1996
A N N U A L R E P O R T
To Our Shareholders:
We have successfully completed an important year in the financial turnaround of
your Company. We have established a solid foundation from which we can grow the
Company's assets, improve overall profitability and continue to develop our
market area. After spending difficult years struggling to recover from what was
probably the worst economic downturn in our local and national economy, we are
now poised to enhance shareholder value.
The Company reported net income of $9,984,000, or $2.71 per share, for the
twelve months ended December 31, 1996, as compared with $1,811,000, or $.49 per
share, for the full year of 1995. Net income reported in 1996 included
approximately $8 million of income tax benefits, compared to $1.1 million of tax
benefits in 1995. Income tax benefits were recorded in 1995 and 1996 as the
Company substantially reduced its valuation allowance on deferred tax assets
because of improved operating performance and anticipation of continued future
profitability. As of the fourth quarter of 1996, the Company returned to a fully
taxable reporting basis. On a pretax basis, the Company earned $2,177,000 in
1996, as compared with $777,000 in 1995.
The major factor influencing the improvement in pretax profits was a substantial
reduction in expenses associated with the Bank's problem assets. Loan loss
provisions decreased from $3,663,000 in 1996 to $1,964,000 in 1995. In addition,
costs associated with managing the Company's Other Real Estate Owned ("OREO")
declined from $484,000 in 1995 to $144,000 in 1996.
The Company's core operating income, consisting of net interest income and other
income, increased moderately, from $15.9 million in 1995 to $16.1 million in
1996. On a year-to-year basis, the Company has increased its average earning
assets by approximately $7 million. However, in the last quarter of 1996 the
Company's average earning assets grew significantly and were nearly $26 million
greater than in the fourth quarter of 1995.
Throughout 1996, management originated quality loans in the portfolio while
continuing to manage the Company's remaining problem loans. In fact, total loans
have increased over $30 million, or 15%, in 1996. We have been successful in
developing our indirect consumer auto loan portfolio, which is comprised of
loans underwritten by the Bank but originated at auto dealerships. The total
consumer loan portfolio increased by $20.3 million, from $45.4 million as of
December 31, 1995 to $65.7 million as of December 31, 1996. At the end of 1996,
we had 84 automobile dealers actively referring consumer contracts to The Bank
of New Haven. In fact, since the Bank keeps a well diversified total loan
portfolio, we sell to other financial institutions indirect auto loans that we
have originated. In total, during 1996 the Bank originated $45 million in
consumer loans, $14 million of which was sold to other banks.
The Bank of New Haven has also continued to develop its residential mortgage
portfolio. We are quite proud of the increase in local residential mortgages
made in 1996. In total, residential mortgages have increased by $9.3 million,
from $45.4 million as of December 31, 1995 to $54.7 million in 1996. In order to
enhance our efficiency in this line of business, we have filed an application
with the Federal
<PAGE>
ANNUAL 1996 REPORT
National Mortgage Association to originate and sell mortgages directly into the
secondary market. Presently, this is done through intermediaries. Like our
indirect auto loan business, we originate many more residential mortgage loans
than we keep in our portfolio. In 1996 the Bank originated $39 million in
residential mortgages, $15 million of which was kept in the Bank's portfolio.
The Bank's commercial loan and commercial mortgage portfolios did not grow as we
had expected in 1996. In total, these loans increased by $4.2 million, from
$113.3 million in 1995 to $117.5 million in 1996. We anticipate making greater
progress in developing new commercial customers in 1997.
The Company's overall operating expenses increased by $824,000, or 7%, when
comparing 1995 to 1996. A major contributing factor to the increase was the
opening of two new branches in 1996. In July, we opened our ninth banking office
located in Milford. It is our second branch location in that city, and we are
pleased with the deposit levels and activity that this branch has generated. In
October of 1996 we opened our first shoreline branch in Branford. We have been
well received by this town, and all indications are that this branch will also
be extremely successful. By the time you receive this report, we will have also
opened a branch in Guilford, another shoreline community. Although our operating
style is to open branches in a tasteful yet fiscally conservative manner, the
cost of developing, marketing and staffing these branches has certainly played a
part in increasing the operating expenses of the Company. We are confident,
however, that these additions will enhance the future value of our franchise.
In 1996, following completion of a regulatory examination, the Bank had all
regulatory orders removed. This almost immediately manifested itself in lower
FDIC insurance premiums. In 1996 these premiums were $173,000, as compared to
$594,000 in 1995. We are extremely proud of all of our employees, directors and
loyal customers who believed in us and supported us through many difficult
years. In particular, our employees should be commended, as they have clearly
been through the most difficult times.
We wish to thank Victor B. Hallberg for his many years of service as a director
since the Bank's incorporation in 1979. Mr. Hallberg, who intends to slow down a
little and enjoy life, has resigned as of the end of 1996.
In addition, we regret to tell you that our dear friend and director, Karl J.
Jalbert, passed away in November, 1996. We will all miss him.
Thank you for your continued support.
Very truly yours,
/s/ GEORGE M. DERMER /s/ F. PATRICK MCFADDEN, JR.
- --------------------- -----------------------------------
George M. Dermer F. Patrick McFadden, Jr.
Chairman of the Board President & Chief Executive Officer
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
----------
Commission File Number 0-14018
BNH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1126899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 Church Street, New Haven, Connecticut 06510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (203) 498-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of such stock as of March
13, 1997.
Common Stock, no par value $45,434,897
* For purposes of this calculation, 226,733 shares held by the directors and
executive officers of BNH Bancshares, Inc. have been deemed to be held by
affiliates of BNH Bancshares, Inc.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Outstanding at
Class March 13, 1997
----- --------------
Common Stock,
no par value per share 3,690,492
Documents Incorporated By Reference
Certain portions of the Company's definitive proxy statement dated March
19, 1997 are incorporated by reference into Part III of this report.
The Exhibit Index is found at page 61.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I....................................................................................... 2
Item 1--Business...................................................................... 2
--Executive Officers of the Company............................................. 7
Item 2--Properties.................................................................... 9
Item 3--Legal Proceedings............................................................. 10
Item 4--Submission of Matters to a Vote of Security Holders........................... 10
PART II...................................................................................... 10
Item 5--Market for the Registrant's Common Equity and Related Stockholder Matters..... 10
Item 6--Selected Financial Data....................................................... 11
Item 7--Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 12
Item 8--Financial Statements and Supplementary Data................................... 31
Item 9--Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................. 56
PART III..................................................................................... 56
Item 10--Directors and Executive Officers of the Registrant............................ 56
Item 11--Executive Compensation........................................................ 56
Item 12--Security Ownership of Certain Beneficial Owners and Management................ 56
Item 13--Certain Relationships and Related Transactions ............................... 56
PART IV...................................................................................... 57
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 57
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
BNH Bancshares, Inc. (the "Company") is a bank holding company
incorporated in Connecticut in February 1985, the principal assets of which are
the common stock of its wholly-owned subsidiaries, The Bank of New Haven (the
"Bank") and Northeastern Capital Corporation (presently inactive)
("Northeastern"). The principal business of the Bank is to provide a full range
of services, including checking and savings accounts and loans primarily to
small and medium-sized businesses, professional organizations and individuals in
the New Haven metropolitan area. As of December 31, 1996, the Company had total
assets of $342 million, total deposits of $298 million, total loans, net of the
allowance for loan losses, of $230 million, and shareholders' equity of $26
million.
The Bank, a state-chartered bank and trust company, was organized under
the Connecticut banking laws on May 24, 1978 and began commercial banking
operations in New Haven, Connecticut on April 16, 1979. The Bank has
concentrated its marketing efforts in the greater New Haven area. The main
office of the Bank and its executive offices are located at 209 Church Street,
New Haven, Connecticut. As of December 31, 1996, the Bank operates nine
additional branch offices, two in New Haven and Milford, and one each in
Branford, Orange, Woodbridge, North Haven and Hamden, Connecticut. The Company
also maintains an Operations Center in Orange, Connecticut. The Bank employed
149 full-time equivalent employees at December 31, 1996.
REGULATION OF THE COMPANY
As a bank holding company, the Company is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System (the
"Board"). The Company's ability to acquire an interest in another bank is
limited by the Bank Holding Company Act of 1956, as amended (the "Act"), which
requires the Company to obtain the approval of the Board prior to the
acquisition of all or substantially all of the assets of any bank or ownership
or control of the voting shares of any bank if, after giving effect to such
acquisition, the Company would own or control more than five percent of the
voting shares of such bank.
The Act was amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") to authorize a bank holding company to
acquire an interest in the voting securities or assets of a savings association,
subject to receiving approval of the Board.
The Act was further amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 to generally permit a bank holding company that
is adequately capitalized to acquire control of or acquire all or substantially
all of the assets of, a bank located in a state other than the home state in
which the bank holding company is located. The same legislation permits
interstate mergers of banks after June 1, 1997, unless the state in which the
bank is located passes legislation to prohibit such mergers. Interstate mergers
may be permitted sooner in any state that passes legislation specifically
permitting such mergers to take place sooner. The establishment of "de novo"
branches by an out-of-state bank is permitted in any state that adopts
legislation to permit such interstate branching.
The Company may not engage in any business other than managing or
controlling banks or savings associations or furnishing services to its
subsidiaries, with the exception of certain activities which, in the opinion of
the Board, are closely related to banking or to managing or controlling banks or
savings associations. The Company is also generally prohibited from acquiring
direct or indirect ownership or control of more than five percent of the voting
shares of any company unless that company is engaged in activities expressly
authorized by the Act or the Board approves the acquisition. In making such
determination, the Board considers whether such activities are closely related
to banking.
Federal Reserve Board regulations require bank holding companies to
meet certain minimum capital requirements. Under the regulations, capital
adequacy of a bank holding company is evaluated in two ways. The Board has
adopted a leverage ratio requirement applicable to bank holding companies with
$150 million or more in consolidated assets. The leverage ratio is a ratio of
"Tier 1 capital" to total average assets as defined in the regulations. Tier 1
capital for a bank holding company is generally defined as common equity,
minority interests in equity accounts of consolidated subsidiaries and
qualifying perpetual preferred stock. (Cumulative perpetual preferred stock is
limited to 25% of Tier 1 capital). In addition, Tier 1 capital excludes goodwill
and other intangibles and investments in subsidiaries that the Board determines
should be deducted from capital. The regulations require a minimum ratio of 3%
Tier 1 capital to total assets for the most highly rated bank holding companies
that are not anticipating or experiencing significant growth and do not have
high levels of risk. All other bank holding companies are required to meet a
minimum leverage ratio that is at least 100 to 200 basis points above this
minimum.
2
<PAGE>
The second measure of capital adequacy adopted by the Board is based on
international risk-based capital standards. The guidelines set forth (i) a
definition of "capital" for risk-based capital purposes; and (ii) a system for
calculating risk-weighted assets by assigning assets and certain off-balance
sheet items to broad risk categories. Basically, the higher percentage of
riskier assets an institution has, the more capital it must have to satisfy the
risk-based guidelines; the lower the risk, the lower the required capital. The
current regulations require a minimum risk-based ratio of 8%, with at least
one-half of that amount consisting of Tier 1 or core capital and up to one-half
of that amount consisting of Tier 2 or supplementary capital.
These guidelines do not address other bank "risk" areas, such as
interest rate exposure, liquidity, funding and market risks, the quality and
level of earnings, investment or loan portfolio and other concentrations of
credit risks; certain risks arising from nontraditional activities, the quality
of loans and investments, the effectiveness of loan and investment policies, or
management's ability to monitor and control financial and operating risks. The
Board does, however, take these factors into account in evaluating capital
ratios. This may cause the supervisory evaluation of capital adequacy to differ
from the conclusions that would be reached based solely on risk-based capital
ratios.
Capital regulation of the Company is also affected by the Federal
Deposit Insurance Act (the "FDI Act") amended by Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act"), which is
discussed below.
The Board also regulates the payment of cash dividends by bank holding
companies as well as other banking practices of such companies. As a bank
holding company, the Company is required to file with the Board an annual report
and such additional information as the Board may require pursuant to the Act.
The Board may conduct examinations of the Company and each of its subsidiaries
pursuant to the Act and regulations thereunder. As the holding company of a
state-chartered bank, the Company is also subject to regulation by the
Connecticut Banking Commissioner and may be required to provide reports to and
be subject to examination by the Banking Commissioner.
Board regulations require the Bank to maintain reserves against its
transaction accounts. Effective December 31, 1996, reserves of 3% are required
to be maintained against transaction accounts totaling $44.9 million or less
(except that $4.4 million is exempt) and a reserve of 10% is required to be
maintained against that portion of total transaction accounts in excess of $44.9
million. These amounts and percentages are subject to further adjustment by the
Board.
REGULATION OF THE BANK
Federal and State banking laws and regulations applicable to the Bank
regulate, among other things, capital adequacy, the scope of a bank's business,
permitted investments, reserves against deposits, the nature and amount of
collateral for loans, loans to affiliates, the establishment of branches and
activities with respect to mergers and acquisitions. The Bank is subject to
Federal regulations promulgated pursuant to the FDI Act to prevent banks from
engaging in unsafe or unsound practices, as well as various other Federal and
State laws, including consumer protection laws.
The Federal Deposit Insurance Corporation ("FDIC") is an independent
agency of the United States Government and currently insures deposits of each
insured depositor of the Bank through its Bank Insurance Fund up to $100,000.
Insurance of deposits by the FDIC subjects the Bank to comprehensive regulation,
supervision and examination by the FDIC. The Bank is required, among other
things, to pay premium charges to the FDIC for such insurance. Under FDICIA, the
FDIC has adopted regulations establishing a risk-based assessment for insurance
premiums pursuant to which higher insurance rates are charged to institutions
that pose greater risks to the deposit insurance funds. Currently, under this
system, a depository institution's semi-annual assessment will fall within a
range of $0 to $0.27 per $100 of domestic deposits, based in part on the
probability that the deposit insurance fund will incur a loss with respect to
that institution. Each institution is notified of its risk classification based
on its capital ratios. For information on insurance premiums paid by the Bank,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Insurance Expense".
The Bank is also required to maintain reserve accounts and liquid
assets at levels fixed from time to time by the FDIC and must meet certain
minimum capital requirements.
The FDIC's capital regulations are similar to the Board's requirements
described above. Regulations adopted pursuant to FDICIA resulted in amendments
to these capital standards and in the additional regulation of undercapitalized
institutions (see the discussion of FDICIA below).
3
<PAGE>
During the first quarter of 1991, the Bank was examined by the FDIC. On
September 19, 1991, the Bank entered into a Stipulation and Consent to the
issuance of an Order to Cease and Desist (the "Order") with the FDIC, which was
concurred in by the Banking Commissioner of the State of Connecticut. On
September 27, 1991, the FDIC issued an Order to Cease and Desist which became
effective on October 7, 1991. The Order required the Bank to take specific
action to correct certain deficiencies addressed as a result of the FDIC's
examination of the Bank as of February 19, 1991. In addition to requiring the
Bank to maintain a Tier 1 leverage capital ratio of 6% or more, the Order
required the Bank to take a series of actions designed to improve its financial
condition and operating results and to augment its capital position. These
requirements and the Bank's response included, but were not limited to,
increasing the loan loss reserve; charging-off classified loans and improving
asset quality; and addressing concerns regarding liquidity and reliance on
volatile funds.
Following the issuance of the Order, the Bank took steps designed to
meet its requirements, including the submission of capital plans designed to
achieve the required capital levels. On July 28, 1993, the Company successfully
completed its rights offering of common stock to existing shareholders and
standby purchasers. The rights offering resulted in the issuance of 10,404,000
new shares of common stock at a subscription price of $1.25 per common share. As
the rights offering took place prior to the reverse 1 for 4 stock split which
occurred in 1996, the number of new shares issued as well as the subscription
price reflected pre-split values. In terms of post-split values, the number of
new shares issued and the subscription price of each are 2,601,000 and $5.00,
respectively. Net proceeds amounted to $11,992,000. The Company contributed the
net proceeds from the rights offering to the Bank in a manner that such proceeds
constituted Tier 1 leverage capital for regulatory purposes. The Bank, as of
December 31, 1993, was in compliance with every provision of the Order.
During the second quarter of 1994, the Company incurred a net loss of
$6,500,000 which reduced both the Bank's and the Company's Tier 1 leverage
capital ratios below the Order's minimum Tier 1 leverage requirement of 6%. This
quarterly net loss was primarily related to an $18,000,000 bulk sale of problem
loans. Management believes that the bulk sale of problem assets significantly
improved the quality of the Company's loan portfolio and believes that its
actions to improve asset quality were responsive to the Order. As a result of
the decline in Tier 1 leverage capital, the Bank, as required by the Order,
filed a capital restoration plan with the FDIC during the third quarterof 1994.
The plan, which was accepted by the FDIC, called for restoration of the Bank's
capital ratios throughfuture earnings.
The FDIC, after completion of a joint examination of the Bank with the
Connecticut Banking Department as of February 6, 1995, removed the Order and,
based on the Bank's improved overall financial condition, issued on May 16,
1995, a less stringent Memorandum of Understanding (the "Memorandum"), which the
Bank voluntarily agreed to enter into. The Memorandum required, among other
things, that the Bank achieve certain Tier 1 leverage and total risk-based
capital requirements. The Bank was to have a Tier 1 leverage capital ratio of at
least 5% by June 30, 1996 and 6% by June 30, 1997. If these thresholds were not
maintained, the Bank would be required to submit a written capital plan to
increase its Tier 1 leverage capital to the required level. Also, the Bank was
to maintain a total risk-based capital ratio of at least 8% throughout the
existence of the Memorandum. As of December 31, 1995, the Bank's Tier 1 leverage
capital and total risk-based capital ratios were 5.3% and 9.4%, respectively. On
April 23, 1996, the FDIC, after completion of a joint examination of the Bank
with the Connecticut Banking Department, based on the Bank's continued improved
overall financial condition, removed the Memorandum in favor of a less stringent
resolution. The Memorandum was removed based on the condition that the Bank's
Board of Directors pass a resolution requiring the Bank to: continue its efforts
towards meeting the Capital Goals as outlined in the Original Memorandum; check
with State Regulators prior to paying any dividends; and establish goals to
internally monitor its level of classified assets as compared to total capital
and eligible reserves.
