FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 0-14550
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NEW ENGLAND COMMUNITY BANCORP, INC.
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DELAWARE 6-1116165
OLD WINDSOR MALL
P.O. BOX 130
WINDSOR, CONNECTICUT 06095
Telephone: (860) 610-3600
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 $.10 per share.
Indicate by checkmark 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 filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by checkmark 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 of this
Form 10-K. /X/
At March 24, 1998, the aggregate market value of the shares outstanding of
Common Stock held by non-affiliates of the Registrant, was $116,337,368.
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, was 5,171,626 at March 24, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Part Into
Document Which Incorporated
-------- ------------------
The information contained in the
Registrant's definitive proxy statement
(which is expected to be filed within
120 days of fiscal year-end 1997 and to
be used in connection with the Annual
Meeting of Shareholders which is
anticipated to be held on April 21,
1998) under the captions "Election of
Directors," "Executive Compensation,"
"Security Ownership of Directors and
Executive Officers," and "Other
Information Relating to Directors and
Executive Officers." Notwithstanding the
foregoing, the information contained in
the definitive proxy statement pursuant
to Items 402(k) and 402(l) of Regulation
S-K is not incorporated by reference and
is not to be deemed part of this report. Part III
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TABLE OF CONTENTS
Part I
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Item 1 Business....................................................................................4
Item 2 Properties.................................................................................18
Item 3 Legal Proceedings..........................................................................19
Item 4 Submission of Matters to a Vote of Security Holders........................................19
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters................................................................20
Item 6 Selected Financial Data....................................................................21
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................21
Item 7A Quantitative and Qualitative Disclosure about Market Risk..................................34
Item 8 Financial Statements and Supplementary Data................................................34
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.....................................................34
Part III
Item 10 Directors and Executive Officers of the Registrant.........................................35
Item 11 Executive Compensation.....................................................................35
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................................................35
Item 13 Certain Relationships and Related Transactions.............................................35
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................................................31
Signatures
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New England Community Bancorp, Inc.
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 1997
PART I
ITEM 1. BUSINESS
General.
New England Community Bancorp, Inc. ("NECB" or the "Company"), which
was formerly known as Olde Windsor Bancorp, Inc., is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. NECB was
organized under the laws of Delaware in 1984 and directly owns New England Bank
& Trust Company ("NEBT"), The Equity Bank ("EQBK") and Community Bank ("CMBK")
(collectively the "Subsidiaries"), each Connecticut chartered commercial banks.
Recent Growth of NECB.
NECB has built its community banking network through both internal
growth and acquisitions. In 1985, NECB was formed by Windsor Bank and Trust
Company ("Windsor Bank") a Connecticut-chartered bank and trust company. NECB
subsequently acquired all of the capital stock and became the sole shareholder
of Windsor Bank. In 1986, NECB acquired a second bank subsidiary, NEBT. In 1988,
the two subsidiaries were combined--retaining the NEBT name. In 1995, NECB
created a second banking subsidiary when it acquired all of the outstanding
common stock of EQBK, which was founded in 1987. In July, 1996 and August, 1997,
respectively, the Company acquired all the outstanding common stock of
Manchester State Bank ("MSB") and First Bank of West Hartford ("FBWH"), both of
which were merged with and into NEBT. On December 31, 1997, NECB acquired CMBK.
The acquisitions of EQBK, MSB and CMBK were accounted for as purchases
and, as such, prior year comparative data was not revised to include information
about either entity. Conversely, the acquisition of FBWH was accounted for as a
"pooling of interests" and therefore all comparative prior periods have been
restated as if the acquisition had been in effect for all periods presented.
On February 10, 1998, the Company and Olde Port Bank & Trust Company
("OPBT") signed a definitive agreement under which the Company will acquire OPBT
in a merger which is intended to be a tax free transaction and which the Company
anticipates will be accounted for as a pooling of interests (the "Merger"). Each
of the outstanding shares of OPBT will be exchanged for shares of NECB
consisting of that number of shares of NECB common stock equal to $200.00 in
value, with a resulting transaction value of approximately $13.8 million. The
final exchange ratio will be determined by dividing $200.00 by the average
closing price of NECB common stock supplied by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") and reported in THE
WALL STREET JOURNAL as of the end of the ten (10) consecutive trading-day period
ending on the date on which the last of the regulatory approvals required for
the consummation of the Merger occurs.
Under certain conditions NECB and OPBT may terminate the transaction if
the average closing price (as defined above) of the Company Common Stock is less
than $20.00 or more than $30.00 per
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share. If the average closing price is below $20.00, OPBT shall have the option
of reducing the consideration to be received by the holders of OPBT Common Stock
by increasing the average closing price for purposes of the exchange ratio to
equal $20.00. If OPBT makes this election the average closing price and the
exchange ratio will be modified accordingly. Conversely, if the average closing
price is above $30.00, NECB shall have the option of increasing the
consideration to be received by the holders of OPBT by reducing the average
closing price for purposes of the Exchange to equal $30.00. If NEBC makes this
election the average closing price and the exchange ratio will modified
accordingly.
The Merger is conditioned upon requisite bank regulatory approvals and
the approval of shareholders of OPBT as well as other customary conditions. It
is anticipated that the acquisition will be consummated in the second quarter of
1998.
On March 19, 1998, the Boards of Directors of NECB and Bank of
South Windsor ("BSW") approved a definitive agreement whereby BSW will be
acquired by NECB ("the Acquisition"). Following the consummation of the
Acquisition, BSW will be merged with and into NEBT. Under the terms of the
agreement, BSW shareholders will receive a fixed exchange of 1.3204 shares of
NECB Common Stock for each share of BSW Common Stock. Using NECB's closing price
on March 18, 1998 of $25.50 per share, the transaction would have a value of
$33.67 per share to BSW shareholders and an aggregate transaction value of
approximately $32.8 million. In the event that the average closing price of
NECB's Common Stock, for the twenty days ending on the date of final regulatory
approval, is less than $23.48, the exchange ratio will (subject to certain
qualifications) be adjusted to result in the receipt by BSW shareholders of NECB
shares having a value of $31.00 per share of BSW Common Stock.
The Acquisition is subject to customary conditions, including but not
limited to the approval by federal and state bank regulatory authorities and the
shareholders of both NECB and BSW.
Management of NECB is continuously exploring various opportunities to
prudently expand NECB's earning potential through expansion of its base of
earning assets by the establishment or acquisition of banking and non-banking
operations. However, there can be no assurance that the Company will be able to
acquire such business enterprises or, if additional acquisitions are undertaken,
that these acquisitions will enhance the profitability of the Company.
Regulation and Supervision
As Connecticut-chartered commercial banks, the deposits of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), the
Subsidiaries are subject to extensive regulation and supervision by both the
Connecticut Banking Commissioner and the FDIC. The Company also is subject to
certain regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and the Connecticut Banking Commissioner. This
governmental regulation is intended primarily to protect depositors and the
FDIC's Bank Insurance Fund, not stockholders.
Connecticut Regulation
The Connecticut Banking Commissioner regulates the Subsidiaries'
internal organization as well as their deposit, lending and investment
activities. The approval of the Connecticut Banking Commissioner is required,
among other things, for the establishment of branch offices and business
combination transactions. The Connecticut Banking Commissioner conducts periodic
examinations of the Subsidiaries. Many of the areas regulated by the Connecticut
Banking Commissioner are subject to similar regulation by the FDIC.
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Connecticut banking laws grant banks broad lending authority--subject
to certain limited exceptions. Total secured and unsecured loans made to any one
obligor pursuant to this statutory authority may not exceed 15% of the
Subsidiary's respective capital, surplus, undivided profits and loss reserves.
The Subsidiaries are prohibited by Connecticut banking law from paying
dividends except from their net profits, which are defined as the remainder of
all earnings from current operations. The total of all dividends declared by
each of the respective Subsidiaries in any calendar year may not, unless
specifically approved by the Connecticut Banking Commissioner, exceed the total
of its net profits for that year combined with its retained net profits of the
preceding two years. These dividend limitations can affect the amount of
dividends payable to stockholders of the Company because dividends received by
the Company from the Subsidiaries are the primary source of funds for the
Company.
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, or after obtaining 10%, increase its ownership to
25% or more, without the prior notification of and lack of disapproval by the
Connecticut Banking Commissioner.
Any state-chartered bank meeting statutory requirements may, with the
approval of the Connecticut Banking Commissioner, establish and operate branches
in any town or towns within the state.
The Connecticut Interstate Banking Act permits Connecticut banks to
engage in stock acquisitions of, and mergers with, depository institutions in
other states with reciprocal legislation. All of the other New England states,
and a majority of the other states, have enacted reciprocal legislation. Federal
interstate banking legislation extended this interstate bank holding company
acquisition authority nationwide as of September 1995. Several interstate
mergers and acquisitions involving Connecticut bank holding companies or banks
with offices in the Subsidiaries' service areas and bank holding companies or
banks headquartered in other states have been completed.
FDIC Regulation
The Subsidiaries' deposit accounts are insured by the Bank Insurance
Fund of the FDIC to a maximum of $100,000 for each insured depositor. As with
all state-chartered FDIC-insured banks, the Subsidiaries are subject to
extensive supervision and examination by the FDIC and also are subject to FDIC
regulations regarding many aspects of their business, including types of deposit
instruments offered and permissible methods for acquisition of funds.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was adopted. It required each federal banking agency to revise
its risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risk of
non-traditional activities. Pursuant to FDICIA, in September 1992, the FDIC
implemented a system of risk-related deposit insurance assessments. Initially
under the new system, beginning January 1, 1993, insurance premiums for all
banks varied between .23% and .31% of total deposits, depending upon the capital
level and supervisory rating of the institution. On May 31, 1995, when the
desired Bank Insurance Fund ("BIF") reserve ratio of 1.25% was achieved by the
FDIC, a new risk-based assessment rate schedule of .04% to .31% of total
deposits was established commencing on June 1,
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1995. The FDIC evaluates the adequacy of the assessment schedule and may
adjust the schedule every six months as the FDIC deems necessary to maintain the
BIF reserve ratio at the designated level. Effective January 1, 1996, the
schedule was further revised resulting in assessment rates ranging from .000% to
.270% of total deposits, subject to the statutory requirement that all
institutions pay at least $2,000 annually for FDIC insurance.
As a result of the Deposit Insurance Act of 1996, a new Financing
Corporation ("FICO") Payment Computation was established. Beginning January 1,
1997, and for the three following years, BIF-assessable deposits are being
charged 20% of the rate imposed on Savings Association Insurance Fund-assessable
deposits. The FICO BIF annual rate for 1997 was .013%.
The risk-based insurance assessment has not had a material effect on
the financial position of the Company. Both NEBT and EQBK qualify for the lowest
assessment rate.
FDIC risk-based capital requirements became fully effective at the end
of 1992. Under these requirements, all FDIC-insured banks are required to
maintain minimum levels of "capital" based upon an institution's total
"risk-weighted assets." For purposes of these requirements, "capital" is
comprised of both Tier 1 capital and Tier 2 capital. Tier 1 capital consists
primarily of common stock and limited amounts of perpetual preferred stock. Tier
2 capital consists of the allowance for loan losses (subject to certain
limitations), certain preferred stock, subordinated debt and convertible
securities. In determining total capital, the amount of Tier 2 capital may not
exceed the amount of Tier 1 capital. A bank's total "risk-weighted assets" are
determined by assigning the bank's assets and off-balance sheet items (e.g.,
letters of credit) to one of four risk categories based upon their relative
credit risk. Under the regulations, the greater the risk associated with an
asset, the greater the amount of such asset that will be subject to the capital
requirements. All FDIC-insured banks are required to maintain minimum ratios of
Tier 1 and total capital to risk-weighted assets of 4% and 8%, respectively. At
December 31, 1997, NEBT's Tier 1 and total risk-based capital ratios were 11.3%
and 12.5%, respectively, compared to 11.8% and 13.1% at December 31, 1996.
EQBK's Tier 1 and total risk-based capital ratios were 11.1% and 12.4%,
respectively, at December 31, 1997 compared to 12.6% and 13.8% at December 31,
1996. At December 31, 1997, CMBK's Tier 1 and total risk-based capital ratios
were 9.1% and 10.4%, respectively, compared to 8.5% and 9.8% at the end of 1996.
Management believes that the Subsidiaries will remain in full compliance with
applicable capital requirements.
A leverage ratio requirement adopted by the FDIC became effective in
1991. Under this requirement, all FDIC-insured institutions are required to
maintain a ratio of common equity, excluding intangible assets, to total assets
of at least 3% for the most highly rated institutions and 4% to 5% for most
institutions. As of December 31, 1997, NEBT's leverage capital ratio was 8.0%,
compared to 8.1% as of December 31, 1996; EQBK's leverage capital ratio as of
that date was 8.8%, compared to 9.3% as of December 31, 1996. As of December 31,
1997, CMBK's leverage capital ratio was 6.1%, compared to 6.0% as of December
31, 1996.
In addition, FDICIA categorizes banks based on five separate capital
levels and triggers certain mandatory and discretionary federal banking agency
responses for institutions that fall below certain capital levels. These
categories range from "well capitalized" for the most highly capitalized
institutions to "critically undercapitalized" for the least capitalized
institutions. A bank is categorized as "well capitalized" if it maintains a
leverage capital ratio of at least 5%, a total capital ratio of at least
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10%, a Tier 1 risk-based capital ratio of at least 6%, and is not subject to a
capital order or directive. Based on their regulatory capital ratios at December
31, 1997, the Subsidiaries were well capitalized as defined in federal banking
agency regulations.
FDICIA also restricts the ability of FDIC-insured state banks, such as
the Subsidiaries, to acquire and retain equity investments. Generally, state
banks may hold equity securities only to the extent permitted for national
banks. However, FDICIA also permits certain state banks to acquire or retain
equity investments in an amount up to 100% of Tier 1 capital in either (1)
common or preferred stock listed on a national securities exchange, or (2)
shares of a registered investment company. NEBT has been granted this exception.
Pursuant to FDICIA, in December 1993, the FDIC issued a final rule
concerning activities of FDIC-insured state banks. Under the final rule, an
insured state bank must obtain the FDIC's prior consent before directly, or
indirectly through a majority-owned subsidiary, engaging "as principal" in any
activity that is not permissible for a national bank unless one of the
exceptions contained in the regulation applies. The final rule sets out
application procedures for requesting FDIC's consent; provides a phase-out
period for activities which are not approved by the FDIC; and sets out
conditions that may be imposed at the FDIC's discretion when approving
applications. The final rule has not had a material impact on the business of
the Company or its Subsidiaries.
Pursuant to FDICIA, in June 1995, the federal bank regulatory agencies
issued final rules establishing standards for safety and soundness at
FDIC-insured institutions and their holding companies. These rules became
effective in August 1995. These standards formalize in regulation the
fundamental standards used by the federal bank regulatory agencies to assess the
operational and managerial qualities of an institution. The rules establish
operational, managerial, asset quality and earnings standards for FDIC-insured
banks and their holding companies and standards that prohibit as an unsafe and
unsound practice the payment of compensation that is excessive or could lead to
material financial loss to such institutions. These standards are designed to
identify potential safety and soundness concerns and ensure that action is taken
to address those concerns before they pose a risk to the deposit insurance
funds. The Company and its Subsidiaries are in compliance with these standards.
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" or
"Substantial Noncompliance." As of their last CRA examination, each of the
Subsidiaries received a rating of "Satisfactory". Failure to receive at least a
"Satisfactory" rating may inhibit an institution from undertaking certain
activities, including acquisitions of other financial institutions, which
require regulatory approval based, in part, on CRA compliance considerations.
FDIC insurance of deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured institution has engaged
in unsafe or unsound practices, or is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule or
order of, or conditions imposed by, the FDIC. Neither the Company nor the
Subsidiaries is aware of any practice, condition or violation that might lead to
termination of deposit insurance.
Federal Reserve Board Regulation
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Under the regulations of the Federal Reserve Board, depository
institutions such as the Subsidiaries are required to maintain reserves against
their transaction accounts. These regulations generally require the maintenance
of reserves of 3.0% against transaction accounts of $52.0 million or less and
10.0% of the amount of such accounts in excess of such amount. These amounts and
percentages are subject to adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a
registered bank holding company. The Federal Bank Holding Company Act of 1956,
as amended (the "BHCA"), under which the Company registered, limits the types of
companies which the Company may acquire or organize and the activities in which
they may engage. In general, a bank holding company and its subsidiaries are
prohibited from engaging in or acquiring 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. The Company
has not determined if it might seek to engage in these or other permissible
non-banking activities.
The Federal Reserve Board has established capital adequacy guidelines
for bank holding companies that are similar to the FDIC's capital requirements
described above. As of December 31, 1997, the Company's Tier 1 and total
risk-based capital ratios were 11.5% and 12.8%, respectively, and the Company's
leverage capital ratio was 9.2%, compared to 12.9%, 14.1% and 8.8%,
respectively, as of December 31, 1996. All ratios exceed the requirements under
these regulations.
Under the BHCA, a bank holding company such as NECB is required to
obtain the prior approval of 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.
As described previously, the Connecticut Interstate Banking Act and
recent federal legislation specifically permit Connecticut bank holding
companies and banks to acquire or be acquired by banks or bank holding companies
in other states with reciprocal merger and acquisition laws. As of September
1995, federal interstate banking legislation extended this interstate bank
holding company acquisition authority nationwide. Federal antitrust laws place
limitations on the acquisition of banks and other businesses.
Under the BHCA, the Company, the Subsidiaries, and any other
subsidiaries are prohibited from engaging in certain reciprocal arrangements in
connection with any extension of credit or provision of any property or
services. The Subsidiaries are subject to certain restrictions imposed by the
Federal Reserve Act on making any investments in the stock or other securities
of the Company or any of their subsidiaries, and the taking of such stock or
securities as collateral for loans to any borrower.
Each of the Subsidiaries is also subject to certain restrictions
imposed by the Federal Reserve Act on the amount of loans it can make to the
Company or other affiliates. Such loans must be collateralized as provided by
the Federal Reserve Act. The total amount of such loans may not exceed 20% of
the capital stock and surplus of the Subsidiary. Loans from a Subsidiary to NECB
or an affiliate singly may not exceed 10% of the capital stock and surplus of
the Subsidiary. Since the formation of the Company, there have been no loans
made by the Subsidiaries to the Company.
The Company is required under the BHCA to file reports of operations
annually with the Federal Reserve Board. In addition, the Company and the
Subsidiaries are subject to examination by
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the Federal Reserve Board. The Company, as a bank holding company, is registered
with the Connecticut Banking Commissioner under the Connecticut Bank Holding
Company and Bank Acquisition Act.
Effect of Governmental Policy
Banking is a business that depends in large measure on interest rate
differentials. One of the most significant factors affecting the Company's and
the Subsidiaries' earnings is the difference between (1) the interest rates paid
by the Subsidiaries on their deposits and their other borrowings and (2) the
interest rates received by the Subsidiaries on loans extended to their customers
and securities held in the Subsidiaries' investment portfolios. The value and
yields of their assets and the rates paid on their liabilities are sensitive to
changes in prevailing market rates of interest. Thus, the earnings and growth of
the Company and its Subsidiaries will be influenced by general economic
conditions, the monetary and fiscal policies of the federal government and
policies of regulatory agencies, particularly the Federal Reserve Board. The
nature and impact of any future changes in monetary policies cannot be
predicted.
The present bank regulatory climate is undergoing significant change,
both as it affects the banking industry itself and as it affects competition
between banks and non-banking financial institutions. There has been significant
change in the regulation of and operations by savings associations, in the bank
merger and acquisition area, in the products and services banks can offer, and
in the non-banking activities in which bank holding companies can engage. In
part as a result of these changes, banks are competing actively with other types
of depository institutions and with non-bank financial institutions, such as
money market funds, brokerage firms, insurance companies and other financial
services enterprises. It is not possible at this time to assess what impact
these changes in the regulatory climate ultimately will have on the Company and
its Subsidiaries.
Moreover, certain legislative and regulatory proposals that could
affect the Company, the Subsidiaries and the banking business in general are
pending, or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies. These proposals
include measures that may alter further the structure, regulation and
competitive relationship of financial institutions, and that may subject the
Company and/or the Subsidiaries to increased regulation, disclosure and
reporting requirements. In addition, the various banking regulatory agencies
frequently propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether or not and in what form any
legislation or regulations will be enacted or the extent to which the business
of the Company and/or its Subsidiaries will be affected thereby.
Description of Business.
The Company exists primarily to hold the stock of its Subsidiaries. In
addition, NECB, through NEBT, indirectly owns one additional subsidiary. The
historical growth of, and regulations affecting, each of NECB's direct and
indirect subsidiaries are described above in this Item 1.
NECB is a legal entity separate from its Subsidiaries. The stock of the
Subsidiaries is NECB's principal asset and the dividends from these entities
represent the primary source of its income. As explained above in this Item 1,
legal and regulatory limitations are imposed on the amount of dividends that may
be paid by the Subsidiaries to NECB.
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NECB currently maintains its executive offices in Windsor, Connecticut.
At December 31, 1997, the Subsidiaries operated out of 14 offices located
primarily in north central Connecticut. In November 1995, NECB purchased an
18,000 square foot building in East Hartford, Connecticut to house the Company's
data processing and other support operations.
At December 31, 1997, NECB, through its Subsidiaries, had gross loans
of $408,535,000, deposits of $522,644,000 and total assets of $606,170,000.
The strategy of NECB is to operate its Subsidiaries as
community-oriented banking institutions dedicated to providing personalized
service. NECB believes that its maintenance of professional, personalized
service has resulted in its ability to obtain and service many of the small to
medium-sized desirable commercial credits in its market area. As part of its
growth strategy, NECB intends to continue to provide personalized banking
services whether expansion occurs through internal growth, de novo expansion,
reorganization or acquisition. The Company's profitability and its financial
condition may be significantly impacted by the continuing implementation of its
acquisition strategy and by the completion, and subsequent integration, of its
recent and/or pending acquisitions. See "Recent Growth of NECB" above.
The Subsidiaries are full service commercial banks and offer the
services generally performed by commercial banks of similar size and character,
including checking, savings, and time deposit accounts, 24-hour telephone
banking, cash management services, safe deposit boxes, secured and unsecured
personal and commercial loans, residential and commercial real estate loans and
letters of credit. The Subsidiaries' deposit accounts are competitive in the
current environment and include money market accounts and a variety of interest
and noninterest-bearing transaction accounts. The Subsidiaries provide these
services to a diverse range of customers and do not rely on any one depositor
for a significant percentage of deposits made in their respective institutions.
Management believes that the business of each institution will continue to be
broad-based and will not depend on the business of one or a few customers, the
loss of any or all of which could materially and adversely affect its business.
The lending policy of NECB's subsidiary banks is designed to correspond
with its mission of remaining a community-oriented bank. The loan policy sets
forth accountability for lending functions in addition to standardizing the
underwriting, credit and documentation procedures. The typical loan customer is
an individual or small business which has a deposit relationship. NECB, through
its subsidiary banks, strives to provide an appropriate mix in its loan
portfolios of commercial loans and loans to individual consumers.
The largest sector of consumer lending has traditionally been mortgage
loans secured by single family residential properties. This includes both first
and second mortgages. Second mortgages consist of equity lines of credit and
closed-end loans, such as home improvement and construction loans. Historically,
single family mortgage loans are considered to involve the least risk to a
lending institution. On loans in excess of 80% of the value of collateral,
borrowers are required to obtain mortgage insurance covering the portion over
80%. Interest rates charged for mortgage loans are primarily set according to
secondary market conditions, and terms generally follow the underwriting
requirements of the Federal Home Loan Mortgage Corporation ("FHLMC") in the
granting of residential mortgage loans. During 1997 approximately 85% of
residential mortgage loans were sold to the FHLMC as well as other outlets. The
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sale of fixed rate mortgage loans in the secondary market provides liquidity to
make additional loans, revenues for servicing the sold loans (when servicing is
retained), and premiums and discounts to par upon the sale of such loans.
The Subsidiaries originate a variety of consumer loans such as short-
term demand loans, automobile and student loans. The vast majority of Consumer
loans are made on secured basis. Interest rates charged on consumer loans
are primarily determined by competitive loan rates offered in their lending
areas. The primary risk in such loans is the borrower's ability to repay. Such
loans are typically made for small amounts, which provides for risk
diversification.
The portfolios of commercial loans of the Subsidiaries include various
products. The Subsidiaries' target market, with respect to commercial lending,
consists businesses with annual sales up to ten million dollars. Commercial
mortgages are granted on owner-occupied and investment properties up to 75% of
the lesser of the cost or appraised value of the property. Short-term business
loans are made on a demand basis to finance various cash needs of customers.
Construction and land development financing is available to qualified borrowers
for development of sub-divisions or single family residences. Financing for
capital expenditures, such as equipment, is provided on an amortizing basis for
terms up to five years or more. The Subsidiaries offer revolving credit lines
and commercial letters of credit primarily used for performance bonding. NEBT is
also a preferred lender of Small Business Administration ("SBA") loans.
The Subsidiaries' deposits are insured by the FDIC and are primarily
invested in investment securities and loans to borrowers within the
Subsidiaries' respective market area. Each of the Subsidiaries is a member of
the Federal Home Loan Bank ("FHLB") through the Federal Home Loan Bank of
Boston. The FHLB encourages and supports residential mortgage lending by
allowing member banks to borrow money long-term at favored rates based on
certain lending ratios and the ownership of shares in the FHLB.
Fee income is generated through traditional deposit related services
such as checking account charges, overdraft fees, stop payment and returned item
fees. NECB maintains automated teller machines ("ATMs"), which also generate fee
income. While the majority of the ATMs are located at the Subsidiaries' offices,
several machines are located offsite including two at Bradley International
Airport in Windsor Locks, Connecticut and four others in a local grocery chain.
The ATMs at branch locations are primarily for efficient utilization of branch
personnel resources and customer convenience, while machines located off-premise
are primarily utilized by non-customers and provide the Subsidiaries with
greater revenues than do the ATMs located at branch locations. NECB also offers
a corporate on-line cash management product, called ACCESS, which is a fee-based
service. The servicing of loans sold on the secondary market and the rental of
safe deposit boxes to customers also provide fee revenues.
NECB and its Subsidiaries had 250 full-time equivalent employees as of
December 31, 1997, compared to 185 employees at the end of 1996. Management
considers the relationships with employees of the Company to be good.
Page -12-
<PAGE>
Competition and General Business Conditions.
The banking business in Connecticut remains intensely competitive.
After shifting its focus in the mid-1990's from improving asset quality and
expense reduction efforts, the industry is now concentrating on growth. As
widely reported, Connecticut-based financial institutions had been adversely
affected by the economic downturn and devaluation of real estate. Many of the
banks in Connecticut and the region had spent much of the early 1990's
strengthening their balance sheets in order to either position themselves for
future opportunities or, in some cases, simply to survive. The combination of
bank failures and regulatory takeovers together with mergers and acquisitions
has served to greatly reduce the number of competitors within NECB's market
area. In conjunction with the erosion of the barriers to interstate banking,
many Connecticut-based institutions were acquired by institutions based outside
of Connecticut. As a result, NECB has come into competition with new and larger
banks.
Federal legislation permits adequately capitalized bank holding
companies to venture across state lines to offer banking services through bank
subsidiaries to a wider geographic market. In light of this, it is now possible
for large super-regional organizations to enter many new markets including the
market served by the Subsidiaries. Many of these competitors, by virtue of their
size and resources, may enjoy certain efficiencies and competitive advantages
over NECB in the pricing, delivery, and marketing of their products and
services.
There are approximately 25 commercial banks headquartered in
Connecticut. In addition, large out-of-state banks compete for the business of
Connecticut residents and businesses located in the Subsidiaries' primary
markets. A number of other depository institutions compete for the business of
individuals and commercial enterprises in Connecticut including savings banks,
savings and loan associations, brokerage houses, financial subsidiaries of other
industries and credit unions. Other financial institutions, such as mutual
funds, consumer finance companies, factoring companies and insurance companies,
also compete with the Subsidiaries for both loans and deposits. Competition for
depositors' funds and for creditworthy loan customers is intense. A number of
larger banks are increasing their efforts to serve smaller commercial borrowers.
Competition among financial institutions is based upon interest rates and other
credit and service charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to larger commercial borrowers,
relative lending limits. As in the past, NECB's future earnings will be affected
by changes in the prevailing interest rates, as well as competition, other
financial market developments and regulatory controls beyond the control of
NECB's Management.
Beginning in the late 1980's and continuing to this day, the
Connecticut banking industry has become more concentrated with over 30 banks
ceasing operations as a result of reorganizations or failure. Increasingly, the
industry consists of a few very large, regional, super-regional and national
institutions, and a number of smaller community-based banks whose success
depends upon providing customer-focused products and services.
The continued growth of large institutions and the potential for large
out-of-area banking organizations to enter the local banking market may increase
opportunities for efficiently operated, service-oriented, community-based
banking organizations to serve customers which large organizations do not serve
well or which do not want to bank with such institutions.
NECB believes that to be successful, community banks must be able to
offer their customers competitive products and services of their own initiation
or through strategic alliances and contractual
Page -13-
<PAGE>
relationships with third parties. While offering desired products and services
is important in attracting and maintaining customer relationships, the delivery
of such products in a convenient, friendly, professional and responsive manner
is essential to the success of a community bank. NECB's management team and
staff continue to strive to meet the needs of customers and the community with
innovative products and friendly, responsive service at convenient locations.
Despite competition with institutions commanding greater financial
resources, the Subsidiaries' supply of funds has imposed no substantial
impediment to their normal lending functions. While the Subsidiaries are limited
to making commercial loans to a single borrower in an amount not to exceed
fifteen percent of their capital and have a "house limit" significantly below
that level, they have, on occasion, arranged for participation by other banks in
larger loan accommodations.
NECB operates banks which are community-oriented with a commitment to
customer service, sound community relations and professional excellence. The
target market of the Subsidiaries consists of individual consumers and locally
based businesses. Emphasis is placed upon "relationship banking" as NECB's banks
strive to provide the majority (if not all) of their clients' borrowing and
deposit needs. NEBT's primary market area is located in north central
Connecticut. The primary market area of EQBK consists of the Towns of
Wethersfield and Rocky Hill, Connecticut. The area of Hartford south of Park
Street forms the secondary market of EQBK. The market area for CMBK is Bristol,
Connecticut and its surrounding communities.
The Subsidiaries' focus remains on being an integral part of the
communities they serve. Officers and employees are trained to meet the needs of
their customers and emphasis is placed on addressing the needs of the local
communities served.
Page -14-
<PAGE>
Executive Officers of the Registrant.
The following table sets forth certain information on each executive
officer of NECB who is not a director:
<TABLE>
<CAPTION>
Name, Age and Officer of Principal Occupation
Position with NECB NECB Since During Past Five Years
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donat A. Fournier, 49 1993 Prior to employment with NECB,
Vice President and Senior Loan Officer Mr. Fournier was Senior Executive
Vice President with Eastland Financial
Corporation in Woonsocket, Rhode Island
Anson C. Hall, 60 1993 Prior to employment with NECB,
Vice President, Chief Financial Officer Mr. Hall owned and operated a business,
and Treasurer Bestway Management, a management
consulting firm
</TABLE>
Statistical Disclosure Required Pursuant to Securities Exchange Act of 1934,
Industry Guide 3.
