an out-of-state bank beginning on
September 25, 1995. Moreover, restrictions on interstate branching will be
removed effective on January 1, 1997.
11
<PAGE>
Item 2
Properties
- --------------------------------------------------------------------------------
Bancorp does not directly own or lease any real property. It uses the premises
and equipment of the Bank, without payment of rental fees to the Bank. The table
below sets forth certain information relating to the Bank's properties:
<TABLE>
<CAPTION>
Owned or Leased/
Office Location Expiration Date of Lease
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Main Office 87 Post Road East Owned
Westport, CT 06880
Main Office Annex 101 Post Road East Leased - lease expires
Westport, CT 06660 June 30, 2001 (2)
Main Office Drive-In 100 Post Road East Owned
Westport, CT 06880
Trust Department 107 Post Road East Leased - lease expires
Westport, CT 06880 June 30, 2001 (2)
Fairfield Branch 1312 Post Road Leased - lease expires
Fairfield, CT 06430 April 30, 2000 (2)
Greens Farms Branch 1111 Post Road East Owned
Westport, CT 06880
Georgetown Branch 60 Redding Road Owned
Georgetown, CT 06829
Saugatuck Branch 50 Charles Street Owned
Westport, CT 06880
Weston Branch 190 Weston Road Leased - lease expires
Weston, CT 06883 February 28, 1998
Operations Center 1 Research Drive Leased - lease expires
Shelton, CT 06484 May 31, 2001
Georgetown (1) 58 Redding Road Owned
(adjacent to branch location) Georgetown, CT 06829
1599 Post Road (1) 1599 Post Road East Owned
(acquired through foreclosure Westport, CT 06880
and included in bank premises)
Post Road East (1) 24 Post Road East Leased - lease expires
(formerly bank offices) Westport, CT 06880 April 1, 1997 (2)
<FN>
(1) Not currently used in operations; leased to third parties.
(2) Lease includes renewal option beyond expiration date indicated.
</FN>
</TABLE>
12
<PAGE>
Item 3
Legal Proceedings
- --------------------------------------------------------------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to their business, to which Bancorp or the Bank is a party
or to which any of their property is subject.
Item 4
Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
No matter was submitted to a vote of Bancorp's security holders during the
fourth quarter of 1995.
PART II
Item 5
Market For Bancorp's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
Bancorp's Common Stock trades on the NASDAQ National Market tier of The NASDAQ
Stock Market under the symbol "WBAT". The following table sets forth the high
and low bid prices of the Common Stock as reported by NASDAQ for the periods
indicated. At December 31, 1995, the Company had approximately 658 stockholders
of record and 5,433,665 outstanding shares of Common Stock. The 658 estimated
stockholders does not reflect the number of persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.
Price Range
---------------- Dividends Dividends
Fiscal Year High Low Declared Paid (1)
- -------------------------------------------------------------------------------
1995 First Quarter $ 5 $ 2 7/8 --- ---
Second Quarter 6 4 $.02 $.02
Third Quarter 5 3/4 4 1/2 $.02 $.02
Fourth Quarter 7 4 3/4 $.05 $.025
1994 First Quarter $ 3 1/2 $ 2 1/2 --- ---
Second Quarter 3 1/4 2 1/4 --- ---
Third Quarter 3 1/2 2 1/4 --- ---
Fourth Quarter 3 1/2 2 3/4 --- ---
(1) See Item 1 "Regulation and Supervision -- Connecticut Regulation" and Item
7 "Liquidity" for discussion regarding restriction on payment of
dividends.
13
<PAGE>
Item 6
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
The selected consolidated financial information of the Company set forth below
has been derived from the Company's audited consolidated financial statements
for such periods. This selected financial information should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere herein. Certain prior year amounts have been
reclassified to conform with the 1995 presentation.
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Interest income $20,725 $17,334 $15,709 $16,719 $ 20,616
Interest expense 6,027 4,749 5,684 8,034 12,218
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 14,698 12,585 10,025 8,685 8,398
Provision for loan losses 1,500 1,800 2,890 2,500 6,232
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,198 10,785 7,135 6,185 2,166
Other operating income 4,005 3,928 5,384 4,996 6,207
OREO expense - net 137 319 552 462 1,141
Other operating expense 11,241 11,268 11,017 11,048 13,104
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,825 3,126 950 (329) (5,872)
Income taxes (benefit) (1,005) (1,236) (252) 13 15
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,830 $ 4,362 $ 1,202 $ (342) $(5,887)
=============================================================================================================================
Net income (loss) per
common share -
Primary $ 0.66 $ 0.44 $ 0.12 $(0.16) $ (2.77)
Fully diluted (1) $ 0.65 --- --- --- ---
=============================================================================================================================
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
BALANCE SHEET DATA:
Total assets $312,917 $283,504 $272,657 $251,714 $244,454
Loans (2):
Mortgage 97,808 104,690 78,228 95,398 102,999
Commercial 46,422 51,462 52,841 57,048 39,610
Home equity 24,842 23,019 21,228 21,449 19,935
Consumer and other 8,980 7,477 6,645 7,738 15,709
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 178,052 186,648 158,942 181,633 178,253
Allowance for loan losses 2,854 3,341 3,024 3,998 4,276
Investment securities 85,338 70,396 91,001 29,923 25,736
Other earning assets (3) 14,744 611 2,903 12,247 7,167
Deposits:
Noninterest-bearing 78,421 72,972 57,479 52,337 46,561
Interest-bearing 196,249 180,986 198,037 185,499 182,206
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 274,670 253,958 255,516 237,836 228,767
Stockholders' equity 24,282 16,398 12,405 11,017 6,125
Cash dividends declared
per common share $ .09 --- --- --- ---
Book value per share -
fully diluted (4)(5) $ 2.44 $ 1.86 $ 1.52 $ 1.38 $ 2.89
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data and financial ratios)
<S> <C> <C> <C> <C> <C>
OTHER INFORMATION:
Yield on earning assets 8.0% 7.1% 7.0% 7.7% 9.1%
Cost of funds 2.3 1.9 2.4 3.5 5.1
Interest spread 5.7 5.2 4.6 4.2 4.0
Net interest margin 5.7 5.1 4.5 4.0 3.7
Weighted average number of
common shares and common
stock equivalents utilized in the
earnings per share calculation (6) -
Primary 10,365,000 10,382,000 10,513,000 2,192,000 2,122,000
Fully diluted (1) 10,469,000 --- --- --- ---
Average balances (7):
Loans (2) $181,969 $170,754 $173,182 $165,346 $185,143
Investment securities 74,134 70,859 37,583 42,443 33,324
Other earning assets (3) 2,708 3,458 13,984 8,862 7,316
Deposits:
Noninterest-bearing 67,050 60,539 49,305 42,930 41,224
Interest-bearing 176,841 183,601 183,227 184,368 194,384
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 243,891 244,140 232,532 227,298 235,608
Total assets 283,882 268,118 248,059 241,629 253,244
Stockholders' equity 20,659 13,732 11,630 9,400 8,766
FINANCIAL RATIOS:
Return on average total assets 2.41% 1.63% 0.48% (0.14)% (2.32)%
Return on average
stockholders' equity (4) 33.06 31.77 10.34 (3.64) (67.16)
Average stockholders' equity
to average total assets (4) 7.28 5.12 4.69 3.89 3.46
Dividend payout ratio 13.64 --- --- --- ---
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital to average
assets (leverage ratio) 8.18% 6.13% 4.84% 4.58% 2.60%
Tier 1 capital to
risk-weighted assets 12.77 9.20 8.22 6.74 3.50
Total capital to
risk-weighted assets 14.02 10.45 9.48 8.01 4.90
Nonaccrual loans
to total assets .64 1.52 2.18 4.21 7.30
Allowance for loan losses
to nonaccrual loans 142.99 77.41 50.82 37.73 23.95
Allowance for loan
losses to total loans 1.60 1.79 1.90 2.20 2.40
<FN>
(1) Fully diluted earnings per share were not applicable in 1994, 1993, 1992
and 1991.
(2) Loans are net of deferred loan fees amounting to $260,000, $400,000,
$337,000, $457,000 and $378,000 for 1995, 1994, 1993, 1992 and 1991,
respectively.
(3) Other earning assets consist of Federal funds sold, securities purchased
under agreement to resell and interest-bearing deposits with banks.
(4) 1995, 1994, 1993 and 1992 amounts include the convertible, noncumulative
preferred shares issued in 1992.
(5) 1995, 1994, 1993 and 1992 include the assumed issuance of additional
Common Stock and the related proceeds from the assumed exercise of certain
stock options and warrants and the assumed conversion of preferred stock.
(6) Assumes the conversion and/or exercise of preferred stock, warrants and
stock options in 1995, 1994 and 1993 using the "treasury stock method".
For 1992 and 1991, this computation excludes stock options, warrants and
preferred stock because their effect would have been antidilutive.
(7) Average balances are averages of daily closing balances.
</FN>
</TABLE>
15
<PAGE>
Item 7
Management's Discussion and
Analysis of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Overview
The following is a discussion and analysis of the Company's financial condition
at the end of 1995 and 1994 and of the results of its operations for the last
three years. This section should be read in conjunction with the consolidated
financial statements included in Item 8.
The Company reported net income for 1995 of $6,830,000, or $0.65 per common
share, fully diluted, as compared to net income of $4,362,000, or $0.44 per
common share, primary, in 1994, an increase of 57.0%. In 1995, primary earnings
per share were $0.66. Contributing to the improved results in 1995 was a decline
in nonperforming assets and related costs, increases in average earning assets,
an improved net interest margin and continued reductions of operating expenses.
Results of operations for 1995 included the recognition of a net deferred tax
asset of $1,122,000 and a net gain on the sale of securities and loans totaling
$58,000. Earnings from core operations (income before income taxes, excluding
non-recurring gains and losses) for 1995 have increased by more than 95% over
last year. As a result of improved operating results, the Company's Tier 1
capital (leverage) ratio increased to 8.18% at December 31, 1995 as compared to
6.13% at December 31, 1994.
At December 31, 1995, the Company had total assets of $312,917,000, an increase
of 10.4% from $283,504,000 at the end of 1994. Assets at December 31, 1994
increased 4.0% from $272,657,000 at December 31, 1993.
Net income for 1994 of $4,362,000 increased 263% over net income for 1993 of
$1,202,000, or $0.12 per common share, primary. Contributing to improved results
in 1994 was a reduction in nonperforming assets, an improvement in net interest
income and a reduction in the provision for loan losses. In addition, in 1994,
stronger fee income from trust fees, mortgage servicing fees and service charges
on deposit accounts contributed to the improved results over 1993. At December
31, 1994, Bancorp's Tier 1 Capital (leverage) ratio was 6.13% as compared to
4.84% at December 31, 1993.
The Company's results for 1995 continued to be impacted by the sluggish regional
economy and real estate market. However, during 1994 and continuing into 1995,
management has seen some positive trends, including the increased stabilization
of the local economy, reduction in vacancy rates, and renewed activity in the
real estate market, which have had a positive effect on earnings. A
deterioration of the economy and/or real estate values would adversely affect
results in 1996 and beyond, and could lead to increased levels of loan
charge-offs, the provision for loan losses and nonaccrual loans and reductions
in income and total capital.
Regulation and Supervision
In December 1994, the Federal Deposit Insurance Corporation (the "FDIC") and the
State of Connecticut Banking Commissioner (the "Commissioner") removed the Order
to Cease and Desist originally imposed on the Bank in October 1991. This action
was the result of a routine examination by the FDIC completed in the fourth
quarter of 1994.
16
<PAGE>
In March 1995, the Federal Reserve Bank of New York ("FRBNY") removed all
restrictions it had imposed on Bancorp in October 1991.
Bancorp resumed the payment of dividends in 1995 after these regulatory orders
were removed. There are certain restrictions on the ability of the Bank to
transfer funds to Bancorp in the form of dividends. See "Liquidity".
The Federal Reserve Board and the FDIC require bank holding companies and banks,
respectively, to comply with guidelines based upon the ratio of capital to total
assets adjusted for risk and the ratio of Tier 1 capital to total quarterly
average assets (leverage ratio).
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at December 31, 1995.
<TABLE>
<CAPTION>
Bancorp's Minimum Capital
Capital Ratio Capital Position Requirements
- ----------------------------------------------------------------------------------
<S> <C> <C>
Total Capital to Risk-Weighted Assets 14.02% 8.0%
Tier 1 Capital to Risk-Weighted Assets 12.77 4.0
Tier 1 Capital to Average Assets (Leverage Ratio) 8.18 3.0(1)
<FN>
(1) An additional 1% to 2% is required for all but the most highly rated
institutions.
</FN>
</TABLE>
The Federal Deposit Insurance Act, as amended by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") establishes five classifications
for banks on the basis of their capital levels; well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At December 31, 1995, the Company was "well capitalized" under
FDIA, based upon the above capital ratios. Deterioration of economic conditions
and real estate values could adversely affect future results, leading to
increased levels of loan charge-offs, provision for loan losses and nonaccrual
loans, affecting the ability of the Company to maintain the well capitalized
classification, and resulting in reductions in income and total capital.
Financial Condition
The Company's assets totaled $312,917,000 at December 31, 1995, an increase of
$29,413,000, or 10.4.%, from $283,504,000 at December 31, 1994. Average assets
increased 5.9% during 1995 over the previous year. Total deposits aggregated
$274,670,000 at December 31, 1995, an increase of $20,712,000, from $253,958,000
at December 31, 1994.
Noninterest-bearing deposits totaled $78,421,000 at December 31, 1995, an
increase of $5,449,000, or 7.5% from $72,972,000 at year end 1994.
Interest-bearing deposits increased from $180,986,000 at December 31, 1994 to
$196,249,000 at December 31, 1995, or 8.4%. For municipalities and selected
commercial and retail customers, the Bank also offers secured
17
<PAGE>
borrowings through repurchase agreements which are included in short-term
borrowings. Securities sold under repurchase agreements were $1,050,000 at
December 31, 1995 and $7,800,000 at December 31, 1994.
The Company's entire securities portfolio of $85,338,000 was classified as
available for sale at December 31, 1995. At December 31, 1994, the available for
sale portfolio totaled $27,190,000 and the held to maturity portfolio totaled
$43,206,000. Securities available for sale are carried at fair value, with any
unrealized gains or losses included as a separate component of stockholders'
equity. The portfolio at December 31, 1995 was comprised primarily of fixed rate
U.S. Government Agency debt and mortgage-backed securities.
During the fourth quarter of 1995, the Financial Accounting Standards Board
provided companies with the opportunity to reclassify securities between the
available for sale portfolio and the held to maturity portfolio. The Company
took advantage of this opportunity and reclassified its entire $42,459,000 held
to maturity portfolio to the available for sale portfolio.
Total loans decreased by $8,596,000 or 4.6%, in 1995, to $178,052,000, net of
deferred loan fees. This decline was due, in part, to the sale during 1995 of
$18.6 million in residential mortgage loans. The Bank engages in the origination
of residential mortgage loans and the sale of such loans based upon liquidity
needs and to manage interest rate risk. In addition, the resolution of several
larger nonperforming commercial mortgage loans contributed to the decline in the
portfolio. During 1995, the Bank concentrated its commercial lending efforts on
small and medium size businesses.
18
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and percentages of total loans at December 31, 1995, 1994, 1993,
1992 and 1991. Certain amounts from prior years have been reclassified to
conform with the 1995 presentation.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loan Amount Loan Amount Loans
- ---------------------------------------------------------------------------------------------------------------------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage:
Construction and
land development $ 3.3 1.8% $ 1.1 .6% $ 2.9 1.8% $ 7.4 4.0% $ 8.6 4.8%
Secured by
residential property 52.9 29.7 57.9 31.0 32.9 20.7 49.9 27.4 54.8 30.7
Secured by
commercial property 41.9 23.5 46.1 24.6 42.7 26.8 38.5 21.2 39.9 22.4
Commercial 46.4 26.0 51.5 27.5 51.9 32.6 54.8 30.1 36.4 20.3
Home equity 24.8 13.9 23.0 12.3 21.2 13.3 21.4 11.7 19.9 11.2
Consumer 8.0 4.5 6.4 3.5 6.3 4.0 8.6 4.7 12.7 7.1
Credit card --- --- --- --- --- --- --- --- 4.9 2.7
Other 1.0 .6 1.0 .5 1.3 .8 1.5 .9 1.4 .8
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 178.3 100.0% 187.0 100.0% 159.2 100.0% 182.1 100.0% 178.6 100.0%
===== ===== ===== ===== =====
Less:
Allowance for loan losses 2.8 3.3 3.0 4.0 4.3
Deferred loan fees .3 .4 .3 .5 .3
- ---------------------------------------------------------------------------------------------------------------------------
Loans - net $175.2 $183.3 $155.9 $177.6 $174.0
===========================================================================================================================
</TABLE>
19
<PAGE>
The following schedule reflects the book value, net of deferred loan fees,
and before the allowance for loan losses, of selected loans segregated according
to the shorter of repricing or maturity and the related interest rate
sensitivity at
December 31, 1995:
<TABLE>
<CAPTION>
Due in 1 Due Between Due After
Year or Less 1 and 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Mortgage loans $ 62,805 $ 25,768 $ 8,052 $ 96,625
Commercial loans 38,838 6,673 98 45,609
- -------------------------------------------------------------------------------------------------------------------------
Total $101,643 $ 32,441 $ 8,150 $142,234
=========================================================================================================================
Loans due after 1 year with:
Fixed interest rates $ 28,851
Floating or adjustable interest rates 11,740
- -------------------------------------------------------------------------------------------------------------------------
Total $ 40,591
=========================================================================================================================
</TABLE>
The above schedule excludes nonaccrual loans, home equity loans and consumer
loans which amount to $35,818,000.
The following table sets forth the principal portion of loans with principal or
interest payments contractually past due 90 days or more, nonaccrual loans,
impaired loans and other real estate owned at December 31, 1995, 1994, 1993,
1992 and 1991. Certain amounts from prior years have been reclassified to
conform with the 1995 presentation.
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due, on accrual status:
Mortgage:
Secured by residential property $ 5 $ 78 $ 433 $ 377 $ 884
Commercial and other --- --- 323 --- 1,560
Commercial --- 6 17 30 610
Home equity 149 102 --- --- ---
Consumer and other 4 14 46 96 114
- ----------------------------------------------------------------------------------------------------------------------------
158 200 819 503 3,168
- ----------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans
Mortgage:
Secured by residential property 85 2,659 1,193 3,702 7,639
Commercial and other 1,098 1,098 2,595 3,004 5,237
Commercial 813 500 1,471 2,887 3,512
Home equity --- 59 471 912 1,213
Consumer and other --- --- 220 92 256
- ----------------------------------------------------------------------------------------------------------------------------
1,996 4,316 5,950 10,597 17,857
Impaired accruing loans 447 3,724 5,242 5,035 3,093
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,601 8,240 12,011 16,135 24,118
Other real estate owned --- 352 2,723 5,724 5,047
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 2,601 $ 8,592 $ 14,734 $ 21,859 $ 29,165
============================================================================================================================
</TABLE>
20
<PAGE>
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $2,443,000, of which
$1,996,000 were nonaccrual loans. At December 31, 1995, the valuation allowance
related to all impaired loans totaled $634,000 and is included in the allowance
for loan losses. For the year ended December 31, 1995, the average recorded
investment in impaired loans was approximately $5.2 million. During 1995 total
interest in the amount of $95,000 was recognized on accruing impaired loans.
At December 31, 1995, impaired accruing loans included $.2 million of loans with
below market interest rates. At December 31, 1995, the Company had no
commitments to lend additional funds to borrowers with loans that have been
classified as impaired. The level of nonperforming assets has had a significant
negative impact on the Company's capital and earnings over the last five years.
Although management recognizes that the level of nonperforming assets is still
high, it is encouraged by the downward trend since 1990 and the 70% decline from
December 31, 1994 to December 31, 1995.
It is the Company's policy to discontinue the accrual of interest on loans,
including impaired loans, when, in the opinion of management, a reasonable doubt
exists as to the timely collection of the amounts due. Additionally, regulatory
requirements generally prohibit the accrual of interest on certain loans when
principal or interest is due and remains unpaid for 90 days or more, unless the
loan is both well secured and in the process of collection.
Operating results since 1989 have been adversely impacted by the level of
nonperforming assets as a result of the deterioration of borrowers' ability to
make scheduled interest and principal payments, caused primarily by the decline
in real estate values, a severe slowdown in business activity and a high rate of
unemployment. In addition to foregone revenue, the Company has had to provide a
high level of provision for loan losses and has incurred significant collection
costs and costs associated with the management and disposition of foreclosed
properties. However, during 1994 and continuing into 1995, management has seen
some positive trends, including the increased stabilization of the local
economy, reduction in vacancy rates, and renewed activity in the real estate
market, which have had a positive effect on earnings.
The characteristics of the real estate market since 1989 include a substantial
decline in real estate property values and a significant increase in the amount
of time that properties remain on the market prior to sale. Factors contributing
to the depressed market conditions are an over supply of properties on the
market and a continued sluggish local economy. As a result, the most significant
increases in nonperforming loans since 1989 have been in commercial mortgage
loans, residential mortgage loans and real estate related commercial loans.
Management has seen some recent improvement in the real estate market and the
local economy, which has had a positive effect on its efforts to resolve
nonperforming loans. Management is aggressively pursuing the collection of all
nonperforming loans. Management's efforts to return nonperforming loans to
performing status may be hampered by market factors.
21
<PAGE>
The following table sets forth the activity on nonaccrual loans for the periods
ended December 31, 1995, 1994, and 1993.
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 4,316 $ 5,950 $10,597
- --------------------------------------------------------------------------------
Additions 2,089 2,868 4,160
- --------------------------------------------------------------------------------
Less:
Repayments 2,697 780 2,145
Transfer to OREO --- 450 524
Charge-offs 802 1,924 4,130
Reinstate accruing 910 1,348 2,008
- --------------------------------------------------------------------------------
Total resolved 4,409 4,502 8,807
- --------------------------------------------------------------------------------
Balance, December 31, $ 1,996 $ 4,316 $ 5,950
================================================================================
Included in additions for 1995 are two loans totaling $1.2 million, from one
borrower, which were substantially resolved in the fourth quarter of 1995.
Subsequent to December 31, 1995, loans totaling $.4 million have been placed on
nonaccrual status.
In addition to the loans classified as nonperforming in the preceding table, the
Bank's internal loan review function has identified approximately $1.4 million
of commercial and commercial real estate loans with more than normal credit
risk. While these loans, were performing according to contractual agreement at
December 31, 1995, previous payment history indicates the borrowers may have
difficulty in the future in meeting all of the terms of the contractual
agreements. These loans, as well as nonperforming commercial and commercial real
estate loans, have been considered in the analysis of the adequacy of the
allowance for loan losses.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance for loan losses on a regular
basis by considering various factors, including past loan loss experience,
delinquent and nonperforming loans and the quality and level of collateral
securing these loans, inherent risks in the loan portfolio, and current economic
and real estate market conditions. Management has performed a loan-by-loan risk
assessment of each classified loan and of a substantial portion of the
performing commercial and commercial mortgage portfolios resulting in a specific
reserve based on loss exposure. An additional general reserve is also allocated
to each of these portfolios as well as to the residential mortgage and other
loan portfolios on an overall basis, based upon the risk category and loss
experience of the given portfolio. Based upon this review, management
22
<PAGE>
believes that, in the aggregate, the allowance of $2,854,000 at December 31,
1995 is adequate to absorb probable loan losses inherent in the loan portfolio.
The adverse real estate market in Fairfield County, the Company's past reliance
upon commercial real estate lending, the level of charge-offs during the past
five years and the level of nonperforming loans are factors which are considered
when the adequacy of the allowance for loan losses is reviewed. There is no
assurance that the Company will not be required to make increases to the
allowance in the future in response to changing economic conditions or
regulatory examinations.
The decrease in the allowance for loan losses from $3,341,000 at December 31,
1994 to $2,854,000 at December 31, 1995 reflects the decline in nonperforming
and nonaccruing loans and $2,366,000 of loan charge-offs during the period. The
charge-offs in 1995 primarily relate to loans on which a specific reserve had
been allocated at December 31, 1994 based on anticipated loss exposure.
It is the Company's policy to charge-off loans against the allowance for loan
losses when losses are certain. Such decisions are based upon an analysis of the
loan, a judgment as to the borrower's ability to repay and the adequacy of
collateral.
The following tables summarize other selected loan and allowance for loan losses
information for 1995, 1994, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses $ 2,854 $ 3,341 $ 3,024 $ 3,998 $ 4,276
Nonaccrual loans 1,996 4,316 5,950 10,597 17,857
Nonperforming loans (1) 2,601 8,240 12,011 16,135 24,118
Allowance for loan losses
as a % of nonaccrual loans 143% 77% 51% 38% 24%
Allowance for loan losses
as a % of nonperforming
loans 110 41 25 25 18
Allowance for loan losses
as a % of loans outstanding at
end of year 1.60 1.79 1.90 2.20 2.40
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
Net loans charged-off as a % of
average loans outstanding 1.14% .87% 2.23% 1.68% 4.03%
<FN>
(1) Includes nonaccrual loans, loans accruing 90 days or more past due and
impaired loans.
</FN>
</TABLE>
23
<PAGE>
As the volume of new loans increased and nonaccrual loans declined, the overall
credit quality of the total loan portfolio has improved which has positively
impacted management's estimate of the allowance for loan losses.
The allowance for loan losses ratio for 1994, 1993 and 1992, as a percentage of
outstanding loans, shown on the preceding page, is impacted by the loans
purchased from the FDIC in late 1992. If these loans had not been included, the
allowance-to-loans outstanding ratio would have been 1.87% at December 31, 1994,
2.07% at December 31, 1993 and 2.45% for December 31, 1992. At December 31, 1995
these loans were no longer subject to a repurchase agreement with the FDIC.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 and 118 address the accounting by creditors for
impairment of certain loans and the recognition of interest income on these
loans and requires that impairment of these loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral. A loan is considered impaired,
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The adoption of SFAS
114 and 118 on January 1, 1995 did not materially affect the Company's financial
statements or the amount of the allowance for loan losses.
Interest payments received on accruing impaired loans are recorded as interest
income. Interest payments on nonaccruing impaired loans are recorded as
reductions of loan principal.
Management is aware of its responsibility for maintaining an adequate allowance
for loan losses and an adequate system to identify credit risk and account for
it appropriately. The various recent regulatory examinations of the Company have
not identified significant problem loans not already identified by management.
Management will continue to review the findings of regulatory examinations and
comply with regulatory recommendations.
A deterioration of economic conditions and real estate values could adversely
affect future results, leading to increased levels of loan charge-offs,
provision for loan losses and nonaccrual loans and reductions in income and
total capital.
24
<PAGE>
The following table summarizes the changes in the allowance for loan losses for
the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Allowances for loan losses, January 1, $ 3,341 $ 3,024 $ 3,998 $ 4,276 $ 5,504
- ----------------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Mortgages: (1)
Secured by residential property (347) (344) (1,091) (560) (1,397)
Commercial and other (1,054) (737) (1,153) (182) (912)
Commercial (795) (707) (1,496) (1,992) (4,146)
Home equity (35) (49) (328) (75) (275)
Consumer and other (135) (258) (305) (604) (1,128)
- ----------------------------------------------------------------------------------------------------------------------------
Total loans charged-off (2,366) (2,095) (4,373) (3,413) (7,858)
Recoveries on amounts previously charged-off 290 612 509 635 398
- ----------------------------------------------------------------------------------------------------------------------------
Net loans charged-off (2,076) (1,483) (3,864) (2,778) (7,460)
Provision charged to operating expenses 1,500 1,800 2,890 2,500 6,232
Other (2) 89 --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31, $ 2,854 $ 3,341 $ 3,024 $ 3,998 $ 4,276
============================================================================================================================
<FN>
(1) Includes write-downs of values of loans transferred to other real estate
owned of $94,000, $185,000 $312,000 and $658,000 in 1994, 1993, 1992 and
1991, respectively. No loans were transferred to OREO during 1995.
(2) Transfer from the OREO valuation allowance to the allowance for loan
losses.
</FN>
</TABLE>
25
<PAGE>
The following table sets forth an estimated allocation by loan category of the
Bank's allowance for loan losses at December 31, 1995, 1994, 1993, 1992 and
1991, along with the percentage of loans in each category to total loans.
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage:
Secured by residential property $ 342 29.7% $ 364 31.0%
Commercial and other 988 25.3 1,673 25.2
Commercial 1,145 26.0 1,014 27.5
Home equity 207 13.9 171 12.3
Consumer 172 5.1 119 4.0
- ------------------------------------------------------------------------------------------------------------------------------
$ 2,854 100.0% $ 3,341 100.0%
==============================================================================================================================
1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage:
Secured by residential property $ 177 20.7% $ 316 27.4%
Commercial and other 1,631 28.6 1,218 25.2
Commercial 986 32.6 2,184 31.3
Home equity 104 13.3 102 11.7
Consumer 126 4.8 178 4.4
- ------------------------------------------------------------------------------------------------------------------------------
$ 3,024 100.0% $ 3,998 100.0%
==============================================================================================================================
1991
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage:
Secured by residential property $ 330 30.7%
Commercial and other 888 27.2
Commercial 2,109 22.1
Home equity 305 11.2
Consumer 644 8.8
- ------------------------------------------------------------------------------------------------------------------------------
$ 4,276 100.0%
==============================================================================================================================
</TABLE>
Specific reserves included in the amounts in the above table are $647,000,
$1,494,000, $1,484,000, $2,348,000 and $2,496,000 for 1995, 1994, 1993, 1992 and
1991, respectively. The unallocated portion of the allowance for loan losses was
$2,207,000, $1,847,000, $1,540,000, $1,650,000 and $1,780,000 for 1995, 1994,
1993, 1992 and 1991, respectively. Increases, in 1994 and 1995, of the
unallocated portion is attributable to the reduction in both nonperforming
assets and the specific reserve allocation attributable to these assets.