FDI ACT
The FDI Act was amended by the FDICIA which was signed into law by the
President on December 19, 1991. The FDICIA amendments increased the supervisory
and regulatory powers of the federal bank regulatory agencies applicable to the
Company and the Bank in a number of ways. The FDI Act was further amended by the
Riegle Act.
A. Capital Categories and Prompt Regulatory Action
FDICIA increases the supervisory powers of the FDIC and the other
federal regulatory agencies with regard to undercapitalized depository
institutions, and changes the capital rules applicable to the Bank. Under the
regulations,
4
<PAGE>
banking regulators defined five capital categories: institutions that are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The purpose of these
categories is to allow federal regulatory agencies to monitor undercapitalized
institutions more closely in order to take appropriate and prompt regulatory
action to minimize the potential for significant loss to the deposit insurance
fund. Institutions in the first two categories operate with few restrictions.
Institutions in the other three categories may be required to raise additional
capital, curtail growth, limit interest rates paid, divest subsidiaries and
limit executive compensation. Regulators are also empowered to remove top
management and call for new elections of directors. FDICIA also allows for the
appointment of a conservator or receiver of an insured depository institution if
the institution is undercapitalized and either has no reasonable prospect of
becoming adequately capitalized, fails to become adequately capitalized as
required, or fails to submit or materially implement a capital plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" for a description of the five capital
categories.
Using the capital categories, FDICIA subjects an insured institution
that has a capital classification below the adequately capitalized level to
several mandatory provisions that apply without agency action. Under these
mandatory provisions, undercapitalized institutions (1) are subject to increased
monitoring by the appropriate federal banking agency and periodic review of the
institution's efforts to raise capital; (2) must submit and implement an
acceptable capital restoration plan; (3) are required to restrict asset growth;
and (4) must obtain prior approval by the agency or the FDIC for acquisitions
and new branches. The FDIC also has the authority to downgrade an institution by
one capital category, notwithstanding its capital ratios, if it determines that
other conditions exist at the institution which make that determination
appropriate. In addition, the FDIC may, through a "prompt corrective action
directive", impose discretionary supervisory actions applicable to
"significantly undercapitalized institutions". Such discretionary actions could
involve requiring the Bank to sell capital, restricting transactions with
affiliates, restricting interest rates on deposits, restricting asset growth,
requiring termination or alteration of any "excessive risk" activities,
requiring a new election of directors, requiring the dismissal of certain
directors or senior executive officers, prohibiting the acceptance of deposits
from correspondent institutions, requiring the Bank to accept an acquisition
offer, requiring liquidation or divestment of a subsidiary, or requiring any
other action the FDIC determines would better carry out the purposes of Section
38 of the FDI Act. Any such prompt corrective action directive must be initiated
by written notice to the Bank. The Bank has the opportunity to object to the
proposed issuance of a directive, and to request a hearing and submit written
and oral evidence in support of its objection. No such prompt corrective action
directives have been initiated against the Bank nor is the Bank aware that any
are contemplated.
B. Safety and Soundness Standards
FDICIA requires the promulgation of "safety and soundness" standards
regarding (i) internal controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure;
(v) asset growth; and (vi) compensation, fees and benefits. The FDIC has issued
regulations and guidelines pursuant to that requirement.
The FDIC's regulations focus on the goals to be achieved by banks
rather than the specific means by which they are to achieve those goals. The
goals are general, although expanded upon in the guidelines, and leave to the
individual bank the ability to tailor its goals to its particular circumstances.
For example, the regulations require a bank to have internal controls,
information systems and an internal audit system appropriate to the size of the
bank and the scope and nature of its activities. Also, a bank must establish and
maintain loan documentation practices that enable the bank to make informed
lending decisions, assess repayment ability, ensure legal enforceability against
the borrower, enable administration and monitoring of the loans, and reflect the
size and complexity of different loans. Practices similar in scope are required
with respect to credit underwriting. Interest rate risk is to be managed in a
manner appropriate to the size of the bank and the complexity of its assets and
liabilities. Asset growth should be prudent and the Bank should consider
funding, risk and capital issues affected by growth.
The regulations require safeguards to prevent compensation, fees and
benefits from being excessive or leading to material financial loss. Payments
are excessive when the amounts paid are unreasonable or disproportionate to the
services performed, based upon an overall analysis of the total compensation to
the individual, the relevant history of the individual and peer group
comparisons, the Bank's financial condition, projected costs and benefits, any
connection between the individual and wrongdoing with regard to the Bank, and
any other factors the FDIC may deem relevant.
5
<PAGE>
C. Additional Restrictions
The FDI Act contains a number of other provisions which could
potentially impact the future operations of the Bank. Section 24 of the FDI Act,
as amended by FDICIA, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under the regulations which implement this provision, except for certain
"grandfathered" equity investment powers, an insured state bank generally may
not, directly or indirectly, acquire or retain any equity investment of a type,
or in an amount, that is not permissible for a national bank, which would
include most equity security investments. In order to acquire or retain any
restricted equity investment, the Bank was required to file a one-time notice
with the FDIC which sets forth the Bank's intention to acquire or retain such
investment. The Bank filed a notice with the FDIC on June 21, 1993. The Bank's
notice was approved on July 15, 1993 by the FDIC. As of December 31, 1995, the
Bank held $3,000 of restricted equity investments. Although the Bank has a
limited amount of equity investments, these restrictions may limit investment
opportunities in the future. However, the Company does not anticipate that such
restrictions will have a material adverse impact on its operations.
The FDIC has also issued regulations which require an insured state
bank to obtain FDIC approval before engaging "as principal" in any activity that
is not permissible for a national bank. The FDI Act also places restrictions on
the acceptance of brokered deposits. Unless an institution is adequately
capitalized, it will not be able to obtain FDIC approval to accept brokered
deposits. There are also restrictions on the interest rate that an institution
can pay on brokered deposits if that institution is not well capitalized and is
accepting deposits pursuant to FDIC approval. The FDIC has adopted regulations
to carry out the provisions relating to brokered deposits. The Company has
replaced all of its brokered deposits and does not anticipate the need for
brokered deposits in the foreseeable future. Accordingly, the Company does not
believe that the brokered deposit restrictions have had or will have a material
adverse impact on the Company or the Bank.
The Community Reinvestment Act of 1977 ("CRA") was enacted to encourage
every financial institution to help meet the credit needs of its entire
community, including low and moderate-income neighborhoods, consistent with the
institution's safe and sound operation. Under CRA, state and federal regulators
are required, when examining financial institutions and when considering
applications for approval of certain mergers, acquisitions or other
transactions, to take into account the institution's record in helping to meet
the credit needs of its entire community, including low and moderate-income
neighborhoods. The Board has the power to disapprove proposed merger or
acquisition transactions involving banking organizations that are deemed by the
Board to have unsatisfactory examination records of CRA compliance. Following
its most recent CRA examination as of March 1995, the Bank received a
"Satisfactory" rating regarding its compliance with CRA.
COMPETITION
The banking industry in Connecticut is highly competitive. The Bank
faces strong competition in attracting deposits and in making loans. Its most
direct competition for deposits comes from other commercial banks, thrift
institutions, credit unions and issuers of commercial paper and other
securities, such as shares in money market funds. Interest rates, convenience of
office locations and marketing are all significant factors in the Bank's
competition for deposits.
Competition for loans comes from other commercial banks, thrift
institutions, insurance companies, consumer finance companies, credit unions and
other institutional lenders. The Bank competes for loan originations through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides. Competition is affected by the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
It is expected that competition will become more intense in the future
due to changes in State and Federal laws and regulations and the entry of
additional bank and non-bank competitors. Connecticut laws have gradually
expanded the powers of state-chartered thrift institutions and these
institutions have virtually the same powers as commercial banks. In addition,
Connecticut law now effectively provides for full interstate banking. Under this
legislation, subject to the approval of the Connecticut Banking Commissioner
after consideration of specified factors, business combinations are permitted
among commercial banks, bank holding companies and thrift institutions located
in Connecticut and other states with reciprocal interstate banking laws. Such
out-of-state institutions may also form their own banks in Connecticut. Several
acquisitions involving Connecticut banks and bank holding companies
6
<PAGE>
and non-Connecticut financial institutions have occurred under Connecticut's
interstate banking law, further increasing competition in the state. Recent
federal legislation permits a bank holding company that is adequately
capitalized to acquire control of, or acquire all or substantially all of the
assets of, a bank located in another state without regard to whether the
acquisition is prohibited by the laws of the state in which the bank is located.
The same legislation permits interstate mergers of banks after June 1, 1997, or
sooner in any state that passes legislation specifically permitting such mergers
to take place sooner. The establishment of "de novo" branches by an out-of-state
bank is permitted in any state that adopts legislation to permit such interstate
branching. Legislation has been adopted in Connecticut which currently permits
interstate mergers and "de novo" interstate branching in Connecticut. The
Company cannot predict the long-range effect of this new legislation on the
Company's operations at this time.
Connecticut law allows statewide branching, which, while advantageous
to the Bank's branch planning, also allows increased branch activity by other
financial institutions.
Certain legislative and regulatory proposals that could affect the
Company 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 further alter
the structure, regulation, and competitive relationship of financial
institutions and that may subject the Company and the Bank 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 in
what form any legislation or regulations will be enacted or the extent to which
the business of the Company will be affected thereby.
The New Haven area banking market has undergone significant changes in
recent years. Due to the failure of three local institutions, as well as the
recent merger of two regional banks, whose corporate headquarters will be
located outside the State of Connecticut, the Bank of New Haven remains the only
commercial bank, as well as one of only two financial institutions, based within
the City of New Haven itself. Although these changes have resulted in generally
increased competition from larger institutions with greater financial resources
than the Bank, the Bank believes that the loss of locally-based competitors
provides certain marketing opportunities. The Bank stresses its local identity
and community orientation in developing and marketing its products and services.
In addition, the Bank focuses on small- to medium-sized commercial customers,
where its emphasis on personal, responsive and efficient services is
particularly appropriate. The Bank supplements this market focus by emphasizing
that it has the capacity and willingness to understand these customers'
financial needs and objectives. The Bank believes this particular segment of the
market is currently underserved. The Bank's market strategy includes expanding
this focus to its retail banking efforts both within its current branch network
and adjacent communities.
EXECUTIVE OFFICERS OF THE COMPANY
Officers are elected to hold office until their respective successors
are duly elected or until their earlier resignation or removal. There is no
family relationship between any executive officer or director of the Company.
F. PATRICK MCFADDEN, JR., 59, has served as President and Chief
Executive Officer of the Company and the Bank since August 1989, and
has served on the Board of Directors of the Company and the Bank since
August 1989. Mr. McFadden was Chairman and Chief Executive Officer of
New Haven Merchants' Bank ("Merchants"), which merged with the Bank in
August 1989, from May 1987 to August 1989.
THOMAS J. CAHILL, JR., 62, Executive Vice President of the Bank
since August 1989, has served on the Board of Directors of the Bank
since August 1989, and was Executive Vice President of Merchants from
January 1989 to August 1989.
JOHN F. TRENTACOSTA, CPA, 44, Executive Vice President of the
Company and the Bank since December 1993, has been Chief Financial
Officer ("CFO") of the Company since April 1988, Secretary of the
Company from 1989 through 1994, Senior Vice President and CFO of the
Bank since December 1988, and has served on the Board of Directors of
the Bank since December 1988.
LORRAINE K. YOUNG, 61, Executive Vice President of the Bank since
December 1987, has served on the Board of Directors of the Bank since
December 1988, and was Senior Vice President of the Bank from 1984.
RICHARD R. BARREDO, 46, has served as Senior Vice President of the
Bank since December 1989 andwas Vice President of the Bank since August
1989 and Vice President of Merchants from September 1988 to August
1989.
7
<PAGE>
MARK A. CANDIDO, 50, has served as Senior Vice President of the
Bank since December 1989 and was Vice President of the Bank since
August 1989 and Vice President of Merchants from 1987 to 1989.
SUPPLEMENTARY INFORMATION
The following supplementary information, some of which is required
under the Securities and Exchange Commission's Guide 3 (Statistical Disclosure
by Bank Holding Companies), is found in this report on the pages indicated
below, and should be read in conjunction with the related consolidated financial
statements andnotes thereto.
Return on Equity and Assets............................................ 11
Average Balance Sheets................................................. 13
Summary of Average Earning Assets and Paying Liabilities............... 14
Rate-Volume Analysis................................................... 15
Maturities and Weighted Average Yields of Investments.................. 16
Types of Investments................................................... 17
Maturity Distribution of Time Deposits of $100,000 or more............. 18
Types of Loans......................................................... 18
Risk Elements in Loan Portfolio........................................ 21
Summary of Loan Loss Experience........................................ 23
Allocation of the Allowance for Loan Losses............................ 24
Maturities and Sensitivities of Loans to Change In Interest Rates...... 28
8
<PAGE>
ITEM 2. PROPERTIES
The table below sets forth information concerning leases or ownership
for the Company's banking locations as of December 31, 1996.
<TABLE>
<CAPTION>
Lease
Year Square Owned or Expiration
Offices Opened Feet Leased Date
- -------- ------ ------ --------- ----------
<S> <C> <C> <C> <C>
Main Office:
209 Church Street
New Haven, CT........................................ 1979 10,000 Leased(1) 1999(2)
Branch and Operations Offices:
Whalley Norton Office
New Haven, CT........................................ 1980 2,000 Leased 1997(2)
Annex Office
New Haven, CT........................................ 1982 2,600 Leased 2006(3)
Orange Office
Orange, CT........................................... 1984 2,600 Leased 1998(4)
Old Gate Lane Office
Milford, CT.......................................... 1986 2,200 Leased 1996(5)
Cherry Street Office
Milford, CT.......................................... 1996 1,700 Leased 2001(8)
Hamden Office
Hamden, CT........................................... 1988 3,950 Owned
Branford Office
Branford, CT......................................... 1996 5,900 Leased 1998(9)(12)
Woodbridge Office Owned/
Woodbridge, CT....................................... 1989 4,200 Leased 2021(6)
Operations Center
273 Indian River Rd
Orange, CT........................................... 1988 17,200 Leased 1997(7)
North Haven Office Owned/
North Haven, CT...................................... 1990 1,200 Leased 1997(6)
Guilford Office
Guilford, CT......................................... 1997(10) 2,700 Leased 2001(11)
</TABLE>
- ----------
(1) On February 20, 1985, the Bank purchased a 25% interest in a partnership
which owns the Main Office building for a purchase price of $200,000. (2)
Renewable to 2009. Subject to the Lessor's right to sell and the Bank's
right of first refusal to buy the building during the renewal period.
(3) Renewable to 2016.
(4) Renewable to 2003.
(5) Lease has expired. Current terms are month-to-month during new lease
negotiations.
(6) The Company owns the building and leases the land.
(7) Renewable to 2009.
(8) Renewable to 2016.
(9) Renewable to 2013.
(10) Branch opened on February 22, 1997.
(11) Renewable to 2011.
(12) Branch is approximately 3,000 square feet. Remaining space available for
sublease.
9
<PAGE>
As of December 31, 1996, the Company provided traditional services from
each of its banking locations. All offices are free-standing buildings located
in commercial and retail business areas, and each has a drive-in teller and
parking facilities for customers. The majority of the Company's support and data
processing operations are located in its Operations Center in Orange,
Connecticut. The Bank purchased a 50% ownership interest in the Chapel Street
facility on September 30, 1991 for $900,000. This transaction reduced the Bank's
annual lease payments to $123,300 until the lease expires on January 31, 2002.
Automated teller machines are located at the Annex, Woodbridge, North Haven,
Orange, both Milford and Branford offices, Costco, a retail facility in Milford,
and Southern Connecticut State University.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to its business, to which the Bank or the Company is a
party or to which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
COMMON STOCK PRICE RANGE AND DIVIDENDS PAID
The Company's common stock is traded on the National Market tier of The
Nasdaq Stock Marketsm under the symbol "BNHB". The table below presents high and
low sales prices for the Company's common stock on the Nasdaq National Market
tier of The Nasdaq Stock Marketsm for 1996 and 1995.
1996 Price 1995 Price
----------------- -----------------
High Low High Low
----- ----- ----- -----
First Quarter.......................... $ 9.00 $7.50 $6.00 $3.52
Second Quarter......................... 8.25 7.00 6.52 5.00
Third Quarter.......................... 7.88 6.75 8.00 5.00
Fourth Quarter......................... 13.00 7.75 8.00 7.00
See Note 11 to the Consolidated Financial Statements for a description
of restrictions on the Company's ability to pay dividends. There were no
dividends paid in 1996 or 1995. At February 3, 1997, the Company has
approximately 1,700 shareholders of record.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income .................................. $ 22,698 $ 22,649 $ 20,693 $ 19,805 $ 22,742
Interest expense ................................. 9,929 9,785 7,595 8,186 11,061
Net interest income .............................. 12,769 12,864 13,098 11,619 11,681
Provision for loan losses ........................ 1,964 3,663 9,199 4,890 10,601
Other income ..................................... 3,342 3,058 2,653 2,638 2,498
Net gain (loss) on investment securities ......... 7 5 (49) (8) 102
Operating expenses ............................... 11,970 11,487 12,669 12,029 14,039
Income (loss) before income taxes ................ 2,177 777 (6,166) (2,670) (10,359)
Provision (benefit) for income taxes ............. (7,807) (1,034) 22 (158) (1,271)
Net income (loss) ................................ 9,984 1,811 (6,188) (2,512) (9,088)
Per common share data:
Net income (loss) (2) ......................... 2.71 0.49 (1.68) (1.16) (8.40)
Book value per share (2) ...................... 6.96 4.24 3.36 5.48 9.96
Cash dividends declared ....................... -- -- -- -- --
AT YEAR END
Total assets ..................................... $342,229 $298,911 $299,175 $287,616 $290,622
Loans ............................................ 234,680 204,495 206,986 198,950 206,249
Deposits ......................................... 298,924 276,764 277,716 264,606 273,119
Shareholders' equity ............................. 25,611 15,593 12,356 20,206 10,739
SIGNIFICANT STATISTICAL DATA
Return on average assets ......................... 3.27% 0.61% (2.13%) (0.88%) (3.04%)
Return on average equity ......................... 54.21% 13.02% (37.78%) (17.66%) (59.02%)
Average equity to average assets ................. 6.03% 4.70% 5.65% 5.00% 5.15%
Average loans to average deposits ................ 78.14% 75.43% 78.44% 75.06% 82.41%
Net interest spread .............................. 3.79% 3.94% 4.26% 3.95% 3.85%
Net interest margin .............................. 4.50% 4.62% 4.82% 4.42% 4.29%
Efficiency ratio (1) ............................. 73.40% 72.12% 80.42% 84.37% 99.01%
Shareholders' equity to total assets ............. 7.48% 5.22% 4.13% 7.03% 3.70%
Tier 1 leverage capital ratio .................... 5.75% 5.29% 4.68% 7.01% 3.74%
Total risk-based capital ratio ................... 9.56% 9.37% 8.09% 11.04% 6.34%
Ratio of nonaccrual loans to total loans ......... 1.54% 2.92% 3.40% 4.42% 4.51%
Ratio of nonperforming assets to total assets .... 1.20% 2.20% 2.97% 5.14% 6.19%
Ratio of nonaccrual loans, restructured loans
and accruing loans past due 90 days or more
to total shareholders' equity and allowance for
loan losses ..................................... 19.38% 35.71% 51.34% 84.27% 123.70%
Ratio of nonperforming assets, restructured loans,
accruing loans past due 90 days or more to
total assets .................................... 1.88% 2.77% 3.91% 10.79% 12.06%
Ratio of net charge-offs to average loans ........ 1.46% 2.24% 5.70% 3.02% 3.86%
Ratio of allowance for loan losses to nonaccrual
loans, restructured loans and accruing loans
past due 90 days or more ........................ 79.96% 76.80% 69.32% 37.94% 40.10%
Weighted average number of shares
outstanding (2) ................................. 3,682 3,682 3,682 2,199 1,080
</TABLE>
- ----------
(1) The efficiency ratio is the ratio of other non-interest expense to
tax-equivalent net interest income plus other income after adjustment to
exclude net gains (losses) on sales of investments.