The statistical disclosures for a bank holding company required
pursuant to Industry Guide 3, not contained in Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations--contained herein,
are presented on the following pages of this Report on Form 10-K:
Page(s) of
Item of Guide 3 This Report
--------------- -----------
II. Investment Portfolio............................................16
III. Loan Portfolio..................................................17
V. Deposits........................................................18
VI. Return on Equity and Assets.....................................18
Page -15-
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM II
INVESTMENT PORTFOLIO
The following table presents the book value of investments as of the
end of each reported period:
(Amounts in thousands)
AVAILABLE FOR SALE:
At December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies................ $ 76,948 $ 82,638 $ 56,139
Mortgage-backed securities.............. 12,730 10,380 11,388
Corporate debt securities............... 10,053 8,003 9,668
Asset-backed securities................. 527 114
Municipal securities.................... 1,008
Marketable equity securities............ 20,190 4,002 15,201
---------- ---------- ----------
Total 120,448 105,137 93,404
---------- ---------- ----------
HELD TO MATURITY:
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies................. 6,398 10,317 11,225
Debt securities issued by states
and political subdivisions
of the states.................... 2,841 2,841 1,565
Mortgage-backed securities............... 1,882
Other debt securities.................... 215 175 175
---------- ---------- ----------
Total 11,336 13,333 12,965
---------- ---------- ----------
Total Investment securities $ 131,784 $ 118,470 $ 106,369
========= ========== ==========
The following table presents maturities and weighted average yields at
December 31, 1997. The weighted average yields were calculated based on the cost
and effective yields to maturity of each security. The weighted average yields
on income from municipal obligations and equity securities were adjusted to a
tax-equivalent basis.
(Amounts in thousands)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE(1)(2):
Weighted After One Weighted After Five Weighted Weighted Weighted
Within Average But Within Average But Within Average After Average Average
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield Total Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies........ $ 6,477 5.51% $ 41,425 6.48% $ 26,832 7.14% $ 1,639 7.43% $ 76,373 6.91%
Mortgage-backed securities...... 411 7.84 4,392 6.82 2,781 6.95 5,001 6.86 12,585 6.87
Corporate debt securities....... 2,497 5.85 7,471 6.48 9,968 6.45
Asset-backed securities......... 527 6.32 527 6.32
-------- --------- --------- --------- ---------
$ 9,385 5.64% $ 53,815 6.51% $ 29,613 7.13% $ 6,640 6.97% $ 99,453 6.88%
-------- --------- --------- --------- ---------
</TABLE>
Page -16-
<PAGE>
<TABLE>
<CAPTION>
Weighted After One Weighted After Five Weighted Weighted Weighted
Within Average But Within Average But Within Average After Average Average
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield Total Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY:
Debt securities issued by the
U.S. Treasury and other U.S.
government agencies........ $ 5,399 6.42% $ 999 7.55% $ 6,398 6.75%
Debt securities issued by states
and political subdivisions
of the states........... 1,006 7.35 1,587 6.58 $ 248 7.54% 2,841 7.08
Mortgage-backed securities...... $ 880 6.00% 765 6.48 237 6.69 1,882 6.56
Corporate debt securities....... 75 8.00 140 7.25 215 7.40
--------- ---------- ---------- --------- ---------
$ 880 6.00% $ 7,245 6.59% $ 2,963 6.94% $ 248 7.54% $ 11,336 6.86%
--------- ---------- ---------- --------- ---------
Total portfolio(2).............. $ 10,265 5.67% $ 61,060 6.52% $ 32,576 7.11% $ 6,888 7.00% $ 110,789 6.88%
========= ========== ========== ========= =========
</TABLE>
(1) Amounts shown at amortized cost.
(2) Does not include Marketable Equity Securities with a carrying amount of
$19,072,000
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
Types of loans at the end of each reporting period.
<TABLE>
<CAPTION>
(Amounts in thousands)
At December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and financial................ $102,105 $ 89,544 $ 66,811 $ 58,990 $ 52,691
Real estate:
Construction......................... 19,620 12,250 12,841 1,883 830
Residential.......................... 111,321 78,510 64,210 51,615 51,433
Commercial........................... 133,803 116,188 83,590 43,467 42,696
Consumer................................ 41,686 39,712 36,310 23,640 23,434
-------- -------- -------- -------- --------
Loans outstanding.................... $408,535 $336,204 $263,762 $179,595 $171,084
======== ======== ======== ======== ========
</TABLE>
The following table shows the maturity and sensitivity of the Company's
loan portfolio outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
After One
One Year Year Through After
(Amounts in thousands) or Less Five Years Five Years Total Loans
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and financial.......................... $ 40,905 $ 48,896 $ 12,304 $ 102,105
Real estate:
Construction................................. 19,009 611 19,620
Residential.................................. 58,045 29,320 23,956 111,321
Commercial................................... 57,717 46,114 29,972 133,803
Consumer.......................................... 30,936 5,478 5,272 41,686
---------- ---------- --------- ----------
Total Loans....................................... $ 206,612 $ 129,808 $ 72,115 $ 408,535
---------- ---------- ---------
Allowance for possible loan losses............. (9,257)
----------
Total loans, net.................................. $ 399,278
==========
</TABLE>
Of those loans due after one year or $201,923,000, approximately
$72,692,000 have predetermined interest rates and $129,231,000 have floating or
adjustable interest rates.
Page -17-
<PAGE>
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM V
DEPOSITS
The following table sets forth average deposits and average rates for
each of the years indicated:
<TABLE>
<CAPTION>
(Amounts in thousands)
1997 1996 1995
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits......................... $ 87,239 $ 72,832 $ 49,544
----------- ----------- -----------
Regular savings deposits................ 105,375 2.32% 98,395 2.12% 68,986 2.30%
NOW accounts............................ 58,933 1.34% 50,325 1.22% 35,089 1.29%
Money market deposits................... 4,055 1.16% 5,014 1.10% 5,047 1.82%
----------- ----------- -----------
Total savings deposits............... 168,363 1.95% 153,734 1.79% 109,122 1.96%
----------- ----------- -----------
Time deposits........................... 180,755 5.15% 176,381 5.38% 104,745 5.28%
----------- ----------- -----------
Total Deposits.................... $ 436,357 2.89% $ 402,947 3.04% $ 263,411 2.91%
=========== =========== ===========
</TABLE>
The following table sets forth the time remaining until maturity for
time deposits in amounts of $100,000 and more:
3 months or less ....................... $13,372
3 to 6 months .......................... 7,259
6 to 12 months ......................... 8,474
More than 12 months .................... 6,824
-------
Total $35,929
=======
NECB, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VI
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return (loss) on average assets............. 0.91% 1.21% 1.26% 0.56% (0.13)%
Return (loss) on average equity............. 9.01 13.00 14.64 8.85 (2.20)
Dividend payout ratio....................... 35.06 21.43 14.04 0.06 0.00
Equity to assets............................ 8.88 9.52 8.87 7.51 5.85
</TABLE>
ITEM 2. PROPERTIES
NECB is the owner of an operations center in East Hartford
Connecticut--located at 20 Founders Plaza, East Hartford, Connecticut. The
18,000 square foot facility houses the data and item processing and customer
service functions and is adequate to support the foreseeable processing and
support needs of NECB.
NEBT's designated main office is located at 176 Broad Street, Windsor,
Connecticut. In addition to the designated main office, NEBT has additional
branches in Windsor and Canton, East Windsor, Ellington, Enfield, Manchester
(2), Somers, Suffield and West Hartford. Of these offices, four are leased and
four are owned properties. The Enfield has a ground lease only. EQBK operates
out of a single leased office in Wethersfield, Connecticut and CMBK operates two
offices, in Bristol and Plymouth, Connecticut. The Bristol office is owned while
the Plymouth facility is leased.
Page -18-
<PAGE>
During the year ended December 31, 1997 the aggregate rental expenses
paid by NECB for all its office properties was approximately $786,000. All
properties are considered to be in good condition and adequate for the purposes
for which they are used.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material adverse legal proceedings other than
ordinary routine litigation incidental to normal business to which NECB and its
Subsidiaries are a party to or which any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of NECB's 1997 fiscal year.
Page -19-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
As of December 31, 1997, there were 5,160,626 shares of NECB Common
Stock issued and outstanding which were held by approximately 4,000 shareholders
of record.
NECB's Common Stock is listed on the Nasdaq National Market. The following
represents the high and low sale prices from each quarter during the last two
years*:
1997
----
High Low
---- ---
1st Quarter......................... $18 3/8 $14 7/8
2nd Quarter......................... 17 1/2 15
3rd Quarter......................... 24 3/4 16 7/8
4th Quarter......................... 25 3/4 20 15/16
1996
----
High Low
---- ---
1st Quarter......................... $11 1/4 $9 3/4
2nd Quarter......................... 13 10 1/2
3rd Quarter......................... 13 11 1/2
4th Quarter......................... 15 3/8 12 5/8
*Not adjusted for 10% stock dividend paid on January 16, 1998 to shareholders of
record December 31, 1997.
The following table shows per share quarterly cash dividends NECB
declared upon the Common Stock over the last two years:
1997 1996
---- ----
Q1......................... $0.07 Q1............................ $0.06
Q2......................... 0.08 Q2............................ 0.06
Q3......................... 0.08 Q3............................ 0.06
Q4......................... 0.09 Q4............................ 0.07
Dividends are generally declared within 45 days prior to the payable
date, to shareholders of record l0 to 15 days after the declaration date.
Reference should be made to page 5 of this Report on Form 10-K for a
discussion of Restrictions on Dividend Payments.
ITEM 6. SELECTED FINANCIAL DATA
Reference should be made to page 4 of this Report on Form 10-K for a
discussion of recent acquisitions which affect the comparability of the
information contained in this table.
(amounts in thousands; except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net interest income $ 25,452 $ 22,544 $ 14,395 $ 12,153 $ 11,651
Provision for loan losses 1,248 2,209 1,200 1,436 2,614
Noninterest income 4,079 3,416 2,343 2,356 3,062
Noninterest expense 20,531 15,964 11,872 11,095 12,619
Income tax expense (benefit) 3,117 2,299 (24) 468 72
Cumulative effect of change
in accounting principal (228)
Net income (loss) 4,635 5,488 3,690 1,510 (364)
PER SHARE DATA:
Net income (loss) per share--basic $ 0.91 $ 1.19 $ 1.19 $ 0.74 $ (0.18)
Net income (loss) per share--diluted 0.90 1.19 1.18 0.74 (0.18)
Dividends declared 0.326 0.255 0.186 0.045 0.00
BALANCE SHEET DATA (AS OF END OF YEAR):
Loans $ 399,278 $ 329,544 $257,887 $ 175,458 $ 170,183
Allowance 9,257 6,660 5,875 4,137 4,413
Goodwill 5,238 4,464 402 0 0
Assets 606,170 516,754 418,868 290,474 281,601
Deposits 522,644 457,004 377,403 266,638 262,779
Shareholders' equity 53,823 49,220 37,148 21,826 16,460
Nonperforming assets 11,945 8,757 8,315 8,551 9,780
OPERATING RATIOS:
Return on average assets 0.91% 1.21% 1.26% 0.56% (0.13)%
Return on average equity 9.01 13.00 14.64 8.85 (2.20)
Net interest margin 5.43 5.40 5.39 4.92 4.57
Total equity to total assets 8.88 9.52 8.87 7.51 5.85
Tangible equity to total assets 8.02 8.66 8.77 7.51 5.85
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
New England Community Bancorp, Inc. ("NECB" or the "Company") reported
net income for 1997 of $4,635,000, or $0.91 per share--basic, compared to
$5,488,000, or $1.19 reported in 1996. Return on assets ("ROA") and return on
equity ("ROE") were 0.91% and 9.01%, respectively, for 1997 compared to 1.21%
and 13.00%, respectively, in 1996. During 1997 the Company acquired First Bank
of West Hartford ("FBWH") and Community Savings Bank ("CMBK"). Expenses related
to these acquisitions totaled $1,750,000 (tax effected), or $0.34 per
share--basic. Net operating income, which excludes the impact of these charges,
amounted to $6,385,000 or $1.25 per share--basic. This represents an increase of
$897,000 or 16% over net operating income for 1996. On an earnings per share
basis (using net operating income), 1997 increased 6% over the $1.19 earnings
per share--basic for 1996. ROA and ROE were 1.26% and 12.41%, respectively in
1997, excluding the acquisition-related charges. The acquisition of FBWH was
accounted for as a "pooling of interests" and as such all comparative prior
periods have been restated as if the acquisition had been in effect for all
periods presented. Conversely, the acquisition of CMBK was accounted for a
purchase and as such prior year comparative data was not revised to include the
results of operations of CMBK. [Please see Acquisition Summary below
Page -20-
<PAGE>
and Footnote 2 to the consolidated financial statements for information
concerning the Company's merger and acquisitions.]
Net interest income on a fully taxable-equivalent ("FTE") basis totaled
$25,630,000 for 1997 compared to $22,784,000 in 1996. The net interest margin
for 1997 was 5.43% versus 5.40% in 1996. The increase in net interest income is
due to growth in average earning assets, much of this growth resulted from the
July 1996 acquisition of Manchester State Bank ("MSB") while the 3 basis point
improvement in net interest margin resulted primarily from an improved mix of
interest-earning assets coupled with a decrease in the cost of interest-bearing
liabilities.
The provision for possible loan losses was $1,248,000 compared to
$2,209,000 in 1996. The decrease is largely due to a sharp decrease in net
charge-offs during 1997 which amounted to $759,000 compared to $3,434,000 in
1996.
Noninterest income increased to $4,079,000 in 1997 from $3,416,000 in
1996. The 19% improvement resulted from the combined effect of the MSB
acquisition (which is primarily reflected in the $592,000 increase in service
charges, fees and commissions) and the $308,000 increase in securities gains.
Noninterest expense totaled $20,531,000 in 1997 compared to $15,964,000
in 1996. The increase primarily resulted from the MSB acquisition, net of cost
reductions derived from the elimination of duplicate operations and other
expense reduction initiatives undertaken by the Company. Illustrative of these
initiatives particularly, NECB's efficiency ratio--excluding the effect of the
restructure charge--equaled 59.7% for 1997 compared to 59.4% for 1996. By
comparison, the efficiency ratio in 1995 was 67.9%.
Total loans at December 31, 1997 amounted to $408,535,000 compared to
$336,204,000 at December 31, 1996 while total deposits amounted to $522,644,000
at December 31, 1997 compared to $457,004,000 at December 31, 1996. In addition
to the $54,921,000 in loans provided by the CMBK acquisition, NECB was able to
add $17,410,000 to loans outstanding during 1997. Absent the effect of CMBK,
which added $63,006,000 in deposits, deposits would have increased a modest
$2,634,000 in 1997.
Shareholders' equity increased $4,603,000 from $49,220,000 at December
31, 1996 to $53,823,000 at year-end 1997. Reflecting the CMBK acquisition (which
was an all cash transaction), the ratio of equity to assets decreased to 8.9% at
December 31, 1997 compared to 9.5% a year earlier.
ACQUISITION SUMMARY
In November 1995, NECB created a second banking subsidiary when it
acquired The Equity Bank ("EQBK"). In July, 1996 and August, 1997, respectively,
the Company acquired all the outstanding common stock of MSB and FBWH, both of
which were merged with and into NEBT. On December 31, 1997, NECB acquired CMBK,
establishing a third banking subsidiary. With the exception of the FBWH
acquisition, each of the transactions were accounted for as purchases and, as
such, prior year comparative data was not revised to include information about
either entity. As previously noted, the acquisition of FBWH was accounted for as
a "pooling of interests" and therefore all comparative prior periods have been
restated as if the acquisition had been in effect for all periods presented.
On February 10, 1998, the Company and Olde Port Bank & Trust Company
("OPBT") of Portsmouth, New Hampshire signed a definitive agreement under which
the Company will acquire OPBT. The Merger is conditioned upon requisite bank
regulatory approvals and the approval of shareholders of OPBT as well as other
customary conditions. It is anticipated that the acquisition will be consummated
in the second quarter of 1998.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which is defined as the difference between
interest earned on earning assets and interest paid on deposits and borrowings,
represents the largest component of NECB's operating income. The principal
earning assets of the Company are the loan portfolios of its subsidiary
banks--which are primarily comprised of loans to finance operations of
businesses located within our market area, mortgage loans to finance the
purchase or improvement of properties used by businesses and mortgage loans and
personal loans to individuals. Representing approximately one-quarter of the
Company's earning assets, NECB's investment portfolio also plays an important
part in the management of
Page -21-
<PAGE>
the Company's balance sheet. These funds are used to provide reserves and meet
the liquidity needs of the Company while providing a source of revenue. Excess
reserves are available to meet the borrowing needs of the communities we serve.
For the following discussion, interest income is presented on a fully
taxable-equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and securities as if such interest were taxed at the
applicable State and Federal income tax rates for all periods presented.
(Amounts in thousands)
Years Ended December 31, 1997 1996 1995
---- ---- ----
Interest income (financial statements) $ 38,981 $ 35,051 $ 22,107
Tax equivalent adjustment 178 240 121
Interest expense (13,529) (12,507) (7,712)
--------- -------- ---------
Net interest income--FTE $ 25,630 $ 22,784 $ 14,516
========= ======== =========
In 1997, net interest income increased $2,846,000, or 12% over 1996.
The increase in 1997 is largely due to growth in earning assets which increased
a substantial $49,605,000 or 12% compared to the 1996 average. The MSB
acquisition added approximately $38,000,000 to the average while internal growth
provided the remainder. The interest-bearing liabilities acquired with MSB added
to interest costs while the combined effect of changes to interest rates of both
earning assets and interest-bearing liabilities served to decrease net interest
income by $437,000 in 1997.
Page -22-
<PAGE>
NET INTEREST MARGIN AND INTEREST RATE SPREAD
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996 1995
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
Years Ended December 31, Balance Paid Rate Balance Paid Rate Balance Paid Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold $ 7,352 $ 400 5.44% $ 9,544 $ 506 5.30% $ 12,513 $ 713 5.70%
Investment securities 120,107 7,850 6.54% 114,487 7,070 6.18% 68,603 4,155 6.06%
Loans (A) 344,227 30,909 8.98% 298,050 27,715 9.30% 187,993 17,360 9.23%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 471,686 39,159 8.30% 422,081 35,291 8.36% 269,109 22,228 8.26%
------- ------- -------
Allowance for loan losses (7,100) (5,360) (3,951)
Cash & due from banks 19,220 15,417 12,305
Other assets 23,446 21,468 14,178
-------- -------- --------
Total Assets $507,252 $453,606 $291,641
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Regular savings deposits $105,375 $ 2,449 2.32% $ 98,395 $ 2,088 2.12% $ 68,986 $ 1,588 2.30%
NOW accounts 58,933 791 1.34% 50,325 612 1.22% 35,089 454 1.29%
Money market deposits 4,055 47 1.16% 5,014 55 1.10% 5,047 92 1.82%
-------- ------- -------- ------ -------- ------
Total savings deposits 168,363 3,287 1.95% 153,734 2,755 1.79% 109,122 2,134 1.96%
Time deposits 180,755 9,312 5.15% 176,381 9,490 5.38% 104,745 5,529 5.28%
Short-term borrowings 6,802 319 4.69% 1,583 95 6.00% 811 49 6.04%
Long-term debt 9,726 611 6.28% 2,662 167 6.27%
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 365,646 13,529 3.70% 334,360 12,507 3.74% 214,678 7,712 3.59%
------ ------ ------
Demand deposits 87,239 72,832 49,544
Other liabilities 2,924 4,198 2,209
-------- -------- --------
Total Liabilities 455,809 411,390 266,431
Equity 51,443 42,216 25,210
-------- -------- --------
Total Liabilities & Equity $507,252 $453,606 $291,641
======== ======== ========
Net interest income $25,630 $22,784 $14,516
======= ======= =======
Net interest spread 4.60% 4.62% 4.67%
Net interest margin 5.43% 5.40% 5.39%
</TABLE>
(A) Average loans include nonaccruing loans.
The net interest margin measures the difference in yield on, and the
mix of, interest-earning assets and interest-bearing liabilities. Net interest
margin is affected by a number of factors including the volume, pricing and
maturity of earning assets and interest-bearing liabilities and interest rate
fluctuations. Changes in nonperforming assets, together with interest lost and
recovered on those assets also affect comparisons of net interest income.
The net interest margin for 1997 increased 3 basis points to 5.43%
compared to 5.40% in 1996, primarily from an improved mix of earning assets
which were funded by a greater percentage of interest-free liabilities.
Investment securities represented 25.46% of average earning assets in 1997
compared to 27.12% in 1996 while characteristically higher-yielding loans
represented 72.98% and 70.61% of average earning assets in 1997 and 1996,
respectively.
Average Earning Asset Mix--Insert Pie Chart
1997 1996
---- ----
Securities 25% 27%
Loans 73% 71%
Other 2% 2%
Page -23-
<PAGE>
Average interest-bearing liabilities increased to $365,646,000 in 1997,
from $334,360,000 in 1996, primarily due to the acquisition of MSB. The interest
rates paid on these liabilities decreased 4 basis points and averaged 3.70% in
1997 compared to 3.74% in 1996. Average total savings deposits increased
$14,629,000 in 1997 compared to 1996. Reflecting an increasingly competitive
market for core deposits the interest rate paid on these deposits rose 16 basis
points in 1997 to 1.95% from 1.79% in 1996. More than offsetting this increase
was a decrease in the cost of time deposits.
Through the increased use of repurchase agreements (for its commercial
customers) and the greater use of Federal Home Loan Bank of Boston ("FHLBB")
borrowings, NECB significantly expanded its use of alternative funding sources
in 1997. Short-term borrowings increased markedly in 1997 and averaged
$6,802,000, compared to $1,583,000 in 1996, as increased use of repurchase
agreements was used to meet NECB's funding requirements. In addition to
providing a source of funds, repurchase agreements allow NECB's commercial
deposit customers to earn interest on excess cash balances. With the majority of
the increase in short-term borrowings occurring in repurchase agreements (which
paid an average of 3.58% in 1997), the rate paid on short-term liabilities
decreased from 1996 and equaled 4.69%. As noted, during 1997 NECB increased its
long-term debt with advances from the FHLBB. NECB's borrowings were fixed rate
and had maturities ranging from 2 to 6 years. In addition, FBWH had 3 loans with
maturities ranging from 3 to 10 years. The cost of these liabilities were
virtually unchanged and equaled 6.28% in 1997 compared to 6.27% in 1996.
RATE/VOLUME ANALYSIS
Changes in net interest income between years is divided into two
components--the change resulting from the change in average balances of interest
earning assets and interest-bearing liabilities (or "volume") and the change in
the rates earned or paid on these balances. The change in interest income and
interest expense attributable to changes in both volume and rate, which cannot
be segregated, has been allocated proportionately to the absolute values of the
changes due to volume and rate. The following table is presented on a FTE basis.
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996
--------------------------------- ---------------------------------
Change due to Change due to
Increase Change in: Increase Change in:
--------- ---------
Years Ended December 31, (Decrease) Rate Volume (Decrease) Rate Volume
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (106) $ 10 $ (116) $ (207) $ (40) $ (167)
Investment securities 780 422 358 2,915 133 2,782
Loans 3,194 (1,069) 4,263 10,355 191 10,164
-------- -------- -------- -------- -------- --------
Total interest income change 3,868 (637) 4,505 13,063 284 12,779
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Regular savings deposits $ 361 $ 206 $ 155 $ 500 $ (168) $ 668
NOW account deposits 179 71 108 158 (38) 196
Money market deposits (8) 3 (11) (37) (37) 0
-------- -------- -------- -------- -------- --------
Total savings deposits 532 280 252 621 (243) 864
Time deposits (178) (409) 231 3,961 179 3,782
Short-term borrowings 224 (72) 296 46 (1) 47
Long-term debt 444 1 443 167 84 83
-------- -------- -------- -------- -------- --------
Total interest expense change 1,022 (200) 1,222 4,795 19 4,776
-------- -------- -------- -------- -------- --------
Net interest income change $ 2,846 $ (437) $ 3,283 $ 8,268 $ 265 $ 8,003
======== ======== ======== ======== ======== ========
</TABLE>
As is shown above, the majority of the increase in net interest income
in both 1997 and 1996 is attributable to changes in volume which is primarily
the result of the acquisitions accounted for as purchases. Noteworthy in the
above analysis is the $1,069,000 decrease in interest income on the loan
portfolio. As noted above, increased market competition for new loans has had
the double effect of increasing origination expense (e.g., marketing) and
increased pricing pressure. This taken together with a stable interest rate
environment has served to reduce the yield on loans by 32 basis points in 1997.
Also noteworthy in 1997 is the pick-up in rates paid on interest bearing savings
deposits in 1997 (particularly in commercial deposits) and the decrease in rates
paid on time deposits.
Page -24-
<PAGE>
NONINTEREST INCOME
NECB's income from noninterest revenue activities increased a strong
19% in 1997 and represented 9.5% of net revenues compared to 8.9% in 1996. The
increase in fee based revenue follows industry trends of the past several years
for shifting dependence away from interest sources of income. Through the
expansion of existing business lines and the introduction of new products and
services, NECB's objective is to increase the percentage of income derived from
noninterest income sources to at least 15% of total net revenue within the next
two years.
For 1997 noninterest income increased 19% from 1996 and totaled
$4,079,000 compared to $3,416,000 and $2,343,000 for 1996 and 1995,
respectively. Service charges, fees and commissions increased 30% and totaled
$2,551,000 in 1997 compared to $1,959,000 in 1996. Included in service charges,
fees and commissions are fees on deposits, loan servicing fees and other fees
and charges. While much of this increase resulted from the MSB acquisition,
strong increases in deposit-related fees also helped fuel the increase. For
example, aided by widespread consumer acceptance, the Company's debit card
program (MasterMoney(TM)) continues to grow dramatically with revenue increasing
by almost 50% from 1996. Also key to the increase in deposit related fees is
NECB's cash management program--Access. While still producing a modest amount of
revenue for the Company, the program reflects NECB's ongoing effort to seek out
opportunities for increasing fee income-producing sources of revenue.
Benefiting from the strong equities market, NECB realized gains from
the sale of securities of $315,000 in 1997. This compares to significantly
smaller amounts recorded in both 1996 and 1995. As a matter of practice, in
conjunction with the of purchase common stock, NECB establishes a target price
objective for the issue. In addition, through regular reviews of holdings, NECB
evaluates each stock and determines whether to sell or continue to hold the
stock. It is the sale of those issues which reached their target prices during
1997 which provided approximately $495,000 in gains in 1997. The likelihood of
profitability of any such gains in the future cannot be predicted.
Gains on sales of loans decreased by $216,000 and totaled $860,000 for
1997 compared to $1,076,000 for 1996. The acquisition of FBWH in mid-1997,
brought with it a small but successful department specializing in the SBA
guaranteed lending program. While it had been FBWH's practice to sell the
guaranteed portion in the secondary market, NECB chose to retain all new
production for its own portfolio. Management is confident that foregoing the
gain on the sale of these loans is outweighed by the continuing return from the
ownership of these assets. 1997 saw the Company increase its production of
mortgages originated for sale by $13,000,000, from $34,000,000 in 1996 to
$47,000,000 in 1997. The increase is largely due to (i) the Company's expanded
market area, (ii) participation in a wider variety of loan programs, and (iii) a
very favorable interest rate environment. At year-end, the bellwether 30-year
fixed mortgage was under 7%, or approximately 100-basis points below 1996's
average.
Mortgage Origination's
(amounts in thousands)
1997 1996 1995
---- ---- ----
$47,000 $34,000 $23,000
NONINTEREST EXPENSE
Total noninterest expense was $20,531,000 in 1997 compared to
$15,964,000 in 1996. The increase of $4,567,000 included non-recurring
acquisition related expenses of $2,197,000 in 1997. Excluding these charges,
noninterest expenses increased by $2,370,000 or 14.8% over the $15,964,000
reported in 1996. Much of the increase in 1997 is due to our expansion into the
Manchester market. The use of purchase accounting for the acquisition of MSB
increased expenses in categories such as salary and benefit expense, occupancy
and equipment. MSB's expenses (net of cost savings achieved in the acquisition)
increased expenses for the second half of 1996 and all of 1997. This "step-up"
in expense aggregated to approximately $1,100,000 in 1997 and $550,000 in 1996.
The largest component of the noninterest expense--salaries and
benefits--totaled $9,648,000 in 1997 compared to $8,320,000 in 1996. The
increase is primarily due to the acquisitions along with other salary and
benefit increases. Equipment totaled $1,404,000 in 1997 which is $253,000 or 22%
higher than the $1,151,000 in 1996. The increase is related to higher lease
expense related to upgrades in the data and item processing activities performed
in the Company's Technology Center. During 1997, NECB migrated to an image-based
system for generating customer statements. From the goodwill recorded in
connection with the EQBK and MSB acquisitions, intangible asset amortization
increased $159,000 from 1996. Other expenses increased by $548,000 and totaled
$2,562,000 compared to $2,014,000 in 1996.
Page -25-
<PAGE>
Reflecting NECB's growth, marketing expense increased from sponsorships (e.g.,
New England Blizzard) and other promotions related to new business initiatives
undertaken in 1997.
INCOME TAXES
In 1997, the Company recognized income tax expense of $3,117,000, an
effective tax rate of 40.2%. This compares to income tax expense of $2,299,000
in 1996, an effective rate of 29.6%. The increase in the effective tax rate is
attributable to a reduction in the valuation reserve for deferred tax assets.
BALANCE SHEET ANALYSIS
Total assets increased to $606,170,000 at December 31, 1997 compared to
$516,754,000 at December 31, 1996. The $54,921,000 in loans and $63,006,000 in
deposits the Company acquired in connection with the CMBK acquisition is
primarily responsible for the increased asset size. Excluding the effect of the
CMBK acquisition, total assets increased by $19,000,000 or 4% over 1996.
Balance Sheet Highlights (amounts in thousands)
December 31, 1997 1996 Change
---- ---- ------
Total Assets $606,170 $516,754 17.3%
Earning Assets 550,912 474,170 16.2%
Securities 134,761 120,910 11.2%
Loans 408,535 336,204 21.5%
Total Deposits 522,644 457,004 14.4%
Equity 53,823 49,220 9.4%
NECB's securities portfolio increased $13,851,000 or 11% from
$120,910,000 at December 31, 1996 to $134,761,000 at December 31, 1997. At
year-end the amortized cost of securities available-for-sale and securities
held-to-maturity totaled $118,525,000 and $11,336,000, respectively.
Management's strategy for investment securities is to maintain a very high
quality portfolio with short and intermediate maturities. Investment securities
classified as available-for-sale provide an additional source of liquidity to
meet the needs of NECB and its customers. The net unrealized gain on securities
available-for-sale increased to $1,923,000 at December 31, 1997 compared to
$368,000 at December 31, 1996. The $1,555,000 improvement is attributable to
declining interest rates and the strong performance in the stock market during
1997.
LOANS
At December 31, 1997, NECB's loan portfolio stood at $408,535,000
compared to $336,204,000 a year earlier. Beyond the effect of the CMBK
acquisition and despite the intense competition in the marketplace, NECB was
able to add significantly to loans outstanding in 1997. Through loans to small
businesses for the financing of facilities and other business purposes, NECB's
lending officers increased loans outstanding by an additional $17,410,000 or 5%
in 1997. In addition, the favorable interest rate environment coupled with a
strong economy helped fuel new home construction which enabled NECB to grow its
real estate construction loan portfolio by 60% in 1997 from $12,250,000 at
December 31, 1996 to $19,620,000 at December 31, 1997. As the preferred small
business lender in its service area together with NECB's expansion into the
Bristol market and a strengthening economy, loans outstanding should continue to
increase.