26
<PAGE>
Other Real Estate Owned
At December 31, 1995, the Company had no other real estate owned properties
("OREO") in its possession. At December 31, 1994, OREO totaled $352,000. OREO
properties are carried at the lower of cost or estimated fair value. During
1995, the Company recorded $171,000 of additional write-downs on real estate
properties and sold real estate properties with a carrying value of $270,000,
which resulted in a net gain of $52,000 during the 1995 period. During 1994, the
Company sold properties with a carrying value of $1,477,000 incurring losses of
$191,000, a portion of which had been previously accrued. In addition, in the
first quarter of 1994, the Company transferred a commercial office building,
carried at $1.3 million, from OREO to banking premises. Subsequent to December
31, 1995 the Company has entered into a contract for the sale of this building
at an amount that approximates book value. The sale is expected to be finalized
during the second quarter of 1996. During the third quarter of 1994, the Bank
acquired two residential properties through foreclosure, carried at $561,000. No
properties were acquired through foreclosure or acquisition during 1995. Further
material declines in the real estate market could cause increases in the level
of OREO, further losses or write-downs.
The following table summarizes the changes in OREO for the years ended December
31, 1995 and 1994.
1995 1994
- -----------------------------------------------------------------
($ in thousands)
Beginning Balance, January 1, $ 352 $ 2,723
- -----------------------------------------------------------------
Additions --- 561
Sales (270) (1,477)
Write-downs (171) (106)
Transfer --- (1,349)
Valuation allowance (1) 89 ---
- -----------------------------------------------------------------
Ending Balance, December 31, $ --- $ 352
=================================================================
(1) Transfer from the OREO valuation allowance to the allowance for loan
losses.
27
<PAGE>
Results of Operations
Overview
The Company's earnings are largely dependent upon net interest income and
noninterest income from its community banking operations, including fees
generated by its Trust department. Net interest income is the difference between
interest earned on the loan and investment portfolios and interest paid on
deposits and other sources of funds. Noninterest income is primarily the result
of fees generated by the Trust department, charges related to transaction
activity from commercial and retail checking accounts and gains from loan and
securities sales.
The Company reported net income for 1995 of $6,830,000 or $0.65 per common
share, fully diluted, and $0.66 per common share, primary compared to net income
of $4,362,000 or $0.44 per common share, primary, for 1994. Net income for 1995
included the recognition of additional deferred tax assets of $1,122,000 and net
gains on the sale of loans and securities amounting to $58,000. Earnings from
core operations (income before income taxes, excluding non-recurring gains and
losses) in 1995 amounted to $5,767,000. By contrast, earnings from core
operations in 1994, amounted to $2,948,000. As discussed below, the significant
improvement in results for 1995 was primarily attributable to a reduction in
nonperforming assets, an increase in the net interest margin due, in part, to an
increase in average earning assets and the yield thereon, a reduction in the
provision for loan losses as a result of the overall improvement in the credit
quality of the loan portfolio and the control of operating expenses as the
Company continued to expand in 1995. In addition, stronger income from trust
fees and a reduction in FDIC premiums contributed to improved 1995 earnings.
Negatively impacting earnings for 1995 was an increase in professional fees
related to strategic planning initiatives and an increase in salaries and
benefits due to the implementation, during 1995, of a new bonus and incentive
program, along with revisions to executive benefit plans.
Net income for 1994 of $4,362,000 increased 263% over net income for 1993 of
$1,202,000, or $0.12 per common share, primary. Contributing to improved results
in 1994 was a reduction in nonperforming assets, an improvement in net interest
income and a reduction in the provision for loan losses. In addition, in 1994,
stronger fee income from trust fees, mortgage servicing fees and service charges
on deposit accounts contributed to the improved results over 1993. At December
31, 1994, Bancorp's Tier 1 Capital (leverage) ratio was 6.13% as compared to
4.84% at December 31, 1993.
The past decline in the regional economy, particularly in the local real estate
market, has affected the ability of many of the Bank's borrowers to repay their
loans. Also, since 1989, real estate values in the Company's market area have
declined substantially. While the Bank's residential, commercial and
construction mortgage lending policies have specified a 75% or less
loan-to-value ratio, the decline in values has increased the possibility of loss
in the event of default. Management believes this decline has abated and
improvements were shown during 1994 and 1995.
28
<PAGE>
Net Interest Income
Net interest income is the difference between interest earned on loans and other
investments and interest paid on deposits and other sources of funds. Net
interest income is affected by a number of variables. One such variable is the
interest rate spread, which represents the difference between the yield on total
average interest-earning assets and the cost of total average
noninterest-bearing and interest-bearing liabilities.
During 1995, the interest rate spread improved, from 5.2% in 1994 to 5.7% in
1995, primarily due to the increase in yields earned on accruing loans and
investment securities. The yield on interest-earning assets was positively
impacted by a net increase in the prime rate during 1995, resulting in higher
yields on the Bank's commercial loan portfolio and home equity portfolio. The
yield on investment securities increased in 1995 due to sales of lower yielding
securities, which resulted in a net loss of $229,000, and purchases of higher
yielding securities.
During 1994, the interest rate spread improved to 5.2% as compared to 4.6% in
1993. This increase was due primarily to the decline of interest costs on
deposit accounts and the increase in average noninterest-bearing deposits. The
yield on earning assets was positively impacted in 1994, as compared to 1993, by
an increase in the prime rate, resulting in higher yields on the Bank's
commercial loan portfolio and home equity portfolio.
Net interest margin represents net interest income divided by average
interest-earning assets. The continued high level of nonearning assets in 1993
and 1994 had a negative impact on the net interest margin during those years.
However, the decline in nonaccruing loans and other real estate owned favorably
impacted the net interest margin in 1994 and 1995.
29
<PAGE>
The following table sets forth a three year comparison of average earning
assets, nonaccrual loans, average interest-bearing liabilities and related
interest income and expense. Average balances are averages of daily closing
balances, except for nonaccrual loans in 1993 and 1994, which are averages of
monthly closing balances. Certain amounts have been reclassified to conform with
the 1995 presentation.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Accruing loans $178,055 $16,200 9.1% $165,330 $13,729 8.3% $163,680 $13,482 8.2%
Non-accruing loans 3,914 --- 5,424 --- 9,502 ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 181,969 16,200 8.9 170,754 13,729 8.0 173,182 13,482 7.8
Investment securities 74,134 4,366 5.9 70,859 3,484 4.9 37,583 1,798 4.8
Federal funds sold
and other 2,708 159 5.9 3,458 121 3.5 13,984 429 3.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $258,811 20,725 8.0 $245,071 17,334 7.1 $224,749 15,709 7.0
======== ------ ======== ------ ======== ------
Noninterest-bearing
demand deposits $ 67,050 --- $ 60,539 --- $ 49,305 ---
Interest-bearing
liabilities:
Money market and
NOW 68,124 1,140 1.7 73,337 1,067 1.5 71,692 1,392 1.9
Savings 51,066 1,013 2.0 62,824 1,269 2.0 57,035 1,521 2.7
Certificates of
deposit 57,651 2,918 5.1 47,440 2,079 4.4 53,650 2,695 5.0
Other 16,520 956 5.8 7,842 334 4.3 2,307 76 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 193,361 6,027 3.1 191,443 4,749 2.5 184,684 5,684 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-
bearing deposits and
interest-bearing
liabilities $260,411 6,027 2.3 $251,982 4,749 1.9 $233,989 5,684 2.4
======== ----- ======== ----- ======== -----
Net interest income(1) $14,698 $12,585 $10,025
==================================================================================================================================
Net interest margin(2) 5.7% 5.1% 4.5%
==================================================================================================================================
Interest rate spread (3) 5.7% 5.2% 4.6%
==================================================================================================================================
<FN>
(1) Interest income includes loan fees of $224,000, $295,000 and $266,000 in
1995, 1994, and 1993, respectively.
(2) Net interest margin is net interest income divided by total average
earning assets.
(3) Interest rate spread is the difference between the yield on total average
interest-earning assets and the cost of total average noninterest-bearing
deposits and interest-bearing liabilities.
</FN>
</TABLE>
30
<PAGE>
The following table analyzes the changes attributable to the rate and volume
components of net interest income. Interest income includes loan fees of
$224,000, $295,000 and $266,000 in 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1995 vs 1994 1994 vs 1993
Increase/(decrease) Increase/(decrease)
due to change in (1): due to change in (1):
Total Total
Rate Volume Change Rate Volume Change
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $1,368 $ 1,103 $ 2,471 $ 124 $ 123 $ 247
Investment securities 717 165 882 78 1,608 1,686
Federal funds sold and other 52 (14) 38 34 (342) (308)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,137 1,254 3,391 236 1,389 1,625
- -------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits and other interest-
bearing liabilities:
Money market and NOW 137 (64) 73 (355) 30 (325)
Savings (35) (221) (256) (372) 120 (252)
Certificates of deposit 355 484 839 (340) (276) (616)
Other 175 447 622 80 178 258
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 632 646 1,278 (987) 52 (935)
- -------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 1,505 $ 608 $ 2,113 $ 1,223 $ 1,337 $ 2,560
===============================================================================================================================
<FN>
(1) Variances were computed as follows:
Variance due to rate = change in rate multiplied by old volume.
Variance due to volume = change in volume multiplied by old rate.
Variance due to rate/volume prorated to rate and volume variances on the
basis of gross value.
</FN>
</TABLE>
31
<PAGE>
Net interest income was $14,698,000 in 1995, compared with $12,585,000 in 1994,
an increase of $2,113,000 or 16.8%. Net interest income for 1994 increased 25.5%
over $10,025,000 in 1993. Contributing factors to the changes in interest income
and expense are discussed below.
Total interest income amounted to $20,725,000 in 1995, compared to $17,334,000
for 1994, an increase of $3,391,000 or 19.6%. A key factor relating to the
higher level of total interest income for 1995, compared to the prior year, was
an increase in average interest-earning assets of $13.7 million or 5.6%, which
positively impacted earnings by $1,254,000. In addition, during this same
period, the average yield on interest-earning assets increased from 7.1% to
8.0%, resulting in an increase in interest income of $2,137,000. Total interest
income of $17,334,000 in 1994 represented an increase of 10.3% over 1993.
Contributing to the improved results in 1994 was an increase of 9.0% in average
interest-earning assets, which positively impacted earnings by $1,389,000. Total
interest income for 1995, 1994 and 1993 was negatively impacted by the level of
nonaccrual loans, averaging $3.9 million, $5.4 million and $9.5 million in 1995,
1994 and 1993, respectively.
Total interest expense for 1995 was $6,027,000, an increase of $1,278,000 or
26.9% from 1994. This increase was, in part, the result of an increase in
interest costs from 1.9% in 1994 to 2.3% in 1995, resulting in an increase in
interest expense of $632,000. Additionally, there was an increase of 1.0% in
interest-bearing liabilities during 1995, to $193,361,000 from $191,443,000 in
1994, resulting in an increase in interest expense of $646,000. Total interest
expense for 1994 declined 16.4% to $4,749,000 from $5,684,000 in 1993. This
decline was primarily the result of a reduction in interest costs from 2.4% in
1993 to 1.9% in 1994, resulting in an expense reduction of $987,000.
Positively impacting the Bank's overall funding costs was an increase of 10.8%
in 1995 and 22.8% in 1994 of average noninterest-bearing liabilities.
Further improvement in net interest income is dependent, in part, upon the
continued resolution of nonperforming assets.
Other Operating Income
The following table sets forth other operating income for the years ended
December 31, 1995, 1994, and 1993 and the percentage change from period to
period.
<TABLE>
<CAPTION>
Years Ended % Change % Change
December 31, 1995 vs 1994 vs
1995 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Trust fees $1,880 $1,637 $1,573 14.8% 4.1%
Service charges on deposit accounts 1,344 1,403 1,284 (4.2) 9.3
Loan sale gains - net 287 175 1,287 64.0 (86.4)
Mortgage servicing fees 141 151 76 (6.6) 98.7
Realized security gains (losses) - net (229) 3 370 N/M (99.2)
Securities held for sale - lower of
aggregate cost or market adjustment --- --- 207 --- N/M
Other 582 559 587 4.1 (4.8)
- -------------------------------------------------------------------------------------------------------------------------------
Total other operating income $4,005 $3,928 $5,384 2.0% (27.0)%
===============================================================================================================================
<FN>
N/M = not measurable or not meaningful.
</FN>
</TABLE>
32
<PAGE>
Total other operating income increased 2.0% in 1995 to $4,005,000 as compared to
$3,928,000 in 1994. In 1994 total other operating income decreased 27.0% from
$5,384,000 in 1993. Contributing factors are discussed below.
Trust fees increased in 1995 to $1,880,000, or 14.8%, from 1994. This increase
is primarily attributed to new wealth management and investment services offered
in 1995 along with an increase in the volume of estate fees. Trust fees
increased in 1994 by 4.1% over 1993 as a result of an increased fee schedule and
an increase in assets held by the Bank's trust department.
Loan sale gains in 1995 were positively impacted by the adoption of Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights". SFAS 122 requires the capitalization of the fair value of
originated mortgage servicing rights in connection with the sale of loans in the
secondary market. During 1995, the Company sold $15.0 million in residential
mortgage loans while retaining the rights to service these loans. Net gains of
$245,000 were realized from the sale of these loans which included the
recognition of a servicing asset (originated mortgage servicing rights) and
origination fees that had been previously collected and deferred in accordance
with Statement of Financial Accounting Standards No. 91. Additionally,
residential mortgage loans totaling $3.6 million were sold in 1995, servicing
released, resulting in realized net gains of $42,000. During 1994, $12.8 million
in residential mortgage loans were sold for a net gain of $175,000. The
reduction in residential mortgage loan sales in 1994, as compared to 1993, was
due, in part, to an increase in the origination of variable rate residential
mortgage loans which the Company generally retains for portfolio as part of its
asset/liability management program.
The other income category increased 4.1% in 1995 to $582,000, primarily the
result of an increase in fees related to wire transfer services, equity lines of
credit and check services. In 1994 the other operating income category decreased
4.8% from 1993 primarily as a result of net gains realized in 1993 as a result
of the sale of a bank property.
Negatively impacting other operating income for 1995 was a net loss of $229,000
on the sale of securities in the available for sale portfolio. The security
losses were incurred primarily in the first quarter of 1995 in connection with
the repositioning of the available for sale portfolio into higher yielding
government agency securities. During 1994 the Bank sold $4.2 million of
government agency securities from the available for sale portfolio resulting in
a net gain of $3,000 as compared to sales in 1993 totaling $28.3 million of
securities from the held for sale portfolio realizing a net gain of $370,000.
Service charges on deposit accounts declined 4.2% to $1,344,000 in 1995 as
compared to $1,403,000 in 1994 due, in part, to a lower volume of insufficient
funds charges. In 1994, service charges on deposit accounts increased 9.3% over
1993 as a result of an increased fee schedule implemented during 1994 and
substantial growth in commercial checking accounts.
Mortgage servicing fees declined in 1995 to $141,000 from $151,000 in 1994 due
to a decline of 5.1% in the average balance of residential mortgage loans
serviced for investors. In 1994, mortgage servicing fees increased 98.7% over
1993. During 1994, the Company became an approved seller/servicer for the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation allowing the Company to retain the servicing rights to residential
mortgage loans sold in the secondary market.
33
<PAGE>
Other Operating Expense
The following table sets forth other operating expense for the periods ended
December 31, 1995, 1994 and 1993 and the percentage change from period to
period.
<TABLE>
<CAPTION>
Years Ended % Change % Change
December 31, 1995 vs 1994 vs
1995 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and benefits $ 5,600 $ 5,416 $ 5,217 3.4% 3.8%
Occupancy - net 1,445 1,484 1,563 (2.6) (5.1)
Professional fees 1,119 941 696 18.9 35.2
Data processing 575 782 742 (26.5) 5.4
FDIC insurance premiums 392 696 679 (43.7) 2.5
Furniture and equipment 292 337 505 (13.4) (33.3)
Other insurance premiums 220 287 329 (23.3) (12.8)
Other real estate owned - net 137 319 552 (57.1) (42.2)
Other 1,598 1,325 1,286 20.6 3.0
- ----------------------------------------------------------------------------------------------------------------------------
Total other operating expense $11,378 $11,587 $11,569 (1.8)% 0.2%
============================================================================================================================
</TABLE>
Total other operating expense declined 1.8% to $11,378,000 in 1995 from
$11,587,000 in 1994. This decline was realized despite the Company's expansion
by opening an additional branch facility during the third quarter of 1995. In
1994 total other operating expense increased 0.2% from $11,569,000 in 1993.
Contributing factors are discussed below.
FDIC insurance premiums declined 43.7% to $392,000 in 1995 from $696,000 in
1994. The decrease is, in part, attributable to a rebate of insurance premiums
from the FDIC during the third quarter of 1995. This action was required due to
statutory limits imposed on the Bank Insurance Fund by the Federal Deposit
Improvement Act of 1991. In addition, the Company's premiums were reduced in
1995 due to improved capital levels. The increase in FDIC insurance premiums of
2.5% in 1994 over 1993 was, in large part due to an increase in deposit levels
partially offset by a reduction in the Company's insurance premium. The Bank has
estimated 1996 FDIC insurance premiums to be approximately $2,000 based on the
current rate structure imposed by the FDIC on banks in the "well capitalized"
category.
Data processing expense declined 26.5% to $575,000 in 1995, primarily due to the
purchase of a new bank-wide hardware and software system during the fourth
quarter of 1994, substantially reducing maintenance and equipment costs. In 1994
data processing expense increased 5.4% over 1993, primarily due to costs
associated with the conversion to the new bank-wide hardware and software
system. During 1996, maintenance and fees related to the computer system are
expected to increase as the warranty period expires.
Other real estate owned expense declined 57.1% in 1995 and 42.2% in 1994 due to
the significant reduction in the levels of foreclosed properties.
Other insurance premiums declined 23.3% in 1995 and 12.8% in 1994 due to lower
premium costs as a result of the Company's improved financial condition and a
continued decline in commercial insurance rates.
34
<PAGE>
Furniture and equipment expense declined 13.4% in 1995 to $292,000 from $337,000
in 1994 as a result of assets becoming fully depreciated, with minimal purchases
of new furniture and equipment. Declines were realized in both furniture and
equipment expense despite additional costs related to the new branch opening.
Furniture and equipment expense declined 33.3% in 1994 from $505,000 in 1993,
primarily due to the purchase of equipment previously leased and reduced
maintenance expenses.
Occupancy expense declined in 1995, by 2.6% or $39,000 and in 1994 by 5.1% from
1993, primarily due to the consolidation of previously leased office space. In
1995 this reduction was offset , in part, by the occupancy costs associated with
the new branch facility.
Offsetting these declines in 1995 was an increase in professional fees of 18.9%
to $1,119,000 from $941,000 in 1994, primarily due to strategic planning
initiatives and costs associated with revisions to executive benefit plans. In
1994, professional fees increased 35.2% over 1993 levels due to corporate legal
costs associated with capital plans, the outsourcing of certain functions and
additional consulting services.
Salaries and benefits increased 3.4% in 1995 as compared to 1994, primarily due
to the implementation of a new bonus and incentive program and an increase in
the Company's contribution to the employee 401(k) Plan. Expenses in 1995 were
also impacted by the addition of staff for the new branch facility. In 1994,
costs associated with a staff reduction program led, in part, to an increase of
3.8% over 1993.
The other expense category increased 20.6% in 1995 to $1,598,000 from $1,325,000
in 1994, primarily the result of advertising costs associated with new Trust
products. In addition, in 1995, expenses associated with forms and supplies
increased due to the conversion of the Bank's hardware and software system, as
well as the opening of a new branch facility. In 1994 the other expense category
increased 3.0% over 1993 primarily due to forms and supplies associated with the
hardware and software system conversion.
Income Taxes
Since January 1, 1993 the Company has accounted for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes". As a result of net operating losses and loss
carryovers, the Company had no regular Federal tax liability for the years 1993
through 1995. The Company paid minimum federal and state income taxes in 1995,
1994 and 1993.
As of December 31, 1995, the Company has aggregate net operating loss
carryforwards of approximately $5.9 million for federal purposes and $6.5
million for state purposes to offset future income for tax return purposes.
At December 31, 1995, the Company recorded a net deferred tax asset of
$2,772,000 representing anticipated future utilization of its net operating loss
carryforwards as an offset against future taxable income. See Note 10 of the
Notes to the Consolidated Financial Statements included at Item 8 of this Form
10-K.
35
<PAGE>
Fourth Quarter Results
The Company recorded net income of $1,463,000 or $0.14 per fully diluted common
share for the fourth quarter of 1995 as compared to $1,213,000 or $0.12 per
fully diluted common share for the same period of 1994.
Results of operations for the fourth quarter of 1995, as compared to the 1994
period, were positively impacted by the continued reduction in nonperforming
assets and operating expenses along with improvements in total interest income
and other operating income. Net income for the fourth quarter of 1994 included
the recognition of an additional deferred tax asset of $200,000 as compared to
no additional deferred tax assets recognized during the same period of 1995. The
Company had previously recognized substantially all of its remaining net
deferred tax assets as of September 30, 1995.
Interest income of $5,374,000 for the fourth quarter of 1995 represented an
increase of 13.1% over the same period in 1994. This improvement in 1995 was
primarily the result of an increase of 6.3% in average interest-earning assets
over the 1994 period.
Interest expense of $1,644,000 for the fourth quarter of 1995 increased
$433,000, or 35.8%, from the 1994 total of $1,211,000. This increase was, in
large part, due to an increase in the cost of funds to 2.5% in the fourth
quarter of 1995 as compared to 1.9% for the same period in 1994. Additionally,
the average balance of interest-bearing liabilities increased 3.7% in 1995 over
the fourth quarter of 1994.
Other operating income for the fourth quarter of 1995 was $1,306,000, as
compared to $1,027,000 for the same period of 1994, an increase of 27.2%. This
increase is primarily the result of an improvement in trust fees due to new
wealth management and investment services offered in 1995. Also, the adoption of
SFAS 122 during the fourth quarter of 1995 resulted in a $171,000 gain.
Other operating expense for the fourth quarter of 1995 was $3,060,000, as
compared to $3,075,000 for the same period of 1994. This decline is due, in
part, to a reduction in other real estate owned expense, data processing expense
and FDIC insurance premiums. Partially offsetting these reductions was an
increase in professional fees due to strategic planning initiatives undertaken
in the fourth quarter of 1995.
Asset/Liability Management
The Bank's asset/liability management program focuses on maximizing net interest
income while minimizing balance sheet risk by maintaining what management
considers to be an appropriate balance between the volume of assets and
liabilities maturing or subject to repricing within the same interval.
Asset/liability management also focuses on maintaining adequate liquidity and
capital. Interest rate sensitivity has a major impact on the Bank's earnings.
Proper asset/liability management involves the matching of short-term interest
sensitive assets and liabilities to reduce interest rate risk. Interest rate
sensitivity is measured by comparing the dollar difference between the amount of
assets maturing or repricing within a specified time period and the amount of
liabilities maturing or repricing within the same time period. This dollar
difference is referred to as the rate sensitivity or maturity "GAP".
36
<PAGE>
Management's goal is to maintain a cumulative one year GAP of under 10% of total
assets. At December 31, 1995, the cumulative one year GAP as a percentage of
total assets was 6.90%. The Bank concentrates on originating adjustable rate
loans to hold in its loan portfolio to reduce interest rate risk. Deregulation
of deposit instruments has allowed the Bank to generate deposit liabilities
whose repricing more closely matches that of its loans.
The following table provides detail reflecting the approximate repricing
intervals for rate-sensitive assets and liabilities at December 31, 1995:
<TABLE>
<CAPTION>
Maturity/Repricing Interval
- ----------------------------------------------------------------------------------------------------------------------------
Over
3 Months
3 Months through 1 to 5 Over 5
or Less 1 Year Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans(1) $ 84,277 $ 48,372 $ 34,505 $ 8,902 $176,056
Investment securities 38,902 24,593 13,927 7,916 85,338
Federal funds sold and other 14,500 --- --- --- 14,500
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 137,679 72,965 48,432 16,818 275,894
- ----------------------------------------------------------------------------------------------------------------------------
Rate-Sensitive Liabilities:
Money market and NOW deposits 69,957 --- --- --- 69,957
Savings deposits 45,455 --- --- --- 45,455
Certificates of deposit and other 45,402 20,499 14,936 --- 80,837
Short-term borrowings 7,733 --- --- --- 7,733
- ----------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 168,547 20,499 14,936 --- 203,982
- ----------------------------------------------------------------------------------------------------------------------------
Gap $(30,868) $ 52,466 $ 33,496 $ 16,818 $ 71,912
============================================================================================================================
Cumulative Gap $(30,868) $ 21,598 $ 55,094 $ 71,912
============================================================================================================================
Cumulative percentage of
rate-sensitive assets to
rate-sensitive liabilities 82% 111% 127% 135%
============================================================================================================================
<FN>
(1) Excludes nonaccrual loans of $1,996,000 and is net of deferred loan fees
of $260,000.
</FN>
</TABLE>
The principal amount of each asset and liability is included in the above table
in the earliest period in which it matures, reprices or is subject to call.
Nonaccrual loans have been excluded from rate-sensitive assets. Regular savings
accounts, money market accounts and NOW deposits have been included in the "3
Months or Less" category. However, these deposits have historically remained
stable and are an integral part of the Bank's funding and asset/liability
management strategy.
Noninterest-bearing demand deposits of $78,421,000 have been excluded from the
table. These deposits, which also have historically been stable, are used to
fund net interest rate sensitive assets beyond three months.
37
<PAGE>
One measure of interest rate sensitivity is the excess or deficiency of assets
that mature or reprice in one year or less. As shown in the preceding table,
rate-sensitive assets that mature or reprice in one year total $210,644,000 and
rate-sensitive liabilities that mature or reprice in one year total
$189,046,000. The resulting positive one year rate-sensitive gap is $21,598,000.
During periods of rising interest rates, a positive gap position can be an
advantage if more rate-sensitive assets than rate-sensitive liabilities reprice
at higher rates, creating a favorable impact on net interest income. This impact
may be mitigated somewhat if the level of nonaccrual loans and other real estate
owned increase, resulting in a decrease in rate-sensitive assets. During a
falling rate environment, a negative rate gap can be an advantage. However, the
impact of rising and falling interest rates on net interest income may not
directly correlate to the Company's GAP position since interest rate changes and
the timing of such changes can be impacted by management's actions as well as by
competitive and market factors. As interest rates change, yields earned on
assets do not necessarily move in parallel with rates paid on liabilities.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of
depositors who want to withdraw funds or borrowers who need assurance that
sufficient funds will be available to meet their credit needs. The objective of
liquidity management is to determine and maintain an appropriate level of liquid
interest-earning assets. Aside from cash on hand and due from banks, the Bank's
more liquid assets are Federal funds sold and securities available for sale. On
a daily basis, the Bank lends its excess funds to other commercial institutions
in need of Federal funds. Such cash and cash equivalents totaled $38,613,000 or
12.3% of total assets at December 31, 1995, as compared with $18,010,000 or 6.4%
of total assets at December 31, 1994. Securities available for sale were
$85,338,000 at December 31, 1995 compared with $27,190,000 at December 31, 1994.
Demand deposits, regular savings, money market accounts and NOW deposits from
consumer and commercial customers are a relatively stable, low cost source of
funds which comprise a substantial portion of funding of the Bank's
interest-earning assets. Other sources of asset liquidity include loan and
mortgage-backed security principal and interest payments, maturing securities
and loans, and earnings on investments.
In addition, the Bank has two unsecured lines of credit with correspondent banks
totaling $5,000,000. The outstanding balance of these lines was $5,000,000 at
December 31, 1995.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At December 31, 1995 these
available lines amounted to $17.1 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. The Bank did not have any borrowings
from the FHLBB at December 31, 1995.
Additional sources of liquidity are available to the Company through the Federal
Reserve Bank's discount window and the sale of certain investment securities to
securities firms and correspondent banks under repurchase agreements. Such
agreements are generally short-term. The outstanding balance of securities sold
under repurchase agreements at December 31, 1995
38
<PAGE>
was $1,050,000. The discount window, if needed, would allow the Company to cover
any short-term liquidity needs without reducing earning assets. At December 31,
1995, the Company did not have any borrowings from the Federal Reserve Bank's
discount window.
Management believes the above sources of liquidity are adequate to meet the
Company's funding needs in 1995 and in the foreseeable future. Bancorp has
minimal operations and therefore does not generate or utilize a significant
amount of funds. Dividends paid by the Company are funded utilizing proceeds
from the exercise of warrants and options and dividends received from the Bank
(although no dividends were paid by the Bank in 1995). Excess proceeds from the
exercise of warrants and options may from time to time result in a loan to the
Bank by Bancorp. At December 31, 1995, Bancorp had loaned a total of $426,000 to
the Bank under such arrangement.
The Bank is prohibited by Connecticut banking law from paying dividends except
from its net profits, which are defined as the remainder of all earnings from
current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the State of Connecticut
Banking Commissioner, exceed the total of its net profits for that year combined
with its retained net profits from the preceding two years. These dividend
limitations can affect the amount of dividends payable to Bancorp as the sole
stockholder of the Bank, and therefore affect Bancorp's payment of dividends to
its stockholders.
Capital Resources
Stockholders' equity increased by $7,884,000 or 48.1% in 1995 to $24,282,000 as
compared to $16,398,000 at December 31, 1994. This increase is primarily due to
earnings of $6.8 million and the exercise of 1,997,000 warrants by preferred
stockholders, which resulted in additional capital of $1,498,000. Additionally,
a net change of $376,000 in the unrealized appreciation of the securities
available for sale portfolio positively impacted stockholders' equity at
December 31, 1995, as compared to December 31, 1994. Stockholders' equity was
reduced by the payment of $865,000 in dividends, which the Company resumed in
1995.