(2) Adjusted to reflect a 1 for 4 reverse stock split which occurred during
1996.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following section presents management's discussion and analysis of
the financial condition and results of operations of the Company and its
subsidiaries for the last three fiscal years. It should be read in conjunction
with the Consolidated Financial Statements and related Notes found later in this
document. When necessary, reclassifications have been made to prior years' data
throughout the following discussion and analysis for purposes of comparability
with 1996 data.
SUMMARY
Net income for 1996 was $9,984,000 as compared to $1,811,000 for 1995
and a net loss of $6,188,000 for 1994. Net income per share was $2.71 in 1996
and $.49 in 1995 compared to a net loss of $1.68 for 1994. The substantial
increase in net income for 1996 reflects an income tax benefit recognized during
the third quarter of 1996 of $7,508,000. This benefit was derived from the
Company reducing its valuation allowance on its deferred tax assets in
accordance with SFAS 109. Pre-tax income for the years 1996 and 1995 was
$2,177,000 and $777,000, respectively, as compared to a loss of $6,166,000 for
1994. The financial condition of the Company has continued to improve in 1996,
as in 1995, and consequently, the Company has reported two consecutive years of
net income after having reported significant net losses for each year since 1990
due to significant loan loss provisions and other real estate owned ("OREO")
expenses resulting from high levels of problem assets. The ratio of nonaccrual
loans, OREO, restructured loans and loans past due 90 days or more to total
assets declined from 3.9% as of December 31, 1994 and 2.8% as of December 31,
1995 to 1.9% as of December 31, 1996.
The Company's major source of revenue, net interest income, declined
slightly, by .7%, during 1996 to $12,769,000. Net interest income was
$12,864,000 in 1995 and $13,098,000 in 1994. The decline in net interest income
for the twelve month period ending December 31, 1996 is primarily due to the
reduction in net interest margin from 4.62% to 4.50%, partially offset by a
higher volume of earning assets.
Consequently, the Company's net interest margin decreased 12 basis
points, or 2.6%, from 4.62% as of December 31, 1995 to 4.50% as of December 31,
1996. Although the Company's loan loss provision, necessitated by the evaluation
of the quality of the loan portfolio and net charge-offs of $3,161,000 in 1996,
$4,597,000 in 1995 and $11,869,000 in 1994, resulted in a significant net loss
in 1994, asset quality has improved in 1995 and 1996 and the level of loan loss
provision has declined. The provision for loan losses was $1,964,000 in 1996,
$3,663,000 in 1995, and $9,199,000 in 1994.
The Company's operating expenses increased 4% from 1995, after having
decreased 9% from 1994 to 1995. Although expenses related to maintaining and
disposing of the Company's OREO properties and overall insurances, including
FDIC premiums, have decreased substantially during 1996 due to the improved
financial condition of the Bank, most other areas of operating expenses have
increased. Salaries, Employee Benefits and Occupancy expenses have increased
$616,000, or 9%, from the twelve month period ended December 31, 1995 to
$7,416,000 for the same 1996 period. One primary reason for this increase was
the opening of two new retail branch facilities, one each in Milford and
Branford. Advertising and Promotional expenses increased $210,000 during 1996
not only due to the advertising expenditures committed to the branch openings,
but also due to several deposit growth campaigns undertaken during the year. The
Company does not anticipate a reduction in the level of operating expenses
during 1997.
Due primarily to aggressive growth within the Consumer and Residential
Loan portfolios, the Company experienced substantial growth in its overall level
of total assets. Total assets were $342,229,000 as of December 31, 1996 compared
to $298,911,000 as of December 31, 1995, an increase of $43,318,000, or 14%.
This compares to a decrease in total assets of $264,000, or .1%, from December
31, 1994 to December 31, 1995. The Company's loan portfolio, in total, grew
$30,185,000 from $204,495,000 as of December 31, 1995 to $234,680,000 as of
December 31, 1996. The percentage of commercial and commercial mortgage loans to
total loans decreased from 55% at December 31, 1995 to 50% at December 31, 1996.
These higher risk loans were replaced, in part, with residential and consumer
loans which increased, as a percentage of total loans, from 44% at December 31,
1995 to 51% at December 31, 1996. The investment portfolio, consisting primarily
of U.S. government securities, was $63,986,000 and $66,598,000 as of December
31, 1996 and 1995, respectively.
The Company recorded an income tax benefit of $7,807,000 in 1996
consisting of a $7,984,000 tax benefit from the reduction of the deferred tax
asset valuation reserve, offset by a $177,000 provision for federal and state
taxes.
A more detailed discussion of the Company's operating results follows.
12
<PAGE>
NET INTEREST INCOME
Net interest income, which is the major source of income for the
Company, is the difference between the interest earned on loans and other
investments and the interest paid on deposits and other sources of funds.
Net interest income decreased $95,000, or .7%, to $12,769,000 in 1996
from $12,864,000 in 1995. This compares to a decrease of $234,000, or 2%, from
$13,098,000 in 1994 to $12,864,000 in 1995. The primary reason for the decrease
in net interest income is that the Company's net interest margin decreased 12
basis points from 4.62% in 1995 to 4.50% in 1996 and decreased 20 basis points
from 4.82% in 1994 to 4.62% in 1995. The impact of lower margins was partially
offset by increases in the volume of earning assets.
Since the competition for quality lending opportunities and for core
and time deposits continues to be strong, the Company believes that any
significant improvement in its net interest margin during 1997 will be difficult
to achieve.
AVERAGE BALANCE SHEETS:
The following table shows the Company's average balance of assets,
liabilities and shareholders' equity by major categories.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
(dollars in thousands)
% of % of % of
ASSETS: $ Amount Total $ Amount Total $ Amount Total
-------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks ...................... $ 16,300 5.34% $16,084 5.43% $16,223 5.59%
Investment securities:
Held to maturity, at amortized cost ......... 23,089 7.56 34,554 11.68 36,167 12.47
Available for sale, at fair value ........... 40,556 13.29 33,118 11.19 25,625 8.84
-------- ------ -------- ------ --------- ------
Total investment securities .................. 63,645 20.85 67,672 22.87 61,792 21.31
Federal funds sold ........................... 3,628 1.19 5,684 1.92 1,234 0.43
Total loans .................................. 216,029 70.77 205,249 69.35 208,105 71.75
Less allowance for loan losses ............... (5,204) (1.70) (6,896) (2.33) (8,251) (2.84)
-------- ------ -------- ------ --------- ------
Loans-net .................................... 210,825 69.07 198,353 67.02 199,854 68.91
-------- ------ -------- ------ --------- ------
Other real estate owned ...................... 1,262 0.41 1,349 0.46 4,015 1.38
Other assets ................................. 9,591 3.14 6,811 2.30 6,904 2.38
-------- ------ -------- ------ --------- ------
Total Assets ............................... $305,251 100.00% $295,953 100.00% $ 290,022 100.00%
======== ====== ======== ====== ========= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
DEPOSITS:
Demand deposits ............................. $50,007 16.38 47,974 16.21% $ 46,290 15.96%
NOW accounts ................................ 39,795 13.04 38,649 13.06 41,048 14.15
Money market accounts ....................... 29,124 9.54 27,870 9.42 27,955 9.64
Savings deposits ............................ 32,189 10.54 31,573 10.67 34,512 11.90
Time deposits under $100,000 ................ 110,519 36.21 111,485 37.67 105,067 36.23
Time deposit of $100,000 or more ............ 14,840 4.86 14,565 4.92 10,444 3.60
-------- ------ -------- ------ --------- ------
Total deposits ............................. 276,474 90.57 272,116 91.95 265,316 91.48
Other borrowings ............................. 9,416 3.09 9,317 3.15 7,362 2.54
Other liabilities ............................ 944 0.31 609 0.22 964 0.34
-------- ------ -------- ------ --------- ------
Total liabilities ............................ 286,834 93.97 282,042 95.30 273,642 94.35
Shareholders' equity ......................... 18,417 6.03 13,911 4.70 16,380 5.65
-------- ------ -------- ------ --------- ------
Total Liabilities and Shareholders' Equity ... $305,251 100.00% $295,953 100.00% $290,022 100.00%
======== ====== ======== ====== ========= ======
</TABLE>
13
<PAGE>
SUMMARY OF AVERAGE EARNING ASSETS AND PAYING LIABILITIES
The following table shows the average amount of the Company's interest
income or interest expense for each category of interest-earning assets and
interest-bearing liabilities, net interest spread and net interest margin.
Current period accrued interest income on loans placed on nonaccrual status,
which has not been collected, is reversed from current period interest income.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- --------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Investment Securities:
Held to maturity, amortized cost ...... $ 23,089 $ 1,276 5.52% $ 34,554 $ 1,842 5.33% $ 36,167 $1,896 5.24%
Available for sale (1) ................ 41,144 2,439 5.93% 33,118 2,045 6.17% 26,310 1,464 5.56%
Federal funds sold ..................... 3,628 188 5.18% 5,684 330 5.81% 1,234 46 3.73%
Loans (2) .............................. 216,029 18,795 8.70% 205,249 18,432 8.98% 208,105 17,287 8.31%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total average earning assets (3) ....... $283,890 $ 22,698 8.00% $278,605 $22,649 8.13% $271,816 $20,693 7.61%
======== -------- ---- ======== ------- ---- ======== ------- -----
Interest Bearing Liabilities
Deposits:
NOW accounts .......................... $ 39,795 $ 598 1.50% $ 38,636 $ 636 1.65% $ 41,048 $ 727 1.77%
Money market accounts ................. 29,124 1,004 3.45% 27,870 886 3.18% 27,955 628 2.25%
Savings deposits ...................... 32,189 846 2.63% 31,573 845 2.68% 34,512 879 2.55%
Time deposits under $100,000 .......... 110,519 6,145 5.56% 111,485 6,072 5.45% 105,06 4,579 4.36%
Time deposits over $100,000 ........... 14,840 813 5.48% 14,565 773 5.31% 10,444 416 3.98%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing deposits ........ $226,467 $ 9,406 4.15% $224,142 $ 9,212 4.11% $219,026 $ 7,229 3.30%
Other borrowings ....................... 9,416 524 5.56% 9,317 573 6.14% 7,362 366 4.97%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing deposits and
other borrowings ..................... $235,883 $ 9,930 4.21% $233,459 $ 9,785 4.19% $226,388 $ 7,595 3.35%
======== -------- ---- ======== ------- ---- ======== ------- -----
Net interest income .................... $ 12,768 $ 12,864 $13,098
======== ======== =======
Interest rate spread (3) ............... 3.79% 3.94% 4.26%
Net interest margin (3) ................ 4.50% 4.62% 4.82%
</TABLE>
- ----------
(1) The average balance and related weighted average yield calculations are
based on average historical amortized cost for the period presented.
(2) The average balance includes average nonaccrual loans of $5,016,346,
$7,499,364, and $8,368,575, for the years ended December 31, 1996, 1995,
and 1994, respectively.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities (which do not include non-interest bearing
demand accounts), and net interest margin represents net interest income as
a percentage of average interest-earning assets, including the average
daily amount of non-performing loans.
14
<PAGE>
RATE-VOLUME ANALYSIS
The following table reflects the changes in net interest income
resulting from changes in interest rates and from asset and liability volume.
The change in interest attributable to both rate and volume has been allocated
proportionately based on the relative changes in the volume and rate components.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
Changes Due To Changes Due To
----------------------------------- -------------------------------------
Increase Rate/ Increase Rate/
(Decrease) Rate Volume Volume (Decrease) Rate Volume Volume
--------- ----- ------ ------ ---------- ---- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN:
Interest Income
Loans.............................. $ 363 $(575) $ 968 $(30) $1,145 $1,394 $(237) $(12)
Investments........................ (172) 25 (198) (1) 527 229 279 19
Federal Funds...................... (142) (32) (119) 11 284 26 166 92
----- ----- ----- ---- ------ ------ ----- ----
Total Earning Assets............... 49 (582) 651 (20) 1,956 1,649 208 99
----- ----- ----- ---- ------ ------ ----- ----
Interest Expense
NOW................................ (38) (55) 19 (2) (91) (52) (42) 3
Money Market....................... 118 75 40 3 258 261 (2) (1)
Savings............................ 1 (15) 16 0 (34) 45 (75) (4)
Time Deposits (L.A.B.)100,000...... 73 127 (53) (1) 1,493 1,143 280 70
Time Deposits (R.A.B.)100,000...... 40 25 15 0 357 138 164 55
Other Borrowings................... (49) (55) 6 (1) 206 86 96 24
----- ----- ----- ---- ------ ------ ----- ----
Total Paying Liabilities........... 145 102 43 0 2,189 1,621 421 147
----- ----- ----- ---- ------ ------ ----- ----
Net Interest Income................ $ (96) $(684) $ 608 $(20) $ (233) $ 28 $(213) $(48)
===== ===== ===== ==== ====== ====== ===== ====
</TABLE>
INTEREST INCOME
Interest income increased $49,000, or 0.2%, to $22,698,000 in 1996 from
$22,649,000 in 1995. This compares to an increase of $1,956,000, or 9.5%, from
$20,693,000 in 1994 to $22,649,000 in 1995. This increase in interest income in
1996 can be attributed to increased volume in the Company's loans offset in part
by a decrease in yields in the Company's loans, and a decrease in volume in the
Company's investments and federal funds sold. Although the average total loan
portfolio increased $10,780,000 from $205,249,000 as of December 31, 1995 to
$216,029,000 as of December 31, 1996, the growth in the Company's loan portfolio
was primarily related to the residential mortgage and consumer portfolios, where
interest rates are generally lower than the commercial portfolio. Also, average
volumes of commercial loans dropped for the same comparable periods. The
percentage of commercial and commercial mortgage loans to total loans declined
from 55% as of December 31, 1995 to 50% as of December 31, 1996, whereas
consumer and residential mortgage loans to total loans increased from 44% as of
December 31, 1995 to 51% as of December 31, 1996. Because of the higher returns
realized on the Company's consumer and residential loan portfolios in 1996, less
money was directed to lower yielding investment vehicles such as federal funds
sold and those within the Company's investment portfolio.
The increase in interest income during 1995 can be attributed to
increased yields on the Company's loans, investments, and federal funds sold.
The Wall Street Prime rate of interest increased from 8.5% as of December 31,
1994 to 9% in February 1995 before eventually returning to 8.5% at the end of
1995. Most of the Company's commercial loans are either directly tied to the
Wall Street Prime rate of interest or an internal Company index whose movement
closely follows movements in the Wall Street Prime. As a result of an increase
in market rates, the Company's average yield on commercial loans increased 131
basis points from 8.89% in 1994 to 10.20% in 1995. The average yield on total
loans increased from 8.31% in 1994 to 8.98% in 1995.
The average investment portfolio and federal funds sold balance
decreased from $73,356,000 in 1995 to $67,861,000 in 1996. The Company's yield
on average investments and federal funds sold remained constant at 5.75% in 1995
and in 1996. As a result of a softer loan demand, increased loan competition and
the Company's goal to reduce the risk in its balance sheet and to increase its
risk-based capital ratios, more funds were directed in 1995 to the Company's
investment portfolio. The average investment portfolio and federal funds sold
balance increased from $63,711,000 in 1994 to $73,356,000 in 1995. The yield on
average investments and federal funds sold was 5.75% during 1995 as compared to
5.35% during 1994. Total interest income earned on the Company's total
investment portfolio was $3,715,000, $3,888,000 and $3,360,000 in 1996, 1995 and
1994, respectively.
15
<PAGE>
Nonaccrual loans and OREO decreased from $8,895,000 as of December 31,
1994 to $6,578,000 as of December 31, 1995 and to $4,181,000 as of December 31,
1996. If nonaccrual loans and OREO earned interest in accordance with their
original terms, the Company would have earned additional interest income of
approximately $708,000 in 1996 as compared to $766,000 in 1995 and $1,128,000 in
1994. In addition, restructured loans totaled $1,580,000, $1,570,000 and
$2,448,000 at December 31, 1996, 1995 and 1994, respectively. Interest income
recorded on these loans in 1996, 1995 and 1994 was $128,000, $119,000 and
$709,000, respectively. Interest income would have been $29,000, $51,000 and
$268,000 higher during 1996, 1995 and 1994, respectively, had these loans earned
interest in accordance with their original terms.