(amounts in thousands)
Loan Portfolio Composition 1997 1996
---- ----
Commercial and financial $102,105 $89,544
Real estate:
Construction 19,620 12,250
Residential 111,321 78,510
Commercial 133,803 116,188
Consumer 41,686 39,712
Page -26-
<PAGE>
A certain degree of credit risk is inherent in the Company's loan
portfolio. Credit risk is managed through the Company's credit function, which
is designed to insure adherence to a high level of credit standards. NECB's
credit function provides a system of checks and balances for NECB's
credit-related activities by establishing and monitoring all credit-related
policies and practices within NECB and insuring their uniform application. These
activities are designed to provide (i) for a thorough analysis of applications
for credit; (ii) continuous examinations of both outstanding and delinquent
loans; and, (iii) an appropriate level of loan diversification. NECB endeavors
to identify potential problem loans early, to take charge-offs promptly--based
upon realistic assessment of likely losses--and to maintain adequate reserves
for possible loan losses. In addition to being diversified by borrower, as shown
in the table below, the Company's portfolio is diversified by industry and
product.
NONPERFORMING ASSETS
Nonperforming assets ("NPAs") are assets on which income recognition in
the form of principal and/or interest has either ceased or is limited, thereby
reducing the Company's earnings. Maintaining a low level of NPAs is important to
the ongoing success of NECB. The Company's comprehensive credit review and
approval process is critical to the ability to minimize NPAs on a long-term
basis. In addition to the negative impact on net interest income and credit
losses, NPAs also increase operating expenses due to the costs associated with
collection efforts.
NPAs include nonaccrual loans and other real estate owned ("OREO").
Generally, loans are placed in nonaccrual status when they are past due greater
than ninety days or the repayment of interest or principal is considered to be
in doubt. OREO consists of properties acquired through foreclosure proceedings.
These properties are recorded at the lower of the carrying value of the related
loans or the estimated fair market value less estimated selling costs. Charges
to the allowance for loan losses are made to reduce the carrying amount of loans
to the fair market value of the properties less estimated selling expenses upon
reclassification as OREO. Subsequent reductions, if needed, are charged to
operating income. In addition to NPAs, the asset quality of the Company can be
measured by the amount of the provision, charge-offs and several credit quality
ratios presented in the discussion concerning Provision and Allowance for Loan
Losses.
NECB's NPAs at December 31, 1993 through 1997 are presented below:
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 9,075 $ 6,441 $ 5,769 $ 5,154 $ 5,519
Other real estate owned 2,870 2,316 2,546 3,397 4,261
-------- -------- -------- -------- --------
Total nonperforming assets $ 11,945 $ 8,757 $ 8,315 $ 8,551 $ 9,780
======== ======== ======== ======== ========
</TABLE>
NPAs increased $3,187,000 or 36% to $11,945,000 at December 31, 1997
from $8,757,000 at December 31, 1996. At December 31, 1997 nonaccrual loans as a
percentage of total loans and nonperforming assets as a percentage of total
assets were 2.20% and 1.97%, respectively, compared to 1.92% and 1.69% at
December 31, 1996. The increase in total NPAs in the year ended December 31,
1997 primarily resulted from the CMBK acquisition which added $4,209,000 in
NPAs.
Activity in NPAs
(amounts in thousands)
1997 1996
---- ----
Balance at beginning of year $ 8,757 $ 8,315
Additions 5,706 5,841
Changes incident to acquisitions 4,209 4,945
Reductions:
Payments (1,733) (2,981)
Returned to performing status (496) (1,193)
Charge-offs/writedowns (1,653) (4,276)
Sales/other, net (2,845) (1,894)
-------- --------
Balance at end of year $ 11,945 $ 8,757
======== ========
Page -27-
<PAGE>
At December 31, 1997 loans past due in excess of ninety days and
accruing interest amounted to $951,000 compared to $395,000 at December 31,
1996. Although these loans are not included in NPAs, Management reviews these
loans when considering risk elements to determine the overall adequacy of the
loan loss reserve.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
NECB's allowance for loan losses represents amounts available for
future credit losses. Management continually assesses the adequacy of their
allowances for loan losses in response to current and anticipated economic
conditions, specific problem loans, historical net charge-offs and the overall
risk profile of their loan portfolios. Management allocates specific allowances
to individual problem loans based upon its analysis of the potential for loss
perceived to exist related to such loans. In addition to the specific allowances
for individual loans, a portion of the allowance is maintained as a general
allowance. The amount of the general allowance is determined through
Management's analysis of the potential for loss inherent in those loans not
considered problem loans. Among the factors considered by Management in this
analysis are the number and type of loans, nature and amount of collateral
pledged to secure such loans and current economic conditions. The allowance for
loan losses is not a precise amount but is derived from judgments based on the
above factors.
The following table summarizes the activity in the allowance for
possible loan losses for the years ended December 31, 1993 through 1997. The
allowance is maintained at a level consistent with identified loss potential and
the perceived risk in the portfolio. It is not considered meaningful to allocate
the allowance according to geographic area as NECB's market area is homogeneous
and limited in size.
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans charged-off:
Commercial and financial $ 619 $ 1,066 $ 682 $ 452 $ 887
Real estate 673 2,610 1,046 1,488 1,664
Installment loans to individuals 69 244 118 92 458
------- ------- ------- ------- -------
Total charge-offs 1,361 3,920 1,846 2,032 3,009
------- ------- ------- ------- -------
Recoveries on loans charged-off:
Commercial and financial 348 188 364 101 48
Real estate 225 258 28 182 22
Installment loans to individuals 29 40 31 37 10
------- ------- ------- ------- -------
Total recoveries 602 486 423 320 80
------- ------- ------- ------- -------
Net loans charged-off 759 3,434 1,423 1,712 2,929
------- ------- ------- ------- -------
Provision charged to operations 1,248 2,209 1,200 1,436 2,614
Changes incident to acquisitions 2,108 2,010 1,961
Balance, at beginning of year 6,660 5,875 4,137 4,413 4,728
------- ------- ------- ------- -------
Balance, at end of year $ 9,257 $ 6,660 $ 5,875 $ 4,137 $ 4,413
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.21% 1.15% 0.76% 0.99% 1.56%
Ratio of allowance for loan losses to total loans 2.27% 1.98% 2.23% 2.30% 2.57%
Ratio of allowance for loan losses to
nonaccrual loans 102.01% 103.38% 101.84% 80.27% 79.96%
</TABLE>
NECB's allowance for loan losses increased $2,597,000 from December 31,
1996 to $9,257,000 at December 31, 1997. Aided by a sharp decrease in net
charge-offs, the provision for loan losses in 1997 was $1,248,000 compared to
$2,209,000 for 1996. Reflecting the decrease in charge-offs, the ratio of net
charge-offs to average loans decreased to 0.21% in 1997 compared to 1.15% in
1996. While the allowance for loan losses increased to 2.27% of total loans at
December 31, 1997 from 1.98% at December 31, 1996, management expects this ratio
to decrease to approximately 2% in 1998. Those NPAs which were identified in
NECB's due diligence of CMBK and for which a specific reserve was established
are expected to be resolved in 1998. Management increased the allowance for loan
losses by $800,000 as part of the evaluation of CMBK consistent with accounting
for the transaction as a purchase.
Page -28-
<PAGE>
The following table reflects the Allowance for Loan Losses as of
December 31, 1997 with allocations categorized by loan type:
(Amounts in thousands) Allocation of Percentage of
Allowance for loan type to
Loans by type Loan Losses total loans
- ------------------------------------------------------------------------------
Commercial & Financial $2,122 25.0%
Real estate:
Construction 510 4.8
Residential 1,803 27.2
Commercial 4,727 32.8
Consumer 95 10.2
------ -----
Total $9,257 100.0%
====== =====
As noted, NECB's subsidiaries perform ongoing reviews of loans to
determine the required allowance for possible loan losses at any given date. To
facilitate this process, an individual loan rating system is utilized. In the
review process, the subsidiaries assess factors including the borrower's past
and current financial condition, repayment ability and liquidity, the nature of
collateral and changes in its value, current and anticipated economic conditions
and other factors deemed appropriate. These reviews are dependent upon
estimates, appraisals and judgments which can change quickly because of changing
economic conditions and Management's perception as to how these factors affect
the financial condition of debtors. The loan rating process classifies loans
according to the subsidiaries' uniform classification system. The subsidiaries
consider performing loans rated as "substandard" and "doubtful" to be potential
problem loans. "Substandard" loans are characterized by well-defined weaknesses
such as deteriorating or inadequate collateral or impaired repayment ability. A
loan is considered "doubtful" when similar conditions exist but are more severe
in nature.
At December 31, 1997, NECB considered loans outstanding of $15,968,000
to be potential problems compared to $17,794,000 at December 31, 1996. Included
in these totals were loans totaling $6,894,000 and $8,719,000, respectively,
which were not classified as nonperforming because such loans are performing
according to their terms.
DEPOSITS
Total deposits increased $65,640,000 or 14% from $457,004,000 at
December 31, 1996 to $522,644,000 at December 31, 1997. This increase is largely
attributable to the acquisition of CMBK which provided $63,006,000 in deposits.
As discussed earlier, by utilizing FHLB as an alternative source of funding
interest earning assets, NECB decreased its reliance upon retail
deposits--particularly CD's--as a funding source. This taken together with a
declining interest rate environment served to reduce rates paid on CD's by more
than 25-basis points in 1997 compared to 1996. The implementation of this
strategy had a significant effect upon renewing CD's acquired in acquisitions.
For example, the interest rate structure of MSB was at or near the top end of
the rates offered throughout its market. This often attracted funds from
depositors who only sought the highest rates then being offered. While time
deposits remain an important source of funds, much of this money did not stay
with the Company. As a result, absent the effect of the acquisition, time
deposits would have decreased by approximately $9,000,000 from 1996. Through its
commercial focus, NECB continues to target small businesses as a source of
growth. This focus helped shift the mix of deposits from the higher priced time
deposits to noninterest-bearing demand deposits and NOW accounts. The percentage
of noninterest-bearing demand deposits to total deposits increased to 21.9% from
19.6% at December 31, 1997 and 1996, respectively.
INTEREST-RATE RISK
The asset/liability management process at NECB provides for a
structured process for ensuring that the risk to earnings from changes in
interest rates is prudently managed. The goal of the asset/liability management
process is to manage the balance sheet to provide maximum level of earnings
while maintaining a high quality balance sheet and acceptable levels of
interest-rate and liquidity risk. Sensitivity of earnings to interest rate
changes occur when yields on assets change differently from the interest costs
on liabilities. To mitigate this interest-rate risk, the structure of the
balance sheet is managed so that movements of interest rates on assets and
liabilities are highly correlated and produce an adequate level of
earnings--even in periods of volatile interest rates.
Key to NECB's management of interest-rate risk are the following
measurement techniques: (i) interest rate sensitivity "gap" analysis; (ii) "rate
shock" to measure earnings volatility due to immediate increase or decrease in
market
Page -29-
<PAGE>
rates of up to 200-basis points; and (iii) simulations of net interest income
under alternative balance sheet and interest rate scenarios. To further improve
the Company's ability to manage interest-rate risk, NECB uses computer modeling
software for its measuring and monitoring process. Using computer modeling, NECB
is able to measure the sensitivity of earnings to interest rate changes. NECB's
Subsidiaries measure the impact assuming the continuation of current balance
sheet trends along with a rate shock. NECB also uses the model to measure its
earnings sensitivity relative to management's most likely interest rate
scenario. In conjunction with the installation of the modeling software, the
Company refined its internal parameters for monitoring gap analysis and the
200-basis point rate shock as well as the assumptions as to the effect of volume
changes, prepayment rates and repricing characteristics for both contractual and
noncontractual assets and liabilities. These guidelines serve as benchmarks for,
determining actions to balance the current position against the Subsidiaries
strategic goals. The results of the simulations are reported to the respective
subsidiary asset/liability committee ("ALCO").
Gap analysis provides a point-in-time "snapshot" of the maturity and
repricing characteristics of the Company's balance sheet. The report, which
follows, is prepared by allocating all assets and liabilities into time horizons
based upon either their contractual or anticipated maturity or repricing. For
floating rate instruments, the entire balance is placed at the next date on
which their rates could be reset and for fixed rate instruments the balances are
placed in time horizon according to their principal repayment schedule. In
addition to prepayment assumptions for mortgage-related instruments, management
also applies assumptions to noncontractual deposits-- such as demand deposits
and savings accounts. The interest sensitivity gap is determined by subtracting
the amount of liabilities from the amount of assets that reprice in a particular
time interval. A liability sensitive position results when more liabilities than
assets reprice or mature within a given time period. Under this scenario, as
interest rates fall, increased net interest revenue will be generated.
Conversely, an asset sensitive position results when more assets than
liabilities reprice with a given period. In such an instance, net interest
revenue would benefit from an increasing interest rate environment. The impact
of creating a liability or asset sensitive position depends on the magnitude of
the actual change in interest rates relative to the behavior of borrowers and
depositors. NECB's policy specifies that the cumulative one-year gap should be
less than 10% of total assets. As is shown in the table below, as of December
31, 1997, the Company was 4.00% liability sensitive at the cumulative one year
gap, well within NECB's policy limits.
<TABLE>
<CAPTION>
INTEREST-RATE GAP ANALYSIS
DECEMBER 31, 1997 CUMULATIVELY REPRICED WITHIN
------------------------------------------------------
(Amounts in thousands, by repricing date) 3 Months 4 to 12 1 to 5 After 5
or Less Months Years Years Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ $ $ $ 39,851 $ 39,851
Securities 2,076 9,374 60,188 63,123 134,761
Loans 94,367 112,245 129,808 72,115 408,535
Loans held-for sale 2,966 2,966
Other assets 20,057 20,057
-------- --------- -------- -------- --------
Total assets 99,409 121,619 189,996 195,146 606,170
-------- --------- -------- -------- --------
Deposits:
Demand 11,451 22,902 34,353 45,804 114,510
Savings 31,291 23,782 9,631 121,889 186,593
Time 65,416 74,388 81,737 221,541
-------- --------- -------- -------- --------
Total deposits 108,158 121,072 125,721 167,693 522,644
Borrowings 14,036 2,000 8,666 946 25,648
Other liabilities 4,055 4,055
Equity 53,823 53,823
-------- --------- -------- -------- --------
Total liabilities and shareholders' equity $122,194 $123,072 $134,387 $226,517 $606,170
-------- -------- -------- -------- --------
Periodic $(22,785) $ (1,453) $ 55,609 $(31,371)
Cumulative gap $(22,785) $ (24,238) $ 31,371 $ 0
Cumulative gap as % of total assets (3.76)% (4.00)% 5.18% 0%
</TABLE>
Through both the modeling process and the complementary gap analysis,
Management believes that the exposure of the Company's income to either a rate
shock or gradual change in interest rates is modest.
Page -30-
<PAGE>
LIQUIDITY RISK
Management's objective for liquidity risk is to ensure the ability of
the Company and its Subsidiaries to meet their cash flow obligations and to
capitalize on business opportunities on a timely and cost effective basis. These
cash flow obligations include the withdrawal of deposits on demand or at
maturity, the repayment of borrowings as they mature and the ability to fund
existing and new loan commitments. Accordingly, NECB's Subsidiaries have
liquidity policies which provide flexibility to meet cash needs. The liquidity
objective is achieved through the maintenance of readily marketable investment
securities as well as a balanced flow of asset maturities, prudent pricing on
loan and deposit products and the sale of mortgage loans in the secondary
market. Liquidity at NECB is measured and monitored daily, enabling Management
to identify and respond to trends occurring in the Company's balance sheet.
All of NECB's subsidiary banks are members of the Federal Home Loan
Bank of Boston (FHLBB) making them eligible for both short term lines of credit
and long term borrowing facilities. The FHLBB provides its member banks with
credit by accepting as collateral the member bank's mortgage assets. The
aggregate credit available to the subsidiaries consists of $9,258,000 short-term
and $139,000,000 in long term. At December 31, 1997, usage of these facilities
amounted to $11,612,000 providing $136,646,000 available for future use. NECB
has alternative sources of liquidity available including federal funds purchased
and repurchase agreements. Purchases of federal funds and borrowing on
repurchase agreements may be utilized to meet short-term borrowing needs. NECB
believes that its policies will enable it to maintain adequate liquidity and to
prudently commit funds to loans or investments, depending upon underlying risk,
demand and rate of return.
As shown in the Consolidated Statements of Cash Flows, NECB's cash and
cash equivalents at December 31, 1997 was virtually unchanged from December 31,
1996 totaling $39,851,000 and $39,854,000, respectively. This compares to a
decrease of $2,481,000 in 1995, compared to December 31, 1994. The increase in
1996 was largely due to the acquisition of MSB coupled with a decrease
throughout the year in interest-bearing account balances.
CAPITAL
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, the investing public, regulators
and its shareholders. A strong capital position helps NECB withstand unforeseen
adverse developments and take advantage of profitable investment opportunities
when they arise. One such opportunity was the acquisition of CMBK, which was an
all cash transaction, and enabled NECB to leverage its balance sheet to improve
its earnings capacity. At December 31, 1997, total shareholders' equity was
$53,823,000, an increase of $4,603,000 compared to $49,220,000 at December 31,
1996. The bulk of the increase came from the retention of earnings which, net of
dividends paid, amounted to $3,010,000. Also increasing capital in 1997 was the
proceeds from the issuance of shares in conjunction with employee benefit plans
and the $927,000 increase in the net unrealized holding gain on securities
available-for-sale. During 1996, shareholders' equity increased $12,072,000 to
$49,220,000 from $37,148,000 at December 31, 1995. The increase resulted
primarily from the MSB acquisition and retained earnings.
As noted above, the Company endeavors to maintain an optimal amount of
capital upon which an attractive return to shareholders will be realized over
the short and long run while meeting all regulatory requirements for minimum
levels of capital.
As of December 31, 1997, the Company exceeded all regulatory capital
ratios and the Subsidiaries were categorized as "well capitalized." The leverage
ratio is computed using the quarterly average assets and, based upon the
December 31, 1997 acquisition date of CMBK, their assets are not included in the
leverage ratio. Had CMBK been part of NECB for the entire fourth quarter of
1997, the leverage ratio would have been approximately 8.1%. The various capital
ratios of the Company for December 31, 1997 and 1996 were:
1997 1996
---- ----
Total risk-based capital (10% to be well capitalized)..... 12.8% 14.1%
Tier 1 risk-based capital (6% to be well capitalized)..... 11.5% 12.9%
Leverage ratio (5% to be well capitalized)................ 9.2% 8.8%
Total equity to assets.................................... 8.9% 9.5%
Tangible equity to assets................................. 8.0% 8.7%
Page -31-
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130"). This statement establishes standards for reporting
and display of comprehensive income and its components (e.g., revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement does not require a specific format
for the financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 31, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. NECB does not expect that upon
adoption, this statement will have a material effect on its consolidated
financial statements.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including those contained in this Item 7 and in Item 1, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 are thus prospective. Such forward looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from future results express or implied by such statements. Such
factors include, but are not limited to: changes in interest rates, regulation,
competition and the local and regional economy.
THE YEAR 2000 PROBLEM
NECB, like all institutions that utilize computer technology, is facing
challenges associated with the inability of many existing computer systems to
process time-sensitive data accurately beyond the year 1999 (referred to as the
"Year 2000 Problem"). The Year 2000 Problem is the result of computer programs
using two digits rather than four in date fields that define the year. Any
computer programs used by NECB that have time-sensitive software may recognize a
date field using "00" as the year 1900 rather than the year 2000. If not
modified or replaced, these programs could cause system failures or
miscalculations, which could adversely affect NECB's ability to process customer
transactions or provide customer service.
NECB has conducted a comprehensive review of its computer systems to
identify all systems that could be affected by the Year 2000 Problem and
developed a comprehensive project management process to modify or replace all
affected systems and test them for Year 2000 compliance. NECB relies upon
third-party providers for its computer software. NECB is monitoring the
activities of its providers to ensure that appropriate development and
implementation plans to address the Year 2000 Problem are in place. NECB has
taken steps to identify alternative vendors in the event that one or more of
these providers fail to become Year 2000 compliant. While NECB expects its Year
2000 plan to be completed on a timely basis (to allow for adequate testing in
late 1998 and 1999), there can be no assurance that the systems of other
companies on which NECB's systems may rely also will be completed in a timely
fashion. In addition, NECB exchanges data with a number of other entities, such
as credit bureaus and governmental entities. The failure of these entities to
adequately to address the Year 2000 Problem could adversely affect NECB's
ability to conduct its business.
Costs associated with modifying existing system applications have been
and will continue to be expensed as incurred. NECB does not expect incremental
costs associated with any modifications for Year 2000 compliance to be material.
1995 COMPARISON
NECB reported net income for 1995 of $3,690,000, or $1.19 per
share--basic. The ROA and ROE for 1995 were 1.26% and 14.64%, respectively.
These performance ratios reflect the pooling of FBWH which, in 1995, had a tax
benefit from the utilization of its loss carryforward.
Page -32-
<PAGE>
Net interest income on an FTE basis in 1995 amounted to $14,516,000.
The net interest margin in 1995 was a strong 5.39%. The yield on
interest-earning assets in 1995 was 8.26% while the cost of interest-bearing
liabilities was 3.59%. The subsequent increase in the cost of interest-bearing
liabilities in 1996 (to 3.74%) is largely attributable to the MSB acquisition.
The provision for loan losses amounted to $1,200,000. Net charge-offs
amounted to $1,423,000 in 1995, down from $1,712,000 a year earlier, while NPAs
totaled $8,315,000.
Noninterest income totaled $2,343,000. Noninterest income was
positively impacted by increases in service charges and gains from the sale of
loans originated for sale. During 1995, NECB originated more than $23,000,000 in
these loans. In 1995, noninterest expenses amounted to $11,872,000.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The main components of market risk for NECB are interest rate risk,
liquidity risk, equity price risk and credit risk. The discussion of interest
rate risk, liquidity risk and credit risk appear in Part II. Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K on pages 29, 31 and 27, respectively. Such
information is incorporated herein by reference.
With regard to equity price risk, the fair value of NECB's common stock
portfolio is expected to fluctuate in a manner similar to price movements in the
S&P 500 index (a broad market index). For example, a 10% decline in the S&P 500
would be expected to reduce the fair value of NECB's year-end 1997 portfolio by
approximately 10%, or $2.02 million. Based on the portfolio's net unrealized
gain of $1.12 million at December 31, 1997, a 10% decline in fair value of would
reduce the net unrealized gain to an unrealized loss of approximately $0.90
million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required by this item are filed as a separate
part of this report (see Appendix A)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page -33-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NECB's Proxy Statement under the caption "The NECB Board of Directors"
contains the information required by this Item with respect to directors and
certain executive officers of NECB. Such information is incorporated herein by
reference. Certain additional information regarding executive officers of NECB,
who are not also directors, appears under Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
NECB's Proxy Statement under the caption "Compensation of Executive
Officers" contains the information required by this Item. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NECB's Proxy Statement contains under the caption "NECB Stock Owned by
Directors and Executive Officers" the information required by this Item. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NECB's Proxy Statement under the caption "Other Information Relating to
Directors and Executive Officers" contains the information required by this
Item. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) (2) List of Financial Statements and Schedules.
The consolidated financial statements and report of independent public
accounts of New England Community Bancorp, Inc. and subsidiaries are listed in
the index appearing on page 34 of this report on Form 10-K.
(a) (3) List of Exhibits
Exhibit No. Description
(3)(i) Amended and Restated Certificate of Incorporation of New
England Community Bancorp, Inc. was filed on June 20, 1995 as
Exhibit 3.1 to New England Community Bancorp, Inc.'s
Registration Statement on Form S-4 (No.33-93640) and is
incorporated herein by reference.
Page -34-
<PAGE>
(3)(ii) Bylaws of New England Community Bancorp, Inc.
(10)(a) The Employment Agreement between New England Bank and Trust
Company and David A. Lentini dated August 9, 1994 was filed as
Exhibit 10.3 to Olde Windsor Bancorp, Inc.'s, now known as New
England Bancorp, Inc.'s, Registration Statement on Form S-1
(No. 33-83622) and is incorporated herein by reference.
(10)(b) The Employment Agreement by and between New England Bank and
Trust Company and David A. Lentini dated August 31, 1993 was
filed as Exhibit 10.4 to Olde Windsor Bancorp, Inc.'s, now
known as New England Community Bancorp, Inc.'s, Registration
Statement on Form S-1 (No. 33-83622) and is incorporated
herein by reference.
(10)(c) The Employment Agreement by and between New England Bank and
Trust Company and Donat A. Fournier dated August 31, 1993 was
filed as Exhibit 10.5 to Olde Windsor Bancorp, Inc.'s, now
known as New England Community Bancorp, Inc.'s, Registration
Statement on Form S-1 (No. 33-83622) and are incorporated
herein by reference.
(10)(d) The Employment Agreement by and between New England Bank and
Trust Company and Donat A. Fournier dated August 9, 1994 was
filed on October 20, 1994 as Exhibit 10.6 to New England
Community Bancorp, Inc.'s Registration Statement on Form S-1
(No. 33-83622), Amendment 1, and is incorporated herein by
reference.
(10)(e) The Employment Agreement by and between New England Bank and
Trust Company and Anson C. Hall dated August 9, 1994 was filed
on October 20, 1994 as Exhibit 10.7 to New England Community
Bancorp, Inc.'s Registration Statement on Form S-1 (No.
33-83622), Amendment Number 1, and is incorporated herein by
reference.
(10)(f) The Employment Agreement by and between New England Community
Bancorp, Inc. and Frank A. Falvo dated December 6, 1996 was
filed on March 31, 1997 as Exhibit 10(f) to New England
Community Bancorp, Inc.'s Annual Report filed on Form 10-K.
(10)(g) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and David A. Lentini dated October 16,
1997.
(10)(h) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Donat A. Fournier dated October
16, 1997.
(10)(i) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Anson C. Hall dated October 16,
1997.
(10)(j) The Executive Retention Agreement by and between New England
Community Bancorp, Inc. and Frank A. Falvo dated October 16,
1997.
Page -35-
<PAGE>
(21) List of Subsidiaries.
Financial Data Schedule.--Fiscal Year End 1997
(27.1) Financial Data Schedule.
(27.2) Financial Data Schedule.--Fiscal Year Ends 1995, 1996
and Ohs, 1, 2, 3 of 1996
(27.3) Financial Data Schedule.--Qtrs. 1, 2, 3 of 1997
Page -36-
<PAGE>
(b) Reports on Form 8-K:
Form 8-K/A filed on October 21, 1997. This 8-K amended an earlier
filing (made on August 15, 1997) and provided Item 7 (a) Financial Statements of
Businesses Acquired; and 7 (b) Pro Forma Financial Statements disclosure.
Form 8-K filed on December 19, 1997. Under Item 5, Other Matters, it
was reported that at a meeting held on December 18, 1997, the Board of Directors
of NECB voted to declare a 10% stock dividend payable January 16, 1998 to
shareholders of record December 31, 1997.
Page -37-
<PAGE>
APPENDIX A
Index to Financial Statements:
Report of Independent Certified Public Accountants for the Years Ended
December 31, 1997, 1996 and 1995........................................F-1
Consolidated Balance Sheets at December 31, 1997 and 1996....................F-2
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995........................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995............................F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995..................................F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1997, 1996 and 1995.........................F-6-26
Page -38-
<PAGE>
Shatswell, MacLeod & Company, P.C. [Letterhead]
83 Pine Street
West Peabody, Massachusetts 01960
To the Board of Directors
New England Community Bancorp, Inc.
Windsor, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of New England
Community Bancorp, Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
England Community Bancorp, Inc. and Subsidiaries as of December 31, 1997, and
the consolidated results of their operations and their cash flows for year ended
December 31, 1997, in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet as of
December 31, 1996 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for New England Community Bancorp, Inc. for
the years ended December 31, 1996 and 1995, prior to their restatement for the
1997 pooling of interests as described in Notes 1 and 2 to the consolidated
financial statements. The contribution of New England Community Bancorp, Inc. to
total assets, net interest income and net income represented 84%, 82% and 78%
for 1996 of the respective restated totals. The contribution of New England
Community Bancorp, Inc. to net interest income and net income represented 73%
and 54% for 1995 of the respective restated totals. Separate financial
statements of the other entity included in the 1996 and 1995 restated
consolidated statements were audited and reported on separately by other
auditors. We have also audited, as to combination only, the accompanying
consolidated balance sheet as of December 31, 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1996 and 1995 after restatement for the 1997 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Notes 1 and 2 to the consolidated financial
statements.
s/s Shatswell, MacLeod & Company, P.C.