At December 31, 1995, Bancorp's Tier 1 capital to average assets ratio (leverage
ratio) was 8.18% and its total capital to risk-weighted asset ratio was 14.02%,
exceeding minimum requirements.
In the fourth quarter of 1992, the Company strengthened capital through a rights
offering to existing shareholders. All registered holders of the Company's
Common Stock as of February 21, 1992 were entitled to acquire additional shares
of Common Stock. Prior to the expiration date of May 31, 1994, a total of
$1,117,000, net of expenses of $102,000, was raised through the rights offering.
In February 1992, the Company completed a private placement of 46,700 investment
units, resulting in total proceeds of $4,670,000 and net proceeds, after
expenses, of $4,320,000. Each unit consists of one share of Series A
Noncumulative Convertible Preferred stock and fifty warrants. These warrants
became exercisable on January 1, 1994 at an exercise price of $.75 per share.
During 1995 and 1994 a total of 2,009,500 warrants were exercised, resulting in
total proceeds of $1,507,125 to the Company. At December 31, 1995, there were
325,500 warrants outstanding. There is no assurance as to the number of
warrants, if any, that will be exercised in the future. All warrants expire on
December 31, 1996.
39
<PAGE>
Item 8
Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
($ in thousands, except share data)
December 31,
- -----------------------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 24,113 $ 18,010
Federal funds sold 14,500 ---
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 38,613 18,010
- -----------------------------------------------------------------------------------------------------------------------
Securities available for sale, at market value 85,338 27,190
Securities held to maturity, at cost
(market value: $39,678) --- 43,206
- -----------------------------------------------------------------------------------------------------------------------
Total securities 85,338 70,396
- -----------------------------------------------------------------------------------------------------------------------
Loans 178,052 186,648
Allowance for loan losses (2,854) (3,341)
- -----------------------------------------------------------------------------------------------------------------------
Loans - net 175,198 183,307
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment - net 4,933 5,137
Accrued interest receivable 2,247 1,758
Other real estate owned - net --- 352
Other assets 6,588 4,544
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $312,917 $283,504
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 78,421 $ 72,972
Interest-bearing deposits 196,249 180,986
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 274,670 253,958
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 7,733 10,484
Other liabilities 6,232 2,664
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 288,635 267,106
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies - Note 8
Stockholders' equity:
Preferred stock - $.01 par value; authorized 2,000,000 shares;
outstanding, 41,850 and 43,950 shares
in 1995 and 1994, respectively 1 1
Common stock - $.01 par value; authorized, 20,500,000
shares; outstanding, 5,433,665 and 3,211,752 shares
in 1995 and 1994, respectively 54 32
Additional paid in capital 22,980 21,459
Retained earnings (deficit) 1,285 (4,680)
Net unrealized depreciation on securities available
for sale, net of tax (38) (414)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,282 16,398
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $312,917 $283,504
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $16,200 $13,729 $13,482
Securities 4,366 3,484 1,798
Federal funds sold and other 159 121 429
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 20,725 17,334 15,709
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 5,110 4,443 5,642
Short-term borrowings 917 306 42
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,027 4,749 5,684
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 14,698 12,585 10,025
Provision for loan losses 1,500 1,800 2,890
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 13,198 10,785 7,135
- -------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Trust fees 1,880 1,637 1,573
Service charges on deposit accounts 1,344 1,403 1,284
Loan sale gains - net 287 175 1,287
Mortgage service fees 141 151 76
Realized security gains (losses) - net (229) 3 370
Securities held for sale - lower of aggregate
cost or market adjustment --- --- 207
Other 582 559 587
- -------------------------------------------------------------------------------------------------------------------------
Total other operating income 4,005 3,928 5,384
- -------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and benefits 5,600 5,416 5,217
Occupancy - net 1,445 1,484 1,563
Professional fees 1,119 941 696
Data processing 575 782 742
FDIC insurance premiums 392 696 679
Furniture and equipment 292 337 505
Other insurance premiums 220 287 329
Other real estate owned - net 137 319 552
Other 1,598 1,325 1,286
- -------------------------------------------------------------------------------------------------------------------------
Total other operating expense 11,378 11,587 11,569
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,825 3,126 950
Income tax benefit (1,005) (1,236) (252)
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,830 $ 4,362 $ 1,202
=========================================================================================================================
Earnings per share:
Primary $ 0.66 $ 0.44 $ 0.12
Fully diluted $ 0.65 --- ---
=========================================================================================================================
Weighted average number of common shares
and common equivalent shares outstanding:
Primary 10,364,606 10,381,834 10,513,188
Fully diluted 10,469,299 --- ---
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
Net Unrealized
Preferred Stock Common Stock Depreciation
-------------------- ------------------- Additional Retained on Securities
Number of Number of Paid in Earnings Available for Sale,
Shares Amount Shares Amount Capital (Deficit) Net of Tax Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 46,200 $ 1 2,865,139 $ 29 $21,231 $(10,244) --- $11,017
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income 1,202 --- 1,202
Issuance of Common Stock - --- --- --- --- --- --- --- ---
1992 Rights Offering --- --- 91,226 1 185 --- --- 186
Stock Conversion (1,250) --- 125,000 1 (1) --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 44,950 1 3,081,365 31 21,415 (9,042) --- 12,405
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 4,362 --- 4,362
Issuance of Common Stock -
Warrants exercised --- --- 12,500 --- 10 --- --- 10
Employee Options exercised --- --- 17,500 --- 35 --- --- 35
1992 Rights Offering --- --- 13 --- --- --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 374 --- --- --- --- ---
Stock Conversion (1,000) --- 100,000 1 (1) --- --- ---
Change in net unrealized
depreciation on securities
available for sale, net of tax --- --- --- --- --- --- $(414) (414)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 43,950 1 3,211,752 32 $21,459 (4,680) (414) 16,398
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income --- --- --- --- --- 6,830 --- 6,830
Issuance of Common Stock -
Warrants exercised --- --- 1,997,000 21 1,477 --- --- 1,498
Employee Options exercised --- --- 9,750 --- 19 --- --- 19
Stock Conversion (2,100) --- 210,000 1 (1) --- --- ---
Dividend Reinvestment and
Stock Purchase Plan --- --- 5,163 --- 26 --- --- 26
Dividends -
Preferred Stock --- --- --- --- --- (380) --- (380)
Common Stock --- --- --- --- --- (485) --- (485)
Change in net unrealized
depreciation on securities
available for sale, net of tax --- --- --- --- --- --- 376 376
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,850 $ 1 5,433,665 $ 54 $22,980 $ 1,285 $ (38) $24,282
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
WESTPORT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,830 $ 4,362 $ 1,202
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,500 1,800 2,890
Recognition of net deferred tax asset (1,122) (1,300) (350)
Depreciation, amortization and accretion 863 1,021 1,160
Provision and losses on other real estate owned - net 129 191 413
Loan sale gains - net (287) (175) (1,287)
Securities held for sale - lower of aggregate
cost or market adjustment --- --- (207)
Realized security (gains) losses - net 229 (3) (370)
Decrease (increase) in accrued interest receivable (489) 713 (994)
Decrease (increase) in other assets (896) (208) 99
Increase (decrease) in other liabilities 3,568 328 (94)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,325 6,729 2,462
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities -
Available for sale 6,500 37,890 27,039
Held to maturity 1,000 12,507 ---
Proceeds from sales of securities -
Available for sale 28,770 4,202 28,294
Principal collected on securities 5,477 1,201 1,961
Purchase of securities held to maturity (4,999) (14,454) (39,697)
Purchase of securities available for sale (51,675) (21,404) (78,171)
Increase in loans - net (13,553) (43,032) (30,728)
Loans repurchased by the FDIC 2,490 1,432 1,893
Proceeds from sales of loans 18,867 12,949 48,486
Purchase of loans (997) (817) (61)
Proceeds from sales of other real estate owned 312 1,393 3,162
Additions to other real estate owned --- (111) (50)
Purchases of premises and equipment (553) (999) (262)
Proceeds from sale of premises --- --- 152
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,361) (9,243) (37,982)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in noninterest-bearing deposits - net 5,449 15,493 5,142
Increase (decrease) in interest-bearing deposits - net 15,263 (17,051) 12,538
Increase (decrease) in short-term borrowings - net (2,751) 8,084 2,067
Proceeds from issuance of Common Stock - net 1,543 45 186
Dividends (865) --- ---
Other - net --- --- (98)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,639 6,571 19,835
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20,603 4,057 (15,685)
Cash and cash equivalents at beginning of year 18,010 13,953 29,638
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 38,613 $ 18,010 $ 13,953
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
WESTPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting and Reporting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Westport Bancorp,
Inc. ("Bancorp") and its subsidiary, The Westport Bank & Trust Company (the
"Bank") (collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles within the banking industry.
In preparing the financial statements, management has made estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated statement of condition and the reported amounts of
revenues and expenses during the reporting period. Actual future results could
differ significantly from these estimates. Estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for loan losses and the valuation of real estate acquired through foreclosures
or in satisfaction of loans. In determining the allowance for loan losses and
the valuation of other real estate owned, independent appraisals are obtained
for significant properties collateralizing loans or other real estate owned.
Future additions to the allowance for loan losses or write-downs of other real
estate owned may be necessary based on changes in economic conditions,
particularly in the Bank's service area, Fairfield County, Connecticut. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and the carrying value
of other real estate owned. Such agencies may recommend that the Bank recognize
additions to the allowance for loan losses or the reserve for other real estate
owned based on their judgments and information available to them at the time of
their examinations.
Securities
Effective January 1, 1994, the Bank adopted Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities". SFAS
115 addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Adoption of SFAS 115 did not have a material effect on the financial
statements.
In accordance with SFAS 115, at the time of purchase, investment securities are
classified as available for sale if the securities are purchased for
asset/liability management and liquidity purposes, or as held to maturity if
management has the intent and ability to hold the securities to maturity.
However, in the fourth quarter of 1995, the FASB provided companies with a one
time opportunity to reclassify securities between the available for sale
portfolio and the held to
44
<PAGE>
maturity portfolio. The Company took advantage of this opportunity and
reclassified its entire $42,459,000 held to maturity portfolio to the available
for sale portfolio. This reclassification resulted in the transfer of $146,000
to the unrealized depreciation on the securities available for sale component of
stockholder's equity, before the related tax effect. This reclassification is
not reflected in the consolidated statement of cash flows because no cash was
involved.
Securities in the available for sale portfolio are carried at fair value, with
unrealized gains and losses net of tax, adjusted for the amortization of
premiums or accretion of purchase discounts, recorded in a separate component of
stockholders' equity. Gains and losses on the sale of securities in the
available for sale portfolio are determined by specific identification and are
included in operations.
Securities which are classified as held to maturity are stated at cost, adjusted
for amortization of premiums or accretion of discounts to the date of maturity
or earlier call date or, in the case of mortgage-backed securities, over the
estimated life of the security. The Company has the ability and intention to
hold these investments until maturity.
If a security held in either the available for sale portfolio or held to
maturity portfolio has experienced a decline that is other than temporary, it is
written down to estimated fair value through a charge to operations.
Prior to the adoption of SFAS 115 on January 1, 1994, securities available for
sale were carried at the lower of aggregate cost or market while securities held
to maturity were carried at cost. In both cases, cost was adjusted for the
amortization of premiums or accretion of discount.
Loans
Effective January 1, 1995, the Bank adopted FASB's Statement of Financial
Accounting Standards No. 114 ("SFAS 114"), "Accounting by Creditors for
Impairment of a Loan", and Statement of Financial Accounting Standards No. 118
("SFAS 118"), "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS 114 and 118 address the accounting by
creditors for impairment of certain loans and the recognition of interest income
on these loans and requires that impairment of certain loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of collateral. The adoption did not
materially affect the Company's consolidated financial statements or the amount
of the allowance for loan losses.
Interest income on loans is accrued based on rates applied to principal amounts
outstanding and includes loan fees, net of direct origination costs, which are
amortized over the term of the loan using the interest method. The accrual of
interest is discontinued when: 1) it appears that future collection of interest
or principal may be doubtful, or 2) when principal or interest is due and
remains unpaid for ninety days or more, unless the loan is both well secured and
in the process of collection. At the time a loan is placed on nonaccrual status,
interest accrued but not collected is generally reversed. Nonaccrual loans that
commence repayment are returned to accrual status only when, in management's
opinion, there has been demonstrated performance for a reasonable period and
continued timely repayment according to loan terms is reasonably
45
<PAGE>
assured. Restructured loans represent loans formally renegotiated as to
maturity, or at interest rates lower than market rates at the time of
restructure. To the extent these loans are currently performing and the interest
rate remains below market, they are presented as impaired accruing loans and are
included in the consolidated financial statements as nonperforming assets.
Allowance for Loan Losses
The provision for loan losses is the amount deemed appropriate by management to
maintain the allowance for loan losses at a level adequate to absorb probable
losses in the loan portfolios. The allowance for loan losses is based on
estimates; actual losses may vary from the current estimates. In estimating
losses, consideration is given to the performance of the loan, the financial
condition of the borrower or guarantor, an analysis of the borrower's cash flow,
estimates of the current value of the underlying collateral based on appraisals
or recent sale prices (net of costs of disposal), the overall risk
characteristics of the Company's portfolios, past credit experience, current
economic and real estate market conditions, and other relevant factors.
Management monitors these factors and adjustments are reported in earnings in
the period in which they become known.
When losses on specific loans are judged by management to be certain, the
portion deemed uncollectible is charged to the allowance for loan losses.
Subsequent recoveries, if any, are credited to the allowance.
In accordance with SFAS 114 and 118, effective January 1, 1995 the Company
revised the method by which the allowance for loan losses is determined for
impaired loans. The impact of this change was not material.
Mortgage Banking Activities
The Bank originates residential mortgage loans, some of which are held in
portfolio and others of which are sold to investors. Loans originated for sale
but not yet sold are carried at the lower of cost or market. Origination and
commitment fees, net of direct origination costs, relating to sold loans are
recognized as a component of the gain on loan sales. The Bank serviced, on
behalf of investors, approximately $50.7 million, $41.3 million and $45.9
million of residential mortgage loans at December 31, 1995, 1994 and 1993,
respectively.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights". SFAS 122 addresses the accounting for mortgage servicing
rights for purchased as well as originated mortgages by a servicer.
Additionally, SFAS 122 requires the capitalization of the fair value of mortgage
servicing rights and amortization of these rights in proportion to the net
servicing income over the period during which servicing income is expected. The
Company adopted SFAS 122 in the fourth quarter of 1995. The adoption of SFAS 122
resulted in the recognition of a servicing asset of $171,000, which amount is
included in 1995 loan sale gains on the statement of income.
46
<PAGE>
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure. OREO properties are recorded at the lower of cost or fair value,
less estimated disposal costs, at the date transferred to OREO. Losses arising
at the time of transfer to OREO are charged against the allowance for loan
losses. Subsequent write-downs of the carrying value of these properties may be
required to reflect the properties at the lower of cost (market value at the
date of transfer to OREO) or market value and are charged to operations.
Realized gains and losses from the sale of OREO are also included in operations.
Transfers of loans to OREO of $450,000 and $524,000 in 1994 and 1993,
respectively, are not reflected in the consolidated statement of cash flows
because no cash was involved in these transfers. No loans were transferred to
OREO during 1995. The 1994 transfer of an OREO property, valued at $1,349,000,
to bank-owned premises is also not reflected in the consolidated statement of
cash flows because no cash was involved in the transfer.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on the
straight-line method over the estimated useful life of each type of asset,
ranging from 3 to 30 years, or the lease term, if shorter.
Income Taxes
In January 1993, the Company adopted Statement of Financial Accounting Standards
No. 109 ("SFAS 109"), "Accounting for Income Taxes". The adoption of SFAS 109
changed the Company's method of accounting for income taxes from the deferred
method (APB Opinion No. 11) to an asset and liability approach. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities.
Adoption of SFAS 109 had no effect on the Company's consolidated financial
statements due to the tax position of the Company at that time.
Earnings Per Share
Primary and fully diluted earnings per share were computed by dividing earnings
(adjusted, if applicable) by the weighted average number of common shares and
common share equivalents outstanding. For primary earnings per share, common
share equivalents are computed using the average closing price of the Company's
common stock for the period. For fully diluted earnings per share, common share
equivalents are computed using the closing price of the Company's common stock
at the end of the period. Fully diluted earnings per share were not applicable
in 1994 and 1993.
For the year ended December 31, 1995 and 1994, the computation includes
4,706,250 and 3,148,913 weighted average common shares outstanding and 1,483,337
and 2,787,921 weighted average common equivalent shares, (fully diluted for
1995), respectively, computed under the treasury stock method. The earnings per
share computations also include 4,279,712 and 4,445,000 weighted average common
shares in 1995 and 1994, respectively, issuable upon the adjusted conversion of
preferred stock. Adjusted earnings consist of net income and the interest effect
of the assumed reduction in short-term borrowings, computed under the treasury
stock method.
47
<PAGE>
Other
For purposes of presenting the consolidated statements of cash flows, cash
equivalents include due from banks, interest-bearing deposits with banks and
Federal funds sold, all of which have original maturities of three months or
less.
Trust income is recorded on an accrual basis. Assets held in a fiduciary or
agency capacity for customers are not included in the consolidated statements of
condition since such items are not assets of the Bank.
Certain amounts from prior years have been reclassified to conform with the 1995
presentation.
Note 2
Regulatory Matters
The Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC)
require bank holding companies and banks, respectively, to comply with capital
guidelines based upon the ratio of capital to total assets adjusted for risk.
The following summarizes the minimum capital requirements and Bancorp's capital
position (there are no significant differences between the Bank's and Bancorp's
capital ratios) at December 31, 1995.
Regulatory
Bancorp Minimum
- --------------------------------------------------------------------------------
($ in thousands)
Tier 1 leverage ratio 8.18% 3.00%(1)
Tier 1 leverage capital $23,903 $8,766
Tier 1 risk-based ratio 12.77% 4.00%
Tier 1 risk-based capital $23,903 $7,487
Total risk-based ratio 14.02% 8.00%
Total risk-based capital $26,249 $14,973
Risk-weighted assets $187,167 ---
(1) An additional 1% to 2% and the corresponding additional capital is
required for all but the most highly rated institutions.
The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), classifies banks in
one of five categories according to capital levels. At December 31, 1995, the
Company was "well capitalized" under FDIA, as amended, based upon the above
capital ratios. Deterioration of economic conditions and real estate values
could adversely affect future results, leading to increased levels of loan
charge-offs, provision for loan losses and nonaccrual loans, affecting the
ability of the Company to maintain the well capitalized classification, and
resulting in reductions in income and total capital.
48
<PAGE>
Note 3
Investment Securities
In accordance with SFAS 115 and as discussed in Note 1, during the fourth
quarter of 1995, the Company's held to maturity portfolio was reclassified as
available for sale.
Securities Available for Sale
The aggregate amortized cost and estimated market value of securities available
for sale at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Market Unrealized Market
Cost Losses Value Cost Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $85,397 $(64) $85,333 $27,604 $(414) $27,190
Other 5 --- 5 --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Total $85,402 $(64) $85,338 $27,604 $(414) $27,190
============================================================================================================================
</TABLE>
Sales of securities available for sale during 1995 consisted of $28.8 million of
U.S. Government Agency securities. During 1994, sales of securities from the
available for sale portfolio consisted of $4.2 million of U.S. Government Agency
securities. Gains of $59,000 and $3,000 for 1995 and 1994, respectively, were
realized on the sales of these securities. Losses of $288,000 were realized on
the sale of securities during 1995. No losses were realized in 1994 from sales
of securities.
The following represents the contractual maturities and weighted average yields
of securities available for sale at December 31, 1995. Expected maturities may
differ from contractual maturities due to prepayments.
<TABLE>
<CAPTION>
After 1 After 5
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $ 5,057 4.8% $64,431 6.1% $ 4,457 5.5% $11,388 6.7% $85,333 6.0%
Other 5 5.5 --- --- --- --- --- --- 5 5.5
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 5,062 4.8% $64,431 6.1% $ 4,457 5.5% $11,388 6.7% $85,338 6.0%
===============================================================================================================================
</TABLE>
49
<PAGE>
Securities Held to Maturity
The table below summarizes the aggregate financial statement carrying value and
market value of securities held to maturity at December 31, 1994. The Company
had no securities in the held to maturity portfolio at December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------
Financial Gross Gross
Statement Unrealized Unrealized Market
Carrying Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and
Government Agency $26,993 $ --- $ (2,255) $24,738
Mortgage-backed
securities 16,208 --- (1,273) 14,935
Other 5 --- --- 5
- ------------------------------------------------------------------------------------------------------
Total $43,206 $ --- $ (3,528) $39,678
======================================================================================================
</TABLE>
Note 4
Restricted Assets
At December 31, 1995, securities with a carrying value of $12,652,000 were
pledged to secure treasury deposits, municipal deposits and repurchase
agreements.
Cash and due from banks of $5,488,000 was subject to withdrawal and usage
restrictions as of December 31, 1995, as a result of Federal Reserve
requirements to maintain certain average balances.
50
<PAGE>
Note 5
Loans
The composition of the Bank's loan portfolio at December 31, 1995 and 1994 was
as follows:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------
Percent Percent
of of
Total Total
Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Mortgage:
Construction and
land development $ 3,234 1.8% $ 1,079 .6%
Secured by
residential property 52,931 29.7 57,937 31.0
Secured by
commercial property 41,903 23.5 46,076 24.6
Commercial 46,422 26.0 51,462 27.5
Home equity 24,842 13.9 23,019 12.3
Consumer 7,982 4.5 6,451 3.5
Other 998 .6 1,026 .5
- ---------------------------------------------------------------------------------------------------------------
Total loans 178,312 100.0% 187,050 100.0%
===== =====
Less:
Allowance for loan losses 2,854 3,341
Deferred loan fees 260 402
- ---------------------------------------------------------------------------------------------------------------
Loans - net $175,198 $183,307
===============================================================================================================
</TABLE>
51
<PAGE>
Changes in the allowance for loan losses for the years ended December 31, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
($ in thousands)
Allowance for loan losses, January 1, $ 3,341 $ 3,024 $ 3,998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans charged-off:
Mortgage:
Secured by residential property (347) (344) (1,091)
Commercial and other (1,054) (737) (1,153)
Commercial (795) (707) (1,496)
Home equity (35) (49) (328)
Consumer and other (135) (258) (305)
- -----------------------------------------------------------------------------------------------------------
Total loans charged-off (2,366) (2,095) (4,373)
- -----------------------------------------------------------------------------------------------------------
Recoveries on amounts previously charged-off:
Mortgage:
Secured by residential property 51 23 45
Commercial and other 51 7 106
Commercial 118 400 199
Home equity 16 20 59
Consumer and other 54 162 100
- -----------------------------------------------------------------------------------------------------------
Total recoveries 290 612 509
- -----------------------------------------------------------------------------------------------------------
Net loans charged-off (2,076) (1,483) (3,864)
Provision charged to operating expenses 1,500 1,800 2,890
Other (1) 89 --- ---
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31, $ 2,854 $ 3,341 $ 3,024
===========================================================================================================
<FN>
(1) Transfer from the OREO valuation allowance to the allowance for loan
losses.
</FN>
</TABLE>
52
<PAGE>
Nonperforming assets at December 31, 1995 and 1994 were as follows:
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Loans 90 days or more past due
on accrual status:
Mortgage:
Secured by residential property $ 5 $ 78
Commercial and other --- ---
Commercial --- 6
Home equity 149 102
Consumer and other 4 14
- -------------------------------------------------------------------------------
Total 158 200
- -------------------------------------------------------------------------------
Nonaccrual loans:
Mortgage:
Secured by residential property 85 2,659
Commercial and other 1,098 1,098
Commercial 813 500
Home equity --- 59
Consumer and other --- ---
- -------------------------------------------------------------------------------
Total 1,996 4,316
- -------------------------------------------------------------------------------
Impaired accruing loans 447 3,724
- -------------------------------------------------------------------------------
Total nonperforming loans 2,601 8,240
Other real estate owned --- 352
- -------------------------------------------------------------------------------
Total nonperforming assets $ 2,601 $ 8,592
===============================================================================
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $2,443,000, of which
$1,996,000 were nonaccrual loans. At December 31, 1995, the valuation allowance
related to all impaired loans totaled $634,000 and is included in the allowance
for loan losses on the statement of condition. For the year ended December 31,
1995, the average recorded investment in impaired loans was approximately $5.2
million. During 1995, total interest of $95,000 was recognized on accruing
impaired loans.
The Bank would have recorded an additional $214,000, $183,500 and $382,000 of
interest income in the years ended December 31, 1995, 1994 and 1993,
respectively, if loans on nonaccrual status at each year end had been current
throughout the year. At December 31, 1995, the Bank has no commitments to lend
additional funds to borrowers whose loans are classified as nonaccrual or
impaired. The Bank would have recorded an additional $7,700, $27,000 and
$113,000 of interest income during 1995, 1994 and 1993 if accruing restructured
loans had made payments in accordance with the original repayment terms.
53
<PAGE>
Certain directors, executive officers and affiliates of the Bank had loans
outstanding aggregating approximately $511,000 and $1,579,000, at December 31,
1995 and 1994,respectively. Such loans were made on substantially the same terms
as comparable loans to others and were performing in 1995 and 1994. Changes in
loans outstanding to such parties during 1995 and 1994 were as follows:
December 31,
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Balance, January 1, $ 1,579 $ 1,324
Additional loans 205 637
Loans repaid (1,273) (244)
Other --- (138)
- -------------------------------------------------------------------------------
Balance, December 31, $ 511 $ 1,579
===============================================================================
The "other" amount primarily represents loans to directors and officers
(including members of their immediate families or associates) who resigned,
retired or changed qualifying employment status during the year ended December
31, 1994.
Note 6
Premises and Equipment
Premises and equipment and accumulated depreciation and amortization are
summarized as follows:
December 31,
1995 1994
- -------------------------------------------------------------------------------
($ in thousands)
Land $ 572 $ 572
Premises 3,817 3,847
Equipment 2,482 2,971
Leasehold improvements 1,018 1,027
- -------------------------------------------------------------------------------
Total 7,889 8,417
Less: Accumulated depreciation
and amortization (2,956) (3,280)
- -------------------------------------------------------------------------------
Premises and equipment - net $ 4,933 $ 5,137
===============================================================================
54
<PAGE>
Note 7
Deposits and Short-term Borrowings
Deposits by major classifications were as follows:
December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Demand $ 78,421 $ 72,972 $ 57,479
NOW 47,816 51,861 55,047
Savings 45,455 56,854 61,944
Money market 22,141 27,541 28,393
Certificates of deposit and other 80,837 44,730 52,653
- --------------------------------------------------------------------------------
Total deposits $274,670 $253,958 $255,516
================================================================================
Included in the table above are certificates of deposit in denominations of
$100,000 or more. These certificates and their remaining maturities were as
follows:
December 31,
1995 1994
- --------------------------------------------------------------------------------
($ in thousands)
Three months or less $34,733 $ 1,436
Three through twelve months 1,771 1,133
Over twelve months 1,150 1,568
- --------------------------------------------------------------------------------
Total $37,654 $ 4,137
================================================================================
Interest expense on certificates of deposit with denominations of $100,000 or
more was $887,000, $138,000 and $125,000 in 1995, 1994, and 1993, respectively.
Short-term borrowings aggregated $7,733,000 and $10,484,000 at December 31, 1995
and 1994, respectively. Such borrowings include securities sold under agreements
to repurchase of $1,050,000 and $7,800,000 in 1995 and 1994, respectively, and
U.S. Treasury note obligations related to treasury, tax and loan deposits in the
amount of $1,683,000 in 1995 and $2,684,000 in 1994. The weighted average
interest cost of short-term borrowings was 5.94% and 4.95% at December 31, 1995
and 1994, respectively, and the terms of the agreements ranged from one to seven
days.
In addition to the securities sold under repurchase agreements and U.S. Treasury
note obligations, the Bank entered into two unsecured Federal fund line of
credit arrangements with correspondent banks totaling $5,000,000. At December
31, 1995, the outstanding balance of these lines was $5,000,000.
During the second quarter of 1995, the Bank became a member of the Federal Home
Loan Bank of Boston ("FHLBB"). Services offered by the FHLBB include an
unsecured credit line of up to a maximum of 2% of the Bank's assets, and
collateralized fixed and variable rate borrowings. At December 31, 1995 these
available lines amounted to $17.1 million. The FHLBB also offers cash management
services, investment services, as well as lower cost advances for affordable
housing or community investment programs. During 1995, borrowings under these
lines were immaterial. The Bank did not have any borrowings from the FHLBB at
December 31, 1995.
55
<PAGE>
The following table summarizes the average balances, weighted average interest
rates and the maximum month end outstanding amounts of short-term borrowings for
1995, 1994 and 1993.
1995 1994 1993
- --------------------------------------------------------------------------------
($ in thousands)
Federal funds purchased and securities
sold under agreements to repurchase:
Average balance $13,778 $ 6,172 $ 1,420
Weighted average interest rate 6.0% 4.5% 2.6%
Maximum month end outstanding amount $28,230 $19,289 $ 3,648
U.S. Treasury note obligation related
to treasury, tax and loan deposits:
Average balance $ 1,657 $ 668 ---
Weighted average interest rate 5.6% 4.6% ---
Maximum month end outstanding amount $ 3,613 $ 3,193 ---
The Bank paid approximately $5,670,000, $4,799,000 and $5,744,000 in interest on
deposits and short-term borrowings during 1995, 1994 and 1993, respectively.
Note 8
Commitments and Contingencies
Long-term Leases
All noncancellable leases are operating leases at December 31, 1995, 1994 and
1993. The Bank has leases for administrative and branch offices with terms
(including renewal options) ranging from one to ten years. Under most lease
arrangements, the Bank pays property taxes, insurance, maintenance and expenses
related to the leased property. Total rental expense under operating leases was
$779,000 in 1995, $761,000 in 1994 and $844,000 in 1993.