MATURITIES AND WEIGHTED AVERAGE YIELDS OF INVESTMENTS:
The following table shows the maturities for held to maturity and
available for sale investment portfolios as of December 31, 1996. As of December
31, 1996, the Company did not have any tax-exempt securities in its investment
portfolio.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------
Held to Maturity Available for Sale
------------------------------ ------------------------------
Weighted Weighted
Amortized Average Fair Amortized Average Fair
Cost Yield Value Cost Yield Value
----- --- ------- ------ --------- ------- ------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
Within 1 year ............................ $ 5,960 5.57% $ 5,951 $ 3,026 5.91% $3,027
After 1 but within 5 years ............... 7,963 5.61% 7,926 0 0.00% 0
------- ---- ------- ------- ---- -------
Total U.S. Treasury securities .......... 13,923 5.59% 13,877 3,026 5.91% 3,027
------- ---- ------- ------- ---- -------
U.S. Government agencies
Within 1 year ............................ 0 0.00% 0 0 0.00% 0
After 1 but within 5 years ............... 7,498 5.43% 7,388 33,743 6.18% 33,500
------- ---- ------- ------- ---- -------
Total U.S. Government agencies .......... 7,498 5.43% 7,388 33,743 6.18% 33,500
------- ---- ------- ------- ---- -------
Other securities--bond
Within 1 year ............................ 0 0.00% 0 0 0.00% 0
After 1 but within 5 years ............... 110 7.27% 110 1,034 5.67% 1,011
After 5 but within 10 years .............. 15 6.00% 15 0 0.00% 0
Other securities--Government Fund ......... 0 0.00% 0 136 5.36% 136
------- ---- ------- ------- ---- -------
Total other ............................. 125 7.12% 125 1,170 5.63% 1,147
------- ---- ------- ------- ---- -------
Other securities--with no fixed maturity .. 0 0.00% 0 4,994 5.59% 4,766
------- ---- ------- ------- ---- -------
TOTAL ................................... $21,546 5.54% $21,390 $42,933 6.08% $42,440
======= ==== ======= ======= ==== =======
</TABLE>
16
<PAGE>
TYPES OF INVESTMENTS:
The following table shows the carrying value of the Company's
investment portfolio as of December 31, 1996, 1995 and 1994.
Carrying Value December 31,
----------------------------------
1996 1995 1994
------- ------- -------
(dollars in thousands)
Investments held to maturity:
U.S. Treasury securities .......... $13,923 $13,960 $18,976
U.S. Government agencies .......... 7,498 9,496 12,993
Corporate and other securities .... 125 375 6,830
Mutual funds and other equities ... 0 0 0
------- ------- -------
Total held to maturity ........... 21,546 23,831 38,799
------- ------- -------
Investments available for sale:
U.S. Treasury securities .......... 3,027 12,044 12,612
U.S. Government agencies .......... 33,500 22,661 10,272
Corporate and other securities .... 1,147 3,256 1,863
Equity securities ................. 1,998 2,008 1,659
Mutual funds ...................... 2,768 2,798 2,750
------- ------- -------
Total available for sale ......... 42,440 42,767 29,156
------- ------- -------
Grand Total ...................... $63,986 $66,598 $67,955
======= ======= =======
INTEREST EXPENSE
During 1996, the Company's cost of funds, measured by its interest
expense increased slightly from $9,785,000 in 1995 to $9,930,000 in 1996. The
average rate paid on the Company's interest-bearing deposits and other
liabilities remained relatively constant increasing 2 basis points from 4.19% in
1995 to 4.21% in 1996. The rates paid for time deposits under $100,000 had the
highest negative impact on the Company's overall cost of funds. The average rate
paid on time deposits under $100,000 increased from 5.45% in 1995 to 5.56% in
1996, an increase of 11 basis points. This impact was mitigated by a slight
decrease in average volume in time deposits under $100,000. The average volume
for time deposits under $100,000 decreased $966,000 from $111,485,000 in 1995 to
$110,519,000 in 1996. The Company's average level of Core Deposits increased
$5,049,000, or 3.5%, to $151,115,000 in 1996 from $146,066,000 in 1995. This
increase in lower cost Core Deposits allowed the Company to control its overall
interest expense. The Company's average cost of funds, including non-interest
bearing demand deposits was constant at 3.47% for 1995 and 1996.
During 1995, the Company's cost of funds, measured by its interest
expense, significantly increased from $7,595,000 in 1994 to $9,785,000 in 1995.
The average rate paid on the Company's interest bearing deposits and other
liabilities increased 84 basis points from 3.35% in 1994 to 4.19% in 1995. The
rates paid for time deposits under $100,000 had the highest negative impact on
the Company's overall cost of funds. The average rate paid on time deposits
under $100,000 increased from 4.36% in 1994 to 5.45% in 1995, an increase of 109
basis points. Due to the increased competition for Core Deposits and business
accounts and relationships, which often generate a stable base of Core Deposits,
the Company had to rely more heavily on time deposits as a source of funds.
Total average time deposits increased from $115,511,000 in 1994 to $126,050,000
in 1995. Although less significant with regard to its impact on the Company's
overall cost of funds, the rates paid on Core Deposits also increased due to
competitive market conditions. The Company's average level of Core Deposits
decreased $3,739,000 from $149,805,000 in 1994 to $146,066,000 in 1995.
The Company anticipates that the upward pressure on market interest
rates for Core and time deposits during 1996 may continue in 1997 and may
increase the Company's overall cost of funds during 1997.
17
<PAGE>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE:
The following table shows the amount outstanding of time deposits of
$100,000 or more by time remaining until maturity as of December 31, 1996.
(dollars in thousands)
Time remaining until maturity:
3 months or less.......................................... $ 4,940
Over 3 through 6 months................................... 2,898
Over 6 through 12 months.................................. 4,079
Over 12 months............................................ 4,887
-------
Total.................................................... $16,804
=======
SUMMARY OF AVERAGE INTEREST BEARING LIABILITIES AND DEMAND DEPOSITS
<TABLE>
<CAPTION>
1996 1995 1994
------------------ -------------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ........................ $ 50,007 17.5% $ 47,974 17.1% $ 46,290 17.0%
NOW accounts ........................... 39,795 13.9 38,649 13.7 41,048 15.1
Money market accounts .................. 29,124 10.2 27,870 9.9 27,955 10.3
Savings deposits ....................... 32,189 11.2 31,573 11.2 34,512 12.6
Time deposits under $100,000 ........... 110,519 38.7 111,485 39.6 105,067 38.5
Time deposits $100,000 or more ......... 14,840 5.2 14,565 5.2 10,444 3.8
-------- ----- -------- ----- -------- -----
Total deposits ....................... 276,474 96.7 272,116 96.7 265,316 97.3
Other borrowings ....................... 9,416 3.3 9,317 3.3 7,362 2.7
-------- ----- -------- ----- -------- -----
Average deposits and other
borrowings ............................ $285,890 100.0% $281,433 100.0% $272,678 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
PROVISION FOR LOAN LOSSES AND RISK ELEMENTS IN THE LOAN PORTFOLIO
The provision for loan losses charged to operations reflects
management's analysis of the loan portfolio and determination of an adequate
allowance for loan losses to provide for probable losses in the loan portfolio.
TYPES OF LOANS:
The following table sets forth the composition of the Company's loan
portfolio as of the end of the last five fiscal years.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Commercial ................ $ 54,240 $ 58,746 $ 67,418 $ 75,230 $ 89,024
Real Estate:
Construction/Development . 820 400 0 0 1,145
Commercial Mortgage ...... 59,283 54,518 57,097 70,212 78,381
Residential Mortgage ..... 54,651 45,399 36,605 26,625 17,418
Consumer .................. 65,686 45,433 45,866 26,883 20,281
-------- -------- -------- -------- --------
Total Loans ................ 234,680 204,496 206,986 198,950 206,249
Allowance for loan losses .. (4,696) (5,893) (6,827) (9,497) (10,574)
-------- -------- -------- -------- --------
Net Loans .................. $229,984 $198,603 $200,159 $189,453 $195,675
======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
The determination of the adequacy of the allowance for loan loss is
based upon management's assessment of risk elements in the portfolio, factors
affecting loan quality and assumptions about the economic environment in which
the Company operates. The Company utilizes a loan grading system, based upon
FDIC parameters, and utilizes that assessment of the overall quality of the loan
portfolio in the process of determining an adequate allowance for loan loss
level. This system involves an ongoing review of the commercial and real estate
loan portfolios, with added emphasis on the Company's larger commercial credits
and nonperforming loans. Various factors are involved in determining the loan
grade, including the cash flow and financial status of the borrower, the
existence and nature of collateral, and general economic conditions and their
impact on the borrower's industry. These reviews are dependent upon estimates,
appraisals and judgments, which can change quickly due to economic conditions
and the Company's perceptions as to how these conditions affect the collateral
securing its current and past due loans as well as the borrower's economic
prospects. In each reporting period, the allowance for loan losses is reviewed
based on the most recent loan grading data and is adjusted to the amount
necessary, in the Company's judgment, to maintain adequate allowance for loan
loss levels. In both 1996 and 1995, the Company retained an independent
management consultant to review the Company's overall loan grading process and
to perform internal loan review. The results of the evaluation generally agreed
with management's assessments of the quality of its loan portfolio.
Although the real estate market and general economic conditions in
Connecticut have improved from their depressed 1991 levels, the Connecticut
economy continues to underperform when compared to the national economic
recovery. The Connecticut economy has had limited job creation over the past
twelve months which has slowed its overall economic recovery compared to other
New England states and the nation. These conditions have negatively impacted the
Company's borrowers with respect to debt service and have contributed to the
Company's need to charge-off certain loans and place additional loans on
nonaccrual status during 1996, 1995, and 1994.
The loan loss allowance decreased $1,197,000, or 20%, from $5,893,000
at December 31, 1995 to $4,696,000 at December 31, 1996 and decreased $934,000,
or 14%, from $6,827,000 at December 31, 1994 to $5,893,000 at December 31, 1995.
However, the ratio of the allowance for loan losses to nonaccrual loans,
restructured loans and accruing loans past due 90 days or more increased to
79.9% at December 31, 1996 from 76.8% at December 31, 1995 and 69.3% at December
31, 1994. The ratio of the loan loss allowance to total loans was 2.0% at
December 31, 1996, as compared to 2.9% and 3.3% at December 31, 1995 and 1994,
respectively. The fact that the loan loss allowance decreased during 1996, while
the overall loan portfolio increased, is due to the actual components of the
loan portfolio growth and overall improvement is asset quality. Less risky
residential mortgages and consumer loans were originated during the past year
which require less reserves for delinquencies and charge-offs.
In 1996, the provision for loan losses was $1,964,000, as compared to
$3,663,000 in 1995 and $9,199,000 in 1994. Net loan charge-offs were $3,161,000,
or 1.46% of average total loans during 1996, as compared to $4,598,000, or
2.24%, in 1995 and $11,869,000, or 5.70%, in 1994. During the third quarter of
1994, the Company completed a bulk sale of problem loans consisting of
performing, nonaccrual and restructured loans having a gross book value of
$18,000,000. Charge-offs related to this loan sale were approximately
$6,500,000. Management believes that this loan sale was necessary in order to
improve the quality of its loan portfolio. The Company anticipates that the
level of 1997 net loan charge-offs will not be as great as the level of
charge-offs experienced by the Company in 1996.
As of December 31, 1996, nonaccrual loans were $3,622,000 as compared
with $5,964,000 as of December 31, 1995, and $7,043,000 as of December 31, 1994.
As of December 31, 1996, approximately $2,954,000 of the nonaccrual portfolio is
collateralized partially by commercial or residential real estate or business
assets and approximately $436,000 of nonaccrual loans were unsecured. The
Company is actively pursuing a workout plan for the orderly disposition or
upgrade of these loans. The Company believes that its allowance for loan losses
is adequate to absorb any potential reduction of the net carrying value in the
nonaccrual portfolio. The ratio of nonaccrual loans to total loans declined from
2.92% at December 31, 1995 to 1.54% at December 31, 1996.
19
<PAGE>
CHANGE IN NONACCRUAL LOANS
The change in the Company's nonaccrual loan portfolio for the years
ended December 31, 1996 and 1995, respectively, are summarized below:
Year ended December 31,
-----------------------
1996 1995
------ ------
(dollars in thousands)
Balance at beginning of year ............................ $5,964 $7,043
New nonaccrual loans .................................... 3,220 6,272
Decreases in nonaccrual loans:
Payments ............................................... 786 1,373
Transfer to accruing status ............................ 289 1,034
Transfer to restructured loans ......................... 90 150
Transfer to OREO ....................................... 1,460 452
Charge-offs ............................................ 2,937 4,342
------ ------
Total ................................................ $3,622 $5,964
====== ======
Accruing loans past due 90 days or more have increased to $671,000 as
of December 31, 1996 from $139,000 as of December 31, 1995 and from $357,000 as
of December 31, 1994. The Company's nonaccrual policy states that any commercial
or mortgage loan attaining a 90-day past due status is placed on nonaccrual
unless such loan is well secured and in the process of collection. Exceptions to
placement on nonaccrual status that extend beyond 120 days must be approved by
the Board of Directors' Loan Committee. Any installment or consumer loan that
attains a 180-day past due status will be charged off regardless of collateral
value or collection proceedings. Previously accrued interest income on loans
placed on nonaccrual, which has not been collected, is reversed from current
period interest income. Nonaccruing loans are returned to accrual status when
principal and interest become current and collectibility is reasonably assured.
At December 31, 1996, 1995 and 1994, the Company had restructured loans
in its loan portfolio of $1,580,000, $1,570,000 and $2,448,000, respectively.
The Company recognizes interest income on restructured loans at reduced,
renegotiated rates. The Company earned an average yield of 7.52%, 7.56% and
6.33% on restructured loans in 1996, 1995 and 1994, respectively.
The Company has adopted SFAS 114, "Accounting by Creditors For
Impairment of a Loan", effective January 1, 1995. The new accounting standard
requires that impaired loans, which are defined as loans where it is probable
that a creditor will not be able to collect both the contractual interest and
principal payments, be measured at the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent, when assessing the need for a
loss accrual. The adoption of the standard resulted in an additional loan loss
provision of $500,000 which was recorded in the first quarter of 1995. As of
December 31, 1996, the Company's recorded investment in loans that are
considered to be impaired under SFAS 114 was $2,507,000 of which $2,108,000 were
on a nonaccrual status and $35,000 were classified as troubled debt restructured
loans. The remaining $364,000 of loans classified as impaired, which are also
classified as potential problem loans, have either experienced slight
delinquency problems or collateral deterioration but continue to meet the
contractual terms of the loan. The Company has also identified several
additional potential problem loans in the amount of $1,775,000 as of December
31, 1996. Potential problem loans are defined as loans where known information
about possible credit problems of borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with the present loan
repayment terms. These accruing loans have generally experienced delinquency
problems during the last several quarterly periods or management believes that
the borrowers potentially may avail themselves of bankruptcy protection.
However, they continue to be less than 90 days delinquent as of December 31,
1996. If these credits continue to have financial difficulties, they could be
classified as nonaccrual or restructured loans and become potential loan
charge-offs in future quarterly periods.
20
<PAGE>
IMPAIRED LOAN TABLE BY TYPE
The following table summarizes the Company's impaired loans by type as
of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- -------------------------------------------
Troubled Troubled
Non- Debt Potential Total Non- Debt Potential Total
Loan Type Accrual Restructured Problem Impaired Accrual Restructured Problem Impaired
- --------- ------- ------------ ------- -------- ------- ------------ ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........ $ 624 $ 0 $323 $ 947 $3,479 $470 $378 $4,327
Commercial
Real Estate ..... 1,284 0 0 1,284 1,224 39 0 1,263
Residential....... 199 35 42 276 0 0 0 0
Consumer(1)....... 0 0 0 0 0 0 0 0
Total .......... $2,107 $35 $365 $2,507(2) $4,703 $509 $378 $5,590(2)
</TABLE>
- ----------
(1) Smaller balance homogeneous loans, such as those found within the Company's
consumer loan portfolio, have been collectively evaluated and are not
considered impaired.
(2) Impaired loans of $1,887,000 and $620,000 were evaluated based on
collateral and discounted cash flows, respectively.
The following table sets forth information on nonaccrual, restructured
and past due ninety days or more (other than nonaccrual) loans and OREO as of
December 31, 1996, 1995, 1994, 1993, and 1992 determined in accordance with the
Company's policy in effect for the respective years.
21
<PAGE>
NONACCRUAL LOANS, OTHER REAL ESTATE OWNED, RESTRUCTURED LOANS AND
LOANS PAST DUE 90 DAYS OR MORE
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial .................................................... $1,005 $1,806 $3,712 $ 4,007 $ 5,647
Real Estate:
Construction .................................................. 0 0 0 0 0
Commercial .................................................... 2,255 3,628 3,129 4,578 3,533
Residential ................................................... 99 292 190 219 0
Consumer ....................................................... 263 238 12 0 116
------ ------ ------ ------- -------
Total nonaccrual loans ......................................... 3,622 5,964 7,043 8,804 9,296
Other real estate owned ........................................ 559 614 1,852 5,993 8,687
------ ------ ------ ------- -------
Total nonperforming assets ..................................... $4,181 $6,578 $8,895 $14,797 $17,983
====== ====== ====== ======= =======
Restructured loans ............................................. $1,580 $1,570 $2,448 $15,139 $15,280
Accruing loans past due 90 days or more ........................ $ 671 $ 139 $ 357 $ 1,088 $ 1,783
Allowance for loan losses ...................................... $4,696 $5,893 $6,827 $ 9,497 $10,575
SFAS 114 impaired loans ........................................ $2,507 $5,590
Ratio of nonperforming assets to total assets .................. 1.2% 2.2% 3.0% 5.1% 6.2%
Ratio of nonperforming assets,
restructured loans and accruing loans
past due 90 days or more to total
assets ........................................................ 1.9% 2.8% 3.9% 10.8% 12.1%
Ratio of nonperforming assets
to total loans and OREO ....................................... 1.8% 3.2% 4.3% 7.2% 8.4%
Ratio of nonperforming assets, restructured
loans, and accruing loans past due 90 days
or more to total loans and OREO ............................... 2.7% 4.0% 5.6% 15.2% 16.3%
Ratio of allowance for loan losses to
nonaccrual loans, restructured loans, and
loans past due 90 days or more ................................ 79.9% 76.8% 69.3% 37.9% 40.1%
Ratio of nonaccrual loans, restructured loans,
and loans accruing past due 90 days or more
to shareholders' equity and allowance for
loan losses ................................................... 19.4% 35.7% 51.3% 84.3% 123.7%
</TABLE>
During the mid-1980's, the Bank, like a number of other Connecticut
institutions, grew rapidly by accumulating deposits and aggressively lending
into a healthy economy. The emphasis on lending did not include, however, a
similar commitment to loan underwriting policies, documentation and credit
administration. These lending practices, coupled with the subsequent dramatic
downturn in the local economy beginning in the late 1980's led to an excessive
level of nonperforming loans and the need to make successive, substantial
provisions to the allowance for loan losses.