- --------------------------------------
SHATSWELL, MACLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 29, 1998, except for Note 2,
as to which the date is February 10, 1998
F-1
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 35,201 $ 24,729
Federal funds sold 4,650 15,125
--------- --------
Cash and cash equivalents 39,851 39,854
Securities held-to-maturity, fair values of $11,478 and $13,386 at
December 31, 1997 and 1996, respectively 11,336 13,333
Securities available-for-sale, at fair value 120,448 105,137
Federal Home Loan Bank stock, at cost 2,977 2,440
Loans outstanding 408,535 336,204
Less: allowance for possible loan losses (9,257) (6,660)
--------- --------
Net loans 399,278 329,544
Loans held-for-sale 2,966 1,931
Accrued interest receivable 4,395 3,913
Premises and equipment 11,064 9,956
Other real estate owned 2,870 2,316
Goodwill 5,238 4,464
Other assets 5,747 3,866
--------- --------
Total Assets $ 606,170 $516,754
========= ========
LIABILITIES:
Deposits:
Noninterest bearing $ 114,510 $ 89,767
Interest bearing 408,134 367,237
--------- --------
Total deposits 522,644 457,004
Short-term borrowings 14,036 2,278
Long-term debt 11,612 3,951
Other liabilities 4,055 4,301
--------- --------
Total Liabilities 552,347 467,534
--------- --------
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.10 par value, 200,000 shares authorized;
no shares issued
Common stock, $.10 par value, authorized 10,000,000 shares:
December 31, 1997, 5,160,626 outstanding;
December 31, 1996, 4,622,400 outstanding 516 462
Additional paid-in capital 51,064 38,546
Retained earnings 1,107 10,003
Net unrealized gain on securities available-for-sale 1,136 209
--------- --------
Total Shareholders' Equity 53,823 49,220
--------- --------
Total Liabilities & Shareholders' Equity $ 606,170 $516,754
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $30,909 $27,715 $17,360
Securities:
Taxable interest 7,317 6,360 3,797
Interest exempt from federal income taxes 141 120 49
Dividends 214 350 188
Federal funds sold and other interest 400 506 713
------- ------- -------
Total interest income 38,981 35,051 22,107
------- ------- -------
INTEREST EXPENSE:
Deposits 12,599 12,245 7,663
Borrowed funds 930 262 49
------- ------- -------
Total interest expense 13,529 12,507 7,712
------- ------- -------
Net interest income 25,452 22,544 14,395
Provision for possible loan losses 1,248 2,209 1,200
------- ------- -------
Net interest income after provision for possible loan losses 24,204 20,335 13,195
------- ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions 2,551 1,959 1,611
Securities gains, net 315 7 26
Gain on sales of loans, net 860 1,076 498
Other 353 374 208
------- ------- -------
Total noninterest income 4,079 3,416 2,343
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 9,648 8,320 5,543
Occupancy 2,069 1,836 1,226
Furniture and equipment 1,404 1,151 861
Outside services 1,035 1,152 870
Postage and supplies 728 759 501
Insurance and assessments 187 180 630
Losses, writedowns, expenses - other real estate owned 387 397 505
Amortization of goodwill 314 155
Acquisition expenses 2,197
Other 2,562 2,014 1,736
------- ------- -------
Total noninterest expense 20,531 15,964 11,872
------- ------- -------
Income before taxes 7,752 7,787 3,666
Income tax expense (benefit) 3,117 2,299 (24)
------- ------- -------
Net Income $ 4,635 $ 5,488 $ 3,690
======= ======= =======
Net Income per share--Basic $ 0.91 $ 1.19 $ 1.19
Net Income per share--Diluted $ 0.90 $ 1.19 $ 1.18
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(amounts in thousands)
Net Unrealized
Gain (Loss)
Additional on Securities
Common Stock Paid-in Retained Available- Total
Shares Value Capital Earnings for-Sale Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,581 $ 258 $ 20,394 $ 2,519 $ (1,345) $ 21,826
Net income 3,690 3,690
Dividends declared--$0.186 per share (481) (481)
Cash dividends declared by pooled
company prior to acquisition (37) (37)
Common stock issued in connection with:
Acquisition of The Equity Bank 1,004 100 9,407 9,507
Common stock offering 256 26 1,075 1,101
Common stock warrants 2 8 8
Net change in unrealized loss on
securities available-for-sale 1,534 1,534
--------- -------- --------- --------- --------- ---------
Balance, December 31, 1995 3,843 384 30,884 5,691 189 37,148
Net income 5,488 5,488
Dividends declared--$0.255 per share (952) (952)
Cash dividends declared by pooled
company prior to acquisition (224) (224)
Common stock issued in connection with:
Acquisition of Manchester State Bank 549 56 6,254 6,310
Employee benefit plans 37 3 184 187
Common stock warrants 193 19 1,224 1,243
Net change in unrealized gain on
securities available-for-sale 20 20
--------- -------- --------- --------- --------- ---------
Balance, December 31, 1996 4,622 462 38,546 10,003 209 49,220
Net income 4,635 4,635
Dividends declared--$0.326 per share (1,471) (1,471)
Cash dividends declared by pooled
company prior to acquisition (154) (154)
Common stock retired in connection
with acquisition of First Bank of
West Hartford (21) (2) (110) (112)
Common stock issued in connection with
employee benefit plans 91 9 797 806
Ten percent stock dividend 469 47 11,831 (11,906) (28)
Net change in unrealized gain on
securities available-for-sale 927 927
--------- -------- --------- --------- --------- ---------
Balance, December 31, 1997 5,161 $ 516 $ 51,064 $ 1,107 $ 1,136 $ 53,823
========= ======== ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
NEW ENGLAND COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,635 $ 5,488 $ 3,690
Adjustment for noncash charges (credits):
Provision for depreciation and amortization 1,003 959 721
Losses from sale or disposal and provisions to reduce
the carrying value of other real estate owned, net 187 372 420
Securities gains, net (315) (7) (26)
Gain on sales of premises and equipment (333) (12)
Accretion of discounts and amortization of premiums
on bonds, net 3 100 104
Accretion, net of amortization, of purchase accounting adjustments (213) (191)
Amortization of goodwill 314 155
Provision for possible loan losses 1,248 2,209 1,200
(Increase) decrease in accrued interest receivable and
other assets, net (491) 90 (297)
Increase in loans held-for-sale (1,035) (72) (1,677)
Increase (decrease) in accrued interest payable and
other liabilities, net (1,034) (793) 725
-------- -------- -------
Net cash provided by operating activities 3,969 8,298 4,860
-------- -------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing accounts 12,369 2,473 (3,659)
Net increase (decrease) in interest-bearing accounts (15,449) (6,914) 7,029
Net increase (decrease) in short-term borrowings 11,758 1,661 (633)
Net increase in long-term debt 6,921 3,951
Issuance of common stock 232 1,431 1,108
Cash and cash equivalents acquired in the acquisitions, net 7,888 14,236 7,790
Cash dividends paid (1,464) (1,042) (453)
-------- -------- --------
Net cash provided by financing activities 22,255 15,796 11,182
-------- -------- --------
INVESTING ACTIVITIES:
Loans originated, net of principal collections (19,407) (8,941) (2,124)
Loans purchased from other lenders (828) (4,871)
Net (increase) decrease in interest-bearing time deposits 3,000 (2,802)
Purchase of Federal Home Loan Bank stock (175) (687)
Proceeds from sales of loans 38 456
Purchases of securities available-for-sale (52,296) (63,886) (57,126)
Proceeds from sales of securities available-for-sale 23,662 19,905 27,325
Proceeds from maturities of securities available-for-sale 18,556 34,152 19,324
Purchases of securities held-to-maturity (25) (4,667) (8,765)
Proceeds from maturities and repayments of securities held-to-maturity 2,020 5,312 10,056
Proceeds from sales of other real estate owned 1,796 2,581 1,978
Purchases of premises and equipment (821) (1,368) (1,518)
Proceeds from sales of premises and equipment 486 12
Capitalization of expenditures on other real estate owned (61) (45)
-------- -------- --------
Net cash used for investing activities (26,227) (15,004) (18,523)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (3) 9,090 (2,481)
Cash and cash equivalents, beginning of year 39,854 30,764 33,245
-------- -------- --------
Cash and cash equivalents, end of year $ 39,851 $ 39,854 $ 30,764
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
New England Community Bancorp, Inc. (the "Company"), a Delaware
Corporation, is a multi-bank holding company. Each of its wholly-owned
subsidiary banks are chartered by the State of Connecticut. New England Bank &
Trust Company ("NEBT") is headquartered in Windsor, Connecticut, and provides
commercial and consumer banking services from its eleven offices located in the
towns of Canton, East Windsor, Ellington, Enfield, Manchester (2), Somers,
Suffield, West Hartford and Windsor (2), Connecticut. The Equity Bank ("EQBK")
provides commercial and consumer banking services from its office in
Wethersfield, Connecticut. Community Bank ("CMBK"), which was acquired in
December 1997, provides similar services from its two offices located in Bristol
and Plymouth, Connecticut.
BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles and include its
accounts and those of its subsidiaries, after elimination of significant
intercompany balances and transactions.
In preparing the consolidated financial statements, Management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the estimates.
ACQUISITIONS
On August 7, 1997, First Bank of West Hartford ("FBWH") was acquired by
NECB and merged with and into NEBT. The transaction was accounted for as a
pooling of interests and, accordingly, the financial information for all prior
periods presented have been restated to present the combined financial
information as though the Company and FBWH had operated as a combined entity for
all periods presented.
On December 31, 1997, Community Savings Bank was acquired by NECB and
renamed Community Bank. The acquisition was accounted for using the purchase
method of accounting. As such, the comparative statements do not include prior
operating results of the acquired entity.
A summary of financial information relating to the above transactions is
presented in Note 2.
SECURITIES
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts computed on the effective interest method. Gains or
losses on sales of investment securities are computed on a specific asset basis.
The Company classifies debt and equity securities into one of two
categories: held-to-maturity or available-for-sale. This security classification
may be modified after acquisition only under certain specified conditions. In
general, securities may be classified as held-to-maturity only if the Company
has the positive intent and ability to hold them to maturity. All other
securities must be classified as available-for-sale. With respect to how the
Company accounts for and reports these securities, refer to the table below:
Security Classification Accounting and Reporting Treatment
- --------------------------------------------------------------------------------
Held-to-maturity These securities are measured at amortized cost
on the balance sheet. Unrealized holding gains
and losses are not included in earnings or in a
separate component of capital. They are merely
disclosed in the notes to the financial
statements.
F-6
<PAGE>
Available-for-sale These securities are carried at fair value on the
balance sheet. Unrealized holding gains and
losses are not included in earnings, but are
reported as a net amount (less expected tax) in a
separate component of capital until realized.
LOANS RECEIVABLE
Loans are stated at their principal amount outstanding and are net of
unearned income on discounted loans. Interest on nondiscounted loans is
recognized on the simple interest method based upon the principal amount
outstanding except for those loans in a nonaccrual status. Loans are generally
placed in a nonaccrual status when they become past due ninety days or whenever
the ultimate collection of principal or interest is considered to be in doubt.
When the accrual of interest ceases, previously recognized and uncollected
interest is reversed against interest income. Payments received on nonaccrual
loans are first applied to the remaining principal balance and are next applied
to interest income.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as adjustments to the related
loans' yield. These amounts are being amortized over the contractual life of the
related loans. Upon sale of loans in the secondary market, the related deferred
fees or costs are recorded in income. Commitment fees based on a percentage of a
customer's unused line of credit and fees related to standby letters of credit
are recognized over the commitment period.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible losses on loans is established through charges
against income and is maintained at a level considered adequate to provide for
probable loan losses based on management's evaluation of known and inherent
risks in the loan portfolio. When a loan or a portion of a loan is considered
uncollectible, it is charged-off against the allowance. Recoveries of loans
previously charged-off are credited to the allowance when received.
Management's evaluation of the allowance is based on a continuing review of
the loan portfolio which includes many factors, such as utilization of an
individual loan rating system to assess trends in asset quality; identification
and review of individual problem situations which may affect the borrower's
ability to repay; review of overall portfolio quality through analytical review
of current charge-offs, delinquency and nonperforming loan data; review of
regulatory authority examinations and evaluation of loans; an assessment of
current economic conditions; and changes in the size and character of the loan
portfolio. These reviews are dependent upon estimates, appraisals and judgments
which can change quickly because of changing economic conditions and
Management's perception as to how these factors affect the financial condition
of debtors.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114) which was amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." The Statements are effective for fiscal years beginning after
December 15, 1994. The Company adopted SFAS No. 114 and SFAS No. 118 on January
1, 1995. These Statements apply to all loans, except large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment, or
loans otherwise carried at fair value or the lower of cost or fair value. Both
Statements specifically exclude leases and other debt securities from its
valuation standards. These Statements require that loans which are impaired (due
to the inability to collect all contractual amounts due) be measured and valued
based upon (i) the present value of expected future cash flows discounted at the
loan's effective interest rate, (ii) the loan's observable market price, or
(iii) the fair value of the collateral if the loan is collateral dependent.
Because of the methods required by SFAS No. 114 and SFAS No. 118 and those
previously used by the Company to evaluate impaired loans, the adoption of the
Statements did not have a material impact on the Company's financial statements.
Interest income on impaired loans is generally recognized in accordance with the
Company's existing income recognition policy. Management believes that the
valuation allowance for impaired loans is adequate.
LOANS HELD-FOR-SALE
Loans held-for-sale are carried at the lower of aggregate cost or fair
value.
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights". On January 1, 1997, the Company adopted SFAS No.
125 which supersedes SFAS No. 122. Under SFAS No. 125, the distinction between
"normal" and "excess" servicing is eliminated. SFAS No. 125 distinguishes only
between the benefits
F-7
<PAGE>
of servicing, the amounts that will be received only if the servicing work is
performed to the satisfaction of the loans' owner and other amounts retained
after the sale of the loans. Such other amounts are accounted for like
interest-only strips and are subsequently measured like investments in debt
securities classified as available-for-sale or trading. These Statements require
that a mortgage banking enterprise recognize, as a separate asset, rights to
service loans for others--either through the acquisition of those rights or from
the sale or securitization of loans with the servicing rights retained on those
loans--based on their relative market value. To determine the fair value of the
servicing rights created, the Company uses (when available) market prices under
comparable servicing sale contracts, or alternatively uses a valuation model
that calculates the present value of future cash flows to determine the fair
value of the servicing rights. In using this valuation method, the Company
incorporates assumptions that market participants would use in estimating future
net servicing income, which includes estimates of the cost of servicing loans,
the discount rate, ancillary income, prepayment speeds and default rates.
The cost of servicing rights is amortized on a straight-line basis which
has substantially the same effect as amortizing the rights in proportion to and
over the period of the estimated net servicing revenues. Impairment of servicing
rights is assessed based upon the fair value of those rights. Fair values are
estimated using discounted cash flows based upon a current market interest rate.
For the purposes of measuring impairment, the rights are stratified based
primarily upon the interest rate risk characteristics of the underlying loans.
The amount of impairment recognized is the amount by which the capitalized
servicing rights for a stratum exceed their fair value.
OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired through, or in lieu
of, mortgage loan foreclosure proceedings. These properties are recorded at the
lower of the carrying value of the related loans or the estimated fair market
value less estimated selling costs. Charges to the allowance for loan losses are
the measure by which properties are reduced to fair market value less estimated
selling costs upon reclassification as other real estate owned. Subsequent
reductions in carrying value, as well as operating expenses, are included in
losses, writedowns, expenses--other real estate owned.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," the
Company classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless of
whether formal foreclosure proceedings take place.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization computed by the straight-line method
for financial reporting and under accelerated methods for income tax purposes.
Asset lives for premises are from 15 to 30 years and for furniture and equipment
from 3 to 7 years while leasehold improvements are amortized over the shorter of
the estimated useful life or the life of the lease.
INTANGIBLES
Intangible assets arising from the acquisitions under the purchase method
of accounting consist of goodwill. Goodwill is amortized on a straight-line
basis over a period of 14 years.
INCOME TAXES
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when the amounts related to such temporary differences are realized or settled.
The Company's policy is to continually evaluate the realizability of any
deferred tax assets resulting from the use of the asset and liability method.
EARNINGS PER SHARE
In the year ended December 31, 1997, the Company adopted SFAS No. 128
"Earnings per Share" ("EPS"). The Statement simplifies the standards for
computing earnings per share. It replaces the presentation of "Primary EPS" with
"Basic EPS" which excludes dilution and is computed by dividing income available
to common shareholders
F-8
<PAGE>
by the weighted-average number of common shares outstanding for the period.
Diluted EPS, if applicable, reflects the potential dilution that could occur if
securities or other contracts of issue common stock (e.g., stock options granted
to employees) were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. While
SFAS No. 128 does require restatement of all prior-period EPS, the adoption of
the Statement had no material effect on the Company's financial statements. EPS
for 1996 and 1995 was restated to reflect the December 1997 ten percent stock
dividend.
CASH FLOWS
For the purpose of the statements of cash flows, the Company has defined
cash equivalents as those amounts included in cash and due from banks and
federal funds sold.
STOCK-BASED COMPENSATION
Prior to 1996, the Company recognized stock-based compensation expense in
the basic financial statements using the "intrinsic value" approach as set forth
in Accounting Principles Board ("APB") Opinion No. 25. As of January 1, 1996,
the Company had the option, under SFAS No 123 of changing its accounting method
for stock-based compensation from the APB No. 25 method to the "fair value"
method introduced in SFAS No. 123. The Company elected to continue using the APB
No. 25 method. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosure of net income and, if presented, earnings per
share, as if the fair value based method of accounting in SFAS No. 123 had been
applied. The Company has made the pro forma disclosures required by SFAS No.
123.
NOTE 2--ACQUISITIONS
As previously disclosed, the acquisition of FBWH was completed on August 7,
1997. Under the terms of the acquisition, approximately 995,000 shares of NECB
common stock were exchanged for all of the outstanding common shares of FBWH at
an exchange ratio of 0.62 shares of NECB for each share of FBWH. The financial
information for all prior periods has been restated to present the combined
financial condition and results of operations of both companies as if the
acquisition had been in effect for all periods presented.
On December 31, 1997, NECB acquired CMBK. Under the terms of the
acquisition, NECB paid $5.30 in cash for each of the outstanding common shares
of CMBK. As previously disclosed, the acquisition was accounted for as a
purchase. In purchase accounting, consolidated income includes income of the
acquired entity from the date of acquisition. Since the date of acquisition was
December 31, 1997, the results of operations for CMBK are not included in the
consolidated financial statements. Goodwill reflected by purchase accounting
amounted to $1,089,000 and is being amortized over fourteen (14) years.
The following summary, prepared on an unaudited pro forma basis,
approximates the consolidated results of operations as if CMBK had been acquired
as of the beginning of 1997 and 1996, respectively, and includes purchase
accounting adjustments.
(amounts in thousands)
1997 1996
---- ----
Net interest income after provision for loan losses $ 26,223 $ 22,522
Noninterest income 4,316 3,633
-------- ---------
Total 30,539 26,155
Noninterest expense 22,861 18,318
-------- ---------
Income before income taxes 7,678 7,837
Income taxes 3,117 2,250
-------- ---------
Pro forma net income $ 4,561 $ 5,587
======== =========
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
On November 30, 1995, the Company acquired EQBK by issuing 1,003,617 shares
of the Company's common stock in exchange for all of the outstanding common
shares (less 69,486 shares not exchanged by dissenting shareholders) of
F-9
<PAGE>
EQBK. The dissenting shareholders and the Company settled in full in 1997. On
July 11, 1996, NECB acquired Manchester State Bank ("MSB") by issuing 549,300
shares of the Company's common stock and paying $3,525,000 in cash for all of
the outstanding common shares of MSB. Both of these acquisitions were accounted
for as purchases, and thus the results of operations for both entities are only
included in the consolidated financial statements since the date of the
respective transactions. Goodwill reflected by purchase accounting amounted to
$840,000 and $3,752,000 for the EQBK and MSB acquisitions, respectively, and in
both cases is being amortized over fourteen (14) years.
On February 10, 1998, NECB signed a definitive agreement to purchase Olde
Port Bank & Trust Company ("OPBT") in Portsmouth, New Hampshire. NECB
anticipates that the transaction will be accounted for as a pooling of
interests. Each of the outstanding shares of OPBT will be exchanged for shares
of NECB consisting of that number of shares of NECB common stock equal to
$200.00 in market value, with the final exchange ratio to be determined by
dividing $200.00 by the average closing price of NECB common stock supplied by
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") and reported in The Wall Street Journal as of the end of the ten (10)
consecutive trading-day period ending on the date on which the last of the
regulatory approvals required for the consummation of the Merger occurs. NECB
anticipates that the acquisition will close on or about June 30, 1998. The
agreement is subject to the approval of regulators and the shareholders of OPBT.
NOTE 3--SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to Management's intent. The carrying amount of securities and
their approximate fair values at December 31 follow:
<TABLE>
<CAPTION>
(amounts in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
December 31, 1997
Marketable equity securities.................. $ 19,072 $ 1,354 $ 236 $ 20,190
Debt securities issued by the U.S. Treasury
and other U.S. government agencies......... 76,373 651 76 76,948
Corporate debt securities..................... 9,968 88 3 10,053
Asset-backed securities....................... 527 527
Mortgage-backed securities.................... 12,585 165 20 12,730
---------- ---------- --------- ----------
$ 118,525 $ 2,258 335 $ 120,448
========== ========== ========= ==========
December 31, 1996
Marketable equity securities.................. $ 3,689 $ 329 $ 16 $ 4,002
Debt securities issued by the U.S. Treasury
and other U.S. government agencies......... 82,647 445 454 82,638
Corporate debt securities..................... 8,008 15 20 8,003
Asset-backed securities....................... 114 114
Mortgage-backed securities.................... 10,311 109 40 10,380
---------- ---------- --------- ----------
$ 104,769 $ 898 $ 530 $ 105,137
========== ========== ========= ==========
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
December 31, 1997
Debt securities issued by the U.S. Treasury
and other U.S. government agencies........... $ 6,398 $ 41 $ 9 $ 6,430
Debt securities issued by states and political
subdivisions of the states................... 2,841 103 2,944
Mortgage-backed securities...................... 1,882 4 1 1,885
Other debt securities........................... 215 4 219
-------- --------- -------- ---------
$ 11,336 $ 152 $ 10 $ 11,478
======== ========= ======== =========
December 31, 1996
Debt securities issued by the U.S. Treasury
and other U.S. government agencies........... $ 10,317 $ 65 $ 63 $ 10,319
Debt securities issued by states and political
subdivisions of the states................... 2,841 64 13 2,892
Other debt securities........................... 175 175
-------- --------- -------- ---------
$ 13,333 $ 129 $ 76 $ 13,386
======== ========= ======== =========
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities were $495,000 and $180,000, respectively, in 1997;
$79,000 and $72,000, respectively, in 1996; and $177,000 and $155,000,
respectively, in 1995.
The scheduled maturities of securities held-to-maturity and securities
available-for-sale (other than equity securities) at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
(amounts in thousands) Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- --------- ----------
<S> <C> <C> <C>
Debt securities other than mortgage-backed and
asset-backed securities:
Due within one year........................ $ 8,974 $ 9,011 $ $
Due after one year through five years...... 48,896 49,303 6,480 6,531
Due after five years through ten years..... 26,832 27,048 2,726 2,790
Due after ten years........................ 1,639 1,639 248 272
Mortgage-backed securities..................... 12,585 12,730 1,882 1,885
Asset-backed securities........................ 527 527
-------- ---------- --------- ---------
$ 99,453 $ 100,258 $ 11,336 $ 11,478
======== ========== ========= =========
</TABLE>
There were no securities of issuers whose aggregate carrying amount
exceeded 10% of shareholders' equity at December 31, 1997.
Securities having a par value of $27,105,000 and $11,205,000 at December
31, 1997 and 1996, respectively, were pledged to secure treasury, tax and loan
deposits, public deposits or securities sold under agreements to repurchase.
F-11
<PAGE>
NOTE 4--LOANS RECEIVABLE
(amounts in thousands)
Loans consisted of the following at December 31,
1997 1996
---- ----
Commercial and financial................ $ 102,105 $ 89,544
Real estate:
Construction........................ 19,620 12,250
Residential......................... 111,321 78,510
Commercial.......................... 133,803 116,188
Consumer................................ 41,686 39,712
---------- ------------
Loans outstanding....................... $ 408,535 $ 336,204
========== ==========
The Company's loans receivable consists primarily of residential and
commercial real estate loans within its primary market area in Connecticut.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The Company's policy for collateral requires that, at the time
of origination, the amount of the loan may not exceed 80% of the appraised value
of the property. In cases where the loan exceeds this percentage, private
mortgage insurance is generally required for that portion of the loan in excess
of 80% of the appraised value of the property.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
(amounts in thousands)
1997 1996 1995
------- ------- -------
Balance, beginning of year............ $ 6,660 $ 5,875 $ 4,137
Changes incident to acquisitions...... 2,108 2,010 1,961
Provision charged to operations....... 1,248 2,209 1,200
Recoveries............................ 602 486 423
Charge-offs........................... (1,361) (3,920) (1,846)
------- ------- -------
Balance, end of year.................. $ 9,257 $ 6,660 $ 5,875
======= ======= =======
RESTRUCTURED LOANS
Loans restructured in a troubled debt restructuring before January 1, 1995,
the effective date of SFAS No. 114 that are not impaired based on the terms
specified by the restructuring agreement, are as follows as of December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996
---- ----
<S> <C> <C>
Aggregate recorded investment................................................ $834 $699
Gross interest income that would have been recorded in the year if
the loans had been current in accordance with their original terms
and had been outstanding throughout the year or since origination....... 58 45
Interest income on the loans included in net income for the year............. 37 12
</TABLE>
The Company has no commitments to lend additional funds to the debtors in
the above restructured loans.
Loans whose terms were modified are not included above, if subsequent to
restructuring, their effective interest rates were equal to or greater than the
rate that the Company was willing to accept for a new loan with comparable risk.
F-12
<PAGE>
IMPAIRED LOANS
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 for the years ended December
31 is as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1997 1996
-------------------------- ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
in Impaired for Credit in Impaired for Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Loans for which there is a related allowance for credit losses.... $ 5,963 $ 1,681 $ 5,077 $ 733
Loans for which there is no related allowance for credit losses... 1,043 840
-------- -------- -------- --------
Totals......................................................... $ 7,006 $ 1,681 $ 5,917 $ 733
======== ======== ======== ========
Average recorded investment in impaired loans during the
year ended December 31,........................................ $ 6,452 $ 5,108
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired:
Total recognized............................................... $ 75 $ 48
Amount recognized using a cash-basis method of accounting...... $ 8 $ 3
</TABLE>
The Company considers residential real estate loans and consumer loans that
are not individually significant to be large groups of smaller balance
homogeneous loans. These loans are collectively evaluated for impairment.
Factors considered by Management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or an
insignificant shortfall in payment does not in itself result in the review of a
loan for impairment. The Company applies SFAS No. 114 on a loan-by-loan basis.
The Company does not apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a loan is not
generally accrued when the loan becomes ninety or more days past due. The
Company may place a loan on nonaccrual status but not classify it as impaired,
if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is an
individually insignificant residential mortgage loan or consumer loan. Impaired
loans are charged-off when Management believes that the collectibility of the
loan's principal is remote. Substantially all of the Company's loans that have
been identified as impaired have been measured by the fair value of the existing
collateral.
RELATED PARTIES
Loans to the Company's executive officers, directors, principal
shareholders and their associates aggregated $2,746,000 at December 31, 1997.
The following table summarizes the related party loan activity for the year
ended December 31, 1997 (Note: beginning balance does not include executive
officers or directors who are not affiliated with the Company at year-end):
(amounts in thousands)
Balance, beginning of year.................................... $ 2,596
Additions..................................................... 1,484
Repayments.................................................... (1,334)
--------
Balance, end of year.......................................... $ 2,746
========
LOAN SERVICING
Loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of loans serviced for others were
$88,168,000 and $86,662,000 as of December 31, 1997 and 1996, respectively.
Servicing rights of $290,000 and $381,000 were capitalized in 1997 and
1996, respectively. Amortization of servicing rights totaled $71,000 in 1997 and
$57,000 in 1996.
No valuation allowance for capitalized servicing rights was required in
1997 or 1996.
F-13
<PAGE>
NOTE 5--PREMISES AND EQUIPMENT
Components of properties and equipment in the consolidated balance sheets
at December 31, were as follows:
(amounts in thousands)
Cost: 1997 1996
---- ----
Land......................................... $ 2,101 $ 1,651
Premises..................................... 9,030 7,604
Furniture and equipment...................... 6,934 5,967
Leasehold improvements....................... 2,338 2,261
-------- --------
Total cost................................ 20,403 17,483
Less accumulated depreciation and amortization... (9,339) (7,527)
-------- --------
Net book value............................... $ 11,064 $ 9,956
======== ========
NONCANCELABLE LEASES
The Company and its subsidiaries occupy certain premises and are provided
equipment under noncancelable leases that are accounted for as operating leases
and that have expiration dates through 2011. These leases are renewable for
either three or five-year terms at the Company's option. Certain of the leases
contain escalation clauses for additional rentals based upon increases in local
property taxes and inflationary measures. Rental expense under these leases
aggregated $1,048,000 in 1997, $828,000 in 1996 and $539,000 in 1995 and is
recorded in occupancy expenses.
The aggregate minimum rental commitments under all leases at December 31,
1997 are $5,401,000 as indicated below:
(amounts in thousands)
In year... ...the minimum commitment is...
---------- -------------------------------
1998.............................. $ 993
1999.............................. 869
2000.............................. 488
2001.............................. 308
2002.............................. 223
Years thereafter.................. 2,520
------
$5,401
------
EQBK leases its premises from a former director.
NOTE 6--DEPOSITS
The aggregate amounts of time deposit accounts (including CDs) with a
minimum denomination of $100,000 or more were $35,929,000 and $29,096,000 as of
December 31, 1997 and 1996, respectively. For all time deposits as of December
31, 1997, the aggregate amount of maturities for each of the following three
years ended December 31, and thereafter are:
(amounts in thousands)
1998......................... $ 166,814
1999......................... 34,077
2000......................... 13,428
Years thereafter............. 7,182
Add: Unamortized premium.... 42
---------
$ 221,543
=========
F-14
<PAGE>
NOTE 7--SHORT-TERM BORROWINGS
Short-term borrowings consisted of treasury, tax and loan deposits
generally repaid within one to 120 days from the transaction date and securities
sold under agreements to repurchase. Short-term borrowings consisted of the
following as of December 31:
(amounts in thousands)
1997 1996
---- ----
Treasury, tax and loan deposits................... $ 7,318 $ 2,146
Securities sold under agreements to repurchase.... 6,718 132
-------- --------
Total.......................................... $ 14,036 $ 2,278
======== ========
Information concerning securities sold under agreements to repurchase is
summarized as follows:
(amounts in thousands)
1997 1996
---- ----
Average balance during the year.....................$ 4,601 $ 185
Maximum month-end balance during the year...........$ 13,078 $ 293
Average interest rate during the year............... 3.58% 3.47%
US Treasury obligations underlying the
agreements at year-end:
Carrying value and estimated fair value........ $13,495 $498
The underlying securities were under the control of the Company as of
December 31, 1997.
NOTE 8--LONG-TERM DEBT
Notes payable to the Federal Home Loan Bank are collateralized by Federal Home
Loan Bank stock and first mortgage real estate loans. All of the notes are fixed
rate and have a weighted average interest rate of 6.28%. The following is a
schedule of maturities:
(amounts in thousands)
1998......................... $ 2,116
1999......................... 3,124
2000......................... 2,133
2001......................... 3,141
2002......................... 152
Years thereafter............. 877
Add: Unamortized premium.... 69
----------
$ 11,612
==========
F-15
<PAGE>
NOTE 9--EMPLOYEE BENEFITS
STOCK COMPENSATION
As indicated in Note 1, the Company applies APB Opinion No. 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
expense has been recognized for the fixed stock options granted. Had
compensation expense been determined based on the fair value at the grant dates
for awards consistent with the method of SFAS No. 123 (also discussed in Note
1), the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income (in thousands) As reported.............. $4,635 $5,488 $3,690
Pro forma................ 4,524 5,426 3,680
Earnings per share As reported.............. $0.91 $1.19 $1.19
Pro forma................ 0.89 1.18 1.18
Earnings per share, assuming dilution As reported.............. $0.90 $1.19 $1.18
Pro forma................ 0.87 1.17 1.18
</TABLE>
All of the following information, including share amounts and exercise
prices, have been adjusted to reflect the issuance of the 10% stock dividend in
December 1997.
During 1993, the Board of Directors of the Company granted stock options to
two executive officers to purchase 37,400 shares of common stock at $4.55 per
share. These options were all exercised in 1996. In January 1995, the Board of
Directors of the Company voted to grant stock options to three executive
officers to purchase 33,000 shares of common stock at $7.05 per share after
January 24, 1996 and prior to January 24, 1998. These options were exercised in
1997. On January 31, 1996, the Board of Directors formed an Executive
Compensation Committee (the "Committee") to administer the 1996 Incentive and
Nonqualified Compensatory Stock Option Plan (the "1996 Plan"), which is
described below. The Committee and the 1996 Plan were approved by shareholders
on May 21, 1996.
Under the 1996 Plan, the Committee may grant either Incentive Stock Options
or Non-Statutory Stock Options to key managerial employees to purchase shares of
common stock of the Company. The 1996 Plan expires on January 31, 2006. The
aggregate number of shares which may be optioned is 825,000 shares of the
Company's common stock. The option price is fixed by the Committee at the time
of the grant and may not be less than 100 percent of the fair market value of
the stock, as determined by the Committee, in good faith as of the grant date.
Each option may be first exercised in five equal annual installments commencing
from the date set forth in the Stock Option Agreement for such options;
provided, however, that no option be exercised beyond ten years after the date
of the grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes Option Pricing Model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:
Dividend yield............... 2.1 percent for all years
Expected volatility.......... 25 percent for all years
Risk-free interest rate...... 5.89 percent, 5.17 percent and 7.43
percent in 1997, 1996 and 1995,
respectively.