Minimum future obligations on leases (including base rents and common area
charges) in effect at December 31, 1995 were:
Operating Leases
- --------------------------------------------------------------------------------
($ in thousands)
1996 $ 784
1997 753
1998 706
1999 710
2000 663
Thereafter 280
- --------------------------------------------------------------------------------
Total minimum obligations $3,896
================================================================================
56
<PAGE>
Employment Contracts
At December 31, 1995, the Bank was committed under employment agreements with
various key officers requiring aggregate annual salary payments of approximately
$532,000 for the terms of the contracts which expire at various dates through
1998. These agreements provide that if the key officers are terminated following
a change in control (as defined) of Bancorp, they are entitled to receive lump
sum severance payments and to continue to participate in certain benefit plans
for three years.
Legal Proceedings
There are no material pending legal proceedings, other than routine litigation
incidental to their business, to which Bancorp or the Bank is a party or to
which any of their property is subject.
Note 9
Stockholders' Equity
Preferred Stock and Warrants
In February 1992, Bancorp completed a private placement of 46,700 investment
units (the "Private Placement"). Each unit consisted of 1 share of Series A
Noncumulative Convertible Preferred Stock (each share being convertible into 100
shares of Common Stock) and 50 Warrants (each Warrant being exercisable
commencing in 1994 for 1 share of Common Stock at an exercise price of $.75 per
share). Holders of record of the Series A Preferred Stock are entitled to
dividends, when and if declared by Bancorp's Board of Directors, at a rate to be
determined by Bancorp's Board of Directors. Holders of shares of Series A
Preferred Stock vote together as a class with holders of the Common Stock for
the election of directors and all other matters as to which holders of the
Common Stock are entitled to vote. Each share of Series A Preferred Stock is
entitled to 100 votes. All warrants expire on December 31, 1996.
Dividends
Connecticut banking law prohibits the Bank from paying dividends except from its
net profits, which are defined as the remainder of all earnings from current
operations. The total of all dividends declared by the Bank in any calendar year
may not, unless specifically approved by the State of Connecticut Banking
Commissioner, exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years. These dividend limitations can
affect the amount of dividends payable to Bancorp as the sole stockholder of the
Bank, and therefore affect Bancorp's payment of dividends to its stockholders.
Dividend Reinvestment and Stock Purchase Plan
Bancorp introduced a Dividend Reinvestment and Stock Purchase Plan on January 1,
1989. Under the terms of the plan, participating stockholders were allowed to
purchase additional shares of Common Stock by reinvesting their cash dividends.
Such plan participants could also make optional cash payments, up to $3,000 per
quarter, to purchase additional shares. Shares purchased through the plan
directly from Bancorp were priced at 95% of the average market value at the time
of purchase; shares purchased in the open market were priced at cost. Bancorp
discontinued the Dividend Reinvestment and Stock Purchase Plan in 1996.
57
<PAGE>
Stockholder Rights Offering
In the fourth quarter of 1992, holders of Bancorp's Common Stock received rights
to acquire additional shares of Common Stock. The rights entitled each
shareholder to purchase one share of Common Stock for every two shares owned as
of February 21, 1992. The purchase price was initially set at $1.50 per share
and increased to $2.00 on December 1, 1992 and $3.00 on June 1, 1993. Prior to
its expiration on May 31, 1994, the rights offering raised $1,117,000, net of
expenses. Bancorp contributed a total of $1,000,000 of the net proceeds during
1993 and 1994 to the capital of the Bank.
Stock Option Agreements
On December 17, 1992, Bancorp's Board of Directors conditionally granted certain
executive officers options to purchase a total of up to 725,000 shares of
Bancorp's Common Stock at an exercise price of $2.00 per share, which was the
fair market value of the stock on that date. The grants became effective upon
approval by the shareholders of Bancorp at the 1993 Annual Meeting of Bancorp's
shareholders. These stock options become exercisable gradually over a five year
period and expire within ten years following the date of the conditional grant.
All unexpired options become immediately exercisable if a change in control (as
defined) of Bancorp occurs.
Incentive Stock Option Plans
Under the 1995 Incentive Stock Option Plan (the "1995 Plan"), the Board of
Directors may grant options to purchase a total of up to 200,000 shares of
Bancorp's Common Stock to key employees of Bancorp and the Bank. Under the 1985
Incentive Stock Option Plan (the "1985 Plan"), for which the authority to grant
options expired on December 31, 1995, the Board was authorized to grant options
to purchase a total of up to 300,000 shares of Bancorp's Common Stock to key
employees of Bancorp and the Bank. The exercise price of options granted under
the Plans are set at the market price of Bancorp's Common Stock on the date of
the grant. Each option may be exercised as to one-half of the total number of
shares covered by such option after one year of continuous employment, and, as
to the other one-half, after two years of continuous employment. Options, in
both Plans, expire ten years after the date of their grant. No options have been
granted under the 1995 Plan.
58
<PAGE>
Activity for the 1985 Plan for the years ended December 31, 1995, 1994 and 1993
was as follows:
1995 1994 1993
- -------------------------------------------------------------------------------
Options outstanding, January 1, 276,550 274,310 129,310
Options granted 5,000 37,200 150,000
Options exercised (9,750) (17,500) ---
Options canceled --- (9,960) (5,000)
Options expired (4,850) (7,500) ---
- -------------------------------------------------------------------------------
Options outstanding, December 31, 266,950 276,550 274,310
===============================================================================
Options exercisable, December 31, 243,350 164,350 68,810
===============================================================================
Price per share of options $2.00 $2.00 $2.00
outstanding, December 31, to to to
$3.50 $19.75 $19.75
===============================================================================
At the discretion of Bancorp's Board of Directors, all outstanding unexercisable
options under the 1985 Plan may become exercisable if a change in control (as
defined) of Bancorp occurs.
Note 10
Income Taxes
At December 31, 1995, 1994 and 1993, the Company had recorded net deferred tax
assets (included in Other Assets) of $2,772,000, $1,650,000 and $350,000,
respectively, for anticipated future utilization of net operating loss
carryforwards ("NOL's") and the tax effect of other temporary differences. At
December 31, 1995, the Company has recognized substantially all of the financial
statement benefit of its deferred tax assets.
The provision (benefit) for income taxes was comprised of the following:
Years ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Federal - current $ 103,000 $ 48,000 $ 23,000
State - current 14,000 16,000 75,000
Federal - deferred (benefit) (1,122,000) (1,300,000) (350,000)
- --------------------------------------------------------------------------------
$(1,005,000) $(1,236,000) $(252,000)
================================================================================
Cash payments for income taxes were $111,000, $78,000 an $89,000 in 1995, 1994
and 1993, respectively.
59
<PAGE>
A reconciliation of the statutory federal income tax provision to the reported
income tax benefit for the years ended December 31, 1995, 1994 and 1993 is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Statutory income tax provision at 34% $ 1,981 $ 1,063 $ 323
Reversal of deferred tax valuation
allowance to:
Eliminate the current year's Federal regular
tax provision through utilization of the NOL (1,981) (1,063) (323)
Recognize the benefit of a portion of the Federal and State
NOL expected to be realized in future years (1,122) (1,300) (350)
Alternative minimum federal tax 103 48 23
State income tax 14 16 75
- ----------------------------------------------------------------------------------------------------------------
Income tax benefit $(1,005) $(1,236) $ (252)
================================================================================================================
</TABLE>
In addition, $470,000 and $256,000 of state taxes (net of the related federal
tax benefit) were not provided in 1995 and 1994, respectively, because of the
utilization of state NOL's.
The components of and changes in the deferred tax asset during 1995, 1994 and
1993, were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
Deferred Deferred Deferred
January 1, (Expense) December 31, (Expense) December 31, (Expense) December 31,
1993 Benefit 1993 Benefit 1994 Benefit 1995
- ------------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax effect of net operating loss
carryforwards:
Federal $ 4,855 $ (1) $ 4,854 $ (756) $ 4,098 $ (2,102) $ 1,996
State 1,142 --- 1,142 (183) 959 (468) 491
Other tax effected temporary
differences resulting in deferred
tax:
Assets 974 (348) 626 (91) 535 90 625
Liabilities (67) (256) (323) (117) (440) 98 (342)
Stockholders' equity --- --- --- --- --- 27 27
- ------------------------------------------------------------------------------------------------------------------------------------
Gross tax effected temporary
differences 6,904 (605) 6,299 (1,147) 5,152 (2,355) 2,797
Valuation allowance (6,904) 955 (5,949) 2,447 (3,502) 3,477 (25)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ --- $ 350 $ 350 $ 1,300 $ 1,650 $ 1,122 $ 2,772
====================================================================================================================================
</TABLE>
At December 31, 1995, the only temporary difference which gives rise to a
significant portion of the tax effected temporary differences shown above was
the loan loss allowance, which resulted in a deferred liability of approximately
$340,000.
60
<PAGE>
As of December 31, 1995, the Company has aggregate NOL's of approximately $5.9
million for federal purposes and $6.5 million for state purposes which are
available to offset future income for tax return purposes. The NOL's are
scheduled to expire as follows:
Federal State
- --------------------------------------------------------------------------------
2006 - $5.8 million 1996 - $6.4 million
2007 - $0.1 million 1997 - $0.1 million
Note 11
Employee Benefit Plans
The Bank has a qualified noncontributory defined benefit pension plan (the
"Pension Plan") covering all employees over the age of 21 who have worked at
least 1,000 hours per year. The Pension Plan was temporarily frozen, effective
January 1, 1992, resulting in no additional benefits for future service since
that date. The Bank also has a non-qualified supplemental executive retirement
plan (the "Supplemental Plan") for certain senior officers. Under the terms of
the Supplemental Plan, if participants are terminated on or after their early
retirement date following a change in control (as defined) of Bancorp, they are
entitled to receive certain additional benefits. During 1995, several
participants were discontinued from the Supplemental Plan, resulting in a
curtailment gain.
The following table sets forth the funded status of the plans and the amounts
shown in the accompanying consolidated statements of condition at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
Pension Supplemental
Plan Plan
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 1,196 $ 955 $ 1,371 $ 895
Nonvested benefits 27 47 --- 471
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 1,223 1,002 1,371 1,366
Effect of anticipated future
compensation levels --- --- 155 128
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 1,223 1,002 1,526 1,494
Fair value of plan assets (2,053) (1,969) --- ---
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation over
plan assets (excess assets) (830) (967) 1,526 1,494
Unamortized prior service cost --- --- (169) (291)
Net unrecognized (loss) gain from past
experience different than assumed (649) (544) (25) 36
Unamortized asset at transition 117 156 --- ---
- --------------------------------------------------------------------------------------------------------------------------------
Pension (asset) liability included in
the consolidated statement of condition $(1,362) $(1,355) $ 1,332 $ 1,239
================================================================================================================================
</TABLE>
61
<PAGE>
Pension (benefit) expense for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost of the current period $ --- $ --- $ --- $ 141 $ 156 $ 116
Interest cost of the projected benefit
obligation 79 83 76 117 101 100
Return on plan assets (173) (178) (189) --- --- ---
Amortization of unrecognized
net asset (22) (22) (22) --- --- ---
Settlement loss due to lump
sum payments 78 --- --- --- --- ---
Amortization of prior
service cost --- --- --- 79 75 75
Curtailment gain --- --- --- (117) --- ---
Amortization of loss 31 27 --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------
Pension (benefit) expense $ (7) $ (90) $(135) $ 220 $ 332 $ 291
==============================================================================================================================
</TABLE>
Key assumptions used in the above calculations at December 31, 1995, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount
rate used to measure the
projected benefit obligation 7.50% 8.25% 7.00% 7.50% 8.25% 7.00%
Rate of increase in
future compensation levels N/A N/A N/A 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 8.50% 9.00% 8.50% N/A N/A N/A
</TABLE>
Pension Plan assets are primarily invested in fixed income and equity
securities. The net unrecognized loss from past experience different than
assumed is being amortized on a straight line basis over 12 years. The Bank uses
the straight-line method of amortization for prior service cost (over 10.8
years) and unrecognized gains and losses (over 12 years) which aggregate more
than 10% of the value of plan assets.
The Bank also has a qualified Employee Stock Ownership Plan ("ESOP") and,
commencing in 1992, a 401(k) Plan covering all eligible employees. Contributions
to the ESOP are at the discretion of the Board of Directors of the Bank; no
contributions were made in 1995, 1994 or 1993. Participants in the 401(k) Plan
are entitled to contribute up to 20% of their compensation, subject to Internal
Revenue Service annual limitations. The Bank contributed 25% in 1993 and 1994
and 50% of annual employee contributions in 1995, up to 6% of a participants'
compensation. Employees are fully vested in the Bank's contributions after five
years of service. The Bank contributed $91,000, $49,000 and $20,000 to the
401(k) Plan in 1995, 1994 and 1993, respectively.
62
<PAGE>
Note 12
Related Party Transactions
The Bank purchases insurance from an insurance brokerage firm owned by a
director of the Bank and Bancorp. This director is the president of the
insurance firm. During 1995, the Bank made insurance payments of $364,062 to
this firm. Payments to this firm for insurance premiums were $326,791 and
$475,462 during 1994 and 1993, respectively.
The Bank leases office space from a trust of which a director of the Bank and
Bancorp serves as trustee. Rental payments of $54,584, $53,740 and $53,527 for
this office space were paid during 1995, 1994 and 1993, respectively.
The Bank also leases office space from a trust which benefits a family member of
a director of the Bank and Bancorp. The Bank made rental payments totaling
$194,196, $195,000 and $184,141 during 1995, 1994 and 1993, respectively,
relating to this office space.
Note 13
New Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 applies to financial statements for
fiscal years beginning after December 15, 1995. Bancorp does not anticipate that
adoption of this pronouncement will have a material impact on its consolidated
financial statements.
In October 1995, FASB issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 is effective for fiscal years beginning after
December 15, 1995. Bancorp does not anticipate that adoption of this
pronouncement will have a material impact on its consolidated financial
statements.
63
<PAGE>
Note 14
Westport Bancorp, Inc. (Parent Company Only)
Condensed Financial Statements
<TABLE>
<CAPTION>
Condensed statements of condition information was as follows:
December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 229 $ 87
Investment in and advances to subsidiary 24,318 16,560
Other assets 4 ---
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $24,551 $16,647
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and other liabilities $ 269 $ 249
Stockholders' equity (net of unrealized depreciation on
securities available for sale of subsidiary) 24,282 16,398
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,551 $16,647
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed statements of income information was as follows:
Years Ended December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest income $ 22 $ 4 $ 6
Other expenses 148 156 133
- ----------------------------------------------------------------------------------------------------
Loss before increase in undistributed
equity of subsidiary (126) (152) (127)
Increase in undistributed equity of subsidiary 6,956 4,514 1,329
- ----------------------------------------------------------------------------------------------------
Net income $ 6,830 $ 4,362 $ 1,202
====================================================================================================
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Condensed cash flow information was as follows:
Years Ended December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,830 $ 4,362 $ 1,202
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed income of subsidiary (6,956) (4,514) (1,329)
Other - net 16 40 37
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (110) (112) (90)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Increase in investment in and advances to subsidiary (426) --- (190)
Net decrease in securities --- --- 248
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (426) --- 58
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Gross proceeds from issuance of Common Stock 1,543 45 186
Dividends (865) --- ---
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 678 45 186
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 142 (67) 154
Cash and cash equivalents at beginning of year 87 154 ---
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 229 $ 87 $ 154
==========================================================================================================
</TABLE>
There are various restrictions which limit the ability of a bank subsidiary to
transfer funds in the form of cash dividends, loans or advances to its parent
company. The Bank is prohibited by Connecticut banking law from paying dividends
except from its net profits, which are defined as the remainder of all earnings
from current operations. The total of all dividends declared by the Bank in any
calendar year may not, unless specifically approved by the Commissioner, exceed
the total of its net profits for that year combined with its retained net
profits from the preceding two years. These dividend limitations can affect the
amount of dividends payable to Bancorp as the sole stockholder of the Bank, and
therefore affect Bancorp's payment of dividends to its stockholders.
In addition, the Bank is subject to restrictions under Section 23A of the
Federal Reserve Act. These restrictions limit the transfer of funds to a parent
company, in the form of loans or extensions of credit, investments and purchases
of assets. Such transfers are limited to 10% of the Bank's capital and surplus.
These transfers are also subject to various collateral requirements.
Note 15
Financial Instruments with Off-Balance
Sheet Risk and Concentrations of Credit Risk
The Bank is a party to financial instruments with off-balance sheet risk entered
into in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
(unfunded loans and unused lines of credit) and standby letters of credit.
65
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of these commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments and evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of credit
is based on management's credit evaluation of the borrower. Collateral held
varies, but may include real estate, accounts receivable, inventory, property
and securities.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued at the customer's request to support various personal and/or
business obligations. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The amount of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include real estate, accounts
receivable, inventory, property, securities and certificates of deposit.
The Bank's maximum exposure to credit loss from outstanding loan commitments and
standby letters of credit at December 31, 1995 was:
($ in thousands)
Loan commitments:
Residential mortgage $ 2,588
Commercial mortgage 260
Residential construction 1,276
- --------------------------------------------------------------------------------
Total 4,124
- --------------------------------------------------------------------------------
Lines of Credit commitments:
Commercial 15,352
Home equity 16,865
Personal 2,333
- --------------------------------------------------------------------------------
Total 34,550
- --------------------------------------------------------------------------------
Standby letters of credit 1,532
- --------------------------------------------------------------------------------
Total commitments and letters of credit $ 40,206
================================================================================
The Bank grants residential, commercial and consumer loans to customers,
principally in the town of Westport and the Fairfield County area of
Connecticut. Although the loan portfolio is diversified, a substantial portion
of its debtors' ability to honor their contracts is dependent upon the economic
conditions in the area, especially in the real estate sector. There are no other
concentrations of loans exceeding 10% of total loans.
66
<PAGE>
Note 16
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
about Fair Value of Financial Instruments", requires disclosure of the estimated
fair value of financial instrument assets, liabilities, commitments and
guarantees. Approximately 96% of the Company's assets and 99% of its liabilities
are considered financial instruments as defined in SFAS 107. Many of the
Company's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. In addition, the majority of the Company's financial instruments,
such as loans and deposits, are held to maturity and are realized or paid
according to the contractual agreement with the customer.
Significant estimations and present value calculations were used by the Company
for the purposes of this disclosure. The estimation methodologies used, the
estimated fair values, and financial statement balances at December 31, 1995 and
1994 ($ in thousands) are shown below.
Financial instrument assets actively traded in a secondary market have been
valued at quoted available market prices. For short-term financial instruments,
the financial statement balance equals fair market value.
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $24,113 $24,113 $18,010 $18,010
Investment securities 85,338 85,338 66,868 70,396
Federal funds sold 14,500 14,500 --- ---
Accrued interest receivable 2,247 2,247 1,758 1,758
The following financial instrument liabilities with stated maturities have been
valued using a present value discounted cash flow with a discount rate
approximating current market rates for similar liabilities:
</TABLE>
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Time deposits with stated
maturities $81,062 $80,837 $48,306 $44,730
Short-term borrowings 7,733 7,733 10,484 10,484
</TABLE>
67
<PAGE>
The following financial instrument liabilities with no stated maturities have
been valued at an estimated fair value equal to both the amount payable on
demand and the financial statement balance:
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing deposits $ 78,421 $ 78,421 $ 72,972 $ 72,972
Interest-bearing deposits 115,412 115,412 136,256 136,256
</TABLE>
The loan portfolio has been valued using a combination of quoted market prices
and recent comparable sales data for both home equity credit lines and
residential mortgages and discounted cash flow for commercial mortgages,
consumer loans and business loans. The discount rate used in these calculations
are current market rates for similar items.
<TABLE>
<CAPTION>
1995 1995 1994 1994
Estimated Financial Estimated Financial
Fair Value Statement Balance Fair Value Statement Balance
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loans $177,585 $175,198 $181,968 $183,307
</TABLE>
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
Management is concerned that reasonable comparability between financial
institutions may not be possible due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values.
All off-balance sheet items are believed to relate to quality assets. There are
no off-balance sheet items that relate to adversely classified assets. The fees
charged for off-balance sheet items are at fair values for similar transactions.
See Note 15 for further information on off-balance sheet items.
68
<PAGE>
Note 17
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Results of operations during the indicated quarters are presented below:
Quarter Ended
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 5,114 $ 5,080 $ 5,157 $ 5,374
Interest expense 1,408 1,497 1,478 1,644
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,706 3,583 3,679 3,730
Provision for loan losses 375 375 375 375
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,331 3,208 3,304 3,355
Other operating income 720 988 991 1,306
Other operating expense 2,834 2,729 2,755 3,060
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,217 1,467 1,540 1,601
Income taxes (benefit) (443) (115) (585) 138
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,660 $ 1,582 $ 2,125 $ 1,463
================================================================================================================================
Net income per common share (1)(2) $ 0.16 $ 0.15 $ 0.20 $ 0.14
================================================================================================================================
Weighted average number of
common shares and common
equivalent shares outstanding: 10,276,000 10,377,000 10,474,000 10,528,000
================================================================================================================================
1994
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 3,894 $ 4,084 $ 4,606 $ 4,750
Interest expense 1,222 1,157 1,159 1,211
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,672 2,927 3,447 3,539
Provision for loan losses 450 450 450 450
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,222 2,477 2,997 3,089
Other operating income 957 929 1,015 1,027
Other operating expense 2,920 2,786 2,806 3,075
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 259 620 1,206 1,041
Income taxes (benefit) 8 (320) (752) (172)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 251 $ 940 $ 1,958 $ 1,213
================================================================================================================================
Net income per common share (1)(2) $ 0.03 $ 0.09 $ 0.19 $ 0.12
================================================================================================================================
Weighted average number of
common shares and common
equivalent shares outstanding: 10,550,000 10,292,000 10,247,000 10,270,000
================================================================================================================================
<FN>
(1) Primary and fully diluted earnings per share are the same for each quarter
in 1995. In 1994, fully diluted earnings per share were not applicable.
(2) The total of each quarter does not equal the primary earnings per common
share for the years 1995 and 1994 due to rounding.
</FN>
</TABLE>
69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Westport Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
Westport Bancorp, Inc. (a Delaware corporation) and subsidiary as of December
31, 1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Westport Bancorp,
Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
New York, New York
January 25, 1996
70
<PAGE>
Item 9
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
Item 10
Directors and Executive Officers of the Registrant
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions "Election
of Directors -- Information about Nominees," "Management -- Executive Officers"
and "Management -- Section 16(a) Compliance" in Bancorp's definitive Proxy
Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such information is
hereby incorporated by reference herein and specifically
made a part hereof by reference.
Item 11
Executive Compensation
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions
"Management -- Executive Compensation," "Management -- Option Exercises and
Holdings," "Management -- Pension and Retirement Plans," "Management --
Supplemental Executive Retirement Plan," "Management -- Split Dollar Life
Insurance," "Management -- Compensation of Directors," "Management -- Agreements
With Certain Executive Officers," and "Management -- Compensation Committee
Interlocks and Insider Participation" in Bancorp's definitive Proxy Statement
for Bancorp's 1996 Annual Meeting of Stockholders. Such information is hereby
incorporated by reference herein and specifically made a part hereof by
reference.
Item 12
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The information required by this item is set forth under the caption "Security
Ownership of Management and Certain Beneficial Owners" in Bancorp's definitive
Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such
information is hereby incorporated by reference herein and specifically made a
part hereof by reference.
71
<PAGE>
Item 13
Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this item is set forth under the captions
"Management -- Compensation Committee Interlocks and Insider Participation" and
"Management -- Certain Other Transactions" in Bancorp's definitive Proxy
Statement for Bancorp's 1996 Annual Meeting of Stockholders. Such information is
hereby incorporated by reference herein and specifically
made a part hereof by reference.
PART IV
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
- --------------------------------------------------------------------------------
Financial Statements.
The following financial statements are included in Item 8 of this Form 10-K:
(a) Westport Bancorp, Inc. Consolidated Statements of Condition as
at December 31, 1995 and 1994.
(b) Westport Bancorp, Inc. Consolidated Statements of Income for
years ended December 31, 1995, 1994 and 1993.
(c) Westport Bancorp, Inc. Consolidated Statements of Changes In
Stockholders' Equity as at December 31, 1995, 1994, and 1993
and January 1, 1993.
(d) Westport Bancorp, Inc. Consolidated Statements of Cash Flows
for years ended December 31, 1995, 1994, and 1993.
(e) Westport Bancorp, Inc. Notes to Consolidated Financial
Statements.
(f) Report of Independent Public Accountants, on Westport Bancorp,
Inc.'s Consolidated Financial Statements for 1995, 1994 and
1993.
Financial Statement Schedules.
Schedules are omitted either because they are not applicable or because the
information is included at Item 8 in this Form 10-K.
Exhibits.
The exhibits which are filed with this Form 10-K or which are incorporated
herein by reference are set forth below:
72
<PAGE>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-12936 ("1991 Form
10-K"), and incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible
Preferred Stock of Bancorp. (Filed as Exhibit 3(b) to 1991
Form 10-K, and incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c)
to Annual Report on Form 10-K for the year ended December
31, 1995, File No. O-12936 ("1995 Form 10-K"), and
incorporated (herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-12936 ("1992 Form 10-K"), and incorporated
herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to
1991 Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to
Registration Statement on Form S-1, File No. 2- 93773, and
incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and
Weston Shopping Center Associates, as amended by
Modification dated July 1, 1993. (Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 0-12936, and as Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and
incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the
Bank and John Sherwood, Trustee. (Filed as Exhibit 10(e) to
1992 Form 10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank
and William L. Gault, Trustee. (Filed as Exhibit 10(f) to
1992 Form 10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991
between the Bank and One Research Drive Associates Limited
Partnership. (Filed as Exhibit 10(h) to 1991 Form 10-K, and
incorporated herein by reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the
Bank and C.A.T.F. Limited Partnership. (Filed as Exhibit
10(f) to 1995 Form 10-K, and incorporated herein by
reference.)
10(g) Employment Agreement among Michael H. Flynn, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
73
<PAGE>
10(i) Employment Agreement among Richard T. Cummings, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp
and the Bank dated April 23, 1996 (Filed herewith).
10(k) Employment Agreement among Richard L. Card, Bancorp and the
Bank dated November 15, 1993, and as amended November 13,
1995. (Filed as Exhibit 10(i)(4) to 1993 Form 10-K and
Exhibit 10(k) to 1995 Form 10-K, respectively, and
incorporated herein by reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989, as amended December 17, 1991. (Filed
as Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated
herein by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3)
to 1992 Form 10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5)
to 1993 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp
dated November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993
Form 10-K, and incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B.
Laudano, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(r) to 1995 Form 10-K, and incorporated
herein by reference.)
10(s) Split Dollar Insurance Agreement between Richard T.
Cummings, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(s) to 1995 Form 10-K, and incorporated
herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card
and the Bank dated as of December 1, 1995. (Filed as
Exhibit 10(t) to 1995 Form 10-K, and incorporated herein by
reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated
November 13, 1995, as amended November 29, 1995, January
18, 1996, and May 16, 1996. (Plan dated November 13, 1995
and amendments dated November 29, 1995 and January 18, 1996
filed as Exhibit 10(u) to 1995 Form 10-K, and incorporated
herein by reference) (Amendment dated May 16, 1996 filed
herewith).
10(v) Trust under Supplemental Executive Retirement Plan between
the Bank and People's Bank, Trustee. (Filed as Exhibit
10(v) to 1995 Form 10-K, and incorporated herein by
reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit
10(m) to 1992 Form 10-K, and incorporated herein by
reference.)
10(x) 1985 Incentive Stock Option Plan 1990 Restatement of
Bancorp. (Filed as Exhibit 10(n) to 1992 Form 10-K, and
incorporated herein by reference.)
10(y) Amended and Restated 1995 Incentive Stock Option Plan of
Bancorp (Filed herewith).
74
<PAGE>
11 Statement Regarding Computation of Per Share Earnings.
(Filed as Exhibit 11 to 1995 Form 10-K, and incorporated
herein by reference.)
21 Subsidiary of Bancorp. (Filed as Exhibit 22 to 1991 Form
10-K, and incorporated herein by reference.)
23 Consent of Arthur Andersen LLP (Filed herewith).
27 Financial Data Schedule (Filed herewith).
Reports on Form 8-K.
Bancorp did not file any reports on Form 8-K during the fourth quarter of 1995.
75
<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, thereunto duly authorized.
WESTPORT BANCORP, INC.
-----------------------
(Registrant)
DATE May 16, 1996 By: /s/ Michael H. Flynn
---------------- --------------------
Michael H. Flynn
President and
Chief Executive Officer
(principal executive officer)
DATE May 16, 1996 By: /s/ William B. Laudano, Jr.
---------------- ---------------------------
William B. Laudano, Jr.
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
- --------------------------------------------------------------------------------
/s/George H. Damman Director May 16, 1996
- -------------------
George H. Damman
/s/Michael H. Flynn Director May 16, 1996
- -------------------
Michael H. Flynn
/s/William L. Gault Director May 16, 1996
- -------------------
William L. Gault
/s/Kurt B. Hersher Director May 16, 1996
- -------------------
Kurt B. Hersher
76
<PAGE>
Signatures Title Date
- --------------------------------------------------------------------------------
/s/William E. Mitchell Director May 16, 1996
- -------------------------
William E. Mitchell
/s/David A. Rosow Chairman of the May 16, 1996
- ------------------------- Board of Directors
David A. Rosow
/s/William D. Rueckert Director May 16, 1996
- -------------------------
William D. Rueckert
/s/Jay Sherwood Director May 16, 1996
- -------------------------
Jay Sherwood
77
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of Bancorp. (Filed as
Exhibit 3(a) to Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-12936 ("1991 Form
10-K"), and incorporated herein by reference.)