In late 1989 and continuing into 1990, a substantially new management
team made a thorough analysis of the then current procedures, policies and
resources relating to the Bank's lending, credit standards, documentation and
risk assessment, and determined that all of these areas required significant
improvement. This process was accelerated in 1991 as a result of the Order.
Throughout this time period, the Company's management responded to the
changing economic situation. For example, during 1991 and 1992, aggregate loans
charged off were $9.2 million and $8.2 million, respectively, which amounts were
greater than the balances of the allowance for loan losses at the beginning of
each of those years. Significantly declining real estate values in the Company's
market area during these periods, among other things, caused the financial
deterioration of borrowers whose businesses were linked to the real estate
market and led to deterioration in real estate collateral values that caused
additional unanticipated charge-offs. This deterioration
22
<PAGE>
continued for a longer period than originally anticipated. Unforeseen
bankruptcies of certain borrowers due primarily to the impact of the worsening
economy additionally contributed to the significant charge-offs.
During 1994, the Company made significant progress in reducing its
exposure to such problem assets substantially through a bulk loan sale, ongoing
workout efforts and loan chargeoffs. Continued progress was made in 1995 and
1996 in improving the Company's overall asset quality. Therefore, the ratio of
nonperforming assets, restructured loans and accruing loans past due 90 days or
more to total assets decreased to 1.9% at December 31, 1996 from 2.8% at
December 31, 1995 and 3.9% at December 31, 1994.
The Company has not made loans to borrowers outside the United States.
At December 31, 1996, there were no concentrations exceeding 10% of total loans.
A concentration is defined as amounts loaned to multiple borrowers engaged in
similar activities which would cause them to be similarly affected by changes in
economic or other conditions. Although the Company makes loans on an unsecured
basis, it should be noted that the Company prefers not to lend to even its most
creditworthy borrowers on an unsecured basis. Accordingly, the Company accepts
residential and commercial real estate as collateral for a commercial loan. The
source of collateral does not always correlate with the borrower's use of the
loan proceeds. To this extent, serious further declines in real estate values in
the Company's market area would negatively affect the collateral securing its
commercial and real estate loans but not necessarily impact the borrower's
ability to meet the terms of the loan.
SUMMARY OF LOAN LOSS EXPERIENCE:
For the periods indicated, the following table summarizes changes in
the allowance for loan losses as a result of loans charged off and recoveries on
loans previously charged off, and additions to the allowance for loan losses
which have been expensed.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCES: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans
(Net of unearned discount)
Average ......................................... $216,029 $205,249 $208,105 $197,902 $226,882
End of Period ................................... 234,680 204,496 206,986 198,950 206,249
ALLOWANCE FOR LOAN LOSSES:
Balance, January 1 .............................. $ 5,893 $ 6,827 $ 9,497 $ 10,575 $ 8,740
Loans charged off:
Commercial ..................................... 2,449 4,200 5,564 4,567 8,345
Real Estate:
Construction/Development ...................... 0 0 0 0 70
Commercial mortgage ........................... 230 229 6,165 1,341 95
Residential mortgage .......................... 302 90 574 93 49
Consumer ....................................... 462 367 187 301 605
-------- -------- -------- -------- --------
Total ........................................ 3,443 4,886 12,490 6,302 9,164
-------- -------- -------- -------- --------
Loan recoveries:
Commercial ..................................... 205 192 334 175 263
Real Estate:
Construction/Development ...................... 0 0 0 0 0
Commercial mortgage ........................... 10 3 173 46 36
Residential mortgage .......................... 1 5 24 7 13
Consumer ....................................... 66 89 90 107 86
-------- -------- -------- -------- --------
Total ........................................ 282 289 621 335 398
-------- -------- -------- -------- --------
Net loans charged off ........................... 3,161 4,597 11,869 5,967 8,766
-------- -------- -------- -------- --------
Provision for loan losses charged to operations . 1,964 3,663 9,199 4,889 10,601
-------- -------- -------- -------- --------
Balance, December 31 ............................ $ 4,696 $ 5,893 $ 6,827 $ 9,497 $ 10,575
======== ======== ======== ======== ========
Net loans charged off to average loans .......... 1.46% 2.24% 5.70% 3.02% 3.86%
</TABLE>
23
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES:
The Company's loan grading system serves as the basis for the Company's
loan loss allowance methodology. The loan loss allowance is determined by
assigning reserve coverages commensurate with the risk characteristics of the
loan portfolio, as established by the loan grading process. Provisions are
charged to income in an amount sufficient to maintain the allowance at a level
consistent with management's assessment of the risks inherent in the loan
portfolio. The allocation of the allowance for loan losses reflects management's
estimate of possible credit losses based on the loss potential associated with
specific loans, subjective assessment of risk characteristics in the portfolio
and historical loss experience. This allocation should not be regarded as an
indication of future losses or that losses will occur in these proportions.
Prior to 1994, the Company had not attempted to allocate specific portions of
the allowance to specific loan categories. The allowance should be considered in
its entirety and is available for credit losses across the entire portfolio. The
following table summarizes the allocation of the Company's allowance for losses
and indicates the percentage of each loan category to total loans for the years
ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
--------------------- -------------------- -------------------
Percent Percent Percent
Loan Loan Loan
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial ................. $1,565 24% $2,266 29% $4,066 33%
Real Estate:
Construction/Development .. 8 4
Commercial ................ 1,550 25% 2,198 27% 1,878 27%
Residential ............... 672 23% 509 22% 443 18%
Consumer ................... 372 28% 307 22% 241 22%
Unallocated ................ 529 N/A 608 N/A 199 N/A
------ --- ------ --- ------ ---
Total ...................... $4,696 100% $5,893 100% $6,827 100%
====== === ====== === ====== ===
</TABLE>
Management, after careful consideration of the above factors, is of the
opinion that the allowance for loan losses as of December 31, 1996 is adequate.
However, due to the slow recovery of the Connecticut economy, it is difficult to
predict how the future economy may impact the Company's loan customers. If
economic conditions continue to improve during 1997, management believes that
the level of its nonaccrual loans could continue to decline throughout 1997. The
nature of the Connecticut economy will continue to influence the levels of loan
charge-offs, nonaccrual loans and the allowance for loan losses, and management
will appropriately adjust the allowance as considered necessary to reflect
future changes in risk. The Bank was most recently examined jointly by the FDIC
and State Banking Department as of December 31, 1995. The Company's financial
statements reflect the results of these examinations as communicated to the Bank
by the regulators.
OTHER INCOME
The Company's core business operations generate various types of
non-interest income, such as service charges on deposit accounts, commissions
and fees, and other service charges. In addition, non-interest income is derived
from other sources, such as the gain or loss on the sale of assets, which may
vary in type from period to period. The Company consistently evaluates its
service charges to insure competitiveness as well as collection efficiency.
Other income increased by $280,000, the major components of which are discussed
below, to $3,342,000 in 1996, from $3,062,000 in 1995. Comparing 1995 to 1994,
other income increased $458,000 in 1995 to $3,062,000 from $2,604,000 in 1994.
The major components of other income are service charges and penalty
fees on checking accounts, which increased $34,000, or 2%, to $2,201,000 in
1996, from $2,168,000 in 1995. Service charges and penalty fees significantly
increased by $512,000, or 31%, to $2,168,000 in 1995 from $1,656,000 in 1994.
During 1995, the Company reevaluated and changed its methodology in assessing
and collecting penalty fees on overdrawn checking accounts.
The miscellaneous or other component of other income was $1,134,000 in
1996, $890,000 in 1995 and $997,000 in 1994. This increase is primarily due to
increased revenue from mortgage placement fees and installment loan
24
<PAGE>
origination fees which result from the Company's active participation in loan
placement programs where both mortgage and installment loans are brokered or
sold to third party financial institutions. Mortgage placement fees, which are
fees the Company earns for originating residential first mortgage applications
were $258,000 in 1996, $200,000 in 1995 and $234,000 in 1994. Installment loan
placement fees, which are fees the Company earns for originating installment
loan applications were $218,000 in 1996, $68,000 in 1995 and $63,000 in 1994.
OPERATING EXPENSES
Operating expenses increased $483,000, or 4%, to $11,970,000 at
December 31, 1996 from $11,487,000 at December 31, 1995. Operating expenses
decreased $1,182,000, or 9%, to $11,487,000 at December 31, 1995 from
$12,669,000 at December 31, 1994.
The increase in operating expenses in 1996 is primarily due to the fact
that, although expenses related to maintaining and disposing of the Company's
OREO, properties and overall insurances, including FDIC premiums, have decreased
substantially during 1996, most other areas of operating expenses have
increased, which is explained below.
The reduction in operating expense during 1995 primarily resulted from
a significant decline in OREO expense which decreased $914,000, or 65%. This
decline was attributed to a substantial reduction in OREO properties held and
more stabilized real estate values. Insurance expense also decreased $230,000,
or 22%, which was primarily attributed to lower FDIC deposit insurance expense.
Operating expenses, exclusive of OREO expense, increased $822,000 or
7%, during 1996 and compared to a decrease of $268,000 or 2% during 1995. The
following discussion highlights the larger operating expenses and those with
large year to year variances:
Salaries and Employee Benefits
Salary and Employee Benefits increased $525,000, or 10%, to $5,997,000
in 1996 as compared to $5,472,000 in 1995. The Company's number of full time
equivalent positions was 149 as of December 31, 1996 as compared to 135 as of
December 31, 1995. A primary reason for the increase in salary expense was the
opening of two new retail branch facilities, one each in Milford and Branford.
Also, compensation related to the Company's mortgage program (loans sold or
retained), which is paid on a per loan closed basis, increased to $178,000 as of
December 31, 1996 as opposed to $130,000 at December 31, 1995 due to an increase
in mortgage origination volume.
Advertising and Promotion
Advertising and Promotion Expense increased $210,000, or 45%, during
1996 due, not only to the advertising dollars committed to the branch openings,
but also to several deposit growth campaigns undertaken during the year, the
result of which was an increase in the average level of core deposits of
$3,000,000 from $98,000,000 at December 31, 1995 to $101,000,000 at December 31,
1996.
As the Company expects to open an additional retail branch facility in
Guilford early in 1997, expenses associated therewith may contribute to
increased levels of operating expenses.
OREO Expense
OREO expense totaled $144,000 in 1996, $483,000 in 1995 and $1,397,000
in 1994. These amounts reflect losses on sales and writedowns of OREO
properties, as well as costs related to general property maintenance such as
property taxes, insurance and utilities. The Company incurred gains on the
disposition of OREO of $58,000 in 1996, as compared to losses on the disposition
of OREO of $126,000 in 1995, and $76,000 in 1994. In addition, the carrying
values of OREO properties were written down $98,000 in 1996, $282,000 in 1995,
and $884,000 in 1994. Maintenance costs for OREO properties amounted to
$105,000, $74,000 and $436,000 in 1996, 1995 and 1994, respectively. This
increase in holding costs in 1996 as compared to 1995 is primarily due to
expense related to the market enhancement of three specific properties. The
decrease in holding costs in 1995 as compared to 1994 is primarily due to a
decrease in the number of properties held in 1995 and the change in the nature
of these properties.
Professional Fees
Professional fees, which include legal, accounting and consulting fees,
were $706,000 in 1996, an increase from $705,000 in 1995 and $776,000 in 1994.
The high level of professional fees during the past three years is in part
25
<PAGE>
related to legal fees associated with the workout of nonperforming assets. With
the decline in nonperforming assets during 1996 and 1995, it is anticipated that
loan workout-related expenses should decline in the future. However, the Company
outsourced its internal audit and loan review functions in 1996 and 1995,
offsetting savings incurred due to a declining level of problem loans.
Insurance Expense
Insurance expense decreased significantly during 1996 to $328,000 from
$793,000 in 1995 and decreased from $1,023,000 in 1994. During 1996 and 1995,
insurance expense declined $465,000, or 59%, and $230,000, or 23%, over the
prior year, respectively. The decreases during 1996 and 1995 can be attributed
to lower premiums paid for FDIC insurance as well as a decrease in the Company's
general insurance premiums. During 1996, the Bank paid net FDIC insurance
premiums of $173,000 and premiums for other insurance of $155,000 as compared to
1995 levels of $594,000 and $199,000, respectively, and 1994 levels of $769,000
and $254,000, respectively.
During 1995, the FDIC's Bank Insurance Fund was over-reserved and,
consequently, deposit premiums were lowered and premium rebates were given to
banks in the third quarter of 1995 based on deposits reported in the first
quarter of 1995. The Company was given a rebate of $97,000 in the third quarter
of 1995. Because of the Bank's improved risk classification and generally lower
deposit premiums assessed for all banks, the Bank's premiums were reduced from
$.31 per $100 of deposits in January 1995 to $.29 per $100 of deposits in July
1995 to $.14 per $100 of deposits in October 1995. The Bank's premiums were
reduced from $.10 per $100 of deposits in January 1996 to $.03 per $100 of
deposits in July 1996.
INCOME TAXES
The Company recorded an income tax benefit of $7,807,000 for the 12
month period ended December 31, 1996. The deferred income tax benefit resulted
from a reduction in the Company's valuation allowance on its deferred tax asset
in accordance with SFAS 109, as the Company recognized substantially all of its
remaining available Federal income tax benefits (expiring in the year 2010)
along with a portion of its remaining State income tax benefits (expiring in the
year 2000) which the Company expects to utilize.
The reduction in the deferred tax valuation allowance reflects the
Company's improved operating performance, reductions in non-performing assets
and a positive outlook for future earnings. These factors make it more likely
than not that these deferred tax items will be utilized in the future. Due to
the utilization of net operating loss carryforwards only minimum Federal and
State income taxes are currently payable.
LIQUIDITY
The primary focus of the Company's liquidity management is to match
cash inflows and outflows with funds provided by the Company's market for
deposits and loans. The Company's objective is to maintain adequate cash which
is invested in federal funds. During 1996, the average balance of federal funds
sold was $3,628,000. In the event that the Company needs to borrow cash to
manage its overnight or short-term position, the Company can borrow
approximately $6,000,000, as of December 31, 1996, on an overnight basis from
the Federal Home Loan Bank of Boston ("FHLB") and has access to a $1,000,000
federal funds line of credit with a commercial correspondent bank. As of
December 31, 1996, the Company had no outstanding overnight borrowings at the
FHLB. In addition, the Company has access to $10,000,000 in short-term funds via
reverse repurchase agreements with a brokerage firm. The Bank also has the
ability to borrow term advances (from one week to twenty years) from the FHLB.
Its total term advance line is approximately $15,000,000 of which $12,000,000
was outstanding as of December 31, 1996. In order to utilize additional
borrowing capacity from the FHLB, additional shares of capital stock would need
to be purchased. The Company's investment portfolio also provides a secondary
source of liquidity.
The liquidity process is monitored by the Company's Asset Liability
Committee ("ALCO"), which meets regularly to implement its asset/liability and
funds management policy. ALCO's role is to evaluate liquidity and interest rate
risk and their impact on earnings. The Committee developed a reporting system
that integrates the current interest rate environment of the national and local
economy with the maturities and the repricing schedules of both the assets and
liabilities of the Company. The objective of ALCO is to manage the Company's
assets and liabilities to provide an optimum and stable net interest margin and
to facilitate a constant level of net interest income.
As of December 31, 1996, the Company's liquidity ratio, as defined by
the FDIC's criteria, was 26.96% compared to 29.3% as of December 31, 1995 and
25.9% as of December 31, 1994. The liquidity ratio is defined as the
26
<PAGE>
total of cash, short-term investments and other marketable assets, divided by
total deposits and short-term liabilities. Management believes that its
liquidity position is adequate as of December 31, 1996.
During 1995, the Financial Accounting Standards Board ("FASB") issued a
pronouncement allowing companies to make a one-time repositioning of their
portfolios, offering the ability to transfer securities from the held to
maturity portfolio to the available for sale portfolio. The Company availed
itself of this opportunity and transferred $5,100,000 (par value) of corporate
bonds from its held to maturity portfolio to its available for sale portfolio.
As of December 31, 1996 and 1995, 66% and 64%, respectively, of the Company's
total investment portfolio is classified as available for sale.
INTEREST RATE SENSITIVITY
The Company concentrates its efforts on evaluating interest rate risk
and appropriately adjusts for changes in rates and maturities of its assets and
liabilities. The Company's objective is to provide stable net interest income.
The following table illustrates the ratio of rate sensitive assets to rate
sensitive liabilities as they mature and/or reprice within the indicated
periods. As of December 31, 1996, the Company's rate sensitive liabilities
repricing or maturing during the first 90 days exceeded rate sensitive assets by
approximately $27,000,000. This results from having a lower level of rate
sensitive assets compared to rate sensitive liabilities coupled with the fact
that approximately 41% of the Company's rate sensitive liabilities mature or
reprice within this ninety day period as opposed to only 34% of rate sensitive
assets. In an increasing rate environment, asset sensitivity enhances earnings
potential, whereas liability sensitivity would negatively impact earnings. In
contrast, in a declining rate environment, asset sensitivity would negatively
impact earnings, whereas liability sensitivity enhances earnings potential. The
Company is "asset sensitive" beyond one year which is primarily due to
approximately 50% of its Loan and Investment portfolios repricing beyond one
year. At December 31, 1996, the amount of the Company's cumulative gap with
respect to assets and liabilities maturing or repricing within one year was
$39,085,000 more liabilities than assets repricing (a negative gap position),
representing a negative 13% cumulative gap to total rate sensitive assets.