Expected lives............... 8 years for the 1997 and 1996 options
granted and 3 years for the 1995 options
granted
F-16
<PAGE>
A summary of the status of all the Company's stock options as of December
31, 1997, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding, beginning of year.............. 187,000 $ 8.92 70,400 $5.72 37,400 $4.55
Granted..................................... 255,750 17.33 154,000 9.32 33,000 7.05
Exercised................................... (33,000) 7.05 (37,400) 4.55
-------- --------- ---------
Forfeited...................................
Outstanding, end of year ................... 409,750 $14.32 187,000 $8.92 70,400 $5.72
-------- --------- ---------
Options exercisable at year-end............. 30,800 33,000 37,400
Weighted-average fair value of options
granted during the year.................. $5.71 $2.89 $1.60
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price as of 12/31/97 Contractual Life Exercisable Price as of 12/31/97 Exercise Price
- -------------- -------------- ---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.32 154,000 8 years $ 9.32 30,800 $9.32
17.27 252,450 10 years 17.27
21.70 3,300 10 years 21.70
-------- --------
409,750 9 years 14.32 30,800 9.32
======== ========
</TABLE>
Not included in the above tables are 66,000 options granted in 1997 and
approved by the Board of Directors at an exercise price of $17.27. These grants
were under the 1997 Non-officer Directors' Stock Option Plan (the "1997 Plan"),
which is described below. The 1997 Plan became effective upon its August 1997
Board approval provided, however, that if the 1997 Plan is not approved by the
shareholders prior to its expiration of the one-year period commencing on the
August 1997 effective date, the 1997 Plan and options granted thereunder shall
be null and void and shall be of no effect.
Under the 1997 Plan, the Committee may grant stock options to non-officer
members of the Board who are not otherwise employees of the Company. Unless
sooner terminated, the 1997 Plan expires in August of 2007. The aggregate number
of shares that may be optioned is 330,000. The option price is fixed by the
Committee at the time of the grant and may not be less than 100 percent of the
fair market value of the stock, as determined by the Committee, in good faith as
of the grant date. The options may be first exercised in five equal annual
installments beginning one year after the grant date.
DEFINED CONTRIBUTION PLAN
During 1996, the Company converted its defined contribution plan into a
401(k) plan (the "Plan"). Employees over the age of 21 and with one year of
service are eligible to participate in the Plan. To encourage systematic savings
by employees, the Company matches employee contributions to the Plan on the
following basis: 100% of the first 3% of employee contributions and 50% of the
next 2%. Both employee and Company matches immediately vest in the Plan.
Additionally, funds which were previously not vested in the defined contribution
plan vested with the transfer into the Plan. Expense for both the 401(k) as well
as the defined contribution plan amounted to approximately $214,000, $175,000
and $237,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-17
<PAGE>
NOTE 10--EARNINGS PER SHARE ("EPS")
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the net income:
<TABLE>
<CAPTION>
(amounts in thousands; except per share data)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Year ended December 31, 1997
Basic EPS
Net income and income available to common stockholders $4,635 5,105 $0.91
Effect of dilutive stock options 70
------- --------
Diluted EPS
Income available to common shareholders and assumed conversions $4,635 5,175 $0.90
======= ======== ======
Year ended December 31, 1996--as restated
Basic EPS
Net income and income available to common shareholders $5,488 4,605 $1.19
Effect of dilutive stock options 20
------- --------
Diluted EPS
Income available to common shareholders and assumed conversions $5,488 4,625 $1.19
======= ======== =====
Year ended December 31, 1995--as restated
Basic EPS
Net income and income available to common shareholders $3,690 3,112 $1.19
Effect of dilutive stock options 2
------- --------
Diluted EPS
Income available to common shareholders and assumed conversions $3,690 3,114 $1.18
======= ======== =====
</TABLE>
NOTE 11--INCOME TAX EXPENSE (BENEFIT)
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
Years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,472 $ 1,247 $ 725
State 882 434 282
--------- -------- ---------
3,354 1,681 1,007
--------- -------- ---------
Deferred:
Federal 213 727 (720)
State 18 251 (125)
--------- -------- ---------
231 978 (845)
--------- -------- ---------
Change in valuation allowance (335) (360) (186)
--------- -------- ---------
Benefit of operating loss carryforward (133)
--------- -------- ---------
Total income tax expense (benefit) $ 3,117 $ 2,299 $ (24)
========= ======== =========
</TABLE>
F-18
<PAGE>
The following reconciles the income tax provision from the statutory rate
to the amount reported in the consolidated statements of income:
<TABLE>
<CAPTION>
(amounts in thousands)
Years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (0.6) (0.6) (0.5)
Dividends received deduction (0.6) (1.1) (1.4)
Unallowable goodwill amortization and other reorganization expense, net 3.0
Other adjustments (0.9)
Unallowable expenses 0.3 0.5 0.6
Change in valuation allowance (1.4) (10.0) (40.5)
Benefit of operating loss carryforward (0.6)
State tax, net of federal tax benefit 6.1 6.8 8.0
------ ------ ------
40.2% 29.6% (0.7)%
====== ====== ======
</TABLE>
At December 31, the Company had deferred tax assets and gross deferred tax
liabilities as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Accrued interest on nonperforming loans $ 120 $ 145 $ 118
Accrued deferred compensation 60 63 63
Accrued expenses 103
Allowance for loan losses 1,397 813 1,412
Loan origination fees 181 205 257
Depreciation 137 149
Other real estate owned valuation 206 348 412
Purchase accounting 108
Transaction costs 386
Operating loss carryforward 918 842 890
------- -------- -------
Gross deferred tax assets 3,376 2,553 3,404
Valuation allowance (335) (695)
------- -------- -------
3,376 2,218 2,709
------- -------- -------
Deferred tax liabilities:
Mortgage servicing rights (173) (75)
Purchase accounting (261) (253)
Other adjustments (32) (75) (31)
Net unrealized gain on securities available-for-sale (786) (158) (134)
------- -------- -------
Gross deferred tax liabilities (991) (569) (418)
------- -------- -------
Net deferred tax assets $ 2,385 $ 1,649 $ 2,291
======= ======== =======
</TABLE>
Net deferred tax assets at December 31, 1997 include deferred taxes of
$1,267,000 from the CMBK acquisition.
F-19
<PAGE>
NOTE 12--CONDENSED FINANCIAL INFORMATION OF NEW ENGLAND COMMUNITY BANCORP, INC.
The condensed balance sheets of New England Community Bancorp, Inc. (parent
company only) as of December 31, 1997 and 1996 and statements of income and cash
flows for each of the three years in the period ended December 31, 1997 follow:
<TABLE>
<CAPTION>
(amounts in thousands)
BALANCE SHEETS
1997 1996
---- ----
<S> <C> <C> <C>
Assets:
Investment in bank subsidiaries, at equity in net assets $53,204 $48,693
Investments 1,039 548
Cash 334 284
Other assets 1,274 12
------- -------
Total Assets $55,851 $49,537
======= =======
Other liabilities $ 2,028 $ 317
Shareholders' equity 53,823 49,220
------- -------
Total Liabilities & Shareholders' Equity $55,851 $49,537
======= =======
STATEMENTS OF INCOME
1997 1996 1995
---- ---- ----
Equity in (distributed) undistributed net income of bank subsidiaries $(1,915) $ 5,056 $ 3,737
Net interest and dividend income 7,354 591 293
Income tax benefit 538 177 33
Other expense (1,342) (336) (373)
------- ------- -------
Net income $ 4,635 $ 5,488 $ 3,690
======= ======= =======
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands)
STATEMENTS OF CASH FLOWS
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 4,635 $ 5,488 $ 3,690
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in distributed (undistributed) net income of bank
subsidiaries 1,915 (5,056) (3,737)
Securities gains, net (1)
Net increase (decrease) in other liabilities 958 (297) 355
Net (increase) decrease in other assets (192) 59 (72)
Decrease in taxes payable (368) (70) (101)
-------- ------- --------
Net cash provided by operating activities 6,948 123 135
-------- ------- --------
Investing activities:
Purchases of securities (179) (98) (235)
Proceeds from retirement of FBWH stock 110
Cost of acquisitions (277) (396)
Proceeds from sales of securities 4,650 850
Cash paid to shareholders of acquired banks (4,832) (3,520)
Investment in acquired bank (919)
Other (5) (3)
-------- ------- --------
Net cash provided by (used for) investing activities (5,820) 750 216
-------- ------- --------
Financing activities:
Net proceeds from issuance of common stock 232 170
Dividends paid (1,310) (817) (415)
-------- ------- --------
Net cash used for financing activities (1,078) (647) (415)
-------- ------- --------
Increase (decrease) in cash 50 226 (64)
Cash, beginning of year 284 58 122
-------- ------- --------
Cash, end of year $ 334 $ 284 $ 58
======== ======= ========
</TABLE>
NOTE 13--FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance-sheet risk
to satisfy the financing needs of its borrowers. These financial instruments
include commitments to extend credit, standby letters of credit and financial
guarantees. The Company does not anticipate any material losses as a result of
these transactions.
Commitments to extend credit are agreements to lend to a borrower as long
as there is not a 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 many of the commitments are expected to
expire without being drawn upon, the total commitments do not necessarily
represent future cash requirements. The Company evaluates each borrower's
creditworthiness on a case-by-case basis using the same credit policies as for
on-balance-sheet financial instruments. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on Management's credit
evaluation of the counterparty. Collateral held varies but may include real
estate, accounts receivable, inventory, property, plant and equipment and
income-producing property.
Standby letters of credit and financial guarantees are conditional
commitments issued by the Company's subsidiaries to guarantee the performance of
a borrower to a third party. The evaluations of creditworthiness, consideration
of need for collateral and credit risk involved in issuing letters of credit are
essentially the same as that involved in extending loans to borrowers.
Of the total standby letters of credit outstanding at December 31, 1997,
$429,000 are secured by deposit accounts held with the Company's subsidiaries.
F-21
<PAGE>
Disclosures of Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of
estimated fair values of financial instruments. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that conveys or imposes the contractual right or obligation to receive or
deliver cash or another financial instrument. Fair value is defined as the
amount at which a financial instrument can be exchanged in a current exchange
between willing parties, other than in a forced sale or liquidation, and is best
evidenced by a quoted market price, if one exists.
The Company has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair value is
based on estimates using the present value of expected future cash flows and
certain other techniques. These techniques are based on certain assumptions
which are subjective and judgmental in nature. Accordingly, the results may not
be substantiated by comparison with independent market prices and, in some
cases, cannot be realized in immediate settlement of the financial instrument.
Furthermore, SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
fair values disclosed should not be interpreted as the aggregate current fair
market value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
FINANCIAL INSTRUMENT METHODS AND ASSUMPTIONS
- --------------------------------------------------------------------------------
Cash and cash equivalents The carrying amounts reported in the balance
sheet for cash and due from banks and federal
funds sold approximate fair value.
Securities The fair value of securities are based on prices
obtained through brokers and independent pricing
services.
Loans The fair value of loans was estimated for groups
of similar loans based on the type of loan,
interest rate characteristics and maturity. The
fair value of performing commercial, commercial
real estate, installment loans and residential
mortgage loans was estimated by discounting
expected future cash flows using interest rates
currently being offered for loans with similar
terms to borrowers of similar credit quality. The
fair value of nonaccruing loans was estimated by
determining expected future principal cash flows,
adjusted for credit risk.
Deposits The fair value of demand deposits, savings, money
market and NOW deposits and certificates of
deposits having variable interest rates
approximate their carrying value. The fair value
of certificates of deposits with fixed maturities
and interest rates was estimated by discounting
expected future cash flows utilizing interest
rates currently being offered on deposits with
similar characteristics and maturities.
Short-term borrowings The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other
short-term borrowings maturing within 90 days
approximate fair values. Fair values of other
short-term borrowings are estimated using
discounted cash flow analyses based on the
Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt The fair values of the Company's long-term debt
are estimated using discounted cash flow analyses
based on the Company's current incremental
borrowing rates for similar types of borrowing
arrangements.
F-22
<PAGE>
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, were as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
(amounts in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 39,851 $ 39,851 $ 39,854 $ 39,854
Securities available-for-sale 120,448 120,448 105,137 105,137
Securities held-to-maturity 11,336 11,478 13,333 13,386
Federal Home Loan Bank stock 2,977 2,977 2,440 2,440
Loans 399,278 400,212 329,544 329,326
Loans held-for-sale 2,966 2,966 1,931 1,947
Accrued interest receivable 4,395 4,395 3,913 3,913
Financial liabilities:
Deposits 522,644 523,463 457,004 458,297
Short-term borrowings 14,036 14,036 2,278 2,278
Long-term debt 11,612 11,629 3,951 3,945
</TABLE>
The carrying amounts of financial instruments in the above table are
included in the consolidated balance sheets under the individual captions.
Off-balance-sheet liabilities:
(amounts in thousands)
1997 1996
---- ----
Notional Notional
Amount Amount
------ ------
Commitments to extend credit $45,803 $46,019
Standby letters of credit and financial guarantees 2,387 2,005
There is no material difference between the notional amount and the
estimated fair value of loan commitments and unadvanced portions of loans. The
fair value of letters of credit approximates the notional value.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments".
F-23
<PAGE>
NOTE 14--DISCLOSURE FOR STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
Supplemental disclosure of cash paid during the period for: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax paid $ 2,524 $ 2,090 $ 813
Interest paid 13,431 12,896 7,619
Supplemental disclosure of noncash investing and financing activities:
Loans charged off, net of recoveries 759 3,434 1,423
Real estate acquired through foreclosure 2,293 2,282 1,049
Loans originated to facilitate sales of other real estate owned 1,154 1,071 592
Assets acquired and liabilities assumed in business combinations were as
follows:
Fair value of assets acquired, excluding cash and cash equivalents 62,422 77,063 111,242
Cash and cash equivalents acquired 7,888 14,236 7,790
------- ------ -----
70,310 91,299 119,032
Liabilities assumed 64,309 84,989 109,525
------ ------ -------
Value of acquired entities 6,001 6,310 9,507
</TABLE>
NOTE 15--REGULATORY MATTERS
RESTRICTIONS ON DIVIDENDS
The Company's principal assets are its investments in its bank
subsidiaries. As such, the Company's ability to pay dividends to its
shareholders is largely dependent on the ability of the Banks to pay dividends
to the Company. The declaration of cash dividends is dependent on a number of
factors, including regulatory limitations, and the Banks' operating results and
financial conditions. The Shareholders of the Company will be entitled to
dividends only when, and if, declared by the Company's Board of Directors out of
funds legally available therefore. The declaration of future dividends will be
subject to favorable operating results, financial conditions, tax considerations
and other factors. The Federal Deposit Insurance Corporation regulations require
banks to maintain certain capital ratios as noted below which may otherwise
restrict the ability of the Banks to pay dividends to the Company.
MINIMUM CAPITAL REQUIREMENTS
The Company and its subsidiary Banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
Their capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
1997, that the Company and the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the framework for prompt corrective action. To be categorized as well
capitalized Banks must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Banks'
categories.
F-24
<PAGE>
The actual capital amounts and ratios are also presented in the following table:
<TABLE>
<CAPTION>
To be Well
(amounts in thousands) Actual Adequacy Purposes Capitalized
- ---------------------- ------ ----------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Greater than Greater than
or equal to or equal to
<S> <C> <C> <C> <C>
As of December 31, 1997
Risk-Based Total Capital:
CONSOLIDATED $52,568 12.8% $32,876 8.0% N/A
NEBT 35,676 12.5 22,808 8.0 $28,510 10.0%
EQBK 11,253 12.4 7,275 8.0 9,094 10.0
CMBK 4,841 10.4 3,720 8.0 4,651 10.0
Risk-Based Tier 1 Capital:
CONSOLIDATED 47,407 11.5 16,438 4.0 N/A
NEBT 32,091 11.3 11,404 4.0 17,106 6.0
EQBK 10,107 11.1 3,638 4.0 5,456 6.0
CMBK 4,241 9.1 1,860 4.0 2,790 6.0
Leverage:
CONSOLIDATED 47,407 9.2 20,523 4.0 N/A
NEBT 32,091 8.0 15,980 4.0 19,975 5.0
EQBK 10,107 8.8 4,612 4.0 5,765 5.0
CMBK 4,241 6.1 2,778 4.0 3,472 5.0
</TABLE>
Under Federal Reserve regulation, the Company's subsidiaries are limited as
to the amount they may lend or advance to the Company, unless such loans and
advances are collateralized by specific obligations. No advances were made to
the Company by any subsidiary at December 31, 1997 or 1996.
NOTE 16--LITIGATION
CMBK is the defendant in a breach of employment contract suit. The
Plaintiff is seeking monetary damages. The case is in the early stages of
discovery. As such, management and legal counsel are unable to evaluate the
outcome at the present time.
NECB is party to various other legal proceedings normally incident to the
kind of business conducted. Management believes that no material liability will
result from such proceedings.
NOTE 17--RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent
with the current year's statement presentation.
F-25
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (Unaudited)
By Quarter 1997 1996
---- ----
(Amounts in thousands,
except per share data) 1 2 3 4 Year 1 2 3 4 Year
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $9,609 $9,744 $9,827 $9,801 $38,981 $8,123 $7,863 $9,405 $9,660 $35,051
Interest expense 3,287 3,302 3,425 3,515 13,529 2,927 2,852 3,360 3,368 12,507
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 6,322 6,442 6,402 6,286 25,452 5,196 5,011 6,045 6,292 22,544
Provision for loan losses 273 285 475 215 1,248 607 532 476 594 2,209
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan
losses 6,049 6,157 5,927 6,071 24,204 4,589 4,479 5,569 5,698 20,335
Noninterest income 954 962 853 1,310 4,079 661 987 876 892 3,416
- -------------------------------------------------------------------------------------------------------------------------
7,003 7,119 6,780 7,381 28,283 5,250 5,466 6,445 6,590 23,751
Noninterest expense 4,597 4,709 5,805 5,420 20,531 3,625 3,707 4,297 4,335 15,964
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,406 2,410 975 1,961 7,752 1,625 1,759 2,148 2,255 7,787
Income taxes 904 910 552 751 3,117 454 510 602 733 2,299
- -------------------------------------------------------------------------------------------------------------------------
Net income $1,502 $1,500 $ 423 $1,210 $4,635 $1,171 $1,249 $1,546 $1,522 $5,488
=========================================================================================================================
Net income
per share--basic $0.30 $0.29 $0.08 $0.24 $0.91 $0.25 $0.27 $0.34 $0.33 $1.19
=========================================================================================================================
Net income
per share--diluted $0.30 $0.29 $0.08 $0.23 $0.90 $0.25 $0.27 $0.34 $0.33 $1.19
=========================================================================================================================
</TABLE>
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 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, in Windsor, Connecticut on
March 19, 1998.
NEW ENGLAND COMMUNITY BANCORP, INC.
By /s/Anson C. Hall
----------------
Anson C. Hall
Vice President, Chief Financial Officer
By /s/David A. Lentini
-------------------
David A. Lentini
Chairman, President and Chief Executive Officer
<PAGE>
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:
Signature Title Date
- --------------------------------------------------------------------------------
s/s David A. Lentini Chairman, President and March 19, 1998
- --------------------------- Chief Executive Officer
(David A. Lentini)
s/s John C. Carmon Director March 19, 1998
- ---------------------------
(John C. Carmon)
s/s Gary J. DeNino Director March 19, 1998
- ---------------------------
(Gary J. DeNino)
s/s Frank A. Falvo Director March 19, 1998
- ---------------------------
(Frank A. Falvo)
s/s Dominic J. Ferraina Director March 19, 1998
- ---------------------------
(Dominic J. Ferraina)
s/s John R. Harvey Director March 19, 1998
- ---------------------------
(John R. Harvey)
s/s Angelina J. McGillivray Director March 19, 1998
- ---------------------------
(Angelina J. McGillivray)
s/s Michael P. Solimene Director March 19, 1998
- ---------------------------
(Michael P. Solimene)
<PAGE>
EXHIBIT INDEX
Exhibit # Description Page
- --------- ----------- ----
3(ii) Bylaws of NECB
10(g) The Executive Retention Agreement by and between New
England Community Bancorp, Inc. and David A. Lentini
dated October 16, 1997.
10(h) The Executive Retention Agreement by and between New
England Community Bancorp, Inc. and Donat A. Fournier
dated October 16, 1997.
10(i) The Executive Retention Agreement by and between New
England Community Bancorp, Inc. and Anson C. Hall dated
October 16, 1997.
10(j) The Executive Retention Agreement by and between New
England Community and Frank A. Falvo dated
October 16, 1997.
21 List of Subsidiaries
Financial Data Schedule.--Fiscal Year End 1997
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.--Fiscal Year Ends 1995, 1996
and Ohs, 1, 2, 3 of 1996
27.3 Financial Data Schedule.--Qtrs. 1, 2, 3 of 1997
EXHIBIT 3.2
BYLAWS
OF
NEW ENGLAND COMMUNITY BANCORP, INC.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE IN DELAWARE. The principal office of New
England Community Bancorp, Inc. (the "Corporation") in the State of Delaware
shall be c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, DE
19801.
Section 2. OTHER OFFICES. The Corporation may have a principal or other
office at such other place or places, either within or without the State of
Delaware, as the Board of Directors may from time to time determine or as shall
be necessary or appropriate for the conduct of the business of the Corporation.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors shall be held in the County of Hartford and State of
Connecticut. The Board of Directors shall fix the place within said county for
the holding of such meetings, and at least ten (10) days notice shall be given
to the stockholders of the place so fixed in the manner set forth in Section 6
of this Article II. All other meetings of the stockholders shall be held at such
place or places, within or without the State of Delaware, as may from time to
time be fixed by the Board of Directors, or as shall be specified in the
respective notices or waivers of notice thereof.
Section 2. ANNUAL MEETINGS. The annual meeting of the stockholders for
the election of directors and the transaction of other business shall be held on
a date fixed by the Board of Directors, but no later than the third Tuesday in
May. If this date shall fall upon a legal holiday, the meeting shall be held on
the next succeeding business day. At each annual meeting the stockholders
entitled to vote shall elect a Board of Directors and may transact such other
corporate business as may be brought before the meeting.
Section 3. NOTICE OF STOCKHOLDER BUSINESS. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting
business must be: (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a stockholder
of record. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the
<PAGE>
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation, not less
than sixty (60) days nor more than ninety (90) days prior to the meeting;
provided, however, that if both (i) fewer days than seventy (70) days notice of
the meeting is given to stockholders, and (ii) such meeting is held more than
thirty (30) days before or after the corresponding date of the annual meeting
held in the preceding year, then such written notice shall be received not later
than the close of the tenth day following the day on which notice of the meeting
was mailed to stockholders. As used herein, notice to the stockholders shall be
deemed to have been given on the date of the Corporation's quarterly report,
letter to stockholders or other communication to stockholders disclosing the
date of the next annual meeting and provided that the annual meeting is in fact
held on such date or within thirty (30) days after such date.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of stock of the Corporation of
which the stockholder is the Beneficial Owner (as that term is defined in the
Restated Certificate of Incorporation of the Corporation), and (d) any material
interest of the stockholder in such business. Notwithstanding anything in the
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this Section 3. The
Chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 3, and any such business not
properly brought before the meeting shall not be transacted.
Section 4. SPECIAL MEETINGS. A special meeting of the stockholders (or
of any class thereof entitled to vote) for any purpose or purposes may be called
at any time by the Chairman of the Board, the President or by order of a
majority of the Board of Directors. Special meetings may not be called by any
other person or persons.
Section 5. QUALIFICATIONS OF DIRECTORS. No person shall be elected, or
hold a position as a director of the Corporation, if such person has been
convicted of a felony, been held in an administrative proceeding or the courts
of the United States or any state thereof to have violated the securities or
blue sky laws of the United States or any such state, has not attended at least
75% of the meetings of the Board of the Corporation or of any other public
corporation while a director, unless such absences were excused by such board,
or after the close of the fiscal year in which such person's 68th birthday
occurs. In addition, each nominee shall meet any qualifications or requirements
promulgated by any agency regulating the Corporation.
Section 6. NOMINATION OF DIRECTORS. In addition to the right of the
Board of Directors of the Corporation to make nominations for the election of
directors, nominations for the election of directors may be made by any
stockholder entitled to vote for the election of directors if that stockholder
complies with all of the provisions of this Section 6.
<PAGE>
(a) Advance notice of such proposed nomination shall be
received by the Chairman of the Governance Committee of the Board of
Directors of the Corporation (which notice may be sent in care of the
Secretary of the Corporation) or, in the absence of such a Committee,
by the Secretary of the Corporation, not less than sixty (60) days nor
more than ninety (90) days prior to any meeting of the stockholders
called for the election of directors; provided, however, that if both
(i) fewer than seventy (70) days notice of the meeting is given to
stockholders, and (ii) such meeting is held more than thirty (30) days
before or after the corresponding date of the annual meeting held in
the preceding year, then such written notice shall be received not
later than the close of the tenth day following the day on which notice
of the meeting was mailed to stockholders. As used herein, notice to
the stockholders shall be deemed to have been given on the date of the
Corporation's quarterly report, letter to stockholders or other
communication to stockholders disclosing the date of the next annual
meeting, provided that the annual meeting is in fact held on such date
or within thirty (30) days after such date.
(b) Each notice under Section 6(a) shall set forth (i) the
name, age, business address, and, if known, residence address of the
nominee proposed in such notice, (ii) the principal occupation or
employment of such nominee, (iii) the class and number of shares of
stock of the Corporation of which the nominee is the Beneficial Owner
(as that term is defined in the Restated Certificate of Incorporation
of the Corporation), (iv) a statement to the effect that the nominee
meets the qualifications set forth in Section 5 of this Article II, and
(v) any other information relating to such person which would be
required to be disclosed in public solicitations of proxies for
election of directors, or would be otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
In addition, the stockholder making such nomination shall promptly
provide any other information reasonably requested by the Corporation.
(c) The nomination made by the stockholder may only be made in
a meeting of the stockholders of the Corporation called for the
election of directors at which such stockholder is present in person or
by proxy, and may only be made by a stockholder who has therefore
complied with the notice provisions of Section 6(a) and (b) above.
(d) The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures, and the defective nomination
shall be disregarded.
Section 7. NOTICE OF MEETINGS. Except as otherwise expressly required
by law, notice of each meeting of stockholders, whether annual or special, shall
be given at least ten (10) days before the date on which the meeting is to be
held to each stockholder of record entitled to vote by delivering a notice
thereof to such stockholder personally or by mailing such notice in a postage
prepaid envelope directed to such stockholder at the address as it appears on
the stock ledger of the Corporation, unless there shall be filed with the
Secretary of the Corporation a written request that notices intended for such
stockholder be directed to another address, in which case such notice shall be
directed to the address designated in such request. Every notice of a special
meeting of the stockholders, besides stating the time
<PAGE>
and place of the meeting, shall state briefly the objects or purposes thereof.
Notices of any meeting of stockholders shall not be required to be given to any
stockholder who shall attend such meeting in person or by proxy; provided,
however, that if any stockholder shall in person or by attorney thereunto
authorized, in writing or by telegraph, cable or wireless, waive notice of any
meeting of the stockholders, whether prior to or after such meeting, no such
notice need be given. Notice of any adjourned meeting of the stockholders shall
not be required to be given, except as expressly required by law.
Section 8. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of the stock ledger to
prepare and make, at least ten (10) days before every election of directors, a
complete list of the stockholders entitled to vote, arranged in alphabetical
order, and showing the address, and the number of shares registered in, the name
of each stockholder. Such list shall be open for ten (10) days at the place
where said election is to be held or at some other specified place within the
City of Windsor, State of Connecticut to the examination of any stockholder
during ordinary business hours and shall be produced and kept at the time and
place of the election during the whole time thereof and subject to the
inspection of any stockholder who may be present. The original or duplicate
stock ledger shall be the only evidence as to who are the stockholders entitled
to examine such list or the books of the Corporation or to vote in person or by
proxy at such election.
Section 9. QUORUM. At each meeting of the stockholders, the holders of
record of one third (1/3) of the issued and outstanding stock of the Corporation
entitled to vote at such meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business, except where otherwise
provided by law, the Restated Certificate of Incorporation or these Bylaws. In
the absence of a quorum, any officer entitled to preside at, or act as Secretary
of, such meeting shall have the power to adjourn the meeting from time to time
until a quorum shall be constituted. At any such adjourned meeting at which a
quorum shall be present any business may be transacted which might have been
transacted at the meeting as originally called, but only those stockholders
entitled to vote at the meeting as originally noticed shall be entitled to vote
at any adjournment or adjournments thereof.
Section 10. VOTING. Except as otherwise provided in the Restated
Certificate of Incorporation, at every meeting of the stockholders each holder
of record of the issued and outstanding stock of the Corporation entitled to
vote at such meeting shall be entitled to one vote in person or by proxy for
each such share of stock entitled to vote held by such stockholder, but no proxy
shall be voted after three (3) years from its date unless the proxy provides for
a longer period, and, except where the transfer books of the Corporation shall
have been closed for a date shall have been fixed as the record date for the
determination of stockholders entitled to vote, no share of stock shall be voted
at any election for directors which shall have been transferred on the books of
the Corporation within twenty (20) days next preceding such election of
directors. Shares of its own capital stock belonging to the Corporation directly
or indirectly shall not be voted upon directly or indirectly. At all meetings of
the stockholders, a quorum being present, all matters shall be decided by
majority vote of the shares of stock entitled to vote held by stockholders
present in person or by proxy, except as otherwise required by the laws of the
State of Delaware. Unless otherwise provided in the Restated Certificate of
Incorporation, all elections of directors shall be by
<PAGE>
ballot. Unless demanded by a stockholder of the Corporation present in person or
by proxy at any meeting of the stockholders and entitled to vote thereat or as
so directed by the Chairman of the meeting or required by the laws of the State
of Delaware, the vote thereat on any other question need not be by ballot. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or in his
name by his proxy, if there be such proxy, and shall state the number of shares
voted by him and the number of votes to which each share is entitled.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The property, business and affairs of the
Corporation shall be managed by the Board of Directors.
Section 2. NUMBER AND TERM OF OFFICE. The number of directors shall be
fixed from time to time by resolution of the Board of Directors but shall not be
less than three (3). Directors shall be stockholders. Each director shall hold
office until the annual meeting of the stockholders next following election and
until a successor shall have been elected and shall qualify, or until such
director's death, resignation or removal.
Section 3. QUORUM AND MANNER OF ACTING. Unless otherwise provided by
law, the presence of one third (1/3) of the whole Board of Directors, and in any
case not less than two (2) directors, shall be necessary to constitute a quorum
for the transaction of business. In the absence of a quorum, a majority of the
directors present may adjourn the meeting from time to time until a quorum shall
be present. Notice of any adjourned meeting need not be given. At all meetings
of the directors, a quorum being present, all matters shall be decided by the
affirmative vote of a majority of the directors present, except as otherwise
required by the laws of the State of Delaware.
Section 4. PLACE OF MEETINGS, BOOKS AND RECORDS. The Board of Directors
may hold its meetings, and keep the books and records of the Corporation, at
such place or places within or without the State of Delaware as the Board may
from time to time determine.
Section 5. ANNUAL MEETING. As promptly as practicable after each annual
meeting of the stockholders for the election of directors, the Board of
Directors shall meet for the purpose of organization, the election of officers
and the transaction of other business. Notice of such meeting need not be given.