3(b) Certificate of Designation of Series A Convertible
Preferred Stock of Bancorp. (Filed as Exhibit 3(b) to 1991
Form 10-K, and incorporated herein by reference.)
3(c) Certificate of Amendment of Bancorp. (Filed as Exhibit 3(c)
to Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-12936 ("1995 Form 10-K"), and
incorporated herein by reference.)
3(d) By-Laws of Bancorp, as amended. (Filed as Exhibit 3(d) to
Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-12936 ("1992 Form 10-K"), and incorporated
herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 2-93773, and
incorporated herein by reference.)
4(b) Specimen Series A Convertible Preferred Stock Certificate.
(Filed as Exhibit 4(b) to 1991 Form 10-K, and incorporated
herein by reference.)
4(c) Specimen Warrant Certificate. (Filed as Exhibit 4(c) to
1991 Form 10-K, and incorporated herein by reference.)
10(a) Weston lease dated June 5, 1979 between the Bank and Weston
Shopping Center, Inc. (Filed as Exhibit 10(c) to
Registration Statement on Form S-1, File No. 2- 93773, and
incorporated herein by reference.)
10(b) Weston lease dated August 23, 1979, between the Bank and
Weston Shopping Center Associates, as amended by
Modification dated July 1, 1993. (Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 0-12936, and as Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1993,
File No. 0-12936 ("1993 Form 10-K"), respectively, and
incorporated herein by reference.)
10(c) Trust Department lease dated November 7, 1986 between the
Bank and John Sherwood, Trustee. (Filed as Exhibit 10(e) to
1992 Form 10-K, and incorporated herein by reference.)
10(d) Gault Building lease dated April 1, 1987 between the Bank
and William L. Gault, Trustee. (Filed as Exhibit 10(f) to
1992 Form 10-K, and incorporated herein by reference.)
10(e) Shelton Operations Center lease dated March 22, 1991
between the Bank and One Research Drive Associates Limited
Partnership. (Filed as Exhibit 10(h) to 1991 Form 10-K, and
incorporated herein by reference.)
10(f) Fairfield branch lease dated March 20, 1995 between the
Bank and C.A.T.F. Limited Partnership. (Filed as Exhibit
10(f) to 1995 Form 10-K, and incorporated herein by
reference.)
10(g) Employment Agreement among Michael H. Flynn, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
78
<PAGE>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
10(h) Employment Agreement among Thomas P. Bilbao, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(i) Employment Agreement among Richard T. Cummings, Bancorp and
the Bank dated April 23, 1996 (Filed herewith).
10(j) Employment Agreement among William B. Laudano, Jr., Bancorp
and the Bank dated April 23, 1996 (Filed herewith).
10(k) Employment Agreement among Richard L. Card, Bancorp and the
Bank dated November 15, 1993, as amended November 13, 1995.
(Filed as Exhibit 10(i)(4) to 1993 Form 10-K and Exhibit
10(k) to 1995 Form 10-K, respectively, and incorporated
herein by reference.)
10(l) Executive Agreement between Arnold Levine and Bancorp dated
October 16, 1989, as amended December 17, 1991. (Filed as
Exhibit 10(i)(1) to 1992 Form 10-K, and incorporated herein
by reference.)
10(m) Stock Option Agreement between Michael H. Flynn and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(n) Stock Option Agreement between Thomas P. Bilbao and Bancorp
dated December 17, 1992. (Filed as Exhibit 10(i)(3) to 1992
Form 10-K, and incorporated herein by reference.)
10(o) Stock Option Agreement between Richard T. Cummings, Jr. and
Bancorp dated December 17, 1992. (Filed as Exhibit 10(i)(3)
to 1992 Form 10-K, and incorporated herein by reference.)
10(p) Stock Option Agreement between William B. Laudano, Jr. and
Bancorp dated September 2, 1993. (Filed as Exhibit 10(i)(5)
to 1993 Form 10-K, and incorporated herein by reference.)
10(q) Stock Option Agreement between Richard L. Card and Bancorp
dated November 18, 1993. (Filed as Exhibit 10(i)(5) to 1993
Form 10-K, and incorporated herein by reference.)
10(r) Split Dollar Insurance Agreement between William B.
Laudano, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(r) to 1995 Form 10-K, and incorporated
herein by reference.)
10(s) Split Dollar Insurance Agreement between Richard T.
Cummings, Jr. and the Bank dated as of December 1, 1995.
(Filed as Exhibit 10(s) to 1995 Form 10-K, and incorporated
herein by reference.)
10(t) Split Dollar Insurance Agreement between Richard L. Card
and the Bank dated as of December 1, 1995. (Filed as
Exhibit 10(t) to 1995 Form 10-K, and incorporated herein by
reference.)
10(u) Supplemental Executive Retirement Plan of Bancorp dated
November 13, 1995, as amended November 29, 1995, January
18, 1996 and May 16, 1996. (Plan dated November 13, 1995
and amendments dated November 29, 1995 and January 18, 1996
filed as Exhibit 10(u) to 1995 Form 10-K, and incorporated
herein by reference) (Amendment dated May 16, 1996 filed
herewith).
10(v) Trust under Supplemental Executive Retirement Plan between
the Bank and People's Bank, Trustee. (Filed as Exhibit
10(v) to 1995 Form 10-K, and incorporated herein by
reference.)
10(w) Directors Retirement Plan of Bancorp. (Filed as Exhibit
10(m) to 1992 Form 10-K, and incorporated herein by
reference.)
10(x) 1985 Incentive Stock Option Plan 1990 Restatement of
Bancorp. (Filed as Exhibit 10(n) to 1992 Form 10-K, and
incorporated herein by reference.)
79
<PAGE>
Exhibit Description
- --------------------------------------------------------------------------------
10(y) Amended and Restated 1995 Incentive Stock Option Plan of
Bancorp (Filed herewith).
11 Statement Regarding Computation of Per Share Earnings.
(Filed as Exhibit 11 to 1995 Form 10-K, and incorporated
herein by reference.)
21 Subsidiary of Bancorp. (Filed as Exhibit 22 to 1991 Form
10-K, and incorporated herein by reference.)
23 Consent of Arthur Andersen LLP (Filed herewith).
27 Financial Data Schedule (Filed herewith).
80
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 23rd day of April, 1996, by and among THE
WESTPORT BANK & TRUST COMPANY, a Connecticut-chartered state bank and trust
company having its principal place of business in the Town of Westport,
Connecticut ("Westport Bank"), WESTPORT BANCORP, INC., a Delaware corporation
owning all of the issued and outstanding shares of capital stock of Westport
Bank ("Westport Bancorp") (Westport Bank and Westport Bancorp, collectively, the
"Employers"), and Michael H. Flynn, an individual residing in the Town of
Fairfield, Connecticut (the "Executive").
WHEREAS, the Employers and the Executive desire that the Executive be
employed as President and Chief Executive Officer of the Employers;
WHEREAS, the Boards of Directors of the Employers (collectively, the
"Boards"), have approved and authorized the Employers to enter into this
Agreement with the Executive;
WHEREAS, the parties desire to enter into this Agreement, setting forth
the terms and conditions for the employment relationship of the Executive with
the Employers and to replace and supercede the existing Employment Agreement
dated August 31, 1989, as amended (the "Prior Agreement"):
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Prior Agreement is hereby replaced and superceded
and shall be of no further force or effect after the date of this Agreement. The
Executive is employed as President and Chief Executive Officer of the Employers
from April 23, 1996 through the term of this Agreement. As the President and
Chief Executive Officer of the Employers, the Executive shall render executive,
policy and other management services to the Employers of the type customarily
performed by persons serving in a similar chief executive officer capacity. As
Chief Executive Officer, the Executive shall be responsible for implementing the
policies of the Boards and shall report only to the Boards. All other officers
of the Employers shall report directly to the Executive, except as the Executive
shall otherwise determine, and except that the internal auditor shall report
directly to the Boards. The Executive shall also perform such duties as the
Boards may from time to time reasonably direct. During the term of this
Agreement, there shall be no material decrease in the duties and
responsibilities of the Executive otherwise than as provided herein, unless the
parties otherwise agree in writing. During the term of this Agreement, the
Executive shall not be required to relocate his place of employment outside of
Fairfield County, Connecticut, in order to perform his services hereunder.
2. Compensation. The Employers agree to pay the Executive during the
term of this Agreement a salary as follows: from the date of commencement of
<PAGE>
employment hereunder through the term of this Agreement, a salary at an initial
annual rate equal to $170,000.00. The Executive's salary shall be reviewed by
the Boards prior to April 1, 1997, and thereafter on an annual basis prior to
April 1 of each year (or such date as from time to time is the date used by the
Employers for review of executive compensation) during the term of this
Agreement. In so reviewing the Executive's salary, the Boards shall consider
increases in the amount of the Executive's salary for increases in the cost of
living for Fairfield County, Connecticut, and based upon the Executive's
performance and scope of responsibility.
The salary of the Executive shall not be decreased at any time during
the term of this Agreement from the amount then in effect, unless the Executive
otherwise agrees in writing. Participation in deferred compensation,
discretionary bonus, retirement and other employee benefit plans and in fringe
benefits, other than salary reduction programs in which the Executive elects to
participate, shall not reduce the salary payable to the Executive under this
Section 2. The salary under this Section 2 shall be payable to the Executive not
less frequently than monthly. The Executive shall not be entitled to receive
fees for serving as a director of the Employers or any of their subsidiaries or
for serving as a member of any committee of the Boards of Directors of the
Employers or any of their subsidiaries.
3. Discretionary Bonuses; Business Expenses. During the term of this
Agreement, the Executive shall be entitled to participate in an equitable manner
with all other executive employees of the Employers in such discretionary
bonuses as may be authorized, declared and paid by the Boards to executive
employees. No other compensation provided for in this Agreement shall be deemed
a substitute for the Executive's right to participate in such bonuses when and
as declared by the Boards. This provision shall not preclude the grant of any
other bonus to the Executive as determined by the Boards.
The Executive is expected and is authorized to incur reasonable
expenses in the performance of his duties hereunder, including such expenses for
the promotion of the business of the Employers as (i) dues for a country club
membership in Fairfield County, Connecticut, (ii) dues for a business luncheon
club membership in Fairfield County, Connecticut and (iii) the costs of
entertainment, travel, and similar business expenses incurred in the performance
of his duties. The Employers shall reimburse the Executive for all such expenses
promptly upon periodic presentation by the Executive of an itemized account of
such expenses.
4. Participation in Retirement and Employee Benefit Plans; Fringe
Benefits.
(a) During the term of this Agreement, the Executive shall be
entitled to participate in any plan of the Employers relating to stock options,
stock purchases, pension, thrift, profit sharing, group life insurance, medical
coverage, education, sick leave or other retirement or employee benefits that
the Employers may adopt for the benefit of executive employees in accordance
with the terms of such plans. The Executive shall also be entitled to
participate in any other fringe benefits which may be or become applicable to
executive employees of the Employers.
- 2 -
<PAGE>
(b) During the term of this Agreement, the Employers shall
continue to fund (i.e., pay the premiums therefor when due) the term life
insurance policy on the Executive's life having a $478,500 death benefit (Policy
Number VINE001314 issued by CNA Life Insurance Company).
5. Term. The initial term of employment under this Agreement shall be
for a three-year period commencing on April 23, 1996 (the "Initial Term"). This
Agreement shall be automatically renewed for an additional consecutive 12-month
period (the "Extended Term") as of April 1, 1997 and every anniversary of April
1 thereafter, unless contrary written notice to each of the other parties has
been given either by the Executive or by both of the Employers at least six
months prior to any such renewal date. Such Initial Term and all such Extended
Terms are collectively referred to herein as the term of this Agreement.
6. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Boards. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the commercial banking industry.
7. Voluntary Absences; Vacations. The Executive shall be entitled,
without loss of pay, to absent himself voluntarily for reasonable periods of
time from the performance of his duties and responsibilities under this
Agreement. All such voluntary absences shall count as paid vacation time, unless
the Boards otherwise approve. The Executive shall be entitled to an annual paid
vacation of four weeks per year or such longer period as the Boards may approve.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Executive. The Executive shall not be entitled to receive any additional
compensation from the Employers on account of his failure to take a paid
vacation.
8. Termination of Employment.
(a) The Boards may terminate the Executive's employment at any
time, but any termination by the Boards other than termination for Cause (as
defined below) shall not prejudice the Executive's right to compensation or
other benefits under this Agreement during the term of the Agreement; provided,
however, that the amount of compensation payable hereunder after termination of
the Executive's employment other than in accordance with Section 9(b) below
shall be reduced by any compensation earned by the Executive as a result of
employment by another employer during the payment period. If the Executive
accepts employment with a new employer while such compensation is being paid, he
shall immediately notify the Employers in writing of the details of the
compensation arrangements and starting date and shall notify the Employers from
time to time of changes regarding compensation. The
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<PAGE>
Executive agrees to provide, at the Employers' request, copies of his federal
income tax return for years in which such compensation was paid, to allow the
Employers to verify compensation from a new employer. Except as provided in
Section 9 and 11 hereof in the case of a termination in accordance with Section
9(b), the Executive shall have no right to receive compensation or other
benefits for any period after termination for Cause. "Cause" shall mean the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform
material stated duties, willful violation of any law, rule, or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order,
the violation of which has a material effect on the Employers or either of them,
material breach of any provision of this Agreement. In determining incompetence,
the acts or omissions shall be measured against standards generally prevailing
in the commercial banking industry; provided, it shall be the burden of the
Employers to prove the alleged acts and omissions and the prevailing nature of
the standards the Employers shall have alleged are violated by such acts and/or
omissions.
(b) The Executive shall have no right to terminate his
employment under this Agreement prior to the end of the term of this Agreement,
unless (i) such termination is approved by the Boards; (ii) there is a material
breach by the Employers or either of them of their obligations under this
Agreement; or (iii) such termination is in accordance with Section 9(b) hereof.
In the event that the Executive violates this provision, the Employers shall be
entitled, in addition to their other legal remedies, to enjoin the employment of
the Executive with any significant competitor of the Employers (or either of
them) for a period of six months. The term "significant competitor" shall mean
any commercial bank, savings bank, savings and loan association, mortgage
banking company or a holding company affiliate of any of the foregoing, which at
the date of its employment of the Executive has an office in any county in
Connecticut in which Westport Bank has one or more offices. If any court or
other tribunal having jurisdiction to determine the validity or enforceability
of this paragraph determines that, strictly applied, it would be invalid or
unenforceable, the definition of "significant competitor" and the time
provisions used shall be deemed modified to the extent necessary (but only to
that extent) so that the restrictions in that subsection, as modified, will be
valid and enforceable. For purpose of this Section 8(b), it shall be the
Executive's burden to prove the alleged acts which constitute a material breach
by the Employers of their obligations under this Agreement.
(c) In the event the employment of the Executive is terminated
by the Employers without Cause under Section 8(a) hereof or his employment or
this Agreement is terminated in accordance with Section 9(b) hereof and the
Employers fail to make timely payment of the amounts then owed to the Executive
under this Agreement, the Executive shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred by the Executive in taking
action to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime rate
(defined as the base rate on corporate loans at large U.S. money center
commercial banks as published by The Wall Street Journal),
- 4 -
<PAGE>
compounded monthly, for the period from the date of employment termination until
payment is made to the Executive. Such reimbursement and interest shall be in
addition to all rights which the Executive is otherwise entitled to under this
Agreement.
(d) In the event of the Executive's death during the term of
this Agreement, his estate shall be entitled to receive his salary for the
remaining term of this Agreement or six months, whichever is less. This
Agreement shall thereupon terminate, except that any vested rights of the
Executive shall then be exercised by his estate.
(e) Notwithstanding any other provision in this Agreement, (i)
the Employers may terminate or suspend this Agreement and the employment of the
Executive hereunder, as if such termination were for Cause under Section 8(a)
hereof and for Willful Misconduct under Section 9(b) hereof, to the extent
required by the laws of the State of Connecticut related to banking, by
applicable federal law relating to deposit insurance or bank holding companies
or by regulations or orders issued by the Banking Commissioner of the State of
Connecticut, the Federal Deposit Insurance Corporation or the Board of Governors
of the Federal Reserve System and (ii) no payment shall be required to be made
to the Executive under this Agreement to the extent such payment is prohibited
by applicable law, regulation or order issued by a banking agency or a court of
competent jurisdiction; provided, that it shall be Westport Bank's burden to
prove that any such action was so required.
9. Change in Control.
(a) If during the term of this Agreement there is a Change in
Control as defined below and the Executive's employment by the Employers shall
have been terminated in accordance with Section 9(b) below, the Executive shall
be entitled to the compensation and benefits specified in Sections 9(d) and 11
below. For purposes of this Agreement, a "Change in Control" shall be deemed to
have occurred if:
(i) 25 percent or more of ownership, control, power
to vote, or beneficial ownership of any class of voting
securities of Westport Bancorp is acquired by any person,
either directly or indirectly or acting through one or more
other persons;
(ii) any person (other than any person named as a
proxy in connection with any solicitation on behalf of the
Board of Directors of Westport Bancorp) holds revocable or
irrevocable proxies, as to the election or removal of three or
more directors of Westport Bancorp, for 25 percent or more of
the total number of voting shares of Westport Bancorp;
(iii) any person has received all applicable
regulatory approvals to acquire control of Westport Bancorp;
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(iv) any person has commenced a cash tender or
exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of 25 percent or more
of the total number of voting shares of Westport Bancorp,
whether or not any requisite regulatory approval for such
acquisition has been received, provided that a Change in
Control will not be deemed to have occurred under this clause
(iv) unless the Board of Directors of Westport Bancorp has
made a determination that such action constitutes or will
constitute a Change in Control;
(v) as the result of, or in connection with, any cash
tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, (A) the persons who
were directors of Westport Bancorp before such transaction
shall cease to constitute at least a majority of the Board of
Directors of Westport Bancorp or its successor or (B) the
persons who were stockholders of Westport Bancorp immediately
before such transaction do not own more than 50 percent of the
outstanding voting stock of Westport Bancorp or its successor
immediately after such transaction; or
(vi) Westport Bancorp's beneficial ownership of the
total number of voting shares of Westport Bank is reduced to
less than 50 percent.
For purposes of this Section, a "person" includes an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate, unincorporated
organization, joint-stock company or similar organization or entity or group
acting in concert. A person for these purposes shall be deemed to be a
"beneficial owner" as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934.
(b) For purposes of this Agreement, the Executive's employment
by the Employers shall be considered terminated "in accordance with Section
9(b)" if a Change in Control shall occur, and in connection with such Change in
Control or within two years thereafter either (x) the Executive's employment
with the Employers shall be terminated as a result of an Actual Termination, or
(y) the Executive's employment with the Employers shall terminate after an event
that would cause the Constructive Termination of his employment and the
Executive shall have given notice to the Employers (pursuant to Section 9(c)
below) that such event has occurred; and the following terms shall have the
meanings set out below:
(i) "Actual Termination" means involuntary
termination of the Executive's employment with the Employers
for any reason other than Willful Misconduct, Disability,
death or Retirement.
(ii) "Willful Misconduct" means (A) the continued
willful failure by the Executive to substantially perform his
duties with the Employers or either of them (other than any
such failure resulting from the
- 6 -
<PAGE>
Executive's incapacity due to physical or mental illness)
after a written demand for substantial performance is
delivered to the Executive by the Boards (or either of the
Boards) that specifically identifies the manner in which the
Executive has not substantially performed his duties and after
a reasonable time period has run to allow the Executive to
perform, (B) willful conduct that is a material violation of
Westport Bank's ethics policy or applicable law and that is
materially injurious to the Employers or either of them, (C)
other willful and wrongful conduct by the Executive that
causes substantial and material injury to the business and
operations of the Employers or either of them, the
continuation of which, in the reasonable judgment of the
Boards (or either of the Boards), will continue to
substantially and materially injure the business and
operations of the Employers (or either of them) in the future,
or (D) conviction of the Executive of a felony involving moral
turpitude; provided, that an act or failure to act shall not
be considered "willful" unless done, or omitted to be done, in
bad faith and without reasonable belief that the Executive's
action or omission was in the best interests of the Employers;
(iii) "Disability" means termination of employment
under circumstances that would qualify the Executive to
receive the benefits of the Westport Bank's long-term
disability plan.
(iv) "Retirement" means termination by the Executive
based on the Executive's having reached normal retirement age
as defined under The Westport Bank & Trust Company Pension
Plan.
(v) On or after a Change in Control any of the
following events shall cause a "Constructive Termination":
(A) the assignment to the Executive by the
Employers (or either of them) of duties materially
inconsistent with the Executive's position, duties,
responsibilities, and status with the Employers, a
material adverse change in the Executive's titles or
offices, any removal of the Executive from or any
failure to reelect the Executive to any of such
positions, except in connection with the termination
of his employment due to Disability, Retirement or
Willful Misconduct, or as a result of the Executive's
death, or any action that would have a material
adverse effect on the physical conditions existing at
the time of the Change in Control in which the
Executive performs his employment duties, provided,
however, that for a period of one year after a Change
in Control, a Constructive Termination shall not be
deemed to have occurred under this subparagraph (A)
solely because the Executive ceases to have any
position, duties, responsibilities, offices or titles
with
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<PAGE>
Westport Bancorp (or any successor) or solely because
Westport Bancorp (or any successor) is not a
publicly-held company;
(B) a reduction by the Employers in the
Executive's base salary as in effect on the date
hereof or as the same may be increased from time to
time during the term of this Agreement, or the
failure to increase (within 12 months of the
Executive's last increase in base salary) the
Executive's base salary in an amount which at least
equals, on a percentage basis, the average percentage
increase in base salary for all officers of Westport
Bank effected in the preceding 12 months;
(C) any failure by the Employers to continue
to provide benefit plans or arrangements which, in
the aggregate, are substantially the same as or
better than any benefit plans or arrangements
(including stock option plans, employee stock
ownership plans and similar arrangements for the
acquisition of stock) in which the Executive is
participating as of the date of the Change in Control
(hereinafter referred to as "Benefit Plans"), or the
taking of any action by the Employers which would
materially adversely affect the Executive's
participation in or materially reduce the Executive's
benefits under such Benefit Plans or deprive the
Executive of any material fringe benefit enjoyed by
the Executive;
(D) a relocation of Westport Bank's
principal executive offices to a location more than
50 miles away from its Westport, Connecticut
location, or outside the State of Connecticut or any
requirement that the Executive relocate to any place
outside such 50-mile radius to perform his duties
hereunder, except for required travel by the
Executive on the business of the Employers to an
extent substantially consistent with the Executive's
business travel obligations at the time of a Change
in Control;
(E) any failure by the Employers to provide
the Executive with the number of paid vacation days
to which the Executive is entitled at the time of a
Change in Control;
(F) any material breach by the Employers or
either of them of any provision of this Agreement;
(G) any failure by the Employers to obtain
the assumption of this Agreement by any acquirors,
successors or assigns of the Employers; or
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<PAGE>
(H) any failure by the Employers to have
renewed this Agreement pursuant to Section 5 hereof
(whether before or after a Change in Control) such
that, after a Change in Control, the remaining term
of this Agreement shall at any time be less than two
years.
(vi) "Date of Termination" means the date specified
in the notice of termination.
(c) Any termination of the Executive's employment by the
Employers after a Change in Control shall be communicated by a written notice of
termination addressed to the Executive and any termination of the Executive's
employment by the Executive after a Change in Control shall be communicated by a
written notice of termination addressed to the Chairmen of the Boards. The
notice of termination shall specify the Date of Termination and the reason for
the termination.
(d) If the Executive's employment by the Employers shall be
terminated following a Change in Control in accordance with Section 9(b), the
Executive shall be entitled to a lump sum cash payment equal to 2.99 times the
Executive's aggregate average annual salary and cash bonus reflected on his
Form(s) W-2 from the Employers for the five calendar years next preceding the
calendar year in which the Change in Control (or the most recent Change in
Control preceding such termination, if there is more than one) occurs (excluding
any amounts attributable to stock options exercised, canceled or otherwise
disposed of during such years). In addition Sections 8(c) and 11 shall apply in
the event of any such termination. The payment provided for in this Section 9(d)
shall be in lieu of any amount that would otherwise be payable to the Executive
under Section 8(a) hereof and shall be made to the Executive within five
business days after the Date of Termination. Such payment shall be subject to
applicable payroll or other taxes required to be withheld by the Employers. In
the case of a Change in Control that occurs after December 31, 1996, such
payment shall be subject to the limitation set out in Section 9(g) below.
(e) Payments and benefits to the Executive under Sections 9(d)
and 11 shall be considered severance pay in consideration of his past service
and his continued service after the date of this Agreement and, except as
specified in Section 11, the Executive shall not be required to mitigate the
amount of any payment provided for in Sections 9(d) and 11 by seeking other
employment or otherwise and the amount of any payments provided for in Sections
9(d) and 11 shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of Termination.
(f) If, in the event of a Change in Control that occurs before
January 1, 1997, the benefits provided by Sections 9(d) and 11 of this
Agreement, (or, if by reason of the amount of such benefits, any other amounts
in the nature of compensation payable to the Executive ("Other Compensation"))
are determined to be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of
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<PAGE>
1986, as amended (the "Code"), the Employers shall pay to the Executive, as
additional compensation, the amount necessary to cause the total payments
(including the additional payment required under this Section 9(f)) and benefits
received by the Executive under Sections 9 and 11 and the Executive's Other
Compensation (net of all federal and state taxes, including all taxes payable
under Section 4999 of the Code) to be equal to the total payments and benefits
the Executive would have received under Sections 9 and 11 and the Executive's
Other Compensation (net of all federal, state and local taxes) if Section 4999
of the Code had not applied.
(g) If, in the event of a Change in Control that occurs after
December 31, 1996, the payments and benefits provided by Sections 9(d) and 11 of
this Agreement, together with any Other Compensation would constitute a
Parachute Payment, the aggregate present value of the payments and benefits to
be provided under Section 11 and any Other Compensation and the payment provided
under Section 9(d) hereof (determined in accordance with Code Section 280G)
shall be reduced to the extent necessary so that no amount payable to the
Executive, and no benefit provided to him, by the Employers or any subsidiary,
shall constitute a Parachute Payment. The determination whether the foregoing
limitation shall apply and, if so, the application of the limitation shall be
made by an independent certified public accounting firm designated by the
Employers and the decision of that firm shall be conclusive and binding on all
persons. In the event that the receipt of any such payment or benefit would
otherwise cause the Executive to be considered to have received a Parachute
Payment, the Executive shall have the right to designate those payments or
benefits that shall be reduced or eliminated so as to satisfy the foregoing
limitation.
10. Disability. If the Executive becomes disabled by reason of injury
or sickness, he shall be entitled to benefits in accordance with Westport Bank's
long-term disability plan then in effect.
11. Certain Benefits Upon Termination. Provided the Executive's
employment is terminated (i) by the Employers for other than Cause (as defined
in Section 8(a) hereof) or (ii) in accordance with Section 9(b) hereof, the
Employers shall maintain in full force and effect for the Executive's continued
benefit from the Date of Termination of his employment and thereafter for a
period of three years the basic and corporate-owned life insurance, (except the
life insurance policy described in Section 4(b) above) accidental death and
dismemberment insurance, dental, health, and disability plans, programs or
arrangements in which the Executive was entitled to participate immediately
prior to the Date of Termination, to the same extent as if the Executive
continued to be an employee of the Employers during the three-year period
following the Date of Termination. The Employers shall continue to pay the cost
of any benefits provided under this Section 11; provided, however, the Employers
and the Executive shall share the cost of the health plan, program, or
arrangement and each shall pay the portion which each would have paid if the
Executive were employed by the Employers. Any benefits provided under this
Section 11, shall be reduced or offset
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<PAGE>
to the extent they are replaced by substantially similar benefits provided by a
new employer. In the case of a Change in Control that occurs after December 31,
1996, the payments and benefits provided for under this Section 11 shall be
subject to the provisions of Section 9(g) hereof.
12. Miscellaneous.
(a) No Assignment. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party hereto. However, in the event of the death of the Executive, all of his
rights to receive payments hereunder shall become rights of his estate as
provided in Section 8(d) hereof.
(b) Other Contracts. The Executive shall not, during the term
of this Agreement, have any other paid employment other than with a subsidiary
or affiliate of the Employers, except with the prior written approval of the
Boards.
(c) Amendments or Additions; Action by Boards. No amendments
or additions to this Agreement shall be binding unless in writing and signed by
all parties hereto. The prior approval by a majority affirmative vote of the
Boards shall be required in order for the Employers to authorize any amendments
or additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of employment with or without Cause under Section 8(a) hereof.
(d) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(e) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(f) Governing Law. This Agreement shall be governed by the
laws of the United States, where applicable, and otherwise by the laws of the
State of Connecticut other than the choice of law rules thereof.
(g) Notice. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to the
Employers:
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<PAGE>
WESTPORT BANCORP, INC.
87 Post Road East
Westport, Connecticut 06880
Attention: Chairman of the Compensation
Committee of the Board of Directors
or if to the Executive: Michael H. Flynn
277 Greenfield Hill Road
Fairfield, Connecticut 06430
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
(h) Counterparts. This Agreement may be executed in several
counterparts, for the convenience of the parties, but shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or caused this Agreement to be duly executed on their behalf, as of
the date and year first above written.
Attest: THE WESTPORT BANK & TRUST
COMPANY
/s/ Judith Peck By /s/ David A. Rosow
- ---------------------- ------------------------
David A. Rosow
Chairman of the Board
Attest: WESTPORT BANCORP, INC.