Simulation analysis provides a detailed and dynamic tool for managing interest
rate risk. It is used to examine the earnings impact of immediate interest rate
"shocks". Utilizing a 200 basis point immediate rate-shock simulation, the most
recent earnings simulation model projects net interest income for the next
twelve months would decrease by an amount equal to approximately 3% if ratios
declined by 200 basis points immediately.
The following table sets forth the distribution of the repricing of the
Company's earning assets and interest bearing liabilities at a single point in
time, as of December 31, 1996. The table shows the interest rate sensitivity gap
(i.e., interest rate sensitive assets less interest rate sensitive liabilities),
the cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (i.e., gap divided by total rate sensitive assets) and the cumulative
interest rate sensitivity gap ratio. The table also sets forth the time periods
in which interest earning assets and interest bearing liabilities will mature or
may reprice in accordance with their contractual terms. However, the table does
not necessarily indicate the impact of general interest rate movements on the
net interest margin since the Company's repricing of various categories of
assets and liabilities is subject to competitive pressures and the needs of the
Company's customers. The Company's interest rate sensitivity position is
adjusted as ALCO's assessment of the interest rate outlook and other factors are
modified. As the Company increases its total assets, the overall business plan
provides for matching its assets and liabilities to reduce interest rate risk
and liquidity risk. As of December 31, 1996, Management is satisfied with its
current level of Interest Rate Risk through a one year time horizon. For
purposes of gap presentation, loan data is based on contractual maturities and
both NOW and money market accounts are considered a short-term funding source.
Demand deposit and savings accounts are considered a long-term funding source
with the exception of specific volatile accounts which are tracked on a monthly
basis.
27
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY TABLE
(dollars in thousands)
December 31, 1996
-------------------------------------------------------------------------------
Month Month Month Months Months Over 1
1 2 3 4-6 7-12 Year Total
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans (1) ......................................... $71,052 $ 4,509 $ 3,746 $ 11,582 $ 27,898 $109,153 $227,940
Investments ....................................... 19,431 1,002 2,750 3,000 7,486 41,511 75,180
------- -------- -------- -------- -------- -------- --------
Total Rate Sensitive Assets ........................ 90,483 5,511 6,496 14,582 35,384 150,664 303,120
------- -------- -------- -------- -------- -------- --------
Rate Sensitive Liabilities:
Time Deposits ..................................... 8,162 7,591 19,778 31,714 27,883 37,799 132,927
Other Deposits .................................... 89,977(2) 3,071 1,072 218 2,075 85,296 181,709
------- -------- -------- -------- -------- -------- --------
Total Rate Sensitive Liabilities ................... 98,139 10,662 20,850 31,932 29,958 123,095 314,636
------- -------- -------- -------- -------- -------- --------
Net Gap ............................................ (7,656) (5,151) (14,354) (17,350) 5,426 27,569 (11,516)
------- -------- -------- -------- -------- -------- --------
Cumulative Gap ..................................... $(7,656) $(12,807) $(27,161) $(44,511) $(39,085) $(11,516) $(11,516)
======= ======== ======== ======== ======== ======== ========
Net Gap as % of total rate sensitive assets ........ -3% -2% -5% -6% 2% 9% -4%
Cumulative Gap as % of total rate sensitive assets . -3% -4% -9% -15% -13% -4% -4%
</TABLE>
- ----------
(1) Excludes nonaccrual loans.
(2) Includes borrowings.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES:
The Company's loan portfolio, as of December 31, 1996, is comprised of
variable and fixed interest rate obligations. Commercial loans, which comprise
approximately 23% of the portfolio, are demand or time obligations with rates
tied to the prime rate of interest. Commercial real estate loans, which
constitute approximately 26% of the total loan portfolio, are made for fixed
terms and generally reprice within one to three years. Consumer loans, which
constitute 28% of the loan portfolio, consist primarily of fixed rate automobile
loans with an average contractual life of approximately four years and home
equity loans that are tied to the prime rate of interest. Residential real
estate loans, which constitute 23% of the loan portfolio are comprised of
variable rate loans which reprice within one year (25% of the residential
portfolio) and fixed rate loans.
The following tables present the maturity distribution and interest
sensitivity of total loans by category at December 31, 1996 based on the
original contractual terms. (Demand loans are included in the "due in one year
or less" category.) Renewal requests by business entities are granted if the
customer is deemed creditworthy. This determination is made in substantially the
same manner as new applications for extension of credit. Both maturity date and
interest rate terms of renewals are based on review of the customer's credit
needs, and current and future economic conditions.
28
<PAGE>
<TABLE>
<CAPTION>
Due After
One Year
Due in Through
One Year Five Due After
or Less (1) Years Five Years Total
----------- ---------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial .............................. $ 43,369 $ 10,242 $ 629 $ 54,240
Real Estate:
Construction/Development ............... 820 820
Commercial Mortgage .................... 25,143 5,768 28,372 59,283
Residential Mortgage ................... 93 1,514 53,044 54,651
Consumer ................................ 9,799 50,282 5,605 65,686
-------- -------- ------- --------
Total Loans ........................... $ 79,224 $ 67,806 $87,650 $234,680
======== ======== ======= ========
Interest sensitivity:
Interest rates fixed or predetermined:
Due within one year .................... $ 6,087
Due after one year ..................... 86,875
Interest rates floating or adjustable:
Within one year ........................ 119,137
After one year ......................... 22,581
--------
Total ................................. $234,680
========
</TABLE>
- ----------
(1) This amount represents all amounts due in one year. It includes the
principal amount of commercial lines of credit due within one year on which
the principal balance may or may not be reduced during the year and which
lines may, based on the Bank's credit evaluation, be extended for
additional periods. At this time, the Company is unable to predict how much
of the disclosed amount will actually be paid during the year. Based on
experience, the Company assumes that an insubstantial amount of such
principal will be paid down during the year and, as such, will not serve as
a principal source of liquidity for the Company's operations. Conversely,
contractual amortization of commercial, residential mortgage and consumer
loans and estimated prepayment of such loans are not reflected in the above
table. Any such payments will serve as a source of liquidity.
CASH FLOWS
The Company generated a positive aggregate cash flow of $1,226,000 as
of December 31, 1996 as compared to a negative aggregate cash flow of $2,193,000
as of December 31, 1995 and a positive aggregate cash flow of $9,663,000 as of
December 31, 1994.
The Company had net income of $9,983,000 in 1996 as compared to
$1,811,000 in 1995 and a net loss of $6,188,000 in 1994. Cash flows provided by
operating activities were $4,249,000, $5,831,000 and $4,459,000 for the periods
ending December 31, 1996, 1995, and 1994, respectively. Cash flows provided by
operating activities were significantly impacted in 1994 for non-cash charges,
including provisions for loan losses and writedowns on OREO, while in 1996
non-cash charges were significantly impacted by the recognition of over
$7,000,000 in Deferred Tax Assets due to the Company's continued profitability.
Net cash provided by financing activities in 1996 was $33,276,000. This
was due largely to substantial increases in the demand and interest bearing
deposits as well as proceeds from Federal Home Loan Bank advances.
Net cash used by financing activities in 1995 was $3,658,000, primarily
due to a decrease in federal funds purchased and securities sold under
repurchase agreements. A net decrease in time deposits when comparing year-end
1995 to 1994, was offset by an increase in proceeds from FHLB advances for the
same period. Net cash provided by financing activities in 1994 was $19,274,000
primarily due to an increase in core deposits, time deposits and net borrowed
funds of $8,085,000, $5,025,000 and $6,164,000, respectively.
Net cash used by investing activities was $36,579,000 for 1996, caused
primarily by the aggressive loan growth in both the residential and consumer
loan portfolios.
Net cash used by investing activities was $4,366,000 for 1995, caused
primarily by investment security purchases and funds used for net loans
originated and matured, partially offset by the sales and maturities of
29
<PAGE>
investment securities. Net cash used by investing activities was $14,071,000 in
1994, of which the major factors were the purchase of investment securities of
$16,231,000, net loans originated and matured of $35,444,000 and offset by
investment securities maturities and sales of $8,005,000 and $3,955,000 as well
as proceeds from the sales of loans of $16,448,000.
CAPITAL RESOURCES
The Company and the Bank are subject to the capital adequacy rules of
several regulators. Effective December 19, 1992, each federal banking agency
issued final rules to carry out the "prompt corrective action" provisions of
FDICIA. The regulations adopted, among other things, defined capital measures
and the capital thresholds for each of the five capital categories established
in the statute and established a uniform schedule for filing of capital
restoration plans by undercapitalized institutions. The following table
identifies generally the capital measures and thresholds defined under the FDIC
and Federal Reserve Board rules:
<TABLE>
<CAPTION>
Total Risk- Tier 1 Risk-
Based Ratio Based Ratio Tier 1 Leverage Ratio
----------- ----------- ---------------------
<S> <C> <C> <C>
Well Capitalized............................... 10% or above & 6% or above & 5% or above
Adequately Capitalized......................... 8% or above & 4% or above & 4% or above
Undercapitalized............................... Under 8% or Under 4% or Under 4%
Significantly Undercapitalized................. Under 6% or Under 3% or Under 3%
Critically Undercapitalized.................... A ratio of tangible
equity to total assets
equal to or under 2%
</TABLE>
To qualify as well capitalized or adequately capitalized, the financial
institution must meet the requirements of all three capital measurements.
Undercapitalized and significantly undercapitalized institutions will be
categorized as such if the institution fails to meet any of the three capital
measurements. The risk-based capital guidelines establish a measurement of
capital adequacy by relating a banking organization's capital to its financial
risks, both on and off-balance sheet. As of December 31, 1996, 1995 and 1994,
the Company's total risk-based capital ratio was 9.56%, 9.37% and 8.09%,
respectively. The second capital measure is the Tier 1 risk-based ratio, which
includes only core capital as it measures the relationship to risk-weighted
assets. As of December 31, 1996, 1995 and 1994, the Company's Tier 1 risk-based
ratio was 8.30%, 8.10% and 6.80%, respectively. The third capital adequacy
measure is the ratio of Tier 1 (or core) leverage capital (using the same
definition of capital as used in the risk-based guidelines) to average total
assets. The Company's Tier 1 leverage ratio was 5.75%, 5.29% and 4.68% as of
December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, based
on the above criteria, the Company falls within the adequately capitalized
category.
As of December 31, 1996, 1995 and 1994, the Bank's total risk-based
capital ratio was 9.50%, 9.35% and 8.03%, respectively, while its Tier 1
risk-based capital ratio was 8.24%, 8.08% and 6.75%, respectively, and its Tier
1 leverage ratio was 5.72%, 5.29% and 4.66%, respectively. As of December 31,
1996, based on the above criteria, the Bank falls within the adequately
capitalized category.
The reporting of debt and equity securities (not held for trading
activities or to maturity) for the purposes of calculating Tier 1 capital for
the Company and the Bank differs from reporting under SFAS 115. Under final FDIC
regulations, net unrealized losses for equity securities that are available for
sale are included in the calculation of Tier 1 capital. All other net unrealized
gains or losses on available for sale securities are excluded from the
definition of Tier 1 capital. As of December 31, 1996 and 1995, Tier 1 capital
was reduced $228,000 and $191,000 to reflect the unrealized depreciation on the
Company's equity securities held as available for sale.
FDICIA requires each federal banking agency to revise its risk-based
capital standards for insured institutions to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and risks
of non-traditional activities, and reflect the actual performance and expected
risk of loss on multi-family residential loans. Regulations adopted by the
Federal Reserve Board, the FDIC and other bank regulatory agencies to implement
this provision require the regulators to take account of, among other factors,
interest rate risk, concentration of credit risks and risks of nontraditional
activities, in setting individual minimum capital requirements for institutions.
Such regulations may, however, further increase the regulatory capital
requirements which are applicable to the Company and the Bank.
30
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effect of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. Notwithstanding this,
inflation can directly affect the value of loan collateral, in particular real
estate. Sharp decreases in real estate prices, as discussed previously, have
resulted in significant loan losses and losses on OREO. Inflation, or
disinflation, could continue to significantly affect the Company's earnings in
future periods.
ADDITIONAL DISCLOSURE
As the year 2000 approaches, a critical issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. In brief, many existing application software products in the
marketplace were designed to only accommodate a two digit date position which
represents the year (e.g., '95' is stored on the system and represents the year
1995). As a result, the year 1999 (i.e., '99') could be the maximum date value
these systems will be able to accurately process. Management is in the process
of working with its software vendors to assure that the Bank is prepared for the
year 2000. Management does not anticipate that the Company will incur operating
expenses or be required to invest heavily in computer system improvements to be
year 2000 compliant.
FAS 125
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The Company will be required to adopt SFAS 125
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, on a prospective basis. The
adoption of this standard will require the Company to capitalize a servicing
asset for installment loans sold with servicing retained but this amount is not
expected to have a material impact on the Company's financial condition or its
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Page
----
Report of Independent Accountants....................................... 32
BNH Bancshares, Inc. (and Subsidiaries):
Consolidated Statement of Financial Position........................... 34
Consolidated Statement of Operations................................... 35
Consolidated Statement of Cash Flows................................... 36
Consolidated Statement of Changes in Shareholders' Equity.............. 37
Notes to Consolidated Financial Statements............................. 38
(b) The following supplementary data is set forth in this
Annual Report on Form 10-K on the following pages:
Consolidated Quarterly Financial Data................................... 55
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Shareholders of
BNH Bancshares, Inc.
We have audited the accompanying consolidated statements of financial
position of BNH Bancshares, Inc. and its Subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years then
ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the 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 audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BNH Bancshares, Inc. and its Subsidiaries as of December 31, 1996 and 1995 and
the consolidated results of its operations, and its cash flows for each of the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for impaired loans in 1995.
[/s/ COOPERS & LYBRAND]
New Haven, Connecticut
February 21, 1997
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Shareholders of
BNH Bancshares, Inc.
In our opinion, the accompanying consolidated statements of operations,
of cash flows and of changes in shareholders' equity for the year ended December
31, 1994 present fairly, in all material respects, the results of operations and
cash flows of BNH Bancshares, Inc. and its subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
[/s/ PRICE WATERHOUSE]
Hartford, Connecticut
February 21, 1995
33
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................... $ 21,043,918 $ 19,818,406
Federal funds sold ................................................ 10,700,000 5,800,000
Investment securities:
Held to maturity (fair value $21,390,292 and $23,825,145) ........ 21,546,034 23,830,868
Available for sale, at fair value ................................ 42,439,947 42,766,901
Loans:
Commercial ....................................................... 54,239,676 58,745,612
Real estate:
Construction/Development ........................................ 820,000 400,000
Commercial mortgage ............................................. 59,283,000 54,518,084
Residential mortgage ............................................ 54,651,322 45,398,532
Consumer ......................................................... 65,685,751 45,433,205
------------ ------------
Total loans .................................................... 234,679,749 204,495,433
Less allowance for loan losses .................................... (4,695,681) (5,892,675)
------------ ------------
Loans--net ........................................................ 229,984,068 198,602,758
Property and equipment--net ....................................... 4,335,019 3,891,749
Accrued interest receivable ....................................... 2,159,525 2,052,832
Other real estate owned ........................................... 558,706 614,272
Other assets ...................................................... 9,462,190 1,533,294
------------ ------------
TOTAL ASSETS .................................................... $342,229,407 $298,911,080
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits .................................................. $ 58,108,856 $ 52,320,298
NOW accounts ..................................................... 43,948,468 44,018,506
Money market accounts ............................................ 30,709,756 29,395,173
Savings deposits ................................................. 32,344,788 32,508,789
Time deposits under $100,000 ..................................... 117,008,717 103,719,077
Time deposits $100,000 or more ................................... 16,803,504 14,802,638
------------ ------------
Total deposits .................................................. 298,924,089 276,764,481
Federal funds purchased and securities sold
under repurchase agreements ...................................... 4,740,797 --
Federal Home Loan Bank advances ................................... 11,922,273 5,546,683
Accrued interest payable .......................................... 434,339 404,262
Other liabilities ................................................. 596,624 602,931
------------ ------------
TOTAL LIABILITIES ............................................... 316,618,122 283,318,357
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock $.01 stated value,
authorized 30,000,000, issued 3,695,268 ......................... 36,953 147,458
Capital surplus .................................................. 47,717,466 47,523,492
Undivided losses ................................................. (21,597,946) (31,581,840)
Net unrealized losses on investment securities available for sale,
net of tax ...................................................... (298,017) (249,216)
Treasury stock (4,776 shares), at cost ........................... (247,171) (247,171)
------------ ------------
Total shareholders' equity ....................................... 25,611,285 15,592,723
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $342,229,407 $298,911,080
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ............................. $18,794,829 $18,432,118 $17,287,044
Investment securities:
Held to maturity ................. 1,275,647 1,842,188 1,895,835
Available for sale ............... 2,437,340 2,045,541 1,464,300
Federal funds ..................... 190,520 329,522 46,343
----------- ----------- -----------
Total interest income ............ 22,698,335 22,649,369 20,693,522
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more . 812,986 772,530 416,151
Other deposits .................... 8,593,155 8,439,596 6,812,760
Other borrowings .................. 523,600 572,826 366,198
----------- ----------- -----------
Total interest expense ........... 9,929,742 9,784,952 7,595,109
----------- ----------- -----------
NET INTEREST INCOME ................ 12,768,593 12,864,417 13,098,413
PROVISION FOR LOAN LOSSES .......... 1,963,518 3,663,000 9,199,054
----------- ----------- -----------
NET INTEREST INCOME AFTER
LOAN LOSS PROVISION ............... 10,805,076 9,201,417 3,899,359
----------- ----------- -----------
OTHER INCOME:
Net income (loss) on securities ... 7,242 5,128 (49,290)
Service charges ................... 2,201,212 2,167,659 1,656,239
Other ............................. 1,133,582 889,511 996,852
----------- ----------- -----------
Total other income ............... 3,342,035 3,062,298 2,603,801
----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits .... 5,996,898 5,471,592 5,483,290
Occupancy ......................... 1,418,529 1,328,196 1,284,854
Advertising and promotion ......... 672,791 462,849 357,500
Office stationary and supplies .... 373,786 256,725 302,276
Professional fees ................. 706,195 704,613 775,624
Insurance ......................... 328,244 793,147 1,023,237
Other real estate owned expense ... 144,206 482,539 1,396,562
Other ............................. 2,329,195 1,987,226 2,045,484
----------- ----------- -----------
Total operating expense .......... 11,969,844 11,486,887 12,668,827
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES ......... 2,177,268 776,828 (6,165,667)
PROVISION (BENEFIT) FOR INCOME TAXES (7,806,625) (1,033,950) 22,480
----------- ----------- -----------
NET INCOME (LOSS) .................. $ 9,983,893 $ 1,810,778 $(6,188,147)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE* ....... $2.71 $0.49 ($1.68)
WEIGHTED AVERAGE SHARES OUTSTANDING 3,681,842 3,681,663 3,681,663
</TABLE>
- ----------
* All per share data adjusted to reflect a 1 for 4 reverse stock split which
occurred during 1996.