Such meeting may be held at any other time or place as shall be specified in a
notice given as hereinafter provided for special meetings of the Board of
Directors or in a waiver of notice thereof signed by all the directors.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held at such time and place, within or without the State of Delaware, as
shall from time to time be determined by the Board of Directors. After there has
been such determination, and notice thereof has been given to each member of the
Board of Directors, regular meetings may be held without further notice.
<PAGE>
Section 7. SPECIAL MEETINGS AND NOTICE THEREOF. Special meetings of the
Board of Directors shall be held whenever called by the Chairman of the Board,
the President or by a majority of the directors. Notice of each such meeting
shall be mailed to each director, addressed to such director's residence or
usual place of business, at least two (2) days before the date on which the
meeting is to be held, or shall be sent to such place by telegraph, cable, radio
or wireless, or be delivered personally or by telephone, not later than the day
before the day on which such meeting is to be held. Each such notice shall state
the time and place of the meeting and the purpose thereof. In lieu of the notice
to be given as set forth above, a waiver thereof in writing, signed by the
director or directors entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto for purposes of this Section
7. No notice to or waiver by any director with respect to any special meeting
shall be required if such director shall be present at said meeting.
Section 8. RESIGNATION. Any director of the Corporation may resign at
any time by giving written notice thereof to the Chairman of the Board, the
President or the Secretary of the Corporation. The resignation of any director
shall take effect upon receipt of notice thereof or at such later time as shall
be specified in such notice; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. When
one or more directors shall resign from the Board, effective at a future date, a
majority of the directors then in office including those who have so resigned
shall have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective.
Section 9. REMOVAL. Any director may be removed if two thirds (2/3) of
the whole Board determines that the director in question is or has engaged in
activities, the nature of which have or would bring disrepute upon the
Corporation, at a meeting called for that purpose.
Section 10. VACANCIES. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, although less than a quorum, or
by a sole remaining director, unless otherwise provided by the Restated
Certificate of Incorporation or the laws of the State of Delaware.
Section 11. COMPENSATION OF DIRECTORS. By resolution of the Board,
directors may receive a stated salary for their services and a specific sum may
be allowed for attendance at each regular or special meeting of the Board or a
specific sum may be allowed for attendance at a meeting of any committee
thereof; provided that nothing herein contained shall be construed to preclude
any director from serving the Corporation or any subsidiary thereof in any other
capacity and receiving compensation therefore.
Section 12. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees. Each
committee shall consist of two or more directors of the Corporation, which, to
the extent provided in the resolution or in these Bylaws, shall have and may
exercise such powers of the Board in the management of the business and affairs
of the Corporation (including the power to authorize the seal of the Corporation
to be affixed to all papers which may require it), as the Board may by
resolution determine and specify in the respective resolutions appointing them,
subject to
<PAGE>
such restrictions as may be contained in the Restated Certificate of
Incorporation, but no such committee shall have power or authority in reference
to the following matters: (i) approving, adopting or recommending to the
stockholders, any action or matter expressly required by Section 141 of the
General Corporation Law of the State of Delaware (the "GCL") to be submitted to
stockholders for approval or (ii) adopting, amending or repealing any Bylaw of
the Corporation. Such committee or committees shall keep regular minutes of
their proceedings and report them to the Board when required. A majority of all
the members of any such committee may fix its rules of procedure, determine its
action and fix the time and place, whether within or without the State of
Delaware, of its meetings and specify what notice thereof, if any, shall be
given, unless the Board of Directors shall otherwise by resolution provide. The
Board of Directors shall have power to change the membership of any such
committee, to fill vacancies thereon and to discharge any such committee, or any
person thereon, at any time. The President of the Corporation shall be an ex
officio member of each committee of the Board. Each member of any such committee
shall be paid such fee, if any, as shall be fixed by the Board of Directors for
each meeting of such committee attended.
The following shall be the permanent committees of the Board, and the
duties and powers of each.
(a) EXECUTIVE COMMITTEE. The Executive Committee shall be
composed of members of the Board. It shall take such action as may be
necessary or required between meetings of the Board of Directors in
instances where it is not necessary or convenient to hold meetings of
the full Board. Prior to any such meeting, an attempt shall be made to
contact all of the members of the Board by telephone, facsimile or
e-mail. It shall have the full power of the Board, except as set forth
in Section 141, GCL. All of its actions shall be reported in written
minutes, which shall be reviewed and approved or disapproved by the
Board after each meeting and filed with the Board minutes. Any action
taken by such Committee shall be final, unless disapproved by the
Board, and in such instance they shall be final, and actions taken
pursuant thereto shall be valid, until such disapproval is evidenced by
the Board.
(b) LOAN COMMITTEE AND SPECIAL ASSET COMMITTEE. The Loan
Committee shall review all loans proposed to be made by the
subsidiaries of the Corporation which are in excess of an amount to be
determined from time to time by the Board, or which have other
characteristics that the Board determines from time to time should be
reviewed on behalf of the Corporation. The Committee shall report to
the Board when it seeks direction or believes the Board should know of
particular transactions, but will not regularly report. It shall keep
its own records of its actions.
(c) INVESTMENT COMMITTEE. The Investment Committee shall
review the investment portfolios of the Corporation and its
subsidiaries. The Committee shall report to the Board when it seeks
direction or believes the Board should know of particular transactions,
but will not regularly report. It shall keep its own records of its
actions.
<PAGE>
(d) COMPENSATION COMMITTEE. The Compensation Committee shall
review the compensation offered by the Corporation to its senior
executives, including stock option, bonus, retirement, deferred
compensation, insurance and similar matters. It shall establish
objectives and evaluate each senior executive in writing, and make its
objectives, evaluations and compensation recommendations to the Board
as to such matters not less than annually. Its proceedings, and any
Board discussion of them, shall be kept on a strictly confidential
basis.
(e) AUDIT COMMITTEE. The Audit Committee shall have at least
two outside directors as members. It shall recommend the Auditors to be
hired by the Corporation and shall negotiate the terms of their
engagement. It shall, assisted by the Auditors of the Corporation,
determine whether the Corporation maintains proper checks and
deterrences against fraud and inaccurate reporting of financial
results. It shall, at the conclusion of each year's audit, review the
management letter prepared by the Auditors, discuss it with them and,
with the assistance of management, prepare a reply which shall be
circulated to, and discussed with, the Board.
(f) CORPORATE GOVERNANCE COMMITTEE. The Corporate Governance
Committee shall:
(i) Consider and recruit members of the Board. It
shall seek to maintain an active and effective Board.
Potential nominees will be interviewed, screened and nominated
by them. Each nominee will normally own Common Stock of the
Corporation, but such ownership may be waived by such
Committee. The activities of present members of the Board will
be reviewed by this Committee to determine if they are
actively assisting the Corporation in its mission. Any member
of the Board who knows of a person who would be a desirable
candidate for election to the Board shall contact this
Committee.
(ii) Together with the management of the Corporation,
it will evaluate candidates for principal officers of the
Corporation.
(iii) On an ongoing basis, it will review the
Restated Certificate of Incorporation, Bylaws, the internal
procedures and policies of the Corporation and other governing
documents and recommend amendments when it feels they are
required to ensure that such procedures and policies do not
hinder, but assist the Corporation in carrying out its
mission, and in redefining that mission when necessary.
The records of this Committee will be confidential. It will not itself
take any independent action, but make recommendations to the Board.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if prior to such action a written consent thereto
is signed by all members of the Board or of such committee, as the case may be,
and such written consent is filed with the minutes or proceedings of the Board
or committee.
<PAGE>
ARTICLE IV
OFFICERS
Section 1. NUMBER. The principal officers of the Corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents, a Treasurer and
a Secretary. The Corporation may also have, at the discretion of the Board of
Directors, such other officers as may be appointed in accordance with the
provisions of these Bylaws. One person may hold the offices and perform the
duties of any two or more of said offices, except the offices and duties of
President and Secretary.
Section 2. ELECTION OR APPOINTMENT AND TERM OF OFFICE. The principal
officers of the Corporation shall be chosen annually by the Board of Directors
at the annual meeting thereof. Each such officer shall hold office until a
successor shall have been duly chosen and shall qualify, or until death,
resignation or removal.
Section 3. SUBORDINATE OFFICERS. In addition to the principal officers
enumerated in Section 1 of this Article IV, the Corporation may have one or more
Assistant Treasurers, one or more Assistant Secretaries and such other officers,
agents and employees as the Board of Directors may deem necessary, each of whom
shall hold office for such period, have such authority, and perform such duties
as the President or the Board of Directors may from time to time determine. The
Board of Directors may delegate to any principal officer the power to appoint
and to remove any such subordinate officers, agents or employees.
Section 4. REMOVAL. Any officer may be removed, either with or without
cause, at any time, by resolution adopted by the Board of Directors at any
regular meeting of the Board or at any special meeting of the Board at which a
quorum is present.
Section 5. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Chairman of the Board or to the Board of Directors or to
the President or to the Secretary. Any such resignation shall take effect upon
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 6. VACANCIES. A vacancy in any office may be filled for the
unexpired portion of the term in the manner prescribed in these Bylaws for
election or appointment to such office for such term.
Section 7. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of stockholders and at all meetings of the Board of
Directors and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 8. PRESIDENT. The President shall be the chief executive
officer of the Corporation and as such shall have general supervision of the
affairs of the Corporation,
<PAGE>
subject to the control of the Board of Directors. In the absence of the Chairman
of the Board, the President shall preside at all meetings of stockholders and at
all meetings of the Board of Directors. Subject to the control and discretion of
the Board of Directors, the President may enter into any contract or execute and
deliver any instrument in the name and on behalf of the Corporation, and in
general, shall perform all duties incident to the office of President, as herein
defined, and all such other duties as from time to time may be assigned by the
Board of Directors.
Section 9. VICE PRESIDENTS. The Vice Presidents in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President. They shall perform such other duties and have such
other powers as the President or the Board of Directors may from time to time
prescribe.
Section 10. TREASURER. The Treasurer shall have charge and custody of,
and be responsible for, all funds and securities of the Corporation and shall
deposit all such funds in the name of the Corporation in such banks or other
depositories as shall be selected by the Board of Directors. The Treasurer shall
exhibit at all reasonable times the books of accounts and records to any of the
directors of the Corporation upon application during business hours at the
office of the Corporation where such books and records shall be kept; when
requested by the Board of Directors, shall render a statement of the condition
of the finances of the Corporation at any meeting of the Board or at the annual
meeting of stockholders; shall receive, and give receipt for, moneys due and
payable to the Corporation from any source whatsoever; and in general, shall
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned by the President or the Board of Directors.
The Treasurer shall give such bond, if any, as the Board of Directors may
require.
Section 11. SECRETARY. The Secretary, if present, shall act as
secretary at all meetings of the Board of Directors and of the stockholders and
keep the minutes thereof in a book or books to be provided for that purpose;
shall see that all notices required to be given by the Corporation are duly
given and served; unless otherwise directed shall have charge of the stock
records of the Corporation; shall see that all reports, statements and other
documents required by law are properly kept and filed; and in general, shall
perform all the duties incident to the office of Secretary and such other duties
as from time to time may be assigned by the President or the Board of Directors.
Section 12. SALARIES. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors, and the salaries of any other
officers may be fixed by the President.
ARTICLE V
INDEMNIFICATION
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The Corporation shall indemnify any person who has or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that such person is or was a director or officer to the maximum extent
permitted by Section 145 of the GCL.
<PAGE>
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 1. CERTIFICATE OF STOCK. Every stockholder of the Corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number of shares of the
capital stock of the Corporation owned by such stockholder.
Section 2. STOCK CERTIFICATES. Any stock certificate which certifies
the number of shares owned by any holder of stock of the Corporation shall be
numbered in the order in which it shall be issued and shall be signed by the
Chairman of the Board or the President or any Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation and shall have the seal of the Corporation affixed thereto;
provided, however, that, where any such certificate is signed (i) by a transfer
agent or an assistant transfer agent or (ii) by a transfer clerk acting on
behalf of the Corporation and a registrar, if the Board shall by resolution so
authorize, the signature of such Chairman of the Board, President, Vice
President, Treasurer, Secretary, Assistant Treasurer or Assistant Secretary and
the seal of the Corporation may be facsimiles thereof. In case any officer or
officers of the Corporation who shall have signed, or whose facsimile signature
or signatures shall have been used on, any such certificate shall cease to be
such officer or officers, whether by reason of death, resignation or otherwise,
before such certificate shall have been delivered by the Corporation, such
certificate may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate, or whose
facsimile signature or signatures shall have been affixed thereto, had not
ceased to be such officer or officers.
Section 3. STOCK LEDGER. A record shall be kept by the Secretary,
transfer agent or by any other officer, employee or agent designated by the
Board of Directors of the name of the person, firm or corporation holding the
stock represented by such certificate, the number of shares represented by such
certificate, and the date thereof, and in case of cancellation, the date of
cancellation.
Section 4. CANCELLATION. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so canceled, except in cases provided
for in Section 7 of this Article VI.
Section 5. TRANSFER OF STOCK. Transfers of shares of the capital stock
of the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by an attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation or with a
transfer clerk or a transfer agent appointed as in Section 6 of this Article VI
provided, and on surrender of the certificate or certificates for such shares
properly endorsed and the payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation; provided, however that
whenever any
<PAGE>
transfer of shares shall be made for collateral security, and not absolutely,
such fact, if known to the Secretary of the Corporation, shall be so expressed
in the entry of transfer.
Section 6. REGULATIONS. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with the Restated
Certificate of Incorporation or these Bylaws, concerning the issue, transfer and
registration of certificates for shares of the stock of the Corporation. It may
appoint, or authorize any principal officer or officers to appoint, one or more
transfer clerks or one or more transfer agents and one or more registrars, and
may require all certificates of stock to bear the signature or signatures of any
of them.
Section 7. LOST, STOLEN, MUTILATED OR DESTROYED CERTIFICATES. As a
condition to the issue of a new certificate of stock in the place of any
certificate theretofore issued and alleged to have been lost, stolen, mutilated
or destroyed, the Board of Directors, in its discretion, may require the owner
of any such certificate, or a legal representative, to give the Corporation a
bond in such sum and in such form as it may direct to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss,
theft, mutilation or destruction of any such certificate or the issuance of such
new certificate. Proper evidence of such loss, theft, mutilation or destruction
shall be procured for the Board of Directors, if required. The Board of
Directors, in its discretion, may authorize the issuance of such new
certificates without any bond when in its judgment it is proper to do so.
Section 8. RECORD DATE. The Board may fix a date in advance of not
exceeding fifty (50) days preceding the date of any meeting of stockholders (nor
less than ten (10) days before the date of such meeting), or the date for the
payment of any dividend, or the date for the allotment of rights, or the date
when any change or conversion or exchange of capital stock shall go into effect
or a date in connection with obtaining any written consent to corporate action
without a meeting, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, such meeting, and any adjournment
thereof, or to receive payment of any dividend, or to receive any such allotment
of rights, or to exercise the rights in respect of any such change, conversion,
or exchange of capital stock or to give such written consent, as the case may
be, notwithstanding any transfer of any stock on the books of the Corporation
after any record date so fixed.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 1. CORPORATE SEAL. The Board of Directors shall provide a
corporate seal, which shall be in the form of a circle and shall bear the name
of the Corporation and words and figures showing that it was incorporated in the
State of Delaware in the year 1984. The Secretary shall be the custodian of the
seal. The Board of Directors may authorize a duplicate seal to be kept and used
by any other officer.
Section 2. FISCAL YEAR. The fiscal year of the Corporation shall be
specified by the Board of Directors.
<PAGE>
Section 3. VOTING OF STOCK OWNED BY THE CORPORATION. The Board of
Directors may authorize any person on behalf of the Corporation to attend, vote
and grant proxies to be used at any meeting of stockholders of any corporation
in which the Corporation may hold stock.
Section 4. DIVIDENDS. Subject to the provisions of the Restated
Certificate of Incorporation, the Board of Directors may, out of funds legally
available therefor, at any regular or special meeting declare dividends upon the
capital stock of the Corporation as and when they deem expedient. Before
declaring any dividend there may be set apart out of any funds of the
Corporation available for dividends such sum or sums as the directors from time
to time in their discretion may deem proper for working capital or as a reserve
fund to meet contingencies or for such other purposes as the directors may deem
conducive in the interests of the Corporation.
ARTICLE VIII
AMENDMENTS
Except as provided in Section 11.8 of the Restated Certificate of
Incorporation, the Bylaws of the Corporation may be altered, amended or repealed
either by the affirmative vote of the holders of a majority of the stock issued
and outstanding and entitled to vote in respect thereof and represented in
person or by proxy at any annual or special meeting of the stockholders, or by
the Board of Directors at any regular or special meeting of the Board of
Directors. Bylaws, whether made or altered by the stockholders or by the Board
of Directors, shall be subject to alteration or repeal by the stockholders as in
this Article VIII above provided.
EXHIBIT 10(g)
EXECUTIVE RETENTION AGREEMENT
This EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made as of the
16th day of October, 1997 by New England Community Bancorp, Inc., a Delaware
corporation (the "Company"), and David A. Lentini (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive has been and continues to be employed by the Company
in a management capacity and has made and is expected to continue to make major
contributions to the business of the Company;
WHEREAS, the Company recognizes the possibility of a Change in Control (as
hereinafter defined); and
WHEREAS, the Company desires to reinforce and encourage the continued
attention and dedication of the Company's key executives, including the
Executive, to their responsibilities on behalf of the Company without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control and to establish certain minimum severance benefits for
such key executives in the event of a Change in Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere
herein, the following terms shall have the following meanings when used
in this Agreement with initial capital letters:
(a) "Annual Compensation" shall mean the sum of (i) the
Executive's annual base salary at the highest rate in effect during the twelve
(12) months preceding the date of termination of the Executive's employment or,
if higher, during the twelve (12) months preceding the Change in Control, plus
(ii) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive, prior to the occurrence of the
Change in Control, the Executive's target bonus for the year in which the Change
in Control occurs.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that, prior to any termination of
employment by the Executive for Good Reason, the Executive shall have (i)
committed an intentional act of fraud, embezzlement or theft in connection with
his duties or in the course of his employment with the Company; (ii) committed
intentional, wrongful damage to property of the Company; or (iii) intentionally
and wrongfully disclosed confidential information of the Company. For purposes
of this Section 1(c), no act, or failure to act, on the Executive's part shall
be deemed "intentional" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that his action or omission was in
the best interests of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by an affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose, after reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive chooses to
have counsel present at such meeting), to be heard before the Board, finding
that, in the good faith opinion of the Board, the Executive has committed an act
constituting "Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit or otherwise affect the right of the Executive
or his beneficiaries to contest the validity or propriety of any such finding or
determination.
(d) "Change in Control" shall mean the occurrence during the Term
of the Agreement of:
(i) a report on Schedule 13D being filed with the Securities
and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange
Act of 1934, as amended (the "Act") disclosing that any person other than the
Corporation or any employee benefit plan sponsored by the Corporation, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act) directly
or indirectly, of thirty-five percent (35%) or more of the total voting power
<PAGE>
represented by the Corporation's then outstanding voting securities (calculated
as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights
to acquire voting securities); or
(ii) any person, other than the Corporation or any employee
benefit plan sponsored by the Corporation, purchasing shares pursuant to a
tender offer or exchange offer to acquire any voting securities of the
Corporation (or securities convertible into such voting securities) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner directly or indirectly, of
thirty-five percent (35%) or more of the total voting power represented by the
Corporation's then outstanding voting securities (all as calculated under clause
(i)); or
(iii) the stockholders of the Corporation approving (A)
any consolidation or merger of the Corporation in which the Corporation is not
the continuing or surviving corporation (other than a merger of the Corporation
in which holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before), or pursuant to which Common Stock would
be converted into cash, securities or other property, or (B) any sale, lease
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Corporation; or
(iv) there having been a change in the composition of the
Board at any time during any consecutive twenty-four month period such that
"continuing directors" cease for any reason to constitute at least a seventy
percent (70%) majority of the Board.
For purposes of the preceding sentence, "continuing directors" means those
members of the Board who either were directors at the beginning of such
consecutive twenty-four (24) month period or were elected by or on the
nomination or recommendation of at least a seventy percent (70%) majority of the
then-existing "continuing directors." So long as there has not been a "Change in
Control" within the meaning of clause (iv), the Board of Directors may adopt by
a seventy percent (70%) majority vote of the "continuing directors" a resolution
to the effect that an event described in clauses (i) or (ii) shall not
constitute a "Change in Control."
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Common Stock" shall mean the common stock of the Company.
(g) "Company" shall mean New England Community Bancorp, Inc.
(h) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(i) "Good Reason" shall mean the occurrence, following a
Change in Control and without the Executive's express written consent, of any of
the following circumstances:
(i) the failure to elect, reelect or otherwise maintain the
Executive in any office or position, or substantially equivalent office or
position, that the Executive held immediately prior to the Change in Control;
(ii) a significant adverse change in nature or scope of the
Executive's authorities, powers, functions or duties attached to any office or
position that the Executive held immediately prior to the Change in Control,
with the exception for a change inherent in the Company no longer being a
publicly owned corporation;
(iii) a reduction in the Executive's base pay as in effect
immediately prior to the Change in Control, or as increased from time to time
thereafter, or a failure following a Change in Control to increase the
Executive's base pay on a percentage basis equal to the average percentage
increase in base pay of all officers of the Company during the period since the
Executive's last increase in base pay;
(iv) a failure by the Company to either (A) continue in
effect (without reduction in benefit level and/or reward opportunities) any
material compensation or employee benefit plan, program or practice in which the
Executive was participating immediately prior to the Change in Control, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) provide the Executive
with compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to
<PAGE>
those provided for under each compensation or employee benefit plan, program and
practice in which the Executive was participating immediately prior to the
Change in Control;
(v) the Company requiring the Executive to be based more than
twenty-five (25) miles from the Executive's principal place of business before
the Change in Control;
(vi) the liquidation, dissolution, merger, consolidation, or
reorganization of the Company or sale or transfer of substantially all its
business and/or assets unless the obligations of this Agreement are assumed by
the successor(s); or
(vii) the Company's, or any successor's, material breach of
this Agreement;
provided, however, that any event or condition described in clauses (i), (ii),
(iii), (iv) or (v) of this Section 1(i) that occurs prior to a Change in Control
but which the Executive reasonably demonstrates (A) was at the request of a
Third Party or (B) otherwise arose in connection with, or in anticipation of, a
Change in Control that has been threatened or proposed and that actually occurs,
shall constitute Good Reason for purposes of this Agreement notwithstanding that
it occurred prior to a Change in Control.
(j) "Present Value" shall mean present value determined using the
discount rate that, at the relevant time, would be used to calculate present
value for purposes of Section 280G of the Code.
(k) "Severance Period" shall mean the period of time commencing on
the date of the occurrence of a Change in Control and continuing for three (3)
years thereafter.
(l) "Third Party" shall mean a Person (as that term is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934) who
has indicated an intention or has taken steps reasonably calculated to effect a
Change in Control.
2. TERM OF AGREEMENT. This Agreement shall commence as of October 16, 1997,
and shall continue in effect until October 16, 2000 (the "Term"); provided,
however, that on October 16, 1998, and on each October 16th thereafter, the Term
shall automatically be extended for one (1) additional year unless either the
Executive or the Company shall have given written notice to the other at least
ninety (90) days prior thereto that the Term shall not be so extended; provided,
further, however, that following the occurrence of a Change in Control, the Term
shall not expire prior to the expiration of the Severance Period.
3. TERMINATION OF EMPLOYMENT DURING THE SEVERANCE PERIOD BY THE COMPANY FOR
A REASON OTHER THAN CAUSE OR BY THE EXECUTIVE FOR GOOD REASON; CERTAIN
TERMINATIONS PRIOR TO THE SEVERANCE PERIOD.
(a) If, during the Severance Period, the Company terminates the
Executive's employment for a reason other than Cause or the Executive terminates
employment on account of Good Reason:
(i) Within five (5) business days following such termination
of employment, the Company shall pay to the Executive a lump sum equal to (A)
three (3) times the Executive's Annual Compensation plus (B) the pro rata share
of the Executive's incentive bonus for the year during which such termination
occurs as provided in the following sentence plus (C) the amount the Executive
would have received as a matching contribution under the Company's 401(k) Plan
if the Executive had received the amounts set forth in clause (A) and (B) of
this Section 3(a)(i) over three (3) years and had made contributions to the
Company's 401(k) Plan based on those amounts at the contribution rate set forth
in the Executive's salary deferral agreement in effect at the time of the Change
in Control. The pro rata share of the Executive's incentive bonus shall be equal
to (Y) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive prior to the occurrence of the
Change in Control, the Executive's target incentive bonus for the year in which
the Change of Control occurs, multiplied by (Z) the number of days in the year
of termination preceding the date of termination divided by three hundred
sixty-five (365);
(ii) Within five (5) business days following such termination
of employment, the Company shall transfer to the Executive title, free and clear
of any liabilities or other encumbrances, to the automobile then provided to the
Executive by the Company for his use;
<PAGE>
(iii) Immediately upon such termination, all stock options
and restricted stock previously granted to the Executive shall vest and the
Executive shall be treated for all purposes as having satisfied any employment
requirements or performance measures contained therein;
(iv) Within five (5) business days following the Executive's
exercise of any stock options whether or not, at the time granted, they were
intended to be "Incentive Stock Options" under Section 422 of the Code, which at
the time exercised, were not eligible to be Incentive Stock Options, the Company
shall pay to the Executive a lump sum equal to (A) the income realized by the
Executive on the exercise of such stock options multiplied by (B) the difference
between the aggregate maximum Federal and Connecticut income tax rates on
ordinary income and the aggregate maximum Federal and Connecticut income tax
rates on capital gains;
(v) For three (3) years following such termination of
employment, the Company shall provide or shall arrange to provide for the
continuation on behalf of the Executive of all benefits and service credit for
benefits under the plans maintained by the Company prior to the Change in
Control that are "welfare plans" and "pension plans" within the meaning of
Sections 3(1) and 3(2), respectively, of ERISA, whether or not such plans are
subject to ERISA. If benefits or service credit for benefits under any of the
foregoing plans are based on the Executive's compensation, the Executive's
Annual Compensation shall be deemed to be the Executive's compensation for such
purpose. If and to the extent that any benefits or service credit for benefits
cannot be paid or provided under a plan providing such benefits or service
credit for benefits, then the Company will itself pay, provide, or otherwise
cause to be provided such benefits or service credit for benefits to the
Executive, his dependents and beneficiaries (or if the Executive so elects, the
fair cash value of equivalents of such benefits or service credit for benefits).
During the period for which benefits and service credits for benefits are
provided pursuant to this Section 3(a)(v), the Company may amend or replace such
plans, provided that any such amendment or replacement plan shall continue to
provide to the Executive benefits and service credit for benefits at a benefit
level at least as valuable as under such plans immediately prior to the Change
in Control. The continuation of health benefits pursuant to this Section 3(a)(v)
shall not reduce in any way the Executive's and any dependent's or beneficiary's
rights to continued health benefits pursuant to Sections 601 through 608 of
ERISA, or any equivalent state or foreign law, for the full period provided by
such laws, and such rights to continued health benefits pursuant to such laws
shall be deemed to arise at the end of the period of health benefit continuation
pursuant to this Section 3(a)(v);
(vi) For three (3) years following such termination of
employment, the Company shall provide the Executive with a country club
membership equal to the membership provided to the Executive prior to the date
of termination of the Executive's employment or, if higher, prior to the
occurrence of the Change in Control;
(vii) For one (1) year following such termination of
employment, the Company, at its cost, shall provide the Executive with executive
outplacement assistance; provided that the cost to the Company for such
assistance shall not exceed fifteen (15) percent of the Executive's base salary
as in effect at the time of the Change in Control.
(b) Certain Additional Payments by the Company.
(i) In the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would subject the Executive to tax under
Section 4999 of the Code, then the Company shall make an additional lump sum
payment to the Executive within thirty (30) days of such determination in an
amount equal to the sum of such tax plus the amount of Federal and state income
taxes and tax under Section 4999 of the Code which will be imposed on the
Executive as a result of the receipt of such lump sum payment (the "Gross-up
Amount").
(ii) All determinations required to be made under this
Section 3(b) shall be made, at the Company's expense, by an accounting firm
selected by the Company, and reasonably acceptable to the Executive, that is one
of the five largest accounting firms in the United States (the "Accounting
Firm"), which shall provide detailed supporting calculations both to the Company
and the Executive within fifteen (15) business days of such termination of
employment or such earlier time as is requested by the Company. Except as set
forth in clause (iii) below, any such determination by the Accounting Firm shall
be binding upon the Company and the Executive.
<PAGE>
(iii) As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that additional Gross-up Amounts which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Executive that the Accounting Firm believes
has a high probability of success, determines that an Underpayment has been
made, any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code.
(c) If the Present Value of the additional payments and benefits
provided pursuant to this Agreement is less than or equal to the Present Value
of the additional payments and benefits that the Executive shall be entitled to
receive solely as a result of his termination of employment under any other
plan, program or arrangement of the Company, including such plans, programs or
arrangements mandated by applicable Federal, state or foreign law (such other
plans, programs and arrangements hereinafter referred to as "Other Plans"), the
Executive shall be entitled to no payments or benefits under this Agreement,
except for the continuation of health benefits for the Executive and his
dependents and beneficiaries pursuant to Section 3(a)(v) hereof. If the Present
Value of the additional payments and benefits provided pursuant to this
Agreement is greater than the Present Value of the additional payments and
benefits that the Executive shall be entitled to receive as a result of his
termination of employment under Other Plans, the payment pursuant to Section
3(a)(i) hereof shall be reduced by the Present Value of such additional payments
and benefits under such Other Plans. For purposes of the foregoing, additional
payments and benefits under Other Plans shall not include plans providing
payments and benefits to which the Executive is entitled by reason of his prior
service such as, without limitation, "pension plans" within the meaning of
Section 3(2) of ERISA, whether or not such plans are subject to ERISA, and other
plans of deferred compensation but shall include plans providing severance
benefits, termination benefits and other payments or benefits paid solely on
account of the loss of employment. If the Company and the Executive cannot agree
on the reduction (if any) in, or the Present Value of, payments and benefits for
purposes of this Section 3(c), the determination of the amount of such reduction
and/or Present Value shall be made by the Accounting Firm described in Section
3(b)(ii) hereof, and such determination shall be conclusive and binding on the
parties. The fees and expenses of such Accounting Firm for its services in
connection with the foregoing determinations shall be paid by the Company.
(d) If the Executive's employment is terminated by the Company
without Cause prior to the date of a Change in Control and the Executive
reasonably demonstrates that such termination (i) was at the request of a Third
Party who effectuates a Change in Control or (ii) otherwise arose in connection
with, or in anticipation of, a Change in Control that has been threatened or
proposed and that actually occurs, such termination shall be deemed to have
occurred after a Change in Control, provided that a Change in Control actually
shall have occurred.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE OR BY THE EXECUTIVE
OTHER THAN FOR GOOD REASON. If the employment of the Executive is terminated (i)
by the Company for Cause; (ii) by the Executive for any reason other than Good
Reason; or (iii) by reason of the Executive's death or permanent disability, no
payments shall be made to the Executive under this Agreement, and the Company
shall have no further obligations under this Agreement. For purposes of the
foregoing, "permanent disability" shall mean the Executive's disability as
defined under the Employee's long-term disability policy as in effect from time
to time.
5. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement, or defense of his rights under
this Agreement by litigation or otherwise because the cost and expense thereof
would substantially detract from the benefits intended to be extended to the
Executive hereunder. Accordingly, if it should appear to the Executive that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice, at the expense of the Company as hereafter
provided, to advise and represent the Executive in connection with any such
interpretation, enforcement, or defense, including, without limitation, the
initiation or defense of any litigation or other legal action , whether by or
against the Company or any director, officer, stockholder, or other person or
entity affiliated with the Company, in any jurisdiction. Without respect to
whether the Executive prevails, in whole or in part, in connection with any of
the foregoing, the Company will pay and be solely financially responsible for
any and all attorneys' and related fees and expenses incurred by the Executive
in connection with any of the foregoing.
<PAGE>
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following termination of employment. Accordingly, the
payments and benefits that the Company will pay or provide to the Executive
pursuant to this Agreement will be liquidated damages, and the Executive will
not be required to mitigate the amount of any such payment or benefit by seeking
other employment or otherwise, nor will any profits, income, earnings, or other
benefits from any source whatsoever create any mitigation, offset, reduction, or
any other obligation of payments and benefits provided pursuant to this
Agreement.
7. TAXES. The Company may withhold from any amounts payable under this
Agreement all Federal, state, local or foreign taxes as the Company is required
to withhold pursuant to any law, regulation or ruling. The Executive shall bear
all expense of, and be solely responsible for, all Federal, state, local or
foreign taxes due with respect to any payments or benefits received pursuant to
this Agreement.
8. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company is required to perform it. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation and benefits from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the date on which the Executive's employment with the Company was
terminated. As used in this Agreement, "the Company" shall include any successor
to the Company's business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee or other designee or, if
there is no such designee, to the Executive's estate.
9. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two (2)
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or one (1) business day after
having been sent by a nationally recognized overnight courier service, addressed
to the Company (to the attention of the General Counsel of the Company) at its
principal executive office and to the Executive at his principal residence, or
to such other address as either party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will be
effective only upon receipt.
10. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable Federal law.
11. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
12. ARBITRATION. Any dispute arising out of, or in any way relating to,
this Agreement shall be resolved by arbitration in Connecticut through the
Hartford, Connecticut office of the American Arbitration Association in
accordance with the Model Employment Arbitration Procedures of the American
Arbitration Association except to the extent such provisions are modified as
hereinafter provided. The arbitration proceeding shall be conducted by three (3)
arbitrators. The Executive and the Company shall each designate one (1)
arbitrator, each of whom shall be an attorney admitted to practice in one or
more states who has ten (10) or more years of experience in employment matters,
and the arbitrators so selected shall thereafter designate a third arbitrator
(who shall be a member of the National Academy of Arbitrators) by mutual
agreement. The arbitrators shall have no authority to modify any provision of
this Agreement or to award a remedy
<PAGE>
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of this Agreement. The decision of the arbitrators
shall be final and binding on the Company and the Executive.
13. MERGER. This Agreement expresses in full the understanding of the
Company and the Executive with respect to compensation and benefits following a
Change in Control and the subsequent termination of the Executive's employment,
and all promises, representations, understandings and arrangements with respect
to such compensation and benefits following a Change in Control and the
subsequent termination of the Executive's employment contained in any agreements
and promises, written or otherwise, expressed or implied, with respect to such
compensation and benefits and such termination are wholly superseded and merged
herein. Except as otherwise specifically provided in this Agreement, nothing in
this Agreement will prevent or limit the Executive's present or future
participation in any benefit, bonus, incentive, or other plan or program
provided by the Company for which the Executive may qualify, nor will this
Agreement in any manner limit or otherwise affect such rights as the Executive
may have under any such plan or program. Amounts or benefits which are vested or
which the Executive is otherwise entitled to receive under any such plan or
program of the Company at or subsequent to the date of termination of employment
shall be payable in accordance with such plan or program, except as otherwise
expressly provided in this Agreement.
14. WAIVER. Failure by either party hereto to insist upon strict adherence
to any one or more of the covenants or terms contained herein, on one or more
occasions, shall not be construed to be a waiver nor will it deprive such party
of the right to require strict compliance with the same thereafter.
15. AMENDMENTS. No amendments hereto, or waivers or releases of obligations
or liabilities hereunder, shall be effective unless agreed to in writing by all
parties hereto.
16. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date first written above.
New England Community Bancorp, Inc.
By: s/s Angelina J. McGillivray
---------------------------
Angelina J. McGillivray
Its Secretary
s/s David A. Lentini
--------------------
David A. Lentini
EXHIBIT 10(h)
EXECUTIVE RETENTION AGREEMENT
This EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made as of the
16th day of October, 1997 by New England Community Bancorp, Inc., a Delaware
corporation (the "Company"), and Donat A. Fournier (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive has been and continues to be employed by the Company
in a management capacity and has made and is expected to continue to make major
contributions to the business of the Company;
WHEREAS, the Company recognizes the possibility of a Change in Control (as
hereinafter defined); and
WHEREAS, the Company desires to reinforce and encourage the continued
attention and dedication of the Company's key executives, including the
Executive, to their responsibilities on behalf of the Company without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control and to establish certain minimum severance benefits for
such key executives in the event of a Change in Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein,
the following terms shall have the following meanings when used in this
Agreement with initial capital letters:
(a) "Annual Compensation" shall mean the sum of (i) the
Executive's annual base salary at the highest rate in effect during the twelve
(12) months preceding the date of termination of the Executive's employment or,
if higher, during the twelve (12) months preceding the Change in Control, plus
(ii) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive, prior to the occurrence of the
Change in Control, the Executive's target bonus for the year in which the Change
in Control occurs.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that, prior to any termination of
employment by the Executive for Good Reason, the Executive shall have (i)
committed an intentional act of fraud, embezzlement or theft in connection with
his duties or in the course of his employment with the Company; (ii) committed
intentional, wrongful damage to property of the Company; or (iii) intentionally
and wrongfully disclosed confidential information of the Company. For purposes
of this Section 1(c), no act, or failure to act, on the Executive's part shall
be deemed "intentional" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that his action or omission was in
the best interests of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by an affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose, after reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive chooses to
have counsel present at such meeting), to be heard before the Board, finding
that, in the good faith opinion of the Board, the Executive has committed an act
constituting "Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit or otherwise affect the right of the Executive
or his beneficiaries to contest the validity or propriety of any such finding or
determination.
(d) "Change in Control" shall mean the occurrence during the Term
of the Agreement of:
(i) a report on Schedule 13D being filed with the Securities
and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange
Act of 1934, as amended (the "Act") disclosing that any person other than the
Corporation or any employee benefit plan sponsored by the Corporation, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act) directly
or indirectly, of thirty-five percent (35%) or more of the total voting power
<PAGE>
represented by the Corporation's then outstanding voting securities (calculated
as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights
to acquire voting securities); or
(ii) any person, other than the Corporation or any employee
benefit plan sponsored by the Corporation, purchasing shares pursuant to a
tender offer or exchange offer to acquire any voting securities of the
Corporation (or securities convertible into such voting securities) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner directly or indirectly, of
thirty-five percent (35%) or more of the total voting power represented by the
Corporation's then outstanding voting securities (all as calculated under clause
(i)); or
(iii) the stockholders of the Corporation approving (A) any
consolidation or merger of the Corporation in which the Corporation is not the
continuing or surviving corporation (other than a merger of the Corporation in
which holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before), or pursuant to which Common Stock would
be converted into cash, securities or other property, or (B) any sale, lease
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Corporation; or
(iv) there having been a change in the composition of the
Board at any time during any consecutive twenty-four month period such that
"continuing directors" cease for any reason to constitute at least a seventy
percent (70%) majority of the Board.
For purposes of the preceding sentence, "continuing directors" means those
members of the Board who either were directors at the beginning of such
consecutive twenty-four (24) month period or were elected by or on the
nomination or recommendation of at least a seventy percent (70%) majority of the
then-existing "continuing directors." So long as there has not been a "Change in
Control" within the meaning of clause (iv), the Board of Directors may adopt by
a seventy percent (70%) majority vote of the "continuing directors" a resolution
to the effect that an event described in clauses (i) or (ii) shall not
constitute a "Change in Control."
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Common Stock" shall mean the common stock of the Company.
(g) "Company" shall mean New England Community Bancorp, Inc.
(h) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(i) "Good Reason" shall mean the occurrence, following a Change in
Control and without the Executive's express written consent, of any of the
following circumstances:
(i) the failure to elect, reelect or otherwise maintain the
Executive in any office or position, or substantially equivalent office or
position, that the Executive held immediately prior to the Change in Control;
(ii) a significant adverse change in nature or scope of the
Executive's authorities, powers, functions or duties attached to any office or
position that the Executive held immediately prior to the Change in Control,
with the exception for a change inherent in the Company no longer being a
publicly owned corporation;
(iii) a reduction in the Executive's base pay as in effect
immediately prior to the Change in Control, or as increased from time to time
thereafter, or a failure following a Change in Control to increase the
Executive's base pay on a percentage basis equal to the average percentage
increase in base pay of all officers of the Company during the period since the
Executive's last increase in base pay;
(iv) a failure by the Company to either (A) continue in
effect (without reduction in benefit level and/or reward opportunities) any
material compensation or employee benefit plan, program or practice in which the
Executive was participating immediately prior to the Change in Control, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) provide the Executive
with compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to
<PAGE>
those provided for under each compensation or employee benefit plan, program and
practice in which the Executive was participating immediately prior to the
Change in Control;
(v) the Company requiring the Executive to be based more
than twenty-five (25) miles from the Executive's principal place of business
before the Change in Control;
(vi) the liquidation, dissolution, merger, consolidation, or
reorganization of the Company or sale or transfer of substantially all its
business and/or assets unless the obligations of this Agreement are assumed by
the successor(s); or
(vii) the Company's, or any successor's, material breach of
this Agreement; provided, however, that any event or condition described in
clauses (i), (ii), (iii), (iv) or (v) of this Section 1(i) that occurs prior to
a Change in Control but which the Executive reasonably demonstrates (A) was at
the request of a Third Party or (B) otherwise arose in connection with, or in
anticipation of, a Change in Control that has been threatened or proposed and
that actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
(j) "Present Value" shall mean present value determined using the
discount rate that, at the relevant time, would be used to calculate present
value for purposes of Section 280G of the Code.
(k) "Severance Period" shall mean the period of time commencing on
the date of the occurrence of a Change in Control and continuing for two (2)
years thereafter.
(l) "Third Party" shall mean a Person (as that term is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934) who
has indicated an intention or has taken steps reasonably calculated to effect a
Change in Control.
2. TERM OF AGREEMENT. This Agreement shall commence as of October 16, 1997,
and shall continue in effect until October 16, 2000 (the "Term"); provided,
however, that on October 16, 1998, and on each October 16th thereafter, the Term
shall automatically be extended for one (1) additional year unless either the
Executive or the Company shall have given written notice to the other at least
ninety (90) days prior thereto that the Term shall not be so extended; provided,
further, however, that following the occurrence of a Change in Control, the Term
shall not expire prior to the expiration of the Severance Period.
3. TERMINATION OF EMPLOYMENT DURING THE SEVERANCE PERIOD BY THE COMPANY FOR
A REASON OTHER THAN CAUSE OR BY THE EXECUTIVE FOR GOOD REASON; CERTAIN
TERMINATIONS PRIOR TO THE SEVERANCE PERIOD.
(a) If, during the Severance Period, the Company terminates the
Executive's employment for a reason other than Cause or the Executive terminates
employment on account of Good Reason:
(i) Within five (5) business days following such termination
of employment, the Company shall pay to the Executive a lump sum equal to (A)
Two (2) times the Executive's Annual Compensation plus (B) the pro rata share of
the Executive's incentive bonus for the year during which such termination
occurs as provided in the following sentence plus (C) the amount the Executive
would have received as a matching contribution under the Company's 401(k) Plan
if the Executive had received the amounts set forth in clause (A) and (B) of
this Section 3(a)(i) over two (2) years and had made contributions to the
Company's 401(k) Plan based on those amounts at the contribution rate set forth
in the Executive's salary deferral agreement in effect at the time of the Change
in Control. The pro rata share of the Executive's incentive bonus shall be equal
to (Y) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive prior to the occurrence of the
Change in Control, the Executive's target incentive bonus for the year in which
the Change of Control occurs, multiplied by (Z) the number of days in the year
of termination preceding the date of termination divided by three hundred
sixty-five (365);
(ii) Within five (5) business days following such
termination of employment, the Company shall transfer to the Executive title,
free and clear of any liabilities or other encumbrances, to the automobile then
provided to the Executive by the Company for his use;
<PAGE>
(iii) Immediately upon such termination, all stock options
and restricted stock previously granted to the Executive shall vest and the
Executive shall be treated for all purposes as having satisfied any employment
requirements or performance measures contained therein;
(iv) Within five (5) business days following the Executive's
exercise of any stock options whether or not, at the time granted, they were
intended to be "Incentive Stock Options" under Section 422 of the Code, which at
the time exercised, were not eligible to be Incentive Stock Options, the Company
shall pay to the Executive a lump sum equal to (A) the income realized by the
Executive on the exercise of such stock options multiplied by (B) the difference
between the aggregate maximum Federal and Connecticut income tax rates on
ordinary income and the aggregate maximum Federal and Connecticut income tax
rates on capital gains;
(v) For three (3) years following such termination of
employment, the Company shall provide or shall arrange to provide for the
continuation on behalf of the Executive of all benefits and service credit for
benefits under the plans maintained by the Company prior to the Change in
Control that are "welfare plans" and "pension plans" within the meaning of
Sections 3(1) and 3(2), respectively, of ERISA, whether or not such plans are
subject to ERISA. If benefits or service credit for benefits under any of the
foregoing plans are based on the Executive's compensation, the Executive's
Annual Compensation shall be deemed to be the Executive's compensation for such
purpose. If and to the extent that any benefits or service credit for benefits
cannot be paid or provided under a plan providing such benefits or service
credit for benefits, then the Company will itself pay, provide, or otherwise
cause to be provided such benefits or service credit for benefits to the
Executive, his dependents and beneficiaries (or if the Executive so elects, the
fair cash value of equivalents of such benefits or service credit for benefits).
During the period for which benefits and service credits for benefits are
provided pursuant to this Section 3(a)(v), the Company may amend or replace such
plans, provided that any such amendment or replacement plan shall continue to
provide to the Executive benefits and service credit for benefits at a benefit
level at least as valuable as under such plans immediately prior to the Change
in Control. The continuation of health benefits pursuant to this Section 3(a)(v)
shall not reduce in any way the Executive's and any dependent's or beneficiary's
rights to continued health benefits pursuant to Sections 601 through 608 of
ERISA, or any equivalent state or foreign law, for the full period provided by
such laws, and such rights to continued health benefits pursuant to such laws
shall be deemed to arise at the end of the period of health benefit continuation
pursuant to this Section 3(a)(v);
(vi) For three (3) years following such termination of
employment, the Company shall provide the Executive with a country club
membership equal to the membership provided to the Executive prior to the date
of termination of the Executive's employment or, if higher, prior to the
occurrence of the Change in Control;
(vii) For one (1) year following such termination of
employment, the Company, at its cost, shall provide the Executive with executive
outplacement assistance; provided that the cost to the Company for such
assistance shall not exceed fifteen (15) percent of the Executive's base salary
as in effect at the time of the Change in Control.
(b) Certain Additional Payments by the Company.
(i) In the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would subject the Executive to tax under
Section 4999 of the Code, then the Company shall make an additional lump sum
payment to the Executive within thirty (30) days of such determination in an
amount equal to the sum of such tax plus the amount of Federal and state income
taxes and tax under Section 4999 of the Code which will be imposed on the
Executive as a result of the receipt of such lump sum payment (the "Gross-up
Amount").
(ii) All determinations required to be made under this
Section 3(b) shall be made, at the Company's expense, by an accounting firm
selected by the Company, and reasonably acceptable to the Executive, that is one
of the five largest accounting firms in the United States (the "Accounting
Firm"), which shall provide detailed supporting calculations both to the Company
and the Executive within fifteen (15) business days of such termination of
employment or such earlier time as is requested by the Company. Except as set
forth in clause (iii) below, any such determination by the Accounting Firm shall
be binding upon the Company and the Executive.
<PAGE>
(iii) As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that additional Gross-up Amounts which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Executive that the Accounting Firm believes
has a high probability of success, determines that an Underpayment has been
made, any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code.
(c) If the Present Value of the additional payments and benefits
provided pursuant to this Agreement is less than or equal to the Present Value
of the additional payments and benefits that the Executive shall be entitled to
receive solely as a result of his termination of employment under any other
plan, program or arrangement of the Company, including such plans, programs or
arrangements mandated by applicable Federal, state or foreign law (such other
plans, programs and arrangements hereinafter referred to as "Other Plans"), the
Executive shall be entitled to no payments or benefits under this Agreement,
except for the continuation of health benefits for the Executive and his
dependents and beneficiaries pursuant to Section 3(a)(v) hereof. If the Present
Value of the additional payments and benefits provided pursuant to this
Agreement is greater than the Present Value of the additional payments and
benefits that the Executive shall be entitled to receive as a result of his
termination of employment under Other Plans, the payment pursuant to Section
3(a)(i) hereof shall be reduced by the Present Value of such additional payments
and benefits under such Other Plans. For purposes of the foregoing, additional
payments and benefits under Other Plans shall not include plans providing
payments and benefits to which the Executive is entitled by reason of his prior
service such as, without limitation, "pension plans" within the meaning of
Section 3(2) of ERISA, whether or not such plans are subject to ERISA, and other
plans of deferred compensation but shall include plans providing severance
benefits, termination benefits and other payments or benefits paid solely on
account of the loss of employment. If the Company and the Executive cannot agree
on the reduction (if any) in, or the Present Value of, payments and benefits for
purposes of this Section 3(c), the determination of the amount of such reduction
and/or Present Value shall be made by the Accounting Firm described in Section
3(b)(ii) hereof, and such determination shall be conclusive and binding on the
parties. The fees and expenses of such Accounting Firm for its services in
connection with the foregoing determinations shall be paid by the Company.
(d) If the Executive's employment is terminated by the Company
without Cause prior to the date of a Change in Control and the Executive
reasonably demonstrates that such termination (i) was at the request of a Third
Party who effectuates a Change in Control or (ii) otherwise arose in connection
with, or in anticipation of, a Change in Control that has been threatened or
proposed and that actually occurs, such termination shall be deemed to have
occurred after a Change in Control, provided that a Change in Control actually
shall have occurred.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE OR BY THE EXECUTIVE
OTHER THAN FOR GOOD REASON. If the employment of the Executive is terminated (i)
by the Company for Cause; (ii) by the Executive for any reason other than Good
Reason; or (iii) by reason of the Executive's death or permanent disability, no
payments shall be made to the Executive under this Agreement, and the Company
shall have no further obligations under this Agreement. For purposes of the
foregoing, "permanent disability" shall mean the Executive's disability as
defined under the Employee's long-term disability policy as in effect from time
to time.
5. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement, or defense of his rights under
this Agreement by litigation or otherwise because the cost and expense thereof
would substantially detract from the benefits intended to be extended to the
Executive hereunder. Accordingly, if it should appear to the Executive that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice, at the expense of the Company as hereafter
provided, to advise and represent the Executive in connection with any such
interpretation, enforcement, or defense, including, without limitation, the
initiation or defense of any litigation or other legal action , whether by or
against the Company or any director, officer, stockholder, or other person or
entity affiliated with the Company, in any jurisdiction. Without respect to
whether the Executive prevails, in whole or in part, in connection with any of
the foregoing, the Company will pay and be solely financially responsible for
any and all attorneys' and related fees and expenses incurred by the Executive
in connection with any of the foregoing.
<PAGE>
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following termination of employment. Accordingly, the
payments and benefits that the Company will pay or provide to the Executive
pursuant to this Agreement will be liquidated damages, and the Executive will
not be required to mitigate the amount of any such payment or benefit by seeking
other employment or otherwise, nor will any profits, income, earnings, or other
benefits from any source whatsoever create any mitigation, offset, reduction, or
any other obligation of payments and benefits provided pursuant to this
Agreement.
7. TAXES. The Company may withhold from any amounts payable under this
Agreement all Federal, state, local or foreign taxes as the Company is required
to withhold pursuant to any law, regulation or ruling. The Executive shall bear
all expense of, and be solely responsible for, all Federal, state, local or
foreign taxes due with respect to any payments or benefits received pursuant to
this Agreement.
8. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company is required to perform it. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation and benefits from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the date on which the Executive's employment with the Company was
terminated. As used in this Agreement, "the Company" shall include any successor
to the Company's business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee or other designee or, if
there is no such designee, to the Executive's estate.
9. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two (2)
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or one (1) business day after
having been sent by a nationally recognized overnight courier service, addressed
to the Company (to the attention of the General Counsel of the Company) at its
principal executive office and to the Executive at his principal residence, or
to such other address as either party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will be
effective only upon receipt.
10. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable Federal law.
11. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
12. ARBITRATION. Any dispute arising out of, or in any way relating to,
this Agreement shall be resolved by arbitration in Connecticut through the
Hartford, Connecticut office of the American Arbitration Association in
accordance with the Model Employment Arbitration Procedures of the American
Arbitration Association except to the extent such provisions are modified as
hereinafter provided. The arbitration proceeding shall be conducted by three (3)
arbitrators. The Executive and the Company shall each designate one (1)
arbitrator, each of whom shall be an attorney admitted to practice in one or
more states who has ten (10) or more years of experience in employment matters,
and the arbitrators so selected shall thereafter designate a third arbitrator
(who shall be a member of the National Academy of Arbitrators) by mutual
agreement. The arbitrators shall have no authority to modify any provision of
this Agreement or to award a remedy
<PAGE>
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of this Agreement. The decision of the arbitrators
shall be final and binding on the Company and the Executive.
13. MERGER. This Agreement expresses in full the understanding of the
Company and the Executive with respect to compensation and benefits following a
Change in Control and the subsequent termination of the Executive's employment,
and all promises, representations, understandings and arrangements with respect
to such compensation and benefits following a Change in Control and the
subsequent termination of the Executive's employment contained in any agreements
and promises, written or otherwise, expressed or implied, with respect to such
compensation and benefits and such termination are wholly superseded and merged
herein. Except as otherwise specifically provided in this Agreement, nothing in
this Agreement will prevent or limit the Executive's present or future
participation in any benefit, bonus, incentive, or other plan or program
provided by the Company for which the Executive may qualify, nor will this
Agreement in any manner limit or otherwise affect such rights as the Executive
may have under any such plan or program. Amounts or benefits which are vested or
which the Executive is otherwise entitled to receive under any such plan or
program of the Company at or subsequent to the date of termination of employment
shall be payable in accordance with such plan or program, except as otherwise
expressly provided in this Agreement.
14. WAIVER. Failure by either party hereto to insist upon strict adherence
to any one or more of the covenants or terms contained herein, on one or more
occasions, shall not be construed to be a waiver nor will it deprive such party
of the right to require strict compliance with the same thereafter.
15. AMENDMENTS. No amendments hereto, or waivers or releases of obligations
or liabilities hereunder, shall be effective unless agreed to in writing by all
parties hereto.
16. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date first written above.
New England Community Bancorp, Inc.
By: s/s Angelina J. McGillivray
-------------------------------
Angelina J. McGillivray
Its Secretary
s/s Donat A. Fournier
---------------------
Donat A. Fournier
EXHIBIT 10(i)
EXECUTIVE RETENTION AGREEMENT
This EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made as of the
16th day of October, 1997 by New England Community Bancorp, Inc., a Delaware
corporation (the "Company"), and Anson C. Hall (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive has been and continues to be employed by the Company
in a management capacity and has made and is expected to continue to make major
contributions to the business of the Company;
WHEREAS, the Company recognizes the possibility of a Change in Control (as
hereinafter defined); and
WHEREAS, the Company desires to reinforce and encourage the continued
attention and dedication of the Company's key executives, including the
Executive, to their responsibilities on behalf of the Company without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control and to establish certain minimum severance benefits for
such key executives in the event of a Change in Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein,
the following terms shall have the following meanings when used in this
Agreement with initial capital letters:
(a) "Annual Compensation" shall mean the sum of (i) the
Executive's annual base salary at the highest rate in effect during the twelve
(12) months preceding the date of termination of the Executive's employment or,
if higher, during the twelve (12) months preceding the Change in Control, plus
(ii) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive, prior to the occurrence of the
Change in Control, the Executive's target bonus for the year in which the Change
in Control occurs.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that, prior to any termination of
employment by the Executive for Good Reason, the Executive shall have (i)
committed an intentional act of fraud, embezzlement or theft in connection with
his duties or in the course of his employment with the Company; (ii) committed
intentional, wrongful damage to property of the Company; or (iii) intentionally
and wrongfully disclosed confidential information of the Company. For purposes
of this Section 1(c), no act, or failure to act, on the Executive's part shall
be deemed "intentional" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that his action or omission was in
the best interests of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by an affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose, after reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive chooses to
have counsel present at such meeting), to be heard before the Board, finding
that, in the good faith opinion of the Board, the Executive has committed an act
constituting "Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit or otherwise affect the right of the Executive
or his beneficiaries to contest the validity or propriety of any such finding or
determination.
(d) "Change in Control" shall mean the occurrence during the Term
of the Agreement of:
(i) a report on Schedule 13D being filed with the Securities
and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange
Act of 1934, as amended (the "Act") disclosing that any person other than the
Corporation or any employee benefit plan sponsored by the Corporation, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act) directly
or indirectly, of thirty-five percent (35%) or more of the total voting power
<PAGE>
represented by the Corporation's then outstanding voting securities (calculated
as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights
to acquire voting securities); or
(ii) any person, other than the Corporation or any employee
benefit plan sponsored by the Corporation, purchasing shares pursuant to a
tender offer or exchange offer to acquire any voting securities of the
Corporation (or securities convertible into such voting securities) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner directly or indirectly, of
thirty-five percent (35%) or more of the total voting power represented by the
Corporation's then outstanding voting securities (all as calculated under clause
(i)); or
(iii) the stockholders of the Corporation approving (A) any
consolidation or merger of the Corporation in which the Corporation is not the
continuing or surviving corporation (other than a merger of the Corporation in
which holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before), or pursuant to which Common Stock would
be converted into cash, securities or other property, or (B) any sale, lease
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Corporation; or
(iv) there having been a change in the composition of the
Board at any time during any consecutive twenty-four month period such that
"continuing directors" cease for any reason to constitute at least a seventy
percent (70%) majority of the Board.
For purposes of the preceding sentence, "continuing directors" means those
members of the Board who either were directors at the beginning of such
consecutive twenty-four (24) month period or were elected by or on the
nomination or recommendation of at least a seventy percent (70%) majority of the
then-existing "continuing directors." So long as there has not been a "Change in
Control" within the meaning of clause (iv), the Board of Directors may adopt by
a seventy percent (70%) majority vote of the "continuing directors" a resolution
to the effect that an event described in clauses (i) or (ii) shall not
constitute a "Change in Control."
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Common Stock" shall mean the common stock of the Company.
(g) "Company" shall mean New England Community Bancorp, Inc.
(h) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(i) "Good Reason" shall mean the occurrence, following a
Change in Control and without the Executive's express written consent, of any of
the following circumstances:
(i) the failure to elect, reelect or otherwise maintain the
Executive in any office or position, or substantially equivalent office or
position, that the Executive held immediately prior to the Change in Control;
(ii) a significant adverse change in nature or scope of the
Executive's authorities, powers, functions or duties attached to any office or
position that the Executive held immediately prior to the Change in Control,
with the exception for a change inherent in the Company no longer being a
publicly owned corporation;
(iii) a reduction in the Executive's base pay as in effect
immediately prior to the Change in Control, or as increased from time to time
thereafter, or a failure following a Change in Control to increase the
Executive's base pay on a percentage basis equal to the average percentage
increase in base pay of all officers of the Company during the period since the
Executive's last increase in base pay;
(iv) a failure by the Company to either (A) continue in
effect (without reduction in benefit level and/or reward opportunities) any
material compensation or employee benefit plan, program or practice in which the
Executive was participating immediately prior to the Change in Control, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) provide the Executive
with compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to
<PAGE>
those provided for under each compensation or employee benefit plan, program and
practice in which the Executive was participating immediately prior to the
Change in Control;
(v) the Company requiring the Executive to be based more
than twenty-five (25) miles from the Executive's principal place of business
before the Change in Control;
(vi) the liquidation, dissolution, merger, consolidation, or
reorganization of the Company or sale or transfer of substantially all its
business and/or assets unless the obligations of this Agreement are assumed by
the successor(s); or
(vii) the Company's, or any successor's, material breach of
this Agreement; provided, however, that any event or condition described in
clauses (i), (ii), (iii), (iv) or (v) of this Section 1(i) that occurs prior to
a Change in Control but which the Executive reasonably demonstrates (A) was at
the request of a Third Party or (B) otherwise arose in connection with, or in
anticipation of, a Change in Control that has been threatened or proposed and
that actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
(j) "Present Value" shall mean present value determined using the
discount rate that, at the relevant time, would be used to calculate present
value for purposes of Section 280G of the Code.
(k) "Severance Period" shall mean the period of time commencing on
the date of the occurrence of a Change in Control and continuing for two (2)
years thereafter.
(l) "Third Party" shall mean a Person (as that term is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934) who
has indicated an intention or has taken steps reasonably calculated to effect a
Change in Control.
2. TERM OF AGREEMENT. This Agreement shall commence as of October 16, 1997,
and shall continue in effect until October 16, 2000 (the "Term"); provided,
however, that on October 16, 1998, and on each October 16th thereafter, the Term
shall automatically be extended for one (1) additional year unless either the
Executive or the Company shall have given written notice to the other at least
ninety (90) days prior thereto that the Term shall not be so extended; provided,
further, however, that following the occurrence of a Change in Control, the Term
shall not expire prior to the expiration of the Severance Period.
3. TERMINATION OF EMPLOYMENT DURING THE SEVERANCE PERIOD BY THE COMPANY FOR
A REASON OTHER THAN CAUSE OR BY THE EXECUTIVE FOR GOOD REASON; CERTAIN
TERMINATIONS PRIOR TO THE SEVERANCE PERIOD.