/s/ Victoria Takacs By /s/ David A. Rosow
- ---------------------- ------------------------
David A. Rosow
Chairman of the Board
/s/ Michael H. Flynn
------------------------
Michael H. Flynn
Executive
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 23rd day of April, 1996, by and among THE
WESTPORT BANK & TRUST COMPANY, a Connecticut-chartered state bank and trust
company having its principal place of business in the Town of Westport,
Connecticut ("Westport Bank"), WESTPORT BANCORP, INC., a Delaware corporation
owning all of the issued and outstanding shares of capital stock of Westport
Bank ("Westport Bancorp") (Westport Bank and Westport Bancorp, collectively, the
"Employers"), and Thomas P. Bilbao, an individual residing in the Town of
Greenwich, Connecticut (the "Executive").
WHEREAS, the Employers and the Executive desire that the Executive be
employed as Executive Vice President and Chief Operating Officer of the
Employers;
WHEREAS, the Boards of Directors of the Employers (collectively, the
"Boards"), have approved and authorized the Employers to enter into this
Agreement with the Executive;
WHEREAS, the parties desire to enter into this Agreement, setting forth
the terms and conditions for the employment relationship of the Executive with
the Employers and to replace and supercede the existing Employment Agreement
dated June 16, 1992, as amended (the "Prior Agreement"):
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Prior Agreement is hereby replaced and superceded
and shall be of no further force or effect after the date of this Agreement. The
Executive is employed as Executive Vice President and Chief Operating Officer of
the Employers from April 23, 1996 through the term of this Agreement. As the
Executive Vice President and Chief Operating Officer of the Employers, the
Executive shall render executive, policy and other management services to the
Employers of the type customarily performed by persons serving in similar
capacities. As Chief Operating Officer, the Executive shall be responsible for
recommending, developing and implementing the operations, finance and loan
administration policies of Westport Bank and the operations and finance policies
of Westport Bancorp and shall report only to the President(s) and Chief
Executive Officer(s) of the Employers. The Executive shall also perform such
duties as the President(s) and Chief Executive Officer(s) may from time to time
reasonably direct. During the term of this Agreement, there shall be no material
decrease in the duties and responsibilities of the Executive otherwise than as
provided herein, unless the parties otherwise agree in writing. During the term
of this Agreement, the Executive shall not be required to relocate his place of
employment outside of Fairfield County, Connecticut, in order to perform his
services hereunder.
<PAGE>
2. Compensation. The Employers agree to pay the Executive during the
term of this Agreement a salary as follows: from the date of commencement of
employment hereunder through the term of this Agreement, a salary at an initial
annual rate equal to $148,000.00. The Executive's salary shall be reviewed by
the Boards prior to April 1, 1997, and thereafter on an annual basis prior to
April 1 of each year (or such date as from time to time is the date used by the
Employers for review of executive compensation) during the term of this
Agreement. In so reviewing the Executive's salary, the Boards shall consider
increases in the amount of the Executive's salary for increases in the cost of
living for Fairfield County, Connecticut, and based upon the Executive's
performance and scope of responsibility.
The salary of the Executive shall not be decreased at any time during
the term of this Agreement from the amount then in effect, unless the Executive
otherwise agrees in writing. Participation in deferred compensation,
discretionary bonus, retirement and other employee benefit plans and in fringe
benefits, other than salary reduction programs in which the Executive elects to
participate, shall not reduce the salary payable to the Executive under this
Section 2. The salary under this Section 2 shall be payable to the Executive not
less frequently than monthly. The Executive shall not be entitled to receive
fees for serving as a director of the Employers or any of their subsidiaries or
for serving as a member of any committee of the Boards of Directors of the
Employers or any of their subsidiaries.
3. Discretionary Bonuses; Business Expenses. During the term of this
Agreement, the Executive shall be entitled to participate in an equitable manner
with all other executive employees of the Employers in such discretionary
bonuses as may be authorized, declared and paid by the Boards to executive
employees. No other compensation provided for in this Agreement shall be deemed
a substitute for the Executive's right to participate in such bonuses when and
as declared by the Boards. This provision shall not preclude the grant of any
other bonus to the Executive as determined by the Boards.
The Executive is expected and is authorized to incur reasonable
expenses in the performance of his duties hereunder, including such expenses for
the promotion of the business of the Employers as the costs of entertainment,
travel, and similar business expenses incurred in the performance of his duties.
The Employers shall reimburse the Executive for all such expenses promptly upon
periodic presentation by the Executive of an itemized account of such expenses.
4. Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. During the term of this Agreement, the Executive shall be entitled to
participate in any plan of the Employers relating to stock options, stock
purchases, pension, thrift, profit sharing, group life insurance, medical
coverage, education, sick leave or other retirement or employee benefits that
the Employers may adopt for the benefit of executive employees in accordance
with the terms of such plans. The Executive shall also be entitled to
participate in any other fringe benefits which may be or become applicable to
executive employees of the Employers.
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<PAGE>
5. Term. The initial term of employment under this Agreement shall be
for a three-year period commencing on April 23, 1996 (the "Initial Term"). This
Agreement shall be automatically renewed for an additional consecutive 12-month
period (the "Extended Term") as of April 1, 1997 and every anniversary of April
1 thereafter, unless contrary written notice to each of the other parties has
been given either by the Executive or by both of the Employers at least six
months prior to any such renewal date. Such Initial Term and all such Extended
Terms are collectively referred to herein as the term of this Agreement.
6. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Employers. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the commercial banking industry.
7. Voluntary Absences; Vacations. The Executive shall be entitled,
without loss of pay, to absent himself voluntarily for reasonable periods of
time from the performance of his duties and responsibilities under this
Agreement. All such voluntary absences shall count as paid vacation time, unless
the Boards otherwise approve. The Executive shall be entitled to an annual paid
vacation of four weeks per year or such longer period as the Boards may approve.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Executive. The Executive shall not be entitled to receive any additional
compensation from the Employers on account of his failure to take a paid
vacation.
8. Termination of Employment.
(a) The Boards may terminate the Executive's employment at any
time, but any termination by the Boards other than termination for Cause (as
defined below) shall not prejudice the Executive's right to compensation or
other benefits under this Agreement during the term of the Agreement; provided,
however, that the amount of compensation payable hereunder after termination of
the Executive's employment other than in accordance with Section 9(b) below
shall be reduced by any compensation earned by the Executive as a result of
employment by another employer during the payment period. If the Executive
accepts employment with a new employer while such compensation is being paid, he
shall immediately notify the Employers in writing of the details of the
compensation arrangements and starting date and shall notify the Employers from
time to time of changes regarding compensation. The Executive agrees to provide,
at the Employers' request, copies of his federal income tax return for years in
which such compensation was paid, to allow the Employers to verify compensation
from a new employer. Except as provided in Section 9 and 11 hereof in the case
of a termination in accordance with Section 9(b), the Executive shall have no
right to receive compensation or other benefits for any period after termination
for Cause. "Cause" shall mean the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform material stated duties, willful violation of any
law, rule,
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<PAGE>
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, the violation of which has a material effect on the
Employers or either of them, or material breach of any provision of this
Agreement. In determining incompetence, the acts or omissions shall be measured
against standards generally prevailing in the commercial banking industry;
provided, it shall be the burden of the Employers to prove the alleged acts and
omissions and the prevailing nature of the standards the Employers shall have
alleged are violated by such acts and/or omissions.
(b) The Executive shall have no right to terminate his
employment under this Agreement prior to the end of the term of this Agreement,
unless (i) such termination is approved by the Boards; (ii) there is a material
breach by the Employers or either of them of their obligations under this
Agreement; or (iii) such termination is in accordance with Section 9(b) hereof.
In the event that the Executive violates this provision, the Employers shall be
entitled, in addition to their other legal remedies, to enjoin the employment of
the Executive with any significant competitor of the Employers (or either of
them) for a period of six months. The term "significant competitor" shall mean
any commercial bank, savings bank, savings and loan association, mortgage
banking company or a holding company affiliate of any of the foregoing, which at
the date of its employment of the Executive has an office in any county in
Connecticut in which Westport Bank has one or more offices. If any court or
other tribunal having jurisdiction to determine the validity or enforceability
of this paragraph determines that, strictly applied, it would be invalid or
unenforceable, the definition of "significant competitor" and the time
provisions used shall be deemed modified to the extent necessary (but only to
that extent) so that the restrictions in that subsection, as modified, will be
valid and enforceable. For purpose of this Section 8(b), it shall be the
Executive's burden to prove the alleged acts which constitute a material breach
by the Employers of their obligations under this Agreement.
(c) In the event the employment of the Executive is terminated
by the Employers without Cause under Section 8(a) hereof or his employment or
this Agreement is terminated in accordance with Section 9(b) hereof and the
Employers fail to make timely payment of the amounts then owed to the Executive
under this Agreement, the Executive shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred by the Executive in taking
action to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime rate
(defined as the base rate on corporate loans at large U.S. money center
commercial banks as published by The Wall Street Journal), compounded monthly,
for the period from the date of employment termination until payment is made to
the Executive. Such reimbursement and interest shall be in addition to all
rights which the Executive is otherwise entitled to under this Agreement.
(d) In the event of the Executive's death during the term of
this Agreement, his estate shall be entitled to receive his salary for the
remaining term of this Agreement or six months, whichever is less. This
Agreement shall thereupon
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<PAGE>
terminate, except that any vested rights of the Executive shall then be
exercised by his estate.
(e) Notwithstanding any other provision in this Agreement, (i)
the Employers may terminate or suspend this Agreement and the employment of the
Executive hereunder, as if such termination were for Cause under Section 8(a)
hereof and for Willful Misconduct under Section 9(b) hereof, to the extent
required by the laws of the State of Connecticut related to banking, by
applicable federal law relating to deposit insurance or bank holding companies
or by regulations or orders issued by the Banking Commissioner of the State of
Connecticut, the Federal Deposit Insurance Corporation or the Board of Governors
of the Federal Reserve System and (ii) no payment shall be required to be made
to the Executive under this Agreement to the extent such payment is prohibited
by applicable law, regulation or order issued by a banking agency or a court of
competent jurisdiction; provided, that it shall be Westport Bank's burden to
prove that any such action was so required.
9. Change in Control.
(a) If during the term of this Agreement there is a Change in
Control as defined below and the Executive's employment by the Employers shall
have been terminated in accordance with Section 9(b) below, the Executive shall
be entitled to the compensation and benefits specified in Sections 9(d) and 11
below. For purposes of this Agreement, a "Change in Control" shall be deemed to
have occurred if:
(i) 25 percent or more of ownership, control, power
to vote, or beneficial ownership of any class of voting
securities of Westport Bancorp is acquired by any person,
either directly or indirectly or acting through one or more
other persons;
(ii) any person (other than any person named as a
proxy in connection with any solicitation on behalf of the
Board of Directors of Westport Bancorp) holds revocable or
irrevocable proxies, as to the election or removal of three or
more directors of Westport Bancorp, for 25 percent or more of
the total number of voting shares of Westport Bancorp;
(iii) any person has received all applicable
regulatory approvals to acquire control of Westport Bancorp;
(iv) any person has commenced a cash tender or
exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of 25 percent or more
of the total number of voting shares of Westport Bancorp,
whether or not any requisite regulatory approval for such
acquisition has been received, provided that a Change in
Control will not be deemed to have occurred under this clause
(iv) unless the
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<PAGE>
Board of Directors of Westport Bancorp has made a
determination that such action constitutes or will constitute
a Change in Control;
(v) as the result of, or in connection with, any cash
tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, (A) the persons who
were directors of Westport Bancorp before such transaction
shall cease to constitute at least a majority of the Board of
Directors of Westport Bancorp or its successor or (B) the
persons who were stockholders of Westport Bancorp immediately
before such transaction do not own more than 50 percent of the
outstanding voting stock of Westport Bancorp or its successor
immediately after such transaction; or
(vi) Westport Bancorp's beneficial ownership of the
total number of voting shares of Westport Bank is reduced to
less than 50 percent.
For purposes of this Section, a "person" includes an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate, unincorporated
organization, joint-stock company or similar organization or entity or group
acting in concert. A person for these purposes shall be deemed to be a
"beneficial owner" as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934.
(b) For purposes of this Agreement, the Executive's employment
by the Employers shall be considered terminated "in accordance with Section
9(b)" if a Change in Control shall occur, and in connection with such Change in
Control or within two years thereafter either (x) the Executive's employment
with the Employers shall be terminated as a result of an Actual Termination, or
(y) the Executive's employment with the Employers shall terminate after an event
that would cause the Constructive Termination of his employment and the
Executive shall have given notice to the Employers (pursuant to Section 9(c)
below) that such event has occurred; and the following terms shall have the
meanings set out below:
(i) "Actual Termination" means involuntary
termination of the Executive's employment with the Employers
for any reason other than Willful Misconduct, Disability,
death or Retirement.
(ii) "Willful Misconduct" means (A) the continued
willful failure by the Executive to substantially perform his
duties with the Employers or either of them (other than any
such failure resulting from the Executive's incapacity due to
physical or mental illness) after a written demand for
substantial performance is delivered to the Executive by the
Boards (or either of the Boards) that specifically identifies
the manner in which the Executive has not substantially
performed his duties and after a reasonable time period has
run to allow the Executive to perform, (B) willful conduct
that is a material violation of Westport Bank's ethics
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<PAGE>
policy or applicable law and that is materially injurious to
the Employers or either of them, (C) other willful and
wrongful conduct by the Executive that causes substantial and
material injury to the business and operations of the
Employers or either of them, the continuation of which, in the
reasonable judgment of the Boards (or either of the Boards),
will continue to substantially and materially injure the
business and operations of the Employers (or either of them)
in the future, or (D) conviction of the Executive of a felony
involving moral turpitude; provided, that an act or failure to
act shall not be considered "willful" unless done, or omitted
to be done, in bad faith and without reasonable belief that
the Executive's action or omission was in the best interests
of the Employers;
(iii) "Disability" means termination of employment
under circumstances that would qualify the Executive to
receive the benefits of the Westport Bank's long-term
disability plan.
(iv) "Retirement" means termination by the Executive
based on the Executive's having reached normal retirement age
as defined under The Westport Bank & Trust Company Pension
Plan.
(v) On or after a Change in Control any of the
following events shall cause a "Constructive Termination":
(A) the assignment to the Executive by the
Employers (or either of them) of duties materially
inconsistent with the Executive's position, duties,
responsibilities, and status with the Employers, a
material adverse change in the Executive's titles or
offices, any removal of the Executive from or any
failure to reelect the Executive to any of such
positions, except in connection with the termination
of his employment due to Disability, Retirement or
Willful Misconduct, or as a result of the Executive's
death, or any action that would have a material
adverse effect on the physical conditions existing at
the time of the Change in Control in which the
Executive performs his employment duties, provided,
however, that for a period of one year after a Change
in Control, a Constructive Termination shall not be
deemed to have occurred under this subparagraph (A)
solely because the Executive ceases to have any
position, duties, responsibilities, offices or titles
with Westport Bancorp (or any successor) or solely
because Westport Bancorp (or any successor) is not a
publicly-held company;
(B) a reduction by the Employers in the
Executive's base salary as in effect on the date
hereof or as the same may be increased from time to
time during the term of this Agreement, or the
failure to increase (within 12 months of the
Executive's last
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<PAGE>
increase in base salary) the Executive's base salary
in an amount which at least equals, on a percentage
basis, the average percentage increase in base salary
for all officers of Westport Bank effected in the
preceding 12 months;
(C) any failure by the Employers to continue
to provide benefit plans or arrangements which, in
the aggregate, are substantially the same as or
better than any benefit plans or arrangements
(including stock option plans, employee stock
ownership plans and similar arrangements for the
acquisition of stock) in which the Executive is
participating as of the date of the Change in Control
(hereinafter referred to as "Benefit Plans"), or the
taking of any action by the Employers which would
materially adversely affect the Executive's
participation in or materially reduce the Executive's
benefits under such Benefit Plans or deprive the
Executive of any material fringe benefit enjoyed by
the Executive;
(D) a relocation of Westport Bank's
principal executive offices to a location more than
50 miles away from its Westport, Connecticut
location, or outside the State of Connecticut or any
requirement that the Executive relocate to any place
outside such 50-mile radius to perform his duties
hereunder, except for required travel by the
Executive on the business of the Employers to an
extent substantially consistent with the Executive's
business travel obligations at the time of a Change
in Control;
(E) any failure by the Employers to provide
the Executive with the number of paid vacation days
to which the Executive is entitled at the time of a
Change in Control;
(F) any material breach by the Employers or
either of them of any provision of this Agreement;
(G) any failure by the Employers to obtain
the assumption of this Agreement by any acquirors,
successors or assigns of the Employers; or
(H) any failure by the Employers to have
renewed this Agreement pursuant to Section 5 hereof
(whether before or after a Change in Control) such
that, after a Change in Control, the remaining term
of this Agreement shall at any time be less than two
years.
(vi) "Date of Termination" means the date specified
in the notice of termination.
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<PAGE>
(c) Any termination of the Executive's employment by the
Employers after a Change in Control shall be communicated by a written notice of
termination addressed to the Executive and any termination of the Executive's
employment by the Executive after a Change in Control shall be communicated by a
written notice of termination addressed to the Chairmen of the Boards. The
notice of termination shall specify the Date of Termination and the reason for
the termination.
(d) If the Executive's employment by the Employers shall be
terminated following a Change in Control in accordance with Section 9(b), the
Executive shall be entitled to a lump sum cash payment equal to 2.99 times the
Executive's aggregate average annual salary and cash bonus reflected on his
Form(s) W-2 from the Employers for the five calendar years next preceding the
calendar year in which the Change in Control (or the most recent Change in
Control preceding such termination, if there is more than one) occurs (excluding
any amounts attributable to stock options exercised, canceled or otherwise
disposed of during such years)c. In addition Sections 8(c) and 11 shall apply in
the event of any such termination. The payment provided for in this Section 9(d)
shall be in lieu of any amount that would otherwise be payable to the Executive
under Section 8(a) hereof and shall be made to the Executive within five
business days after the Date of Termination. Such payment shall be subject to
applicable payroll or other taxes required to be withheld by the Employers. In
the case of a Change in Control that occurs after December 31, 1996, such
payment shall be subject to the limitation set out in Section 9(g) below.
(e) Payments and benefits to the Executive under Sections 9(d)
and 11 shall be considered severance pay in consideration of his past service
and his continued service after the date of this Agreement and, except as
specified in Section 11, the Executive shall not be required to mitigate the
amount of any payment provided for in Sections 9(d) and 11 by seeking other
employment or otherwise and the amount of any payments provided for in Sections
9(d) and 11 shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of Termination.
(f) If, in the event of a Change in Control that occurs before
January 1, 1997, the benefits provided by Sections 9(d) and 11 of this
Agreement, (or, if by reason of the amount of such benefits, any other amounts
in the nature of compensation payable to the Executive ("Other Compensation"))
are determined to be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), the Employers shall pay
to the Executive, as additional compensation, the amount necessary to cause the
total payments (including the additional payment required under this Section
9(f)) and benefits received by the Executive under Sections 9 and 11 and the
Executive's Other Compensation (net of all federal and state taxes, including
all taxes payable under Section 4999 of the Code) to be equal to the total
payments and benefits the Executive would have received under Sections 9 and 11
and the Executive's Other Compensation (net of all federal, state and local
taxes) if Section 4999 of the Code had not applied.
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<PAGE>
(g) If, in the event of a Change in Control that occurs after
December 31, 1996, the payments and benefits provided by Sections 9(d) and 11 of
this Agreement, together with any Other Compensation would constitute a
Parachute Payment, the aggregate present value of the payments and benefits to
be provided under Section 11 and any Other Compensation and the payment provided
under Section 9(d) hereof (determined in accordance with Code Section 280G)
shall be reduced to the extent necessary so that no amount payable to the
Executive, and no benefit provided to him, by the Employers or any subsidiary,
shall constitute a Parachute Payment. The determination whether the foregoing
limitation shall apply and, if so, the application of the limitation shall be
made by an independent certified public accounting firm designated by the
Employers and the decision of that firm shall be conclusive and binding on all
persons. In the event that the receipt of any such payment or benefit would
otherwise cause the Executive to be considered to have received a Parachute
Payment, the Executive shall have the right to designate those payments or
benefits that shall be reduced or eliminated so as to satisfy the foregoing
limitation.
10. Disability. If the Executive becomes disabled by reason of injury
or sickness, he shall be entitled to benefits in accordance with Westport Bank's
long-term disability plan then in effect.
11. Certain Benefits Upon Termination. Provided the Executive's
employment is terminated (i) by the Employers for other than Cause (as defined
in Section 8(a) hereof) or (ii) in accordance with Section 9(b) hereof, the
Employers shall maintain in full force and effect for the Executive's continued
benefit from the Date of Termination of his employment and thereafter for a
period of three years the basic and corporate-owned life insurance, accidental
death and dismemberment insurance, dental, health, and disability plans,
programs or arrangements in which the Executive was entitled to participate
immediately prior to the Date of Termination, to the same extent as if the
Executive continued to be an employee of the Employers during the three-year
period following the Date of Termination. The Employers shall continue to pay
the cost of any benefits provided under this Section 11; provided, however, the
Employers and the Executive shall share the cost of the health plan, program, or
arrangement and each shall pay the portion which each would have paid if the
Executive were employed by the Employers. Any benefits provided under this
Section 11, shall be reduced or offset to the extent they are replaced by
substantially similar benefits provided by a new employer. In the case of a
Change in Control that occurs after December 31, 1996, the payments and benefits
provided for under this Section 11 shall be subject to the provisions of Section
9(g) hereof.
12. Miscellaneous.
(a) No Assignment. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party hereto. However, in the event of the death of the Executive, all of his
rights to receive
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<PAGE>
payments hereunder shall become rights of his estate as provided in Section 8(d)
hereof.
(b) Other Contracts. The Executive shall not, during the term
of this Agreement, have any other paid employment other than with a subsidiary
or affiliate of the Employers, except with the prior written approval of the
Boards.
(c) Amendments or Additions; Action by Boards. No amendments
or additions to this Agreement shall be binding unless in writing and signed by
all parties hereto. The prior approval by a majority affirmative vote of the
Boards shall be required in order for the Employers to authorize any amendments
or additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of employment with or without Cause under Section 8(a) hereof.
(d) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(e) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(f) Governing Law. This Agreement shall be governed by the
laws of the United States, where applicable, and otherwise by the laws of the
State of Connecticut other than the choice of law rules thereof.
(g) Notice. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to the
Employers:
WESTPORT BANCORP, INC.
87 Post Road East
Westport, Connecticut 06880
Attention: Chairman of the Compensation
Committee of the Board of Directors
or if to the Executive: Thomas P. Bilbao
97 Shore Road
Old Greenwich, Connecticut 06870
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
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<PAGE>
(h) Counterparts. This Agreement may be executed in several
counterparts, for the convenience of the parties, but shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or caused this Agreement to be duly executed on their behalf, as of
the date and year first above written.
Attest: THE WESTPORT BANK & TRUST
COMPANY
/s/ Victoria Takacs By /s/ Michael H. Flynn
- ------------------------- -----------------------------------
Michael H. Flynn
President and Chief Executive
Officer
Attest: WESTPORT BANCORP, INC.
/s/ Beverley H. Brooks By /s/ Michael H. Flynn
- -------------------------- -----------------------------------
Michael H. Flynn
President and Chief Executive
Officer
/s/ Thomas P. Bilbao
-----------------------------------
Thomas P. Bilbao
Executive
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 23rd day of April, 1996, by and among THE
WESTPORT BANK & TRUST COMPANY, a Connecticut-chartered state bank and trust
company having its principal place of business in the Town of Westport,
Connecticut ("Westport Bank"), WESTPORT BANCORP, INC., a Delaware corporation
owning all of the issued and outstanding shares of capital stock of Westport
Bank ("Westport Bancorp") (Westport Bank and Westport Bancorp, collectively, the
"Employers"), and Richard T. Cummings, an individual residing in the Town of
Fairfield, Connecticut (the "Executive").
WHEREAS, the Employers and the Executive desire that the Executive be
employed as Senior Vice President, Lending of the Employers;
WHEREAS, the Boards of Directors of the Employers (collectively, the
"Boards"), have approved and authorized the Employers to enter into this
Agreement with the Executive;
WHEREAS, the parties desire to enter into this Agreement, setting forth
the terms and conditions for the employment relationship of the Executive with
the Employers and to replace and supercede the existing Employment Agreement
dated January 12, 1990, as amended (the "Prior Agreement"):
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Prior Agreement is hereby replaced and superceded
and shall be of no further force or effect after the date of this Agreement. The
Executive is employed as Senior Vice President, Lending of the Employers from
April 23, 1996 through the term of this Agreement. As Senior Vice President,
Lending of the Employers, the Executive shall render other management services
to the Employers of the type customarily performed by persons serving in similar
capacities. The Executive shall be responsible for supervising the lending
activities of Westport Bank and shall report only to the President(s) and Chief
Executive Officer(s) of the Employers. All members of the lending staff of the
Employers shall report directly to the Executive, except as the President(s) and
Chief Executive Officer(s) shall otherwise determine. The Executive shall also
perform such duties as the President(s) and Chief Executive Officer(s) may from
time to time reasonably direct. During the term of this Agreement, there shall
be no material decrease in the duties and responsibilities of the Executive
otherwise than as provided herein, unless the parties otherwise agree in
writing. During the term of this Agreement, the Executive shall not be required
to relocate his place of employment outside of Fairfield County, Connecticut, in
order to perform his services hereunder.
2. Compensation. The Employers agree to pay the Executive during the
term of this Agreement a salary as follows: from the date of commencement of
<PAGE>
employment hereunder through the term of this Agreement, a salary at an initial
annual rate equal to $108,600.00. The Executive's salary shall be reviewed by
the Boards prior to April 1, 1997, and thereafter on an annual basis prior to
April 1 of each year (or such date as from time to time is the date used by the
Employers for review of executive compensation) during the term of this
Agreement. In so reviewing the Executive's salary, the Boards shall consider
increases in the amount of the Executive's salary for increases in the cost of
living for Fairfield County, Connecticut, and based upon the Executive's
performance and scope of responsibility.
The salary of the Executive shall not be decreased at any time during
the term of this Agreement from the amount then in effect, unless the Executive
otherwise agrees in writing. Participation in deferred compensation,
discretionary bonus, retirement and other employee benefit plans and in fringe
benefits, other than salary reduction programs in which the Executive elects to
participate, shall not reduce the salary payable to the Executive under this
Section 2. The salary under this Section 2 shall be payable to the Executive not
less frequently than monthly. The Executive shall not be entitled to receive
fees for serving as a director of the Employers or any of their subsidiaries or
for serving as a member of any committee of the Boards of Directors of the
Employers or any of their subsidiaries.
3. Discretionary Bonuses; Business Expenses. During the term of this
Agreement, the Executive shall be entitled to participate in an equitable manner
with all other executive employees of the Employers in such discretionary
bonuses as may be authorized, declared and paid by the Boards to executive
employees. No other compensation provided for in this Agreement shall be deemed
a substitute for the Executive's right to participate in such bonuses when and
as declared by the Boards. This provision shall not preclude the grant of any
other bonus to the Executive as determined by the Boards.
The Executive is expected and is authorized to incur reasonable
expenses in the performance of his duties hereunder, including such expenses for
the promotion of the business of the Employers as (i) dues for a country club
membership in Fairfield County, Connecticut, (ii) dues for a business luncheon
club membership in Fairfield County, Connecticut and (iii) the costs of
entertainment, travel, and similar business expenses incurred in the performance
of his duties. The Employers shall reimburse the Executive for all such expenses
promptly upon periodic presentation by the Executive of an itemized account of
such expenses.
4. Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. During the term of this Agreement, the Executive shall be entitled to
participate in any plan of the Employers relating to stock options, stock
purchases, pension, thrift, profit sharing, group life insurance, medical
coverage, education, sick leave or other retirement or employee benefits that
the Employers may adopt for the benefit of executive employees in accordance
with the terms of such plans. The Executive shall also be entitled to
participate in any other fringe benefits which may be or become applicable to
executive employees of the Employers.
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<PAGE>
5. Term. The initial term of employment under this Agreement shall be
for a three-year period commencing on April 23, 1996 (the "Initial Term"). This
Agreement shall be automatically renewed for an additional consecutive 12-month
period (the "Extended Term") as of April 1, 1997 and every anniversary of April
1 thereafter, unless contrary written notice to each of the other parties has
been given either by the Executive or by both of the Employers at least six
months prior to any such renewal date. Such Initial Term and all such Extended
Terms are collectively referred to herein as the term of this Agreement.
6. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Employers. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the commercial banking industry.
7. Voluntary Absences; Vacations. The Executive shall be entitled,
without loss of pay, to absent himself voluntarily for reasonable periods of
time from the performance of his duties and responsibilities under this
Agreement. All such voluntary absences shall count as paid vacation time, unless
the Boards otherwise approve. The Executive shall be entitled to an annual paid
vacation of four weeks per year or such longer period as the Boards may approve.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Executive. The Executive shall not be entitled to receive any additional
compensation from the Employers on account of his failure to take a paid
vacation.
8. Termination of Employment.
(a) The Boards may terminate the Executive's employment at any
time, but any termination by the Boards other than termination for Cause (as
defined below) shall not prejudice the Executive's right to compensation or
other benefits under this Agreement during the term of the Agreement; provided,
however, that the amount of compensation payable hereunder after termination of
the Executive's employment other than in accordance with Section 9(b) below
shall be reduced by any compensation earned by the Executive as a result of
employment by another employer during the payment period. If the Executive
accepts employment with a new employer while such compensation is being paid, he
shall immediately notify the Employers in writing of the details of the
compensation arrangements and starting date and shall notify the Employers from
time to time of changes regarding compensation. The Executive agrees to provide,
at the Employers' request, copies of his federal income tax return for years in
which such compensation was paid, to allow the Employers to verify compensation
from a new employer. Except as provided in Section 9 and 11 hereof in the case
of a termination in accordance with Section 9(b), the Executive shall
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<PAGE>
have no right to receive compensation or other benefits for any period after
termination for Cause. "Cause" shall mean the Executive's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform material stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, the violation of which has a material
effect on the Employers or either of them, or material breach of any provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the commercial banking
industry; provided, it shall be the burden of the Employers to prove the alleged
acts and omissions and the prevailing nature of the standards the Employers
shall have alleged are violated by such acts and/or omissions.