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................ $ 9,983,894 $ 1,810,778 ($ 6,188,147)
Adjustments for items not affecting cash:
Provision for loan losses ........................................ 1,963,518 3,663,000 9,199,054
Depreciation and amortization of property and equipment .......... 500,253 504,487 547,035
(Amortization) accretion of bond premiums and discounts .......... (219,062) (180,687) 175,504
(Gain) loss from the sale of available for sale securities ....... (7,242) (5,128) 49,290
Gains on sales of longer term loans .............................. -- -- (30,000)
Loss/writedown on other real estate owned ........................ 39,111 408,598 960,033
(Increase) Decrease in interest receivable ....................... (106,693) 87,445 7,587
Increase in interest payable ..................................... 30,077 99,447 30,220
(Increase) Decrease in deferred tax asset ........................ (8,010,738) 1,073,000 --
Other, net ....................................................... 271,005 (1,629,926) (291,084)
------------ ------------ ------------
Net cash provided by operating activities ........................ 4,444,123 5,831,015 4,459,492
------------ ------------ ------------
FINANCIAL ACTIVITIES
Net increase (decrease) in demand, NOW,
money market and savings accounts ............................... 6,869,102 (124,891) 8,084,519
Net increase (decrease) in time deposits ......................... 15,290,507 (826,790) 5,025,323
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements ................. 4,740,797 (3,561,134) 3,472,200
Proceeds from Federal Home Loan Bank advances .................... 6,375,590 854,503 4,692,180
Net proceeds from exercising stock options ....................... 83,469 -- --
Payment of Federal Home Loan Bank advances ....................... -- -- (2,000,000)
------------ ------------ ------------
Net cash provided (used) by financing activities ................. 33,359,465 (3,658,312) 19,274,222
------------ ------------ ------------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold .................... (4,900,000) (5,800,000) 6,690,354
Maturities of securities held to maturity ........................ 5,250,000 10,200,000 8,005,000
Maturities of securities available for sale ...................... 26,599,445 11,552,676 593,624
Purchase of securities available for sale ........................ (26,314,443) (32,396,633) (8,341,723)
Purchase of securities held to maturity .......................... (2,951,573) (500,000) (7,889,439)
Proceeds from the sale of available for sale securities .......... 10,392 14,113,275 3,954,710
Net loans originated and matured ................................. (33,344,828) (1,943,302) (35,443,910)
Net proceeds from other real estate owned ........................ 16,454 664,913 2,306,269
Proceeds from sales of loans ..................................... -- -- 16,447,790
Purchase of property and equipment ............................... (943,523) (256,850) (393,855)
------------ ------------ ------------
Net cash used by investing activities ............................ (36,578,076) (4,365,922) (14,071,180)
------------ ------------ ------------
(Decrease) Increase in cash ...................................... 1,225,512 (2,193,219) 9,662,534
Cash and due from banks at beginning of period ................... 19,818,406 22,011,625 12,349,091
------------ ------------ ------------
Cash and due from banks at end of period ......................... $ 21,043,918 $ 19,818,406 $ 22,011,625
============ ============ ============
Cash paid for:
Interest expense ................................................ $ 9,899,664 $ 9,684,885 $ 7,564,889
Income taxes .................................................... 15,500 39,050 22,480
</TABLE>
Non-cash transfers from loans receivable to other real estate owned
were $1,666,477, $809,467 and $308,709 for the twelve month periods ending
December 31, 1996, 1995 and 1994, respectively.
Non-cash transfers from other real estate owned to loans receivable for
transactions that satisfy sales treatment were $0, $973,750, and $1,379,073 for
the twelve month periods ending December 31, 1996, 1995 and 1994, respectively.
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
BNH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY, Beginning of Year ..................................... $15,592,723 $12,355,659 $20,206,348
COMMON STOCK
Net proceeds of rights offering ............................................ 166
One for four reverse stock split ........................................... (110,653)
Fractional shares retirement from reverse stock split . .................... (18)
CAPITAL SURPLUS
Net proceeds of stock options exercises, gross of tax effect ............... 87,016
One for four reverse stock split ........................................... 110,653
Fractional shares payout from reverse stock split .......................... (3,713)
Fractional shares retirement from reverse stock split ...................... 18
UNDIVIDED PROFITS
Net income (loss) .......................................................... 9,983,893 1,810,778 (6,188,147)
Change in unrealized depreciation on
marketable equity securities .............................................. 12,959
Change in unrealized appreciation (depreciation) on
investment securities available for sale .................................. (48,800) (1,426,286) (1,675,501)
----------- ----------- -----------
SHAREHOLDERS' EQUITY, End of Year ........................................... $25,611,285 $15,592,723 $12,355,659
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BNH Bancshares, Inc. ("the
Company") conform with generally accepted accounting principles. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant policies are summarized below.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries, The Bank of New Haven
("the Bank") and Northeastern Capital Corporation ("Northeastern"). All
intercompany accounts have been eliminated.
Statement of Cash Flows: For the purpose of reporting cash flows, the
Company has defined cash and cash equivalents as cash on hand and demand
deposits due from other financial institutions.
Nature Of Operations: The Company operates ten branches in the greater
New Haven metropolitan area located in southwestern Connecticut. The Company's
primary source of revenue is providing loans to customers who are predominantly
small and middle market businesses and middle income individuals.
Investment Securities: Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost, adjusted for amortization of premiums
and accretion of discounts. Debt and equity securities which are not classified
as held to maturity or as trading securities are classified as available for
sale and reported at fair value, with unrealized gains and losses excluded from
the results of operations and reported as a separate component of shareholders'
equity, net of income taxes, if applicable. Realized gains and losses on sales
of all securities are reported in earnings and computed using the specific
identification cost basis. Fair values of securities are determined by prices
obtained from independent market sources. See Note 3--Investment Securities.
Equity securities and mutual funds are stated at the lower of aggregate
cost or fair value with net unrealized losses reported as a reduction of
shareholders' equity.
Loans And Allowance For Loan Losses: Loans are carried at their unpaid
principal balance and are net of unearned interest income. Interest income on
loans not made on a discounted basis is accrued and credited to income based
upon the contractual rates of the loans applied to the principal amounts
outstanding. Unearned discount on consumer loans is recognized as income over
the terms of the loans by the actuarial, sum-of-the-months-digits and simple
interest methods. Consumer loans at December 31, 1996, 1995 and 1994 are shown
net of unearned income of $879,229, $1,494,796, and $2,834,893, respectively.
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the contractual
life of the related loans.
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for probable losses inherent in the loan
portfolio, including commitments to extend credit. The allowance for loan losses
is established through a provision for loan losses charged to operations. Loans
are charged against the allowance for loan losses when management believes that
the collectibility of the principal is unlikely. Recoveries of loans previously
charged-off are credited to the allowance when received. The allowance
represents an amount which, in management's judgment, will be adequate to absorb
probable losses on existing loans that may become uncollectible. Management's
judgment in determining the adequacy of the allowance is based on various
factors influencing the collectibility of loans. These factors include, but are
not limited to, an analysis of the borrower's ability to meet the repayment
terms, the borrower's overall financial condition, the estimated value of
collateral supporting the credit, the concentration of credit risk in the
portfolio and judgments as to the effect of both the local and national
economies on the Company's borrowers' economic prospects. Management's
determination of the allowance is, by necessity, dependent upon estimates,
appraisals and judgments, which may change quickly because of changing economic
conditions and the Company's perception as to how these factors may affect the
financial condition of the borrowers.
38
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for losses on
loans and writedowns of Other Real Estate Owned ("OREO"). Such agencies may
require the Bank to recognize additions to the allowance or additional
writedowns on OREO based on their judgments of information available to them at
the time of their examination.
The Company's nonaccrual policy is as follows: commercial and mortgage
loans are placed on nonaccrual status when a loan attains a past due status of
90 days or more, unless such loans are well collateralized and in the process of
collection. Any exceptions to placement on nonaccrual status that extend beyond
120 days past due must be approved by the Board of Directors Loan Committee. Any
installment or consumer loan that attains a 180 day past due status will be
placed on nonaccrual status regardless of collateral value or collection
proceedings. Previously accrued interest income on loans placed on nonaccrual
status, which has not been collected, is reversed from current period interest
income. Nonaccruing loans are returned to accrual status when principal and
interest become current and collectibility is reasonably assured.
Property And Equipment: Property, equipment and improvements are stated
at cost less accumulated depreciation and amortization. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets. Gains and losses on the disposition of assets are included in net
income.
Income Taxes: Deferred income taxes are provided for differences
arising in the timing of income and expenses for financial reporting and for
income tax purposes. Deferred income taxes and tax benefits are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company
provides deferred taxes for the estimated future tax effects attributable to
temporary differences and carryforwards when realization is more likely than
not.
Per Common Share Calculations: Net income (loss) per common share is
computed based on the weighted average number of common shares outstanding
during each year. Per share earnings and weighted average shares of common stock
for all periods presented reflect all stock dividends and splits. The exercise
of stock options would not result in material dilution of earnings per share.
Other Real Estate Owned: Real estate acquired through foreclosure or by
deed in lieu of foreclosure, is carried at the lower of 1) carrying value of the
related loan or 2) fair value at date acquired through foreclosure less the cost
to dispose. At the time of foreclosure, the excess, if any, of the loan value
over the estimated fair value of the property acquired less costs to dispose is
charged to the allowance for loan losses. Subsequent to the time of foreclosure,
reductions in the carrying value of foreclosed properties are recognized through
charges to OREO expense, with unrealized depreciation reported as a reduction of
OREO. Costs relating to the subsequent development or improvement of the
property are capitalized to the extent realizable. Holding costs are charged to
OREO expense in the period in which they are incurred.
Fair Value Of Financial Instruments: The Company is required to
disclose fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practical to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, for these values as well as those established through market
quotations in many cases, could not be realized in immediate settlement of the
instrument. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash And Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair values.
Investment Securities: Fair values for investment securities are based
on quoted market prices.
39
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans Receivable: For variable-rate loans that reprice frequently with
no significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analysis, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value. The Company's off-balance sheet lending
commitments are predominantly at market interest and accordingly are fair value
neutral.
Deposit Liabilities: The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date. The
carrying amounts for variable-rate money market accounts approximate their fair
values. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased,
securities sold under repurchase agreements, and Federal Home Loan Bank advances
approximate their fair values.
New Accounting Pronouncements Disclosures: In June 1996, the FASB
issued Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. The Company
will be required to adopt SFAS 125 for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, on a
prospective basis. The adoption of this standard will require the Company to
capitalize a servicing asset for installment loans sold with servicing retained
but this amount is not expected to have a material impact on the Company's
financial condition or its results of operations.
2. REGULATORY MATTERS
On September 19, 1991, the Bank voluntarily agreed to the issuance of
an Order to Cease and Desist ("the Order") with the Federal Deposit Insurance
Corporation ("FDIC"). The Order required the Bank to take specific action to
correct certain deficiencies addressed as a result of the FDIC's examination of
the Bank as of February 19, 1991. In addition to requiring the Bank to maintain
a Tier 1 leverage capital ratio of 6% or more, the Order required the Bank to
take a series of actions designed to improve its financial condition and
operating results and to augment its capital position. These requirements and
the Bank's response thereto included, but were not limited to, increasing the
loan loss reserve; charging-off classified loans and improving asset quality;
and addressing concerns regarding liquidity and reliance on volatile funds.
Since 1991, both the Company and the Bank have been examined several
times by each of its regulators. The Bank has always placed the highest priority
in complying with the provisions of the Order and the recommendations of the
examiners. However, since the Bank had experienced significant net operating
losses in the years 1991 through 1993, it found that it could not comply with
the capital requirements of the Order. Therefore, on February 1, 1993, the Bank
submitted to the FDIC a capital restoration plan outlining the steps the Company
and the Bank intended to take to achieve adequate capital levels. On July 28,
1993, the Company successfully completed its rights offering of common stock to
existing shareholders and standby purchasers. The rights offering resulted in
the issuance of 10,404,000 new shares of common stock at a subscription price of
$1.25 per common share. Net proceeds amounted to $11,992,000 and the Company
contributed that amount to the Bank in a manner qualifying as Tier 1 capital.
The Bank, as of December 31, 1993, was in compliance with every provision of the
Order.
During the second quarter of 1994, the Company incurred a net loss of
$6,500,000 which reduced both the Bank's and the Company's Tier 1 leverage
capital ratios below the Order's minimum Tier 1 leverage requirement of 6%. This
quarterly net loss was primarily related to an $18,000,000 bulk loan sale of
problem assets. Although the loan sale resulted in the Bank and the Company not
complying with the capital requirements of the Order, management believes that
the bulk sale of problem assets significantly improved the quality of the
Company's loan portfolio. Consequently, the Bank, as required by the Order,
filed a capital restoration plan with the FDIC during the third quarter of 1994.
The plan was accepted by the FDIC and called for restoration of the Bank's
capital ratios
40
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
through future earnings. As of December 31, 1994, the Company and the Bank were
adequately capitalized as defined by normal regulatory standards and management
believed it was in compliance with every provision of the Order except that its
Tier 1 leverage capital ratio fell short of the 4.7% requirement.
On May 16, 1995, the FDIC removed the Order and issued a Memorandum of
Understanding, which the Bank voluntarily agreed to enter into. The Memorandum
required, among other things, that the Bank achieve certain Tier 1 leverage and
total risk-based capital requirements. The Bank was required to have a Tier 1
leverage capital ratio of at least 5% by June 30, 1996 and 6% by June 30, 1997.
Also the Bank was to maintain a total risk-based capital ratio of at least 8%
throughout the existence of the Memorandum. As of December 31, 1995, both the
Company's and the Bank's Tier 1 leverage ratios were 5.3%. In addition, both the
Bank's and the Company's total risk-based capital ratios were 9.4% as of
December 31, 1995. As of December 31, 1995, the Bank was in compliance with
every provision of the Memorandum.
On April 23, 1996, the FDIC, after completion of a joint examination of
the Bank with the Connecticut Banking Department, based on the Bank's improved
overall financial condition removed the Memorandum. The Memorandum was removed
based on the condition that the Bank's Board of Directors pass a resolution
requiring the Bank to: continue its efforts towards meeting the Capital Goals as
outlined in the Original Memorandum; check with State Regulators prior to paying
any dividends; and establish goals to internally monitor its level of classified
assets as compared to total capital and eligible reserves.
The Company's actual capital amounts and ratios are presented in the
following table for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions
------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to Risk Weighted Assets) ...... $21,258,730 9.56% > $17,794,215 > 8.00% > $22,242,769 > 10.00%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) ...... $18,454,738 8.30% > $ 8,897,108 > 4.00% > $13,345,662 > 6.00%
- - - -
Tier 1 Capital
(to Average Assets) ............ $18,454,738 5.75% > $ 7,726,220 > 4.00% > $ 9,657,775 > 5.00%
- - - -
As of December 31, 1995
Total Capital
(to Risk Weighted Assets) ...... $18,108,115 9.37% > $15,452,439 > 8.00% > $19,315,549 > 10.00%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) ...... $15,650,730 8.10% > $ 7,726,220 > 4.00% > $11,589,329 > 6.00%
- - - -
Tier 1 Capital
(to Average Assets) ............ $15,650,730 5.29% > $11,830,676 > 4.00% > $14,788,345 > 5.00%
- - - -
</TABLE>
- -----------
> Greater than or less sign.
- -
41
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT SECURITIES
A summary of the amortized cost and fair value of securities classified
as held to maturity at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $13,923,364 $24,853 $ 70,713 $13,877,504
U.S. Government agencies............................ 7,497,670 0 109,882 7,387,788
Other debt securities............................... 125,000 0 0 125,000
----------- ------- -------- -----------
Total............................................. $21,546,034 $24,853 $180,595 $21,390,292
=========== ======= ======== ===========
</TABLE>
A summary of the amortized cost and fair value of securities classified
as available for sale at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $ 3,025,844 $ 4,619 $ 3,248 $ 3,027,215
U.S. Government agencies............................ 33,743,500 46,585 289,922 33,500,163
Other debt securities............................... 1,034,541 0 23,150 1,011,391
Equity securities................................... 1,997,800 0 0 1,997,800
Mutual fund investments............................. 3,131,749 0 228,371 2,903,378
----------- ------- -------- -----------
Total............................................. $42,933,434 $51,204 $544,691 $42,439,947
=========== ======= ======== ===========
</TABLE>
Investment securities held to maturity with an amortized cost of
$9,969,357 and available for sale securities with a market value of $2,487,884
at December 31, 1996 were pledged to secure public deposits, securities sold
under agreement to repurchase, letters of credit and for other purposes as
required by law.