(a) If, during the Severance Period, the Company terminates the
Executive's employment for a reason other than Cause or the Executive terminates
employment on account of Good Reason:
(i) Within five (5) business days following such termination
of employment, the Company shall pay to the Executive a lump sum equal to (A)
Two (2) times the Executive's Annual Compensation plus (B) the pro rata share of
the Executive's incentive bonus for the year during which such termination
occurs as provided in the following sentence plus (C) the amount the Executive
would have received as a matching contribution under the Company's 401(k) Plan
if the Executive had received the amounts set forth in clause (A) and (B) of
this Section 3(a)(i) over two (2) years and had made contributions to the
Company's 401(k) Plan based on those amounts at the contribution rate set forth
in the Executive's salary deferral agreement in effect at the time of the Change
in Control. The pro rata share of the Executive's incentive bonus shall be equal
to (Y) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive prior to the occurrence of the
Change in Control, the Executive's target incentive bonus for the year in which
the Change of Control occurs, multiplied by (Z) the number of days in the year
of termination preceding the date of termination divided by three hundred
sixty-five (365);
(ii) Within five (5) business days following such
termination of employment, the Company shall transfer to the Executive title,
free and clear of any liabilities or other encumbrances, to the automobile then
provided to the Executive by the Company for his use;
<PAGE>
(iii) Immediately upon such termination, all stock options
and restricted stock previously granted to the Executive shall vest and the
Executive shall be treated for all purposes as having satisfied any employment
requirements or performance measures contained therein;
(iv) Within five (5) business days following the Executive's
exercise of any stock options whether or not, at the time granted, they were
intended to be "Incentive Stock Options" under Section 422 of the Code, which at
the time exercised, were not eligible to be Incentive Stock Options, the Company
shall pay to the Executive a lump sum equal to (A) the income realized by the
Executive on the exercise of such stock options multiplied by (B) the difference
between the aggregate maximum Federal and Connecticut income tax rates on
ordinary income and the aggregate maximum Federal and Connecticut income tax
rates on capital gains;
(v) For three (3) years following such termination of
employment, the Company shall provide or shall arrange to provide for the
continuation on behalf of the Executive of all benefits and service credit for
benefits under the plans maintained by the Company prior to the Change in
Control that are "welfare plans" and "pension plans" within the meaning of
Sections 3(1) and 3(2), respectively, of ERISA, whether or not such plans are
subject to ERISA. If benefits or service credit for benefits under any of the
foregoing plans are based on the Executive's compensation, the Executive's
Annual Compensation shall be deemed to be the Executive's compensation for such
purpose. If and to the extent that any benefits or service credit for benefits
cannot be paid or provided under a plan providing such benefits or service
credit for benefits, then the Company will itself pay, provide, or otherwise
cause to be provided such benefits or service credit for benefits to the
Executive, his dependents and beneficiaries (or if the Executive so elects, the
fair cash value of equivalents of such benefits or service credit for benefits).
During the period for which benefits and service credits for benefits are
provided pursuant to this Section 3(a)(v), the Company may amend or replace such
plans, provided that any such amendment or replacement plan shall continue to
provide to the Executive benefits and service credit for benefits at a benefit
level at least as valuable as under such plans immediately prior to the Change
in Control. The continuation of health benefits pursuant to this Section 3(a)(v)
shall not reduce in any way the Executive's and any dependent's or beneficiary's
rights to continued health benefits pursuant to Sections 601 through 608 of
ERISA, or any equivalent state or foreign law, for the full period provided by
such laws, and such rights to continued health benefits pursuant to such laws
shall be deemed to arise at the end of the period of health benefit continuation
pursuant to this Section 3(a)(v);
(vi) For three (3) years following such termination of
employment, the Company shall provide the Executive with a country club
membership equal to the membership provided to the Executive prior to the date
of termination of the Executive's employment or, if higher, prior to the
occurrence of the Change in Control;
(vii) For one (1) year following such termination of
employment, the Company, at its cost, shall provide the Executive with executive
outplacement assistance; provided that the cost to the Company for such
assistance shall not exceed fifteen (15) percent of the Executive's base salary
as in effect at the time of the Change in Control.
(b) Certain Additional Payments by the Company.
(i) In the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would subject the Executive to tax under
Section 4999 of the Code, then the Company shall make an additional lump sum
payment to the Executive within thirty (30) days of such determination in an
amount equal to the sum of such tax plus the amount of Federal and state income
taxes and tax under Section 4999 of the Code which will be imposed on the
Executive as a result of the receipt of such lump sum payment (the "Gross-up
Amount").
(ii) All determinations required to be made under this
Section 3(b) shall be made, at the Company's expense, by an accounting firm
selected by the Company, and reasonably acceptable to the Executive, that is one
of the five largest accounting firms in the United States (the "Accounting
Firm"), which shall provide detailed supporting calculations both to the Company
and the Executive within fifteen (15) business days of such termination of
employment or such earlier time as is requested by the Company. Except as set
forth in clause (iii) below, any such determination by the Accounting Firm shall
be binding upon the Company and the Executive.
<PAGE>
(iii) As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that additional Gross-up Amounts which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Executive that the Accounting Firm believes
has a high probability of success, determines that an Underpayment has been
made, any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code.
(c) If the Present Value of the additional payments and benefits
provided pursuant to this Agreement is less than or equal to the Present Value
of the additional payments and benefits that the Executive shall be entitled to
receive solely as a result of his termination of employment under any other
plan, program or arrangement of the Company, including such plans, programs or
arrangements mandated by applicable Federal, state or foreign law (such other
plans, programs and arrangements hereinafter referred to as "Other Plans"), the
Executive shall be entitled to no payments or benefits under this Agreement,
except for the continuation of health benefits for the Executive and his
dependents and beneficiaries pursuant to Section 3(a)(v) hereof. If the Present
Value of the additional payments and benefits provided pursuant to this
Agreement is greater than the Present Value of the additional payments and
benefits that the Executive shall be entitled to receive as a result of his
termination of employment under Other Plans, the payment pursuant to Section
3(a)(i) hereof shall be reduced by the Present Value of such additional payments
and benefits under such Other Plans. For purposes of the foregoing, additional
payments and benefits under Other Plans shall not include plans providing
payments and benefits to which the Executive is entitled by reason of his prior
service such as, without limitation, "pension plans" within the meaning of
Section 3(2) of ERISA, whether or not such plans are subject to ERISA, and other
plans of deferred compensation but shall include plans providing severance
benefits, termination benefits and other payments or benefits paid solely on
account of the loss of employment. If the Company and the Executive cannot agree
on the reduction (if any) in, or the Present Value of, payments and benefits for
purposes of this Section 3(c), the determination of the amount of such reduction
and/or Present Value shall be made by the Accounting Firm described in Section
3(b)(ii) hereof, and such determination shall be conclusive and binding on the
parties. The fees and expenses of such Accounting Firm for its services in
connection with the foregoing determinations shall be paid by the Company.
(d) If the Executive's employment is terminated by the Company
without Cause prior to the date of a Change in Control and the Executive
reasonably demonstrates that such termination (i) was at the request of a Third
Party who effectuates a Change in Control or (ii) otherwise arose in connection
with, or in anticipation of, a Change in Control that has been threatened or
proposed and that actually occurs, such termination shall be deemed to have
occurred after a Change in Control, provided that a Change in Control actually
shall have occurred.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE OR BY THE EXECUTIVE
OTHER THAN FOR GOOD REASON. If the employment of the Executive is terminated (i)
by the Company for Cause; (ii) by the Executive for any reason other than Good
Reason; or (iii) by reason of the Executive's death or permanent disability, no
payments shall be made to the Executive under this Agreement, and the Company
shall have no further obligations under this Agreement. For purposes of the
foregoing, "permanent disability" shall mean the Executive's disability as
defined under the Employee's long-term disability policy as in effect from time
to time.
5. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement, or defense of his rights under
this Agreement by litigation or otherwise because the cost and expense thereof
would substantially detract from the benefits intended to be extended to the
Executive hereunder. Accordingly, if it should appear to the Executive that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice, at the expense of the Company as hereafter
provided, to advise and represent the Executive in connection with any such
interpretation, enforcement, or defense, including, without limitation, the
initiation or defense of any litigation or other legal action , whether by or
against the Company or any director, officer, stockholder, or other person or
entity affiliated with the Company, in any jurisdiction. Without respect to
whether the Executive prevails, in whole or in part, in connection with any of
the foregoing, the Company will pay and be solely financially responsible for
any and all attorneys' and related fees and expenses incurred by the Executive
in connection with any of the foregoing.
<PAGE>
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following termination of employment. Accordingly, the
payments and benefits that the Company will pay or provide to the Executive
pursuant to this Agreement will be liquidated damages, and the Executive will
not be required to mitigate the amount of any such payment or benefit by seeking
other employment or otherwise, nor will any profits, income, earnings, or other
benefits from any source whatsoever create any mitigation, offset, reduction, or
any other obligation of payments and benefits provided pursuant to this
Agreement.
7. TAXES. The Company may withhold from any amounts payable under this
Agreement all Federal, state, local or foreign taxes as the Company is required
to withhold pursuant to any law, regulation or ruling. The Executive shall bear
all expense of, and be solely responsible for, all Federal, state, local or
foreign taxes due with respect to any payments or benefits received pursuant to
this Agreement.
8. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company is required to perform it. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation and benefits from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the date on which the Executive's employment with the Company was
terminated. As used in this Agreement, "the Company" shall include any successor
to the Company's business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee or other designee or, if
there is no such designee, to the Executive's estate.
9. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two (2)
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or one (1) business day after
having been sent by a nationally recognized overnight courier service, addressed
to the Company (to the attention of the General Counsel of the Company) at its
principal executive office and to the Executive at his principal residence, or
to such other address as either party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will be
effective only upon receipt.
10. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable Federal law.
11. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
12. ARBITRATION. Any dispute arising out of, or in any way relating to,
this Agreement shall be resolved by arbitration in Connecticut through the
Hartford, Connecticut office of the American Arbitration Association in
accordance with the Model Employment Arbitration Procedures of the American
Arbitration Association except to the extent such provisions are modified as
hereinafter provided. The arbitration proceeding shall be conducted by three (3)
arbitrators. The Executive and the Company shall each designate one (1)
arbitrator, each of whom shall be an attorney admitted to practice in one or
more states who has ten (10) or more years of experience in employment matters,
and the arbitrators so selected shall thereafter designate a third arbitrator
(who shall be a member of the National Academy of Arbitrators) by mutual
agreement. The arbitrators shall have no authority to modify any provision of
this Agreement or to award a remedy
<PAGE>
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of this Agreement. The decision of the arbitrators
shall be final and binding on the Company and the Executive.
13. MERGER. This Agreement expresses in full the understanding of the
Company and the Executive with respect to compensation and benefits following a
Change in Control and the subsequent termination of the Executive's employment,
and all promises, representations, understandings and arrangements with respect
to such compensation and benefits following a Change in Control and the
subsequent termination of the Executive's employment contained in any agreements
and promises, written or otherwise, expressed or implied, with respect to such
compensation and benefits and such termination are wholly superseded and merged
herein. Except as otherwise specifically provided in this Agreement, nothing in
this Agreement will prevent or limit the Executive's present or future
participation in any benefit, bonus, incentive, or other plan or program
provided by the Company for which the Executive may qualify, nor will this
Agreement in any manner limit or otherwise affect such rights as the Executive
may have under any such plan or program. Amounts or benefits which are vested or
which the Executive is otherwise entitled to receive under any such plan or
program of the Company at or subsequent to the date of termination of employment
shall be payable in accordance with such plan or program, except as otherwise
expressly provided in this Agreement.
14. WAIVER. Failure by either party hereto to insist upon strict adherence
to any one or more of the covenants or terms contained herein, on one or more
occasions, shall not be construed to be a waiver nor will it deprive such party
of the right to require strict compliance with the same thereafter.
15. AMENDMENTS. No amendments hereto, or waivers or releases of obligations
or liabilities hereunder, shall be effective unless agreed to in writing by all
parties hereto.
16. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date first written above.
New England Community Bancorp, Inc.
By: s/s Angelina J. McGillivray
-------------------------------
Angelina J. McGillivray
Its Secretary
s/s Anson C.Hall
----------------
Anson C. Hall
EXHIBIT 10(j)
EXECUTIVE RETENTION AGREEMENT
This EXECUTIVE RETENTION AGREEMENT (this "Agreement") is made as of the
16th day of October, 1997 by New England Community Bancorp, Inc., a Delaware
corporation (the "Company"), and Frank A. Falvo (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive has been and continues to be employed by the Company
in a management capacity and has made and is expected to continue to make major
contributions to the business of the Company;
WHEREAS, the Company recognizes the possibility of a Change in Control (as
hereinafter defined); and
WHEREAS, the Company desires to reinforce and encourage the continued
attention and dedication of the Company's key executives, including the
Executive, to their responsibilities on behalf of the Company without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control and to establish certain minimum severance benefits for
such key executives in the event of a Change in Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein,
the following terms shall have the following meanings when used in this
Agreement with initial capital letters:
(a) "Annual Compensation" shall mean the sum of (i) the
Executive's annual base salary at the highest rate in effect during the twelve
(12) months preceding the date of termination of the Executive's employment or,
if higher, during the twelve (12) months preceding the Change in Control, plus
(ii) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive, prior to the occurrence of the
Change in Control, the Executive's target bonus for the year in which the Change
in Control occurs.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that, prior to any termination of
employment by the Executive for Good Reason, the Executive shall have (i)
committed an intentional act of fraud, embezzlement or theft in connection with
his duties or in the course of his employment with the Company; (ii) committed
intentional, wrongful damage to property of the Company; or (iii) intentionally
and wrongfully disclosed confidential information of the Company. For purposes
of this Section 1(c), no act, or failure to act, on the Executive's part shall
be deemed "intentional" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that his action or omission was in
the best interests of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by an affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose, after reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive chooses to
have counsel present at such meeting), to be heard before the Board, finding
that, in the good faith opinion of the Board, the Executive has committed an act
constituting "Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit or otherwise affect the right of the Executive
or his beneficiaries to contest the validity or propriety of any such finding or
determination.
(d) "Change in Control" shall mean the occurrence during the Term
of the Agreement of:
(i) a report on Schedule 13D being filed with the Securities
and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange
Act of 1934, as amended (the "Act") disclosing that any person other than the
Corporation or any employee benefit plan sponsored by the Corporation, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act) directly
or indirectly, of thirty-five percent (35%) or more of the total voting power
<PAGE>
represented by the Corporation's then outstanding voting securities (calculated
as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights
to acquire voting securities); or
(ii) any person, other than the Corporation or any employee
benefit plan sponsored by the Corporation, purchasing shares pursuant to a
tender offer or exchange offer to acquire any voting securities of the
Corporation (or securities convertible into such voting securities) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner directly or indirectly, of
thirty-five percent (35%) or more of the total voting power represented by the
Corporation's then outstanding voting securities (all as calculated under clause
(i)); or
(iii) the stockholders of the Corporation approving (A) any
consolidation or merger of the Corporation in which the Corporation is not the
continuing or surviving corporation (other than a merger of the Corporation in
which holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before), or pursuant to which Common Stock would
be converted into cash, securities or other property, or (B) any sale, lease
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Corporation; or
(iv) there having been a change in the composition of the
Board at any time during any consecutive twenty-four month period such that
"continuing directors" cease for any reason to constitute at least a seventy
percent (70%) majority of the Board.
For purposes of the preceding sentence, "continuing directors" means those
members of the Board who either were directors at the beginning of such
consecutive twenty-four (24) month period or were elected by or on the
nomination or recommendation of at least a seventy percent (70%) majority of the
then-existing "continuing directors." So long as there has not been a "Change in
Control" within the meaning of clause (iv), the Board of Directors may adopt by
a seventy percent (70%) majority vote of the "continuing directors" a resolution
to the effect that an event described in clauses (i) or (ii) shall not
constitute a "Change in Control."
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Common Stock" shall mean the common stock of the Company.
(g) "Company" shall mean New England Community Bancorp, Inc.
(h) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(i) "Good Reason" shall mean the occurrence, following a
Change in Control and without the Executive's express written consent, of any of
the following circumstances:
(i) the failure to elect, reelect or otherwise maintain the
Executive in any office or position, or substantially equivalent office or
position, that the Executive held immediately prior to the Change in Control;
(ii) a significant adverse change in nature or scope of the
Executive's authorities, powers, functions or duties attached to any office or
position that the Executive held immediately prior to the Change in Control,
with the exception for a change inherent in the Company no longer being a
publicly owned corporation;
(iii) a reduction in the Executive's base pay as in effect
immediately prior to the Change in Control, or as increased from time to time
thereafter, or a failure following a Change in Control to increase the
Executive's base pay on a percentage basis equal to the average percentage
increase in base pay of all officers of the Company during the period since the
Executive's last increase in base pay;
(iv) a failure by the Company to either (A) continue in
effect (without reduction in benefit level and/or reward opportunities) any
material compensation or employee benefit plan, program or practice in which the
Executive was participating immediately prior to the Change in Control, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) provide the Executive
with compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to
<PAGE>
those provided for under each compensation or employee benefit plan, program and
practice in which the Executive was participating immediately prior to the
Change in Control;
(v) the Company requiring the Executive to be based more
than twenty-five (25) miles from the Executive's principal place of business
before the Change in Control;
(vi) the liquidation, dissolution, merger, consolidation, or
reorganization of the Company or sale or transfer of substantially all its
business and/or assets unless the obligations of this Agreement are assumed by
the successor(s); or
(vii) the Company's, or any successor's, material breach of
this Agreement; provided, however, that any event or condition described in
clauses (i), (ii), (iii), (iv) or (v) of this Section 1(i) that occurs prior to
a Change in Control but which the Executive reasonably demonstrates (A) was at
the request of a Third Party or (B) otherwise arose in connection with, or in
anticipation of, a Change in Control that has been threatened or proposed and
that actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
(j) "Present Value" shall mean present value determined using the
discount rate that, at the relevant time, would be used to calculate present
value for purposes of Section 280G of the Code.
(k) "Severance Period" shall mean the period of time commencing on
the date of the occurrence of a Change in Control and continuing for two (2)
years thereafter.
(l) "Third Party" shall mean a Person (as that term is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934) who
has indicated an intention or has taken steps reasonably calculated to effect a
Change in Control.
2. TERM OF AGREEMENT. This Agreement shall commence as of October 16, 1997,
and shall continue in effect until October 16, 2000 (the "Term"); provided,
however, that on October 16, 1998, and on each October 16th thereafter, the Term
shall automatically be extended for one (1) additional year unless either the
Executive or the Company shall have given written notice to the other at least
ninety (90) days prior thereto that the Term shall not be so extended; provided,
further, however, that following the occurrence of a Change in Control, the Term
shall not expire prior to the expiration of the Severance Period.
3. TERMINATION OF EMPLOYMENT DURING THE SEVERANCE PERIOD BY THE COMPANY FOR
A REASON OTHER THAN CAUSE OR BY THE EXECUTIVE FOR GOOD REASON; CERTAIN
TERMINATIONS PRIOR TO THE SEVERANCE PERIOD.
(a) If, during the Severance Period, the Company terminates the
Executive's employment for a reason other than Cause or the Executive terminates
employment on account of Good Reason:
(i) Within five (5) business days following such termination
of employment, the Company shall pay to the Executive a lump sum equal to (A)
Two (2) times the Executive's Annual Compensation plus (B) the pro rata share of
the Executive's incentive bonus for the year during which such termination
occurs as provided in the following sentence plus (C) the amount the Executive
would have received as a matching contribution under the Company's 401(k) Plan
if the Executive had received the amounts set forth in clause (A) and (B) of
this Section 3(a)(i) over two (2) years and had made contributions to the
Company's 401(k) Plan based on those amounts at the contribution rate set forth
in the Executive's salary deferral agreement in effect at the time of the Change
in Control. The pro rata share of the Executive's incentive bonus shall be equal
to (Y) the greatest amount of incentive bonus compensation received by the
Executive with respect to any year from, and including, the third year prior to
the year in which the Change in Control occurs or, if no such incentive bonus
compensation has been received by the Executive prior to the occurrence of the
Change in Control, the Executive's target incentive bonus for the year in which
the Change of Control occurs, multiplied by (Z) the number of days in the year
of termination preceding the date of termination divided by three hundred
sixty-five (365);
(ii) Within five (5) business days following such
termination of employment, the Company shall transfer to the Executive title,
free and clear of any liabilities or other encumbrances, to the automobile then
provided to the Executive by the Company for his use;
<PAGE>
(iii) Immediately upon such termination, all stock options
and restricted stock previously granted to the Executive shall vest and the
Executive shall be treated for all purposes as having satisfied any employment
requirements or performance measures contained therein;
(iv) Within five (5) business days following the Executive's
exercise of any stock options whether or not, at the time granted, they were
intended to be "Incentive Stock Options" under Section 422 of the Code, which at
the time exercised, were not eligible to be Incentive Stock Options, the Company
shall pay to the Executive a lump sum equal to (A) the income realized by the
Executive on the exercise of such stock options multiplied by (B) the difference
between the aggregate maximum Federal and Connecticut income tax rates on
ordinary income and the aggregate maximum Federal and Connecticut income tax
rates on capital gains;
(v) For three (3) years following such termination of
employment, the Company shall provide or shall arrange to provide for the
continuation on behalf of the Executive of all benefits and service credit for
benefits under the plans maintained by the Company prior to the Change in
Control that are "welfare plans" and "pension plans" within the meaning of
Sections 3(1) and 3(2), respectively, of ERISA, whether or not such plans are
subject to ERISA. If benefits or service credit for benefits under any of the
foregoing plans are based on the Executive's compensation, the Executive's
Annual Compensation shall be deemed to be the Executive's compensation for such
purpose. If and to the extent that any benefits or service credit for benefits
cannot be paid or provided under a plan providing such benefits or service
credit for benefits, then the Company will itself pay, provide, or otherwise
cause to be provided such benefits or service credit for benefits to the
Executive, his dependents and beneficiaries (or if the Executive so elects, the
fair cash value of equivalents of such benefits or service credit for benefits).
During the period for which benefits and service credits for benefits are
provided pursuant to this Section 3(a)(v), the Company may amend or replace such
plans, provided that any such amendment or replacement plan shall continue to
provide to the Executive benefits and service credit for benefits at a benefit
level at least as valuable as under such plans immediately prior to the Change
in Control. The continuation of health benefits pursuant to this Section 3(a)(v)
shall not reduce in any way the Executive's and any dependent's or beneficiary's
rights to continued health benefits pursuant to Sections 601 through 608 of
ERISA, or any equivalent state or foreign law, for the full period provided by
such laws, and such rights to continued health benefits pursuant to such laws
shall be deemed to arise at the end of the period of health benefit continuation
pursuant to this Section 3(a)(v);
(vi) For three (3) years following such termination of
employment, the Company shall provide the Executive with a country club
membership equal to the membership provided to the Executive prior to the date
of termination of the Executive's employment or, if higher, prior to the
occurrence of the Change in Control;
(vii) For one (1) year following such termination of
employment, the Company, at its cost, shall provide the Executive with executive
outplacement assistance; provided that the cost to the Company for such
assistance shall not exceed fifteen (15) percent of the Executive's base salary
as in effect at the time of the Change in Control.
(b) Certain Additional Payments by the Company.
(i) In the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would subject the Executive to tax under
Section 4999 of the Code, then the Company shall make an additional lump sum
payment to the Executive within thirty (30) days of such determination in an
amount equal to the sum of such tax plus the amount of Federal and state income
taxes and tax under Section 4999 of the Code which will be imposed on the
Executive as a result of the receipt of such lump sum payment (the "Gross-up
Amount").
(ii) All determinations required to be made under this
Section 3(b) shall be made, at the Company's expense, by an accounting firm
selected by the Company, and reasonably acceptable to the Executive, that is one
of the five largest accounting firms in the United States (the "Accounting
Firm"), which shall provide detailed supporting calculations both to the Company
and the Executive within fifteen (15) business days of such termination of
employment or such earlier time as is requested by the Company. Except as set
forth in clause (iii) below, any such determination by the Accounting Firm shall
be binding upon the Company and the Executive.
<PAGE>
(iii) As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that additional Gross-up Amounts which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Executive that the Accounting Firm believes
has a high probability of success, determines that an Underpayment has been
made, any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code.
(c) If the Present Value of the additional payments and benefits
provided pursuant to this Agreement is less than or equal to the Present Value
of the additional payments and benefits that the Executive shall be entitled to
receive solely as a result of his termination of employment under any other
plan, program or arrangement of the Company, including such plans, programs or
arrangements mandated by applicable Federal, state or foreign law (such other
plans, programs and arrangements hereinafter referred to as "Other Plans"), the
Executive shall be entitled to no payments or benefits under this Agreement,
except for the continuation of health benefits for the Executive and his
dependents and beneficiaries pursuant to Section 3(a)(v) hereof. If the Present
Value of the additional payments and benefits provided pursuant to this
Agreement is greater than the Present Value of the additional payments and
benefits that the Executive shall be entitled to receive as a result of his
termination of employment under Other Plans, the payment pursuant to Section
3(a)(i) hereof shall be reduced by the Present Value of such additional payments
and benefits under such Other Plans. For purposes of the foregoing, additional
payments and benefits under Other Plans shall not include plans providing
payments and benefits to which the Executive is entitled by reason of his prior
service such as, without limitation, "pension plans" within the meaning of
Section 3(2) of ERISA, whether or not such plans are subject to ERISA, and other
plans of deferred compensation but shall include plans providing severance
benefits, termination benefits and other payments or benefits paid solely on
account of the loss of employment. If the Company and the Executive cannot agree
on the reduction (if any) in, or the Present Value of, payments and benefits for
purposes of this Section 3(c), the determination of the amount of such reduction
and/or Present Value shall be made by the Accounting Firm described in Section
3(b)(ii) hereof, and such determination shall be conclusive and binding on the
parties. The fees and expenses of such Accounting Firm for its services in
connection with the foregoing determinations shall be paid by the Company.
(d) If the Executive's employment is terminated by the Company
without Cause prior to the date of a Change in Control and the Executive
reasonably demonstrates that such termination (i) was at the request of a Third
Party who effectuates a Change in Control or (ii) otherwise arose in connection
with, or in anticipation of, a Change in Control that has been threatened or
proposed and that actually occurs, such termination shall be deemed to have
occurred after a Change in Control, provided that a Change in Control actually
shall have occurred.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE OR BY THE EXECUTIVE
OTHER THAN FOR GOOD REASON. If the employment of the Executive is terminated (i)
by the Company for Cause; (ii) by the Executive for any reason other than Good
Reason; or (iii) by reason of the Executive's death or permanent disability, no
payments shall be made to the Executive under this Agreement, and the Company
shall have no further obligations under this Agreement. For purposes of the
foregoing, "permanent disability" shall mean the Executive's disability as
defined under the Employee's long-term disability policy as in effect from time
to time.
5. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement, or defense of his rights under
this Agreement by litigation or otherwise because the cost and expense thereof
would substantially detract from the benefits intended to be extended to the
Executive hereunder. Accordingly, if it should appear to the Executive that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of his choice, at the expense of the Company as hereafter
provided, to advise and represent the Executive in connection with any such
interpretation, enforcement, or defense, including, without limitation, the
initiation or defense of any litigation or other legal action , whether by or
against the Company or any director, officer, stockholder, or other person or
entity affiliated with the Company, in any jurisdiction. Without respect to
whether the Executive prevails, in whole or in part, in connection with any of
the foregoing, the Company will pay and be solely financially responsible for
any and all attorneys' and related fees and expenses incurred by the Executive
in connection with any of the foregoing.
<PAGE>
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following termination of employment. Accordingly, the
payments and benefits that the Company will pay or provide to the Executive
pursuant to this Agreement will be liquidated damages, and the Executive will
not be required to mitigate the amount of any such payment or benefit by seeking
other employment or otherwise, nor will any profits, income, earnings, or other
benefits from any source whatsoever create any mitigation, offset, reduction, or
any other obligation of payments and benefits provided pursuant to this
Agreement.
7. TAXES. The Company may withhold from any amounts payable under this
Agreement all Federal, state, local or foreign taxes as the Company is required
to withhold pursuant to any law, regulation or ruling. The Executive shall bear
all expense of, and be solely responsible for, all Federal, state, local or
foreign taxes due with respect to any payments or benefits received pursuant to
this Agreement.
8. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company is required to perform it. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation and benefits from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the date on which the Executive's employment with the Company was
terminated. As used in this Agreement, "the Company" shall include any successor
to the Company's business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee or other designee or, if
there is no such designee, to the Executive's estate.
9. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two (2)
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or one (1) business day after
having been sent by a nationally recognized overnight courier service, addressed
to the Company (to the attention of the General Counsel of the Company) at its
principal executive office and to the Executive at his principal residence, or
to such other address as either party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will be
effective only upon receipt.
10. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable Federal law.
11. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
12. ARBITRATION. Any dispute arising out of, or in any way relating to,
this Agreement shall be resolved by arbitration in Connecticut through the
Hartford, Connecticut office of the American Arbitration Association in
accordance with the Model Employment Arbitration Procedures of the American
Arbitration Association except to the extent such provisions are modified as
hereinafter provided. The arbitration proceeding shall be conducted by three (3)
arbitrators. The Executive and the Company shall each designate one (1)
arbitrator, each of whom shall be an attorney admitted to practice in one or
more states who has ten (10) or more years of experience in employment matters,
and the arbitrators so selected shall thereafter designate a third arbitrator
(who shall be a member of the National Academy of Arbitrators) by mutual
agreement. The arbitrators shall have no authority to modify any provision of
this Agreement or to award a remedy
<PAGE>
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of this Agreement. The decision of the arbitrators
shall be final and binding on the Company and the Executive.
13. MERGER. This Agreement expresses in full the understanding of the
Company and the Executive with respect to compensation and benefits following a
Change in Control and the subsequent termination of the Executive's employment,
and all promises, representations, understandings and arrangements with respect
to such compensation and benefits following a Change in Control and the
subsequent termination of the Executive's employment contained in any agreements
and promises, written or otherwise, expressed or implied, with respect to such
compensation and benefits and such termination are wholly superseded and merged
herein. Except as otherwise specifically provided in this Agreement, nothing in
this Agreement will prevent or limit the Executive's present or future
participation in any benefit, bonus, incentive, or other plan or program
provided by the Company for which the Executive may qualify, nor will this
Agreement in any manner limit or otherwise affect such rights as the Executive
may have under any such plan or program. Amounts or benefits which are vested or
which the Executive is otherwise entitled to receive under any such plan or
program of the Company at or subsequent to the date of termination of employment
shall be payable in accordance with such plan or program, except as otherwise
expressly provided in this Agreement.
14. WAIVER. Failure by either party hereto to insist upon strict adherence
to any one or more of the covenants or terms contained herein, on one or more
occasions, shall not be construed to be a waiver nor will it deprive such party
of the right to require strict compliance with the same thereafter.
15. AMENDMENTS. No amendments hereto, or waivers or releases of obligations
or liabilities hereunder, shall be effective unless agreed to in writing by all
parties hereto.
16. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date first written above.
New England Community Bancorp, Inc.
By: s/s Angelina J. McGillivray
-------------------------------
Angelina J. McGillivray
Its Secretary
s/s Frank A. Falvo
------------------
Frank A. Falvo
EXHIBIT 21
SUBSIDIARIES OF NEW ENGLAND COMMUNITY BANCORP, INC.
Percent
Owned By
New England
Incorporated In Community
Subsidiary The State of: Bancorp, Inc.
- ---------- ------------- -------------
New England Bank and Trust Company Connecticut 100%
The Equity Bank Connecticut 100%
Community Bank Connecticut 100%
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 35,201
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 131,784
<INVESTMENTS-MARKET> 131,926
<LOANS> 411,501
<ALLOWANCE> 9,257
<TOTAL-ASSETS> 606,170
<DEPOSITS> 522,644
<SHORT-TERM> 14,036
<LIABILITIES-OTHER> 4,055
<LONG-TERM> 11,612
0
0
<COMMON> 516
<OTHER-SE> 53,307
<TOTAL-LIABILITIES-AND-EQUITY> 606,170
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<INTEREST-INVEST> 7,672
<INTEREST-OTHER> 400
<INTEREST-TOTAL> 38,981
<INTEREST-DEPOSIT> 12,599
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<INTEREST-INCOME-NET> 25,452
<LOAN-LOSSES> 1,248
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