(b) The Executive shall have no right to terminate his
employment under this Agreement prior to the end of the term of this Agreement,
unless (i) such termination is approved by the Boards; (ii) there is a material
breach by the Employers or either of them of their obligations under this
Agreement; or (iii) such termination is in accordance with Section 9(b) hereof.
In the event that the Executive violates this provision, the Employers shall be
entitled, in addition to their other legal remedies, to enjoin the employment of
the Executive with any significant competitor of the Employers (or either of
them) for a period of six months. The term "significant competitor" shall mean
any commercial bank, savings bank, savings and loan association, mortgage
banking company or a holding company affiliate of any of the foregoing, which at
the date of its employment of the Executive has an office in any county in
Connecticut in which Westport Bank has one or more offices. If any court or
other tribunal having jurisdiction to determine the validity or enforceability
of this paragraph determines that, strictly applied, it would be invalid or
unenforceable, the definition of "significant competitor" and the time
provisions used shall be deemed modified to the extent necessary (but only to
that extent) so that the restrictions in that subsection, as modified, will be
valid and enforceable. For purpose of this Section 8(b), it shall be the
Executive's burden to prove the alleged acts which constitute a material breach
by the Employers of their obligations under this Agreement.
(c) In the event the employment of the Executive is terminated
by the Employers without Cause under Section 8(a) hereof or his employment or
this Agreement is terminated in accordance with Section 9(b) hereof and the
Employers fail to make timely payment of the amounts then owed to the Executive
under this Agreement, the Executive shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred by the Executive in taking
action to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime rate
(defined as the base rate on corporate loans at large U.S. money center
commercial banks as published by The Wall Street Journal), compounded monthly,
for the period from the date of employment termination until payment is made to
the Executive. Such reimbursement and interest shall be in addition to all
rights which the Executive is otherwise entitled to under this Agreement.
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<PAGE>
(d) In the event of the Executive's death during the term of
this Agreement, his estate shall be entitled to receive his salary for the
remaining term of this Agreement or six months, whichever is less. This
Agreement shall thereupon terminate, except that any vested rights of the
Executive shall then be exercised by his estate.
(e) Notwithstanding any other provision in this Agreement, (i)
the Employers may terminate or suspend this Agreement and the employment of the
Executive hereunder, as if such termination were for Cause under Section 8(a)
hereof and for Willful Misconduct under Section 9(b) hereof, to the extent
required by the laws of the State of Connecticut related to banking, by
applicable federal law relating to deposit insurance or bank holding companies
or by regulations or orders issued by the Banking Commissioner of the State of
Connecticut, the Federal Deposit Insurance Corporation or the Board of Governors
of the Federal Reserve System and (ii) no payment shall be required to be made
to the Executive under this Agreement to the extent such payment is prohibited
by applicable law, regulation or order issued by a banking agency or a court of
competent jurisdiction; provided, that it shall be Westport Bank's burden to
prove that any such action was so required.
9. Change in Control.
(a) If during the term of this Agreement there is a Change in
Control as defined below and the Executive's employment by the Employers shall
have been terminated in accordance with Section 9(b) below, the Executive shall
be entitled to the compensation and benefits specified in Sections 9(d) and 11
below. For purposes of this Agreement, a "Change in Control" shall be deemed to
have occurred if:
(i) 25 percent or more of ownership, control, power
to vote, or beneficial ownership of any class of voting
securities of Westport Bancorp is acquired by any person,
either directly or indirectly or acting through one or more
other persons;
(ii) any person (other than any person named as a
proxy in connection with any solicitation on behalf of the
Board of Directors of Westport Bancorp) holds revocable or
irrevocable proxies, as to the election or removal of three or
more directors of Westport Bancorp, for 25 percent or more of
the total number of voting shares of Westport Bancorp;
(iii) any person has received all applicable
regulatory approvals to acquire control of Westport Bancorp;
(iv) any person has commenced a cash tender or
exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of 25 percent or more
of the total number of voting shares of Westport Bancorp,
whether or not any requisite regulatory approval for
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<PAGE>
such acquisition has been received, provided that a Change in
Control will not be deemed to have occurred under this clause
(iv) unless the Board of Directors of Westport Bancorp has
made a determination that such action constitutes or will
constitute a Change in Control;
(v) as the result of, or in connection with, any cash
tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, (A) the persons who
were directors of Westport Bancorp before such transaction
shall cease to constitute at least a majority of the Board of
Directors of Westport Bancorp or its successor or (B) the
persons who were stockholders of Westport Bancorp immediately
before such transaction do not own more than 50 percent of the
outstanding voting stock of Westport Bancorp or its successor
immediately after such transaction; or
(vi) Westport Bancorp's beneficial ownership of the
total number of voting shares of Westport Bank is reduced to
less than 50 percent.
For purposes of this Section, a "person" includes an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate, unincorporated
organization, joint-stock company or similar organization or entity or group
acting in concert. A person for these purposes shall be deemed to be a
"beneficial owner" as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934.
(b) For purposes of this Agreement, the Executive's employment
by the Employers shall be considered terminated "in accordance with Section
9(b)" if a Change in Control shall occur, and in connection with such Change in
Control or within two years thereafter either (x) the Executive's employment
with the Employers shall be terminated as a result of an Actual Termination, or
(y) the Executive's employment with the Employers shall terminate after an event
that would cause the Constructive Termination of his employment and the
Executive shall have given notice to the Employers (pursuant to Section 9(c)
below) that such event has occurred; and the following terms shall have the
meanings set out below:
(i) "Actual Termination" means involuntary
termination of the Executive's employment with the Employers
for any reason other than Willful Misconduct, Disability,
death or Retirement.
(ii) "Willful Misconduct" means (A) the continued
willful failure by the Executive to substantially perform his
duties with the Employers or either of them (other than any
such failure resulting from the Executive's incapacity due to
physical or mental illness) after a written demand for
substantial performance is delivered to the Executive by the
Boards (or either of the Boards) that specifically identifies
the manner in
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<PAGE>
which the Executive has not substantially performed his duties
and after a reasonable time period has run to allow the
Executive to perform, (B) willful conduct that is a material
violation of Westport Bank's ethics policy or applicable law
and that is materially injurious to the Employers or either of
them, (C) other willful and wrongful conduct by the Executive
that causes substantial and material injury to the business
and operations of the Employers or either of them, the
continuation of which, in the reasonable judgment of the
Boards (or either of the Boards), will continue to
substantially and materially injure the business and
operations of the Employers (or either of them) in the future,
or (D) conviction of the Executive of a felony involving moral
turpitude; provided, that an act or failure to act shall not
be considered "willful" unless done, or omitted to be done, in
bad faith and without reasonable belief that the Executive's
action or omission was in the best interests of the Employers;
(iii) "Disability" means termination of employment
under circumstances that would qualify the Executive to
receive the benefits of the Westport Bank's long-term
disability plan.
(iv) "Retirement" means termination by the Executive
based on the Executive's having reached normal retirement age
as defined under The Westport Bank & Trust Company Pension
Plan.
(v) On or after a Change in Control any of the
following events shall cause a "Constructive Termination":
(A) the assignment to the Executive by the
Employers (or either of them) of duties materially
inconsistent with the Executive's position, duties,
responsibilities, and status with the Employers, a
material adverse change in the Executive's titles or
offices, any removal of the Executive from or any
failure to reelect the Executive to any of such
positions, except in connection with the termination
of his employment due to Disability, Retirement or
Willful Misconduct, or as a result of the Executive's
death, or any action that would have a material
adverse effect on the physical conditions existing at
the time of the Change in Control in which the
Executive performs his employment duties, provided,
however, that for a period of one year after a Change
in Control, a Constructive Termination shall not be
deemed to have occurred under this subparagraph (A)
solely because the Executive ceases to have any
position, duties, responsibilities, offices or titles
with Westport Bancorp (or any successor) or solely
because Westport Bancorp (or any successor) is not a
publicly-held company;
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<PAGE>
(B) a reduction by the Employers in the
Executive's base salary as in effect on the date
hereof or as the same may be increased from time to
time during the term of this Agreement, or the
failure to increase (within 12 months of the
Executive's last increase in base salary) the
Executive's base salary in an amount which at least
equals, on a percentage basis, the average percentage
increase in base salary for all officers of Westport
Bank effected in the preceding 12 months;
(C) any failure by the Employers to continue
to provide benefit plans or arrangements which, in
the aggregate, are substantially the same as or
better than any benefit plans or arrangements
(including stock option plans, employee stock
ownership plans and similar arrangements for the
acquisition of stock) in which the Executive is
participating as of the date of the Change in Control
(hereinafter referred to as "Benefit Plans"), or the
taking of any action by the Employers which would
materially adversely affect the Executive's
participation in or materially reduce the Executive's
benefits under such Benefit Plans or deprive the
Executive of any material fringe benefit enjoyed by
the Executive;
(D) a relocation of Westport Bank's
principal executive offices to a location more than
50 miles away from its Westport, Connecticut
location, or outside the State of Connecticut or any
requirement that the Executive relocate to any place
outside such 50-mile radius to perform his duties
hereunder, except for required travel by the
Executive on the business of the Employers to an
extent substantially consistent with the Executive's
business travel obligations at the time of a Change
in Control;
(E) any failure by the Employers to provide
the Executive with the number of paid vacation days
to which the Executive is entitled at the time of a
Change in Control;
(F) any material breach by the Employers or
either of them of any provision of this Agreement;
(G) any failure by the Employers to obtain
the assumption of this Agreement by any acquirors,
successors or assigns of the Employers; or
(H) any failure by the Employers to have
renewed this Agreement pursuant to Section 5 hereof
(whether before or after a Change in Control) such
that, after a Change in Control, the remaining term
of this Agreement shall at any time be less than two
years.
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(vi) "Date of Termination" means the date specified
in the notice of termination.
(c) Any termination of the Executive's employment by the
Employers after a Change in Control shall be communicated by a written notice of
termination addressed to the Executive and any termination of the Executive's
employment by the Executive after a Change in Control shall be communicated by a
written notice of termination addressed to the Chairmen of the Boards. The
notice of termination shall specify the Date of Termination and the reason for
the termination.
(d) Subject to Section 9(f) below, if the Executive's
employment by the Employers shall be terminated following a Change in Control in
accordance with Section 9(b), the Executive shall be entitled to a lump sum cash
payment equal to 2.99 times the Executive's aggregate average annual salary and
cash bonus reflected on his Form(s) W-2 from the Employers for the five calendar
years next preceding the calendar year in which the Change in Control (or the
most recent Change in Control preceding such termination, if there is more than
one) occurs (excluding any amounts attributable to stock options exercised,
canceled or otherwise disposed of during such years). In addition Sections 8(c)
and 11 shall apply in the event of any such termination. The payment provided
for in this Section 9(d) shall be in lieu of any amount that would otherwise be
payable to the Executive under Section 8(a) hereof and shall be made to the
Executive within five business days after the Date of Termination. Such payment
shall be subject to applicable payroll or other taxes required to be withheld by
the Employers.
(e) Payments and benefits to the Executive under Sections 9(d)
and 11 shall be considered severance pay in consideration of his past service
and his continued service after the date of this Agreement and, except as
specified in Section 11, the Executive shall not be required to mitigate the
amount of any payment provided for in Sections 9(d) and 11 by seeking other
employment or otherwise and the amount of any payments provided for in Sections
9(d) and 11 shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of Termination.
(f) If, in the event of a Change in Control, the payments and
benefits provided by Sections 9(d) and 11 of this Agreement, together with any
other payments and benefits in the nature of compensation to which the Executive
is entitled ("Other Compensation") would constitute a "parachute payment" as
defined in Section 280G of the Code (a "Parachute Payment"), the aggregate
present value of the payments and benefits to be provided under Section 11 and
any Other Compensation and the payment provided under Section 9(d) hereof
(determined in accordance with Code Section 280G) shall be reduced to the extent
necessary so that no amount payable to
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the Executive, and no benefit provided to him, by the Employers or any
subsidiary, shall constitute a Parachute Payment. The determination whether the
foregoing limitation shall apply and, if so, the application of the limitation
shall be made by an independent certified public accounting firm designated by
the Employers and the decision of that firm shall be conclusive and binding on
all persons. In the event that the receipt of any such payment or benefit would
otherwise cause the Executive to be considered to have received a Parachute
Payment, the Executive shall have the right to designate those payments or
benefits that shall be reduced or eliminated so as to satisfy the foregoing
limitation.
10. Disability. If the Executive becomes disabled by reason of injury
or sickness, he shall be entitled to benefits in accordance with Westport Bank's
long-term disability plan then in effect.
11. Certain Benefits Upon Termination. Provided the Executive's
employment is terminated (i) by the Employers for other than Cause (as defined
in Section 8(a) hereof) or (ii) in accordance with Section 9(b) hereof, subject
to Section 9(f) above, the Employers shall maintain in full force and effect for
the Executive's continued benefit from the Date of Termination of his employment
and thereafter for a period of three years the basic, corporate-owned and split
dollar life insurance, accidental death and dismemberment insurance, dental,
health, and disability plans, programs or arrangements in which the Executive
was entitled to participate immediately prior to the Date of Termination, to the
same extent as if the Executive continued to be an employee of the Employers
during the three-year period following the Date of Termination. The Employers
shall continue to pay the cost of any benefits provided under this Section 11;
provided, however, the Employers and the Executive shall share the cost of the
health plan, program, or arrangement and each shall pay the portion which each
would have paid if the Executive were employed by the Employers. Any benefits
provided under this Section 11, shall be reduced or offset to the extent they
are replaced by substantially similar benefits provided by a new employer.
12. Miscellaneous.
(a) No Assignment. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party hereto. However, in the event of the death of the Executive, all of his
rights to receive payments hereunder shall become rights of his estate as
provided in Section 8(d) hereof.
(b) Other Contracts. The Executive shall not, during the term
of this Agreement, have any other paid employment other than with a subsidiary
or affiliate of the Employers, except with the prior written approval of the
Boards.
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(c) Amendments or Additions; Action by Boards. No amendments
or additions to this Agreement shall be binding unless in writing and signed by
all parties hereto. The prior approval by a majority affirmative vote of the
Boards shall be required in order for the Employers to authorize any amendments
or additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of employment with or without Cause under Section 8(a) hereof.
(d) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(e) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(f) Governing Law. This Agreement shall be governed by the
laws of the United States, where applicable, and otherwise by the laws of the
State of Connecticut other than the choice of law rules thereof.
(g) Notice. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to the
Employers:
WESTPORT BANCORP, INC.
87 Post Road East
Westport, Connecticut 06880
Attention: Chairman of the Compensation
Committee of the Board of Directors
or if to the Executive: Richard T. Cummings
2436 Redding Road
Fairfield, Connecticut 06430
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
(h) Counterparts. This Agreement may be executed in several
counterparts, for the convenience of the parties, but shall constitute one and
the same instrument.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or caused this Agreement to be duly executed on their behalf, as of
the date and year first above written.
Attest: THE WESTPORT BANK & TRUST
COMPANY
/s/ Victoria Takacs By /s/ Michael H. Flynn
- ------------------------- ----------------------------------------
Michael H. Flynn
President and Chief Executive
Officer
Attest: WESTPORT BANCORP, INC.
/s/ Jennifer Chamberlain By /s/ Michael H. Flynn
- ------------------------- ----------------------------------------
Michael H. Flynn
President and Chief Executive
Officer
/s/ Richard T. Cummings
----------------------------------------
Richard T. Cummings
Executive
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EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 23rd day of April, 1996, by and among THE
WESTPORT BANK & TRUST COMPANY, a Connecticut-chartered state bank and trust
company having its principal place of business in the Town of Westport,
Connecticut ("Westport Bank"), WESTPORT BANCORP, INC., a Delaware corporation
owning all of the issued and outstanding shares of capital stock of Westport
Bank ("Westport Bancorp") (Westport Bank and Westport Bancorp, collectively, the
"Employers"), and William B. Laudano, Jr., an individual residing in the Town of
Guilford, Connecticut (the "Executive").
WHEREAS, the Employers and the Executive desire that the Executive be
employed as Senior Vice President and Chief Financial Officer of the Employers;
WHEREAS, the Boards of Directors of the Employers (collectively, the
"Boards"), have approved and authorized the Employers to enter into this
Agreement with the Executive;
WHEREAS, the parties desire to enter into this Agreement, setting forth
the terms and conditions for the employment relationship of the Executive with
the Employers and to replace and supercede the existing Employment Agreement
dated February 23, 1995, as amended (the "Prior Agreement"):
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Prior Agreement is hereby replaced and superceded
and shall be of no further force or effect after the date of this Agreement. The
Executive is employed as Senior Vice President and Chief Financial Officer of
the Employers from April 23, 1996 through the term of this Agreement. As Senior
Vice President and Chief Financial Officer of the Employers, the Executive shall
render other management services to the Employers of the type customarily
performed by persons serving in similar capacities. As Senior Vice President and
Chief Financial Officer, the Executive shall be responsible for recommending,
developing and implementing the operations and finance policies of the Employers
and shall report only to the President(s) and Chief Executive Officer(s) of the
Employers. All other members of the operations and finance management staff of
the Employers shall report directly to the Executive, except as the President(s)
and Chief Executive Officer(s) shall otherwise determine. The Executive shall
also perform such duties as the President(s) and Chief Executive Officer(s) may
from time to time reasonably direct. During the term of this Agreement, there
shall be no material decrease in the duties and responsibilities of the
Executive otherwise than as provided herein, unless the parties otherwise agree
in writing. During the term of this Agreement, the Executive shall not be
required to relocate his place of employment outside of Fairfield County,
Connecticut, in order to perform his services hereunder.
<PAGE>
2. Compensation. The Employers agree to pay the Executive during the
term of this Agreement a salary as follows: from the date of commencement of
employment hereunder through the term of this Agreement, a salary at an initial
annual rate equal to $105,000.00. The Executive's salary shall be reviewed by
the Boards prior to April 1, 1997, and thereafter on an annual basis prior to
April 1 of each year (or such date as from time to time is the date used by the
Employers for review of executive compensation) during the term of this
Agreement. In so reviewing the Executive's salary, the Boards shall consider
increases in the amount of the Executive's salary for increases in the cost of
living for Fairfield County, Connecticut, and based upon the Executive's
performance and scope of responsibility.
The salary of the Executive shall not be decreased at any time during
the term of this Agreement from the amount then in effect, unless the Executive
otherwise agrees in writing. Participation in deferred compensation,
discretionary bonus, retirement and other employee benefit plans and in fringe
benefits, other than salary reduction programs in which the Executive elects to
participate, shall not reduce the salary payable to the Executive under this
Section 2. The salary under this Section 2 shall be payable to the Executive not
less frequently than monthly. The Executive shall not be entitled to receive
fees for serving as a director of the Employers or any of their subsidiaries or
for serving as a member of any committee of the Boards of Directors of the
Employers or any of their subsidiaries.
3. Discretionary Bonuses; Business Expenses. During the term of this
Agreement, the Executive shall be entitled to participate in an equitable manner
with all other executive employees of the Employers in such discretionary
bonuses as may be authorized, declared and paid by the Boards to executive
employees. No other compensation provided for in this Agreement shall be deemed
a substitute for the Executive's right to participate in such bonuses when and
as declared by the Boards. This provision shall not preclude the grant of any
other bonus to the Executive as determined by the Boards.
The Executive is expected and is authorized to incur reasonable
expenses in the performance of his duties hereunder, including such expenses for
the promotion of the business of the Employers as the costs of entertainment,
travel, and similar business expenses incurred in the performance of his duties.
The Employers shall reimburse the Executive for all such expenses promptly upon
periodic presentation by the Executive of an itemized account of such expenses.
4. Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. During the term of this Agreement, the Executive shall be entitled to
participate in any plan of the Employers relating to stock options, stock
purchases, pension, thrift, profit sharing, group life insurance, medical
coverage, education, sick leave or other retirement or employee benefits that
the Employers may adopt for the benefit of executive employees in accordance
with the terms of such plans. The
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Executive shall also be entitled to participate in any other fringe benefits
which may be or become applicable to executive employees of the Employers.
5. Term. The initial term of employment under this Agreement shall be
for a three-year period commencing on April 23, 1996 (the "Initial Term"). This
Agreement shall be automatically renewed for an additional consecutive 12-month
period (the "Extended Term") as of April 1, 1997 and every anniversary of April
1 thereafter, unless contrary written notice to each of the other parties has
been given either by the Executive or by both of the Employers at least six
months prior to any such renewal date. Such Initial Term and all such Extended
Terms are collectively referred to herein as the term of this Agreement.
6. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Employers. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in the commercial banking industry.
7. Voluntary Absences; Vacations. The Executive shall be entitled,
without loss of pay, to absent himself voluntarily for reasonable periods of
time from the performance of his duties and responsibilities under this
Agreement. All such voluntary absences shall count as paid vacation time, unless
the Boards otherwise approve. The Executive shall be entitled to an annual paid
vacation of four weeks per year or such longer period as the Boards may approve.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Executive. The Executive shall not be entitled to receive any additional
compensation from the Employers on account of his failure to take a paid
vacation.
8. Termination of Employment.
(a) The Boards may terminate the Executive's employment at any
time, but any termination by the Boards other than termination for Cause (as
defined below) shall not prejudice the Executive's right to compensation or
other benefits under this Agreement during the term of the Agreement; provided,
however, that the amount of compensation payable hereunder after termination of
the Executive's employment other than in accordance with Section 9(b) below
shall be reduced by any compensation earned by the Executive as a result of
employment by another employer during the payment period. If the Executive
accepts employment with a new employer while such compensation is being paid, he
shall immediately notify the Employers in writing of the details of the
compensation arrangements and starting date and shall notify the Employers from
time to time of changes regarding compensation. The Executive agrees to provide,
at the Employers' request, copies of his federal income tax return for years in
which such compensation was paid, to allow the Employers to verify compensation
from a new employer. Except as provided in Section 9 and 11 hereof in the case
of a termination in accordance with Section 9(b), the Executive shall
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<PAGE>
have no right to receive compensation or other benefits for any period after
termination for Cause. "Cause" shall mean the Executive's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform material stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, the violation of which has a material
effect on the Employers or either of them, or material breach of any provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the commercial banking
industry; provided, it shall be the burden of the Employers to prove the alleged
acts and omissions and the prevailing nature of the standards the Employers
shall have alleged are violated by such acts and/or omissions.
(b) The Executive shall have no right to terminate his
employment under this Agreement prior to the end of the term of this Agreement,
unless (i) such termination is approved by the Boards; (ii) there is a material
breach by the Employers or either of them of their obligations under this
Agreement; or (iii) such termination is in accordance with Section 9(b) hereof.
In the event that the Executive violates this provision, the Employers shall be
entitled, in addition to their other legal remedies, to enjoin the employment of
the Executive with any significant competitor of the Employers (or either of
them) for a period of six months. The term "significant competitor" shall mean
any commercial bank, savings bank, savings and loan association, mortgage
banking company or a holding company affiliate of any of the foregoing, which at
the date of its employment of the Executive has an office in any county in
Connecticut in which Westport Bank has one or more offices. If any court or
other tribunal having jurisdiction to determine the validity or enforceability
of this paragraph determines that, strictly applied, it would be invalid or
unenforceable, the definition of "significant competitor" and the time
provisions used shall be deemed modified to the extent necessary (but only to
that extent) so that the restrictions in that subsection, as modified, will be
valid and enforceable. For purpose of this Section 8(b), it shall be the
Executive's burden to prove the alleged acts which constitute a material breach
by the Employers of their obligations under this Agreement.
(c) In the event the employment of the Executive is terminated
by the Employers without Cause under Section 8(a) hereof or his employment or
this Agreement is terminated in accordance with Section 9(b) hereof and the
Employers fail to make timely payment of the amounts then owed to the Executive
under this Agreement, the Executive shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred by the Executive in taking
action to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime rate
(defined as the base rate on corporate loans at large U.S. money center
commercial banks as published by The Wall Street Journal), compounded monthly,
for the period from the date of employment termination until payment is made to
the Executive. Such reimbursement and interest shall be in
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addition to all rights which the Executive is otherwise entitled to under this
Agreement.
(d) In the event of the Executive's death during the term of
this Agreement, his estate shall be entitled to receive his salary for the
remaining term of this Agreement or six months, whichever is less. This
Agreement shall thereupon terminate, except that any vested rights of the
Executive shall then be exercised by his estate.
(e) Notwithstanding any other provision in this Agreement, (i)
the Employers may terminate or suspend this Agreement and the employment of the
Executive hereunder, as if such termination were for Cause under Section 8(a)
hereof and for Willful Misconduct under Section 9(b) hereof, to the extent
required by the laws of the State of Connecticut related to banking, by
applicable federal law relating to deposit insurance or bank holding companies
or by regulations or orders issued by the Banking Commissioner of the State of
Connecticut, the Federal Deposit Insurance Corporation or the Board of Governors
of the Federal Reserve System and (ii) no payment shall be required to be made
to the Executive under this Agreement to the extent such payment is prohibited
by applicable law, regulation or order issued by a banking agency or a court of
competent jurisdiction; provided, that it shall be Westport Bank's burden to
prove that any such action was so required.
9. Change in Control.
(a) If during the term of this Agreement there is a Change in
Control as defined below and the Executive's employment by the Employers shall
have been terminated in accordance with Section 9(b) below, the Executive shall
be entitled to the compensation and benefits specified in Sections 9(d) and 11
below. For purposes of this Agreement, a "Change in Control" shall be deemed to
have occurred if:
(i) 25 percent or more of ownership, control, power
to vote, or beneficial ownership of any class of voting
securities of Westport Bancorp is acquired by any person,
either directly or indirectly or acting through one or more
other persons;
(ii) any person (other than any person named as a
proxy in connection with any solicitation on behalf of the
Board of Directors of Westport Bancorp) holds revocable or
irrevocable proxies, as to the election or removal of three or
more directors of Westport Bancorp, for 25 percent or more of
the total number of voting shares of Westport Bancorp;
(iii) any person has received all applicable
regulatory approvals to acquire control of Westport Bancorp;
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(iv) any person has commenced a cash tender or
exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of 25 percent or more
of the total number of voting shares of Westport Bancorp,
whether or not any requisite regulatory approval for such
acquisition has been received, provided that a Change in
Control will not be deemed to have occurred under this clause
(iv) unless the Board of Directors of Westport Bancorp has
made a determination that such action constitutes or will
constitute a Change in Control;
(v) as the result of, or in connection with, any cash
tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, (A) the persons who
were directors of Westport Bancorp before such transaction
shall cease to constitute at least a majority of the Board of
Directors of Westport Bancorp or its successor or (B) the
persons who were stockholders of Westport Bancorp immediately
before such transaction do not own more than 50 percent of the
outstanding voting stock of Westport Bancorp or its successor
immediately after such transaction; or
(vi) Westport Bancorp's beneficial ownership of the
total number of voting shares of Westport Bank is reduced to
less than 50 percent.
For purposes of this Section, a "person" includes an individual, corporation,
partnership, trust, association, joint venture, pool, syndicate, unincorporated
organization, joint-stock company or similar organization or entity or group
acting in concert. A person for these purposes shall be deemed to be a
"beneficial owner" as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934.
(b) For purposes of this Agreement, the Executive's employment
by the Employers shall be considered terminated "in accordance with Section
9(b)" if a Change in Control shall occur, and in connection with such Change in
Control or within two years thereafter either (x) the Executive's employment
with the Employers shall be terminated as a result of an Actual Termination, or
(y) the Executive's employment with the Employers shall terminate after an event
that would cause the Constructive Termination of his employment and the
Executive shall have given notice to the Employers (pursuant to Section 9(c)
below) that such event has occurred; and the following terms shall have the
meanings set out below:
(i) "Actual Termination" means involuntary
termination of the Executive's employment with the Employers
for any reason other than Willful Misconduct, Disability,
death or Retirement.
(ii) "Willful Misconduct" means (A) the continued
willful failure by the Executive to substantially perform his
duties with the Employers
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or either of them (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness)
after a written demand for substantial performance is
delivered to the Executive by the Boards (or either of the
Boards) that specifically identifies the manner in which the
Executive has not substantially performed his duties and after
a reasonable time period has run to allow the Executive to
perform, (B) willful conduct that is a material violation of
Westport Bank's ethics policy or applicable law and that is
materially injurious to the Employers or either of them, (C)
other willful and wrongful conduct by the Executive that
causes substantial and material injury to the business and
operations of the Employers or either of them, the
continuation of which, in the reasonable judgment of the
Boards (or either of the Boards), will continue to
substantially and materially injure the business and
operations of the Employers (or either of them) in the future,
or (D) conviction of the Executive of a felony involving moral
turpitude; provided, that an act or failure to act shall not
be considered "willful" unless done, or omitted to be done, in
bad faith and without reasonable belief that the Executive's
action or omission was in the best interests of the Employers;
(iii) "Disability" means termination of employment
under circumstances that would qualify the Executive to
receive the benefits of the Westport Bank's long-term
disability plan.
(iv) "Retirement" means termination by the Executive
based on the Executive's having reached normal retirement age
as defined under The Westport Bank & Trust Company Pension
Plan.
(v) On or after a Change in Control any of the
following events shall cause a "Constructive Termination":
(A) the assignment to the Executive by the
Employers (or either of them) of duties materially
inconsistent with the Executive's position, duties,
responsibilities, and status with the Employers, a
material adverse change in the Executive's titles or
offices, any removal of the Executive from or any
failure to reelect the Executive to any of such
positions, except in connection with the termination
of his employment due to Disability, Retirement or
Willful Misconduct, or as a result of the Executive's
death, or any action that would have a material
adverse effect on the physical conditions existing at
the time of the Change in Control in which the
Executive performs his employment duties, provided,
however, that for a period of one year after a Change
in Control, a Constructive Termination shall not be
deemed to have occurred under this subparagraph (A)
solely because the Executive ceases to
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have any position, duties, responsibilities, offices
or titles with Westport Bancorp (or any successor) or
solely because Westport Bancorp (or any successor) is
not a publicly-held company;
(B) a reduction by the Employers in the
Executive's base salary as in effect on the date
hereof or as the same may be increased from time to
time during the term of this Agreement, or the
failure to increase (within 12 months of the
Executive's last increase in base salary) the
Executive's base salary in an amount which at least
equals, on a percentage basis, the average percentage
increase in base salary for all officers of Westport
Bank effected in the preceding 12 months;
(C) any failure by the Employers to continue
to provide benefit plans or arrangements which, in
the aggregate, are substantially the same as or
better than any benefit plans or arrangements
(including stock option plans, employee stock
ownership plans and similar arrangements for the
acquisition of stock) in which the Executive is
participating as of the date of the Change in Control
(hereinafter referred to as "Benefit Plans"), or the
taking of any action by the Employers which would
materially adversely affect the Executive's
participation in or materially reduce the Executive's
benefits under such Benefit Plans or deprive the
Executive of any material fringe benefit enjoyed by
the Executive;
(D) a relocation of Westport Bank's
principal executive offices to a location more than
50 miles away from its Westport, Connecticut
location, or outside the State of Connecticut or any
requirement that the Executive relocate to any place
outside such 50-mile radius to perform his duties
hereunder, except for required travel by the
Executive on the business of the Employers to an
extent substantially consistent with the Executive's
business travel obligations at the time of a Change
in Control;
(E) any failure by the Employers to provide
the Executive with the number of paid vacation days
to which the Executive is entitled at the time of a
Change in Control;
(F) any material breach by the Employers or
either of them of any provision of this Agreement;
(G) any failure by the Employers to obtain
the assumption of this Agreement by any acquirors,
successors or assigns of the Employers; or
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<PAGE>
(H) any failure by the Employers to have
renewed this Agreement pursuant to Section 5 hereof
(whether before or after a Change in Control) such
that, after a Change in Control, the remaining term
of this Agreement shall at any time be less than two
years.
(vi) "Date of Termination" means the date specified
in the notice of termination.
(c) Any termination of the Executive's employment by the
Employers after a Change in Control shall be communicated by a written notice of
termination addressed to the Executive and any termination of the Executive's
employment by the Executive after a Change in Control shall be communicated by a
written notice of termination addressed to the Chairmen of the Boards. The
notice of termination shall specify the Date of Termination and the reason for
the termination.
(d) Subject to Section 9(f) below, if the Executive's
employment by the Employers shall be terminated following a Change in Control in
accordance with Section 9(b), the Executive shall be entitled to a lump sum cash
payment equal to 2.99 times the Executive's aggregate average annual salary and
cash bonus reflected on his Form(s) W-2 from the Employers for the five calendar
years next preceding the calendar year in which the Change in Control (or the
most recent Change in Control preceding such termination, if there is more than
one) occurs (excluding any amounts attributable to stock options exercised,
canceled or otherwise disposed of during such years). In addition Sections 8(c)
and 11 shall apply in the event of any such termination. The payment provided
for in this Section 9(d) shall be in lieu of any amount that would otherwise be
payable to the Executive under Section 8(a) hereof and shall be made to the
Executive within five business days after the Date of Termination. Such payment
shall be subject to applicable payroll or other taxes required to be withheld by
the Employers.
(e) Payments and benefits to the Executive under Sections 9(d)
and 11 shall be considered severance pay in consideration of his past service
and his continued service after the date of this Agreement and, except as
specified in Section 11, the Executive shall not be required to mitigate the
amount of any payment provided for in Sections 9(d) and 11 by seeking other
employment or otherwise and the amount of any payments provided for in Sections
9(d) and 11 shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of Termination.
(f) If, in the event of a Change in Control, the payments and
benefits provided by Sections 9(d) and 11 of this Agreement, together with any
other payments and benefits in the nature of compensation to which the Executive
is entitled ("Other Compensation") would constitute a "parachute payment" as
defined in Section 280G of the Code (a "Parachute Payment"), the aggregate
present value of the payments and
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benefits to be provided under Section 11 and any Other Compensation and the
payment provided under Section 9(d) hereof (determined in accordance with Code
Section 280G) shall be reduced to the extent necessary so that no amount payable
to the Executive, and no benefit provided to him, by the Employers or any
subsidiary, shall constitute a Parachute Payment. The determination whether the
foregoing limitation shall apply and, if so, the application of the limitation
shall be made by an independent certified public accounting firm designated by
the Employers and the decision of that firm shall be conclusive and binding on
all persons. In the event that the receipt of any such payment or benefit would
otherwise cause the Executive to be considered to have received a Parachute
Payment, the Executive shall have the right to designate those payments or
benefits that shall be reduced or eliminated so as to satisfy the foregoing
limitation.
10. Disability. If the Executive becomes disabled by reason of injury
or sickness, he shall be entitled to benefits in accordance with Westport Bank's
long-term disability plan then in effect.
11. Certain Benefits Upon Termination. Provided the Executive's
employment is terminated (i) by the Employers for other than Cause (as defined
in Section 8(a) hereof) or (ii) in accordance with Section 9(b) hereof, subject
to Section 9(f) above, the Employers shall maintain in full force and effect for
the Executive's continued benefit from the Date of Termination of his employment
and thereafter for a period of three years the basic, corporate-owned and
split-dollar life insurance, accidental death and dismemberment insurance,
dental, health, and disability plans, programs or arrangements in which the
Executive was entitled to participate immediately prior to the Date of
Termination, to the same extent as if the Executive continued to be an employee
of the Employers during the three-year period following the Date of Termination.
The Employers shall continue to pay the cost of any benefits provided under this
Section 11; provided, however, the Employers and the Executive shall share the
cost of the health plan, program, or arrangement and each shall pay the portion
which each would have paid if the Executive were employed by the Employers. Any
benefits provided under this Section 11, shall be reduced or offset to the
extent they are replaced by substantially similar benefits provided by a new
employer.
12. Miscellaneous.
(a) No Assignment. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party hereto. However, in the event of the death of the Executive, all of his
rights to receive payments hereunder shall become rights of his estate as
provided in Section 8(d) hereof.
- 10 -
<PAGE>
(b) Other Contracts. The Executive shall not, during the term
of this Agreement, have any other paid employment other than with a subsidiary
or affiliate of the Employers, except with the prior written approval of the
Boards.
(c) Amendments or Additions; Action by Boards. No amendments
or additions to this Agreement shall be binding unless in writing and signed by
all parties hereto. The prior approval by a majority affirmative vote of the
Boards shall be required in order for the Employers to authorize any amendments
or additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of employment with or without Cause under Section 8(a) hereof.
(d) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(e) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
(f) Governing Law. This Agreement shall be governed by the
laws of the United States, where applicable, and otherwise by the laws of the
State of Connecticut other than the choice of law rules thereof.
(g) Notice. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to the
Employers:
WESTPORT BANCORP, INC.
87 Post Road East
Westport, Connecticut 06880
Attention: Chairman of the Compensation
Committee of the Board of Directors
or if to the Executive: William B. Laudano, Jr.
191 Saddle Hill Drive
Guilford, Connecticut 06437
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
(h) Counterparts. This Agreement may be executed in several
counterparts, for the convenience of the parties, but shall constitute one and
the same instrument.
- 11 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or caused this Agreement to be duly executed on their behalf, as of
the date and year first above written.
Attest: THE WESTPORT BANK & TRUST
COMPANY
/s/ Victoria Takacs By /s/ Michael H. Flynn
- ---------------------- ------------------------------
Michael H. Flynn
President and Chief Executive
Officer
Attest: WESTPORT BANCORP, INC.
/s/ Nancy M. Roche By /s/ Michael H. Flynn
- ---------------------- ------------------------------
Michael H. Flynn
President and Chief Executive
Officer
/s/ William B. Laudano, Jr.
--------------------------------
William B. Laudano, Jr.
Executive
- 12 -
<PAGE>
SECOND AMENDMENT
TO THE WESTPORT BANK & TRUST COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Westport Bancorp, Inc. (the "Company") and The
Westport Bank & Trust Company (the "Bank") have heretofore adopted The Westport
Bank & Trust Company Supplemental Executive Retirement Plan, as amended (the
"SERP"); and
WHEREAS, the Company and the Bank have heretofore entered into
Participation Agreements concerning the SERP with Michael H. Flynn, Thomas P.
Bilbao and Arnold Levine (collectively, the "Participants"); and
WHEREAS, the Company and the Bank, with the consent of the
Participants, desire to amend the SERP as set out herein; and
WHEREAS, this Second Amendment has been adopted by the Boards
of Directors of the Company and the Bank;
NOW, THEREFORE, the SERP is hereby amended as follows,
effective immediately:
1. Section 1.6 of the SERP is hereby amended to read in its
entirety as follows:
"Change of Control" shall mean and shall be deemed to have
occurred if:
(i) 25 percent or more of ownership, control, power
to vote, or beneficial ownership of any class of voting
securities of the Company is acquired by any person, either
directly or indirectly or acting through one or more other
persons;
(ii) any person (other than any person named as a
proxy in connection with any solicitation on behalf of the
Board of Directors of the Company) holds revocable or
irrevocable proxies, as to the election or removal of three or
more directors of the Company, for 25 percent or more of the
total number of voting shares of the Company;
(iii) any person has received all applicable
regulatory approvals to acquire control of the Company;
(iv) any person has commenced a cash tender or
exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of 25 percent or more
of the total number of voting shares of the Company, whether
or not any requisite regulatory
<PAGE>
approval for such acquisition has been received, provided that
a Change of Control will not be deemed to have occurred under
this clause (iv) unless the Board of Directors of the Company
has made a determination that such action constitutes or will
constitute a Change of Control;
(v) as the result of, or in connection with, any cash
tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, (A) the persons who
were directors of the Company before such transaction shall
cease to constitute at least a majority of the Board of
Directors of the Company or its successor or (B) the persons
who were stockholders of the Company immediately before such
transaction do not own more than 50 percent of the outstanding
voting stock of the Company or its successor immediately after
such transaction; or
(vi) the Company's beneficial ownership of the total
number of voting shares of the Bank is reduced to less than 50
percent.
For purposes of this Section, a "person" includes an
individual, corporation, partnership, trust, association,
joint venture, pool, syndicate, unincorporated organization,
joint-stock company or similar organization or entity or group
acting in concert. A person for these purposes shall be deemed
to be a "beneficial owner" as that term is used in Rule 13d-3
under the Securities Exchange Act of 1934.
2. The first sentence of Section 2.4(a) is amended to read as
follows:
In the case of a Participant whose Termination of Employment
occurs before his Early Retirement Date, distribution of
payments under Section 2.2 shall begin on the first day of the
calendar month next following the Participant's Normal
Retirement Date.
3. The first sentence of Article 3 is amended to read as
follows:
In the case of a Participant who has an "Actual Termination"
or a "Constructive Termination" (as defined below) in
connection with or following a Change of Control, for purposes
of applying Section 2.3, such Participant shall be deemed to
be two years older than his actual age at such time and shall
be deemed to have two additional Years of Service.
4. In all other respects, the SERP shall continue in full
force and effect.
- 2 -
<PAGE>
The undersigned Secretary of the Company and the Bank certifies that the
foregoing Second Amendment to The Westport Bank & Trust Company Supplemental
Executive Retirement Plan was duly adopted by the Boards of Directors of the
Company and the Bank, respectively, at meetings held on May 16, 1996.
/s/ John J. Henchy
--------------------------------
John J. Henchy
CONSENTED AND AGREED TO:
/s/ Michael H. Flynn
--------------------------------
Michael H. Flynn
/s/ Thomas P. Bilbao
---------------------
Thomas P. Bilbao
/s/ Arnold Levine
--------------------------------
Arnold Levine
- 3 -
<PAGE>
AMENDED AND RESTATED
1995 INCENTIVE STOCK OPTION PLAN
Westport Bancorp, Inc.
----------------------------
1. Objectives of the Plan. The purposes of this 1995 Incentive Stock
Option Plan (the "Plan") are (i) to attract and retain the best
available personnel for positions of substantial responsibility with
Westport Bancorp, Inc. ("Bancorp"), or any of its subsidiaries that now
exist or that Bancorp may hereafter organize or acquire (hereinafter
collectively called the "Corporation"); (ii) to provide additional
incentive to such personnel; and (iii) to encourage the ownership of
Bancorp Common Stock by such personnel, thereby promoting the success
of the Corporation.
2. Effective Date. The Plan shall become effective on May 25, 1995, and
shall terminate as provided herein. The Plan as amended and restated
May 16, 1996 is effective for options granted on and after that date.
3. Stock Reserved for the Plan. The number of shares of the authorized but
unissued Common Stock, par value $0.01 per share, of Bancorp (the
"Common Stock") that are reserved for issue and may be issued upon the
exercise of options granted under the Plan shall be 200,000 shares.
In lieu of such unissued shares, Bancorp may, in its discretion,
transfer on the exercise of options reacquired shares or shares bought
in the market for the purposes of the Plan, provided that (subject to
the provisions of paragraph 13) the total number of shares that may be
issued or sold upon the exercise of options granted under the Plan
shall not exceed an aggregate of 200,000. Any employee may hold more
than one option at any time.
If any options granted under the Plan shall for any reason terminate or
expire without having been exercised in full, the stock not purchased
under such options shall be available again for the purposes of the
Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the Board of
Directors of Bancorp (the "Board"). Members of the Board who
are eligible for options hereunder or who have been granted
options may vote on any matters affecting the administration
of the Plan or the grant of any options pursuant to the Plan
except that no such member shall act upon the granting of an
option to himself, but any such member may be counted in
determining the existence of a quorum at any meeting of the
Board during which action is taken with respect to the
granting of options to him.
(b) Powers of the Board. Subject to the provisions of the Plan,
the Board shall have the authority: (i) to grant to any
employee eligible hereunder an option to purchase shares of
Common Stock that shall be conditioned on the execution by
such employee of an Incentive Stock Option Agreement
substantially in the form of Exhibit I hereto (with such
modifications as the Board may desire, within the terms of the
Plan and the requirements of law); (ii) to determine the
purchase price for Common Stock to be issued pursuant to an
option granted under the Plan, the number of shares to be
represented by each option, the employees to whom and the time
or times at which options shall be granted or exercised, and
the term of each option, which in no event shall be more than
ten (10) years from the date of the grant of the option; (iii)
to interpret the Plan; (iv) to prescribe, amend and rescind
rules and regulations relating to the Plan; (v) to determine
the terms and provisions of each option granted under
<PAGE>
the Plan (which need not be identical) and, with the consent
of the holder thereof, to modify or amend each option; (vi) to
impose job performance conditions and any other conditions on
the exercise of any option and to determine whether such
conditions have been met; (vii) to accelerate the exercise
date of any option; (viii) to authorize any person to execute
on behalf of the Corporation any instrument required to
effectuate a grant of an option previously granted by the
Board; and (ix) to make all other determinations deemed
necessary or advisable for the administration of the Plan. It
is intended that options issued hereunder to employees
(including employees who are also directors of the
Corporation) shall qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Board shall administer the Plan in order
to preserve the characterization of options granted pursuant
hereto as incentive stock options.
(c) Effect of Board's Decision. All decisions, determinations, and
interpretations of the Board shall be final and binding on all
holders of any options granted under the Plan.
(d) Committee Recommendations. The Compensation Committee of the
Board (the "Committee") shall make recommendations to the
Board with respect to (i) the employees to whom options should
be granted, (ii) the terms and provisions of any option, (iii)
whether any job performance conditions to which the exercise
of a previously granted option is subject have been met, and
(iv) any other matter described in this paragraph; provided,
however, that the final decisions on any such matter shall
rest with the Board. The Committee shall also perform such
other functions and duties with respect to the Plan as the
Board shall from time to time assign to the Committee.
5. Eligibility; Factors to be Considered in Granting Options. An option
may be granted to any person who, at the time the option is granted, is
an employee of the Corporation. No option may be granted hereunder to
an employee who at the time such option is granted owns, within the
meaning of Section 422 of the Code, stock possessing more than 10% of
the total combined voting power of all classes of stock of the
Corporation or its subsidiaries (a "10% Shareholder") unless the option
price is at least 110% of the fair market value of such stock on the
date of grant and the option may not be exercised more than five (5)
years after the date of grant.
In determining the employees to whom options shall be granted, the term
of the option, and the number of shares to be covered by each option,
the Board shall take into account the duties of the respective
employees, their present and potential contributions to the success of
the Corporation, and such other factors as it shall deem relevant in
connection with accomplishing the purposes of the Plan. An employee who
has been granted an option may be granted an additional option or
options if the Board shall so determine.
A member of the Board of Directors of the Corporation who is not also
an employee of the Corporation or a subsidiary shall not be eligible to
receive a grant of an option hereunder.
6. Option Prices. The purchase price of the Common Stock covered by each
option shall be determined by the Board, but shall not be less than
100% (or 110% in the case of an option granted to a 10% Shareholder) of
the fair market value of the Common Stock on the date the option is
granted. For purposes of this Plan, the fair market value of Common
Stock shall be determined as of a particular date in the following
manner: if the stock is listed or admitted to trading on a national
securities exchange or reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), the fair
market value per share shall be the closing price of Bancorp Common
Stock reported by such exchange or NASDAQ for such date (or, if no
closing price was reported for such date, then the closing price for
the next preceding day for which a closing price was reported); if the
stock is not then listed or admitted to trading on a national
securities exchange or reported by NASDAQ,
2
<PAGE>
the fair market value shall be determined by the Board of Directors of
Bancorp on the basis of such factors as it deems relevant.
7. Terms of Options. The term of each option shall be for such period as
the Board shall determine, but not more than ten (10) years (or five
(5) years in the case of an option granted to a 10% Shareholder) from
the date of grant, thereof, and shall be subject to earlier termination
as hereinafter provided. If the original term of any option is less
than ten (10) years (or five (5) years in the case of an option granted
to a 10% Shareholder) from the date of grant, the option prior to its
expiration may be amended, with the approval of the Board and the
employee, to extend the term to not more than ten (10) years (or five
(5) years in the case of an option granted to a 10% Shareholder) from
the original date of granting of such options. Except as otherwise
required by law, such extension shall not constitute the grant of a new
option and the purchase price specified in such option need not be
modified.
8. Conditions to the Exercisability of Options. The Board may, in its sole
discretion set conditions that must be satisfied before an option may
be exercised. These conditions may be based on the length of the
optionee's continuous employment with the Corporation subsequent to the
grant, the job performance of the optionee subsequent to the grant, the
performance of the Corporation as a whole, or any other reasonable
criteria. The Board shall determine in each case annually whether such
conditions have been satisfied for the preceding fiscal year. With
respect to performance-related conditions, the Board shall fix the
number of shares, if any, as to which each outstanding option shall
then become exercisable. No such option subject to performance-related
conditions shall become exercisable until the Board (a) determines that
such conditions have been satisfied during the fiscal year preceding
such determination and (b) fixes the number of shares as to which the
option shall thereupon become exercisable. The aggregate fair market
value (as of the date of grant) of such options exercisable by an
individual for the first time in any calendar year under the Plan and
any other incentive stock option plan of the Corporation or any parent
or subsidiary corporation shall not exceed $100,000.
9. Exercise of Options. Unless otherwise provided in the option agreement,
a holder of an option may purchase all, or from time to time any part
of, the shares of which the right to purchase has accrued in accordance
with the terms of paragraph 8; provided, however, that an option shall
not be exercised as to fewer than fifty (50) shares, or the remaining
shares covered by the option if fewer than fifty (50), at any one time.
The purchase price of the shares as to which an option shall be
exercised shall be paid in full at the time of exercise at the election
of the holder of an option (a) in cash or by certified check, (b) by
tendering to Bancorp shares of Bancorp's Common Stock, then owned by
him, having a fair market value equal to the cash exercise price
applicable to the purchase price of the shares as to which an option is
being exercised, or (c) partly in cash and partly in shares of
Bancorp's Common Stock valued at fair market value determined as of the
close of the business day immediately preceding the day on which the
option is exercised, in the manner set forth in paragraph 6.
Notwithstanding the preceding sentence, payment in full of the purchase
price need not accompany the written notice of exercise provided the
notice of exercise directs that the certificate or certificates for the
shares of Bancorp's Common Stock for which the that option is exercised
be delivered to a licensed broker acceptable to Bancorp as the agent
for the individual exercising the option and, at the time such
certificate or certificates are delivered, the broker tenders to
Bancorp cash (or cash equivalents acceptable to Bancorp) equal to the
purchase price for the shares of Bancorp's Common Stock purchased
pursuant to the exercise of the option plus the amount (if any) of
federal and/or other taxes that Bancorp, may, in its judgment, be
required to withhold with respect to the exercise of the option and the
sale of such shares of Common Stock. Fractional shares of Common Stock
will not be issued. Except as provided in paragraphs 11 and 12 hereof,
no option may be exercised at any time unless the holder thereof is
then an employee of the Corporation or one of its subsidiaries. The
holder of an option shall have none of the rights of a stockholder with
respect to the
3
<PAGE>
shares subject to option until such shares shall have been registered
on the transfer books of Bancorp in the name of such holder.
Notwithstanding any other provision of this Plan or any option granted
hereunder, any option granted hereunder and then outstanding may become
immediately exercisable in full, in the discretion of the Board, in the
event of a "Change of Control". For purposes hereof, (a) the term
"Control" shall have the same meaning as is ascribed thereto in Rule
12b-2 of the Rules and Regulations promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 and
(b) an event or events constituting a Change of Control of the
Corporation shall be deemed to have occurred on such date as the
Corporation shall file, or shall have become obligated to file,
whichever is earlier, a Current Report on Form 8-K describing any such
Change of Control of the Corporation pursuant to Item 1 thereof or
indicating that any such Change of Control either is imminent or may
have occurred. The Committee may adopt such procedures as to notice and
exercise as may be necessary to effectuate the acceleration of the
exercisability of options as described above.
10. Non-transferability of Options. An option granted under the Plan shall
not be transferable otherwise than by will or the laws of descent and
distribution, and an option may be exercised, during the lifetime of
the employee, only by the employee.
11. Termination of Employment. In the event that the employment of an
employee to whom an option has been granted under the Plan shall be
terminated (other than by reason of death or disability), such option
may subject to the provisions of paragraph 8 be exercised, to the
extent that the employee was entitled to do so at the date of such
termination, at any time within three (3) months after such
termination, but in no event after the expiration of the term of the
option. Options granted under the Plan shall not be affected by any
changes of duties or position so long as the holder continues to be an
employee of the Corporation. Retirement pursuant to any pension plan
provided by the Corporation shall be deemed to be a termination of
employment for the purposes of this paragraph 11. Nothing in the Plan
or in any option granted pursuant to the Plan shall confer upon any
employee any right to continue in the employ of the Corporation or
interfere with the right of the Corporation to terminate his employment
at any time.
12. Death or Disability of Employee. If an employee to whom an option has
been granted under the Plan shall die or become disabled within the
meaning of Section 422 of the Code, such option may be exercised
subject to the provisions of paragraphs 8 and 9, to the extent that the
employee was entitled to do so at the date of such death or disability,
by the employee, or the representative of the employee's estate, at any
time within such period, not exceeding one (1) year after such death or
commencement of disability, as shall be prescribed in the option
agreement, but in no event after the expiration of the term of the
option.
13. Adjustments Upon Changes in Capitalization. Notwithstanding any other
provision of the Plan, the Board, as it deems appropriate, may adjust
the number and class of shares covered by each outstanding option, the
option prices, and the minimum number of shares as to which options
shall be exercisable at any one time in the event of changes in the
outstanding Common Stock by reason of Stock dividends, split-ups,
recapitalizations, mergers, consolidations, combinations or exchanges
of shares and the like; and, in the event of any such change in the
outstanding Common Stock, the aggregate number and class of shares
available under the Plan and the maximum number of shares as to which
options may be granted shall be appropriately adjusted.
14. No Loans to Holders of Options. Neither Bancorp nor any of its
subsidiaries may directly or indirectly lend money to any person for
the purpose of assisting such person to acquire or carry shares of the
Common Stock issued upon the exercise of options granted under the
Plan.
4
<PAGE>
15. Time of Granting Options. The date of grant of an option under the Plan
shall, for all purposes, be the date on which the Board makes the
determination granting such option. Notice of the determination shall
be given to each employee to whom an option is so granted within a
reasonable time after the date of such grant.
16. Termination and Amendment of the Plan. Unless the Plan has previously
been terminated, no option shall be granted hereunder after May 24,
2005. The Board may at any time prior to that date terminate the Plan
or make such modification or amendment of the Plan as it shall deem
advisable; provided, however, that no amendment may be made to the Plan
without the approval by the holders of Common Stock, except as provided
in paragraphs 7 or 13 hereof, that would (i) increase the maximum
number of shares for which options may be granted under the Plan, (ii)
change the manner of determining the minimum option prices, (iii)
extend the period during which an option may be granted or exercised,
or (iv) amend the requirements as to the class of employees eligible to
receive options. No termination, modification, or amendment of the Plan
may, without the consent of the employee to whom an option shall
theretofore have been granted, adversely affect the right of such
employee under such option.
17. Government Regulations. The Plan and the grant and exercise of options
thereunder, and the obligation of Bancorp to sell and deliver shares
under such options, shall be subject to all applicable laws, rules and
regulations.
5
<PAGE>
EXHIBIT 1
---------
WESTPORT BANCORP, INC.
AMENDED AND RESTATED
1995 INCENTIVE STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
THIS AGREEMENT is entered into by and between WESTPORT
BANCORP, INC. (the "Company") and _____________________________ (the "Optionee")
as of May 16, 1996.
1. This Option Agreement is subject to and governed by the
terms and conditions of the Westport Bancorp, Inc. Amended and Restated 1995
Stock Option Plan (the "Plan"), a copy of which is attached hereto as Exhibit A
and incorporated by reference herein.
2. The date of grant of this Option is May 16, 1996.
3. Pursuant and subject to the Plan, the Company hereby grants
to the Optionee the right and option (the "Option") to purchase ____________
shares of the common stock, par value $.01 per share, of the Company (the
"Stock").
4. The purchase price of the Stock under the Option is
$____________ per share, which is equal to the fair market value of a share of
the Stock on the date of grant.
5. The Option shall constitute an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, to the extent provided in Section 8 of the Plan.
6. Subject to the provisions of the Plan, the Option may be
exercised (i) to the extent of ___________ shares of Stock on and at any time
after the date of grant and before termination of the Option pursuant to the
Plan and (ii) to the extent of ___________ shares of Stock on and at any time
after January 1, 1997 and before termination of the Option pursuant to the Plan
(except that, in the event that a "Change of Control" (as defined in the Plan)
occurs before January 1, 1997, the Option shall be exercisable in full upon the
occurrence of the Change of Control), but in no event later than 10 years after
the date of grant. The Option may be exercised in increments of not less than 50
shares, unless the number purchased is the total number at the time available
for purchase under the Option.
7. The rights of the Optionee to exercise the Option following
termination of employment, death, or disability are as provided in Paragraphs 11
and 12 of the Plan.
8. The shares subject to the Option and the purchase price
specified above are subject to adjustment in certain events as set out in
Paragraph 13 of the Plan. In the event that the Company is merged with or into
another corporation or the Company becomes a subsidiary of another corporation,
the Option may be assumed by a successor or a parent or affiliated corporation
or such corporation may substitute for the Option an option to purchase the
stock of such corporation or a parent or affiliated corporation.
<PAGE>
9. The Option is not transferable, except upon the death of
the Optionee as provided in the Plan.
10. The Plan is administered by the Board of Directors of the
Company, whose decisions with respect to the construction or interpretation of
the Plan or this Agreement shall be final and conclusive.
11. The parties hereto recognize that the Company or a
subsidiary may be obligated to withhold federal and local income taxes and
Federal Insurance Contributions Act (social security) taxes to the extent that
the Optionee realizes ordinary income in connection with the exercise of the
Option or a disposition of shares of Stock acquired hereunder. The Optionee
agrees that the Company or a Subsidiary may withhold amounts needed to cover
such taxes from payments otherwise due and owing to the Optionee, including
withholding of shares that would otherwise be issued hereunder, and also agrees
that upon demand the Optionee will promptly pay to the Company or a subsidiary
having such obligation any additional amounts as may be necessary to satisfy
such withholding tax obligation. Such payment shall be made in cash or cash
equivalent.
12. The Optionee agrees to notify the Company in writing of
any disposition of shares of stock acquired by the Optionee pursuant to the
exercise of this Option within 30 days of such disposition.
13. The procedures for exercising this Option are as provided
in Paragraph 9 of the Plan. All communications to the Company should be
addressed to Westport Bancorp, Inc., 87 Post Road East, Westport, CT 06880,
Attention: Corporate Secretary.
WESTPORT BANCORP, INC.
By:
-------------------------------
Its:
-------------------------
OPTIONEE
----------------------------------
-2-
<PAGE>
ADDRESS FOR OPTIONEE:
-------------------------------------
Number Street
-------------------------------------
City State Zip Code
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statements, File Nos. 33-48420 and 33-8277.
/s/ Arthur Andersen LLP
------------------------
Arthur Andersen LLP
New York, New York
May 16, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 24113
<INT-BEARING-DEPOSITS> 196249
<FED-FUNDS-SOLD> 14500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85338
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 178052
<ALLOWANCE> 2854
<TOTAL-ASSETS> 312917
<DEPOSITS> 274670
<SHORT-TERM> 7733
<LIABILITIES-OTHER> 6232
<LONG-TERM> 0
<COMMON> 54
0
1
<OTHER-SE> 24227
<TOTAL-LIABILITIES-AND-EQUITY> 312917
<INTEREST-LOAN> 16200
<INTEREST-INVEST> 4366
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</TABLE>