A summary of the amortized cost and fair value of securities classified
as held to maturity at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $13,959,923 $78,187 $ 0 $14,038,110
U.S. Government agencies............................ 9,495,945 0 83,909 9,412,036
Other securities.................................... 375,000 0 0 375,000
----------- ------- ------- -----------
Total............................................. $23,830,868 $78,187 $83,909 $23,825,146
=========== ======= ======= ===========
</TABLE>
A summary of the amortized cost and fair value of securities classified
as available for sale at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $11,982,649 $61,845 $ 0 $12,044,494
U.S. Government agencies............................ 22,754,567 0 93,415 22,661,152
Other securities.................................... 3,281,943 0 26,437 3,255,506
Equity securities................................... 2,000,950 7,242 0 2,008,192
Mutual fund investments............................. 2,996,008 0 198,451 2,797,557
----------- ------- -------- -----------
Total............................................. $43,016,117 $69,087 $318,303 $42,766,901
=========== ======= ======== ===========
</TABLE>
42
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Below are the maturity schedules and corresponding amortized cost and
fair values of U.S. Treasury securities, U.S. Government agencies and other debt
securities:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
-------------------------- ---------------------------
Amortized Amortized
December 31, 1996 Cost Fair Value Cost Fair Value
- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less........................ $ 5,959,911 $ 5,951,021 $ 3,025,844 $ 3,027,215
Due after one year through five years.......... 15,571,123 15,424,271 34,778,041 34,511,554
Due after five years through ten years......... 15,000 15,000 0 0
Due after ten years............................ 0 0 0 0
----------- ----------- ----------- -----------
Total.......................................... $21,546,034 $21,390,292 $37,803,885 $37,538,769
=========== =========== =========== ===========
</TABLE>
In 1996, equity securities with a carrying value of $3,150 were sold
for a net gain of $7,242.
In 1995, U.S. Treasury securities available for sale with a carrying
value of $7,855,707 were sold at a net gain of $93,976, corporate bond
securities available for sale with a carrying value of $6,161,000 were sold at a
net loss of $89,521 and equity securities with a carrying value of $91,375 were
sold at a gain of $672.
In 1994, available for sale corporate bond securities with a carrying
value of $2,000,000 were sold for a net loss of $43,290 and mutual fund
investments with a carrying value of $2,004,000 were sold with a loss of $6,000.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company engages in lending activities that finance business
development, inventory and working capital, as well as loans to individuals for
residential real estate, auto and home improvement purposes. Loans for which
payment was past due ninety days or more and still accruing were $671,000,
$139,000 and $357,000 as of December 31, 1996, 1995 and 1994, respectively.
Nonaccrual loans were $3,622,000 as of December 31, 1996, $5,964,000 as of
December 31, 1995 and $7,043,000 as of December 31, 1994. As of December 31,
1996, approximately $2,954,000 of the nonaccrual portfolio were collateralized
partially by commercial or residential real estate or business assets and
approximately $436,000 of nonaccrual loans were unsecured. Interest income was
not recognized on nonaccrual loans for the years ending December 31, 1996, 1995
and 1994. If such loans had been accruing the entire year under their original
terms, the amount of interest income that would have been earned was $598,000,
$649,000 and $762,000 for the periods ending December 31, 1996, 1995 and 1994,
respectively. Restructured loans totaled $1,580,000, $1,570,000 and $2,448,000
at December 31, 1996, 1995 and 1994, respectively. Interest income recorded on
restructured loans outstanding during 1996, 1995 and 1994 was $128,000, $119,000
and $709,000, respectively. Interest income would have been $29,000, $51,000 and
$268,000 higher during 1996, 1995 and 1994, respectively, had these loans earned
interest in accordance with their original terms.
The Company adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors For Impairment of a Loan" ("SFAS 114"), effective
January 1, 1995. The new accounting standard requires that impaired loans, which
are defined as loans where it is probable that a creditor will not be able to
collect both the contractual interest and principal payments, be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral, if the loan is collateral dependent,
when assessing the need for a loss accrual. The adoption of the standard
resulted in an additional loan loss provision of $500,000 which was recorded in
the first quarter of 1995. As of December 31, 1996, the Company's investment in
loans that are considered to be impaired under SFAS 114 was $2,507,000 of which
$2,108,000 were on a nonaccrual status and $35,000 were classified as troubled
debt restructured loans. The remaining $364,000 of loans classified as impaired,
which are also classified as potential problem loans, have either experienced
slight delinquency problems or collateral deterioration but continue to meet the
contractual terms of the loan. As of December 31, 1996, the Company's allowance
for loan losses on impaired loans was $705,000. This allowance is comprised of
reserves of $572,000 based on the credit grades internally assigned to the
entire impaired portfolio of $2,507,000 plus an additional $133,000 in reserves
based on the SFAS 114 impaired loan calculation. The average balance of impaired
loans during 1996 was $4,000,000. As of December 31,
43
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996, $2,108,000 of the Company's impaired loans were nonaccrual loans for which
interest income was not recognized. The remaining $399,000 of impaired loans
were accruing loans and income was recognized in accordance with the Company's
loan accrual policy. No additional loan commitments were made to borrowers whose
loans were considered impaired.
The Bank has transactions in the ordinary course of business with
directors and officers and companies with which they are associated, which
resulted in related party loans aggregating $2,907,000, $4,457,000 and
$7,702,000 at December 31, 1996, 1995 and 1994, respectively. During 1996, new
loans totaling $434,000 were made and $1,984,000 were either repaid or the
obligation is no longer a related party transaction.
Changes in the allowance for loan losses are as follows:
1996 1995 1994
---------- ---------- -----------
Balance, January 1 ..................... $5,892,675 $6,827,374 $ 9,497,305
Provision charged to operations ........ 1,963,518 3,663,000 9,199,054
Loans charged-off:
Commercial ............................ 2,448,932 4,200,258 5,563,941
Real Estate:
Commercial mortgage .................. 230,002 228,728 6,164,962
Residential mortgage ................. 302,078 89,776 574,223
Consumer .............................. 462,135 367,170 187,006
---------- ---------- -----------
Total ............................... 3,443,147 4,885,932 12,490,132
Loan recoveries:
Commercial ............................ 205,060 191,950 333,644
Real Estate:
Commercial mortgage .................. 10,479 3,111 173,116
Residential mortgage ................. 713 5,350 23,901
Consumer .............................. 66,383 87,822 90,486
---------- ---------- -----------
Total ............................... 282,635 288,233 621,147
---------- ---------- -----------
Net loans charged-off .................. 3,160,512 4,597,699 11,868,985
---------- ---------- -----------
Balance, December 31 ................... $4,695,681 $5,892,675 $ 6,827,374
========== ========== ===========
44
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
December 31,
-----------------------------
1996 1995
----------- -----------
Land............................................. $ 175,000 $ 175,000
Building......................................... 2,941,501 2,923,649
Furniture and equipment.......................... 3,736,691 3,041,006
Leasehold improvements........................... 2,113,387 1,885,278
----------- -----------
Total cost....................................... 8,966,579 8,024,933
Less accumulated depreciation and amortization... (4,631,560) (4,133,184)
----------- -----------
Total.......................................... $ 4,335,019 $ 3,891,749
=========== ===========
The 1996, 1995 and 1994 depreciation and amortization expense on
property and equipment was $500,254, $504,486, and $547,035, respectively.
6. OTHER REAL ESTATE OWNED
Other real estate owned expense was $144,000 for the year ended
December 31, 1996 as compared to $483,000 and $1,397,000 for the years ended
December 31, 1995 and 1994, respectively. These expenses reflect losses on sales
and writedowns on OREO properties and associated holding costs. OREO holding
costs were $105,000 for the year ended December 31, 1996 as compared to $74,000
and $436,000 for the years ended December 31, 1995 and 1994, respectively.
Income earned on OREO was $50,000, $74,000 and $123,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
OREO activity for the past three years is summarized below:
OTHER REAL ESTATE OWNED
1996 1995 1994
---------- ---------- ----------
Balance, January 1................... $ 614,272 $1,852,068 $5,993,229
Properties added--net................ 1,795,349 809,467 515,110
Proceeds from OREO sold.............. 1,811,804 1,638,665 3,216,030
Gains (losses) on properties sold.... 58,389 (126,458) (76,143)
Other activity....................... 480,010
Property writedowns.................. 97,500 282,140 884,088
---------- ---------- ----------
Balance, December 31................. $ 558,706 $ 614,272 $1,852,068
========== ========== ==========
The following table sets forth the types and number of units of
properties which constitute the Company's OREO.
As of December 31, 1996 As of December 31, 1995
----------------------- -----------------------
Types of Properties # of Units Book Value # of Units Book Value
- ------------------- ---------- ---------- ---------- ----------
Single Family............. 2 $319,381 3 $433,405
Condominium............... 2 59,674 2 55,085
Commercial................ 4 117,361 2 50,992
Undeveloped Land.......... 2 62,290 3 74,790
-- -------- -- --------
Total................... 10 $558,706 10 $614,272
== ======== == ========
7. LEASES
The Bank leases ten offices, including its Main Office and Operations
Center space under noncancellable agreements expiring on various dates through
2006, with various renewal options, and requiring various annual minimum rentals
and the payment of property taxes. The Bank also has ground leases for its North
Haven and
45
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Woodbridge branches which expire in the years 1997 and 2021, respectively.
Rental expenses are accrued and charged to operations over the lease term on a
straight-line basis. Rental expense amounted to $563,000, $501,000 and $496,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The Bank
owns a 25% interest in a partnership which owns the Main Office building and a
50% interest in a partnership which owns its Chapel Street facility.
The total future minimum rental payments due under the agreements at
December 31, 1996 for the years 1997 through 2001 are $603,000, $480,000,
$423,000, $290,000, and $265,000, respectively. Minimum rental payments for all
years after 2000 aggregate $1,010,000. These minimum rental payments include
rent for the Guilford branch which is scheduled to open in early 1997.
8. FEDERAL HOME LOAN BANK ADVANCES
The following table illustrates the Bank's advances with the Federal
Home Loan Bank of Boston.
December 31,
---------------------------------------------
1996 1995
------------------ -------------------
Rate Balance Rate Balance
----- ------- ----- -------
(dollars in thousands)
Due February 14, 1996......... 7.200% 1,000
Due March 18, 1996............ 6.750% 1,000
Due May 16, 1996.............. 5.990% 1,500
Due February 20, 1997......... 4.990% 3,000
Due March 27, 1997............ 5.860% 1,000 5.860% 1,000
Due May 5, 1997............... 6.160% 360 6.160% 1,047
Due October 21, 1997.......... 5.750% 2,000
Due October 21, 1998.......... 6.070% 2,000
Due October 21, 1999.......... 6.260% 2,000
Due January 23, 2003.......... 5.460% 1,062
Due December 26, 2003......... 6.670% 500
----- ------- ----- ------
Total....................... $11,922 $5,547
======= ======
The FHLB Advance due May 5, 1997 is an amortizing advance with a
paydown the first day of each month. The original balance was $2,000,000.
The FHLB advance due January 23, 2003 is an amortizing advance with a
paydown the first day of each month. The original balance was $1,180,000.
As a member of the Federal Home Loan Bank of Boston, the Bank has
access to a pre-approved overnight line of credit for up to 2% of its total
assets. At December 31, 1996, the Company had $1,997,800 of Federal Home Loan
Bank Stock, which is classified as an available for sale security.
9. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
1996 1995 1994
----------- ----------- -------
Current:
Federal....................... $ (83,647) $ 15,961 --
State......................... 76,495 23,089 22,480
----------- ----------- -------
Total current............... (7,152) 39,050 22,480
----------- ----------- -------
Deferred:
Federal....................... (6,882,512) (792,315) --
State......................... (916,961) (280,685) --
----------- ----------- -------
Total deferred.............. (7,799,473) (1,073,000) 0
----------- ----------- -------
$(7,806,625) $(1,033,950) $22,480
=========== =========== =======
46
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconcilement of the statutory federal income tax rate
applied to pre-tax accounting income with the income tax provisions in the
statement of operations:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Tax (benefit) at statutory rate.......... $ 740,272 $ 264,122 $(2,096,327)
State tax, net of federal tax benefits... 144,460 385,202 (451,086)
Expiration of state net operating losses. 464,355 110,904 --
Effect of state tax reduction............ 543,274 99,300 --
Valuation Allowance...................... (9,635,472) (1,877,951) 2,620,200
Dividend received deduction.............. (30,419) (70,401) (59,493)
Other, net............................... (33,095) 54,874 9,186
----------- ----------- ----------
Provision (benefit) for income taxes..... $(7,806,625) $(1,033,950) $ 22,480
=========== =========== ==========
</TABLE>
The components of the Company's net deferred tax assets at December 31
are as follows:
1996 1995
----------- -----------
Deferred tax assets:
Operating loss carryforwards.................... $ 6,844,743 $ 7,357,222
Loan loss allowance............................. 1,596,532 2,003,510
OREO provisions................................. 250,821 239,746
SFAS 115 valuation.............................. 153,523 75,625
State taxes..................................... 1,629,958 2,757,584
Accrued and other items......................... 993,060 971,619
----------- -----------
Total deferred tax assets...................... 11,468,637 13,405,306
----------- -----------
Deferred tax liabilities:
Bad debt recapture.............................. 165,746 331,493
Other........................................... 10,475 38,453
----------- -----------
Total deferred tax liabilities................. 176,221 369,946
----------- -----------
Deferred tax assets.............................. 11,292,416 13,035,360
Valuation allowance.............................. 2,224,472 11,962,360
----------- -----------
Net deferred tax assets........................ $ 9,067,944 $ 1,073,000
=========== ===========
The allocation of deferred tax expense (benefit) involving items
charged to current year income and items charged directly to shareholders'
equity for the year ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax (benefit) allocated to stockholders' equity... $ (195,470) $ --
Deferred tax (benefit) allocated to income................. (7,799,474) (1,073,000)
----------- -----------
Total deferred tax benefit............................... $(7,994,944) $(1,073,000)
=========== ===========
</TABLE>
The Company will recognize a deferred tax asset only when, based upon
available evidence, realization is more likely than not. At December 31, 1996,
the Corporation had reduced its valuation allowance against deferred tax assets
to $2,224,472. The remaining valuation allowance primarily represents the tax
effect of federal and state net operating loss carryforwards which are expected
to expire.
47
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has federal and state net operating loss carryforwards for
tax return purposes as follows:
<TABLE>
<CAPTION>
Year Year of Year Year of
Federal Generated Expiration State Generated Expiration
------- --------- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 3,929,474 1991 2006
1,172,833 1992 1997
1,163,642 1992 2007
2,981,903 1993 1998 $ 7,127,720 1992 1997
591,388 1993 2008 3,537,269 1993 1998
9,673,239 1994 2009 9,645,595 1994 1999
619,118 1995 2010 719,880 1995 2000
----------- -----------
$20,131,597 $21,030,464
=========== ===========
</TABLE>
Federal and state net operating losses must be utilized in order
beginning with the earliest year in which the losses were generated. The federal
net operating loss of $5,498,416 generated in 1991 and expiring in 2006 must be
utilized prior to the net operating losses of $1,172,833 and $2,981,903 which
expire in 1997 and 1998, respectively.
Future changes in the ownership of the Company could limit the
utilization of federal tax carryforwards under Internal Revenue Code Section
382.
48
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business to meet the financing needs of its
customers. These instruments expose the Company to credit risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial investment for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
Total credit exposure related to these items at December 31, 1996 and
1995 is summarized below:
1996 1995
------- -------
(dollars in thousands)
Loan commitments..................................... $ 3,788 $ 4,284
Unadvanced portion of lines of credit................ 14,313 15,657
Unadvanced portion of home equity lines of credit.... 5,477 3,819
Standby letters of credit............................ 1,904 1,967
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained (if deemed necessary by the Company) upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held is primarily commercial and residential real
property. Interest rates on approved loan commitments, home equity loans and
lines of credit are a combination of fixed and variable interest rates.
The Bank is required to maintain certain average reserve balances under
requirements specified by the Federal Reserve Board. The average balance of such
reserves during 1996 was approximately $5,757,000.
11. SHAREHOLDERS' EQUITY
The Company's principal assets are its investments in its wholly-owned
subsidiaries, The Bank of New Haven and Northeastern Capital Corporation
(presently inactive). The Company may declare and pay dividends only out of
funds legally available and pays cash dividends from its undivided profits
(losses). Dividends from the Bank are the primary source of funds for the
Company. The payment of dividends by the Bank is restricted by various state and
federal statutory and regulatory limitations and the need to maintain minimum
regulatory capital levels.
The Company's Common Stock and Capital Surplus components of
Shareholders' Equity were each affected by a reverse 1 for 4 stock split which
was approved by the Company's shareholders in April of 1996. As a result of this
reverse split, approximately $111,000 was transferred from Common Stock to
Capital Surplus to reflect the reduction in the number of issued shares.
12. EMPLOYEE BENEFITS
In 1990, the Company authorized a Section 401(k) Profit Sharing Plan.
The plan, which began January 1, 1991, allows employees to make tax-deferred
contributions which can be invested in various investment vehicles, including
the Company's Common Stock. The Company, at the option of its directors, may
elect to match a portion of these employee contributions to the plan with
Company funds. Total profit sharing expense for the years ended December 31,
1996 and 1995 was $55,000 and $40,000, respectively and no expense was incurred
in 1994.
13. STOCK OPTION PLANS
In 1986, the Company adopted the 1986 BNH Bancshares, Inc. Stock Option
Plan ("the 1986 Option Plan"). Under the 1986 Option Plan, the Company may grant
incentive stock options or nonqualified stock options and/or stock appreciation
rights to key employees of the Company and its subsidiaries. All number of share
data has been
49
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjusted to reflect a reverse 1 for 4 stock split which was approved by the
Company's shareholders in April of 1996. At December 31, 1996, 1995 and 1994,
there were 7,687, 14,045 and 14,045 shares respectively of common stock
remaining available for issuance upon the exercise of outstanding and future
grants of awards under the 1986 Option Plan. The option price is equal to the
fair market value of the shares on the date of grant. All options are
exercisable from six months to three years after the date of grant and expire
five years after the date of grant. As of December 31, 1995, 1994 and 1993,
there were 7,687, 9,643 and 9,643, respectively, options outstanding under the
1986 Option Plan that were exercisable by employees. As of December 31, 1996
options may no longer be granted under the 1986 Option Plan.
In 1992, the Company adopted the BNH Bancshares, Inc. 1992 Stock
Incentive Plan (the "1992 Incentive Plan"). Under the 1992 Incentive Plan, the
Company may grant incentive stock options or nonqualified stock options, stock
appreciation rights, unrestricted or restricted stock or other performance
awards to key employees of the Company and its subsidiaries. The Salary and
Benefit Committee of the Company's Board of Directors made awards of non
qualified stock options as follows:
1993--options are exercisable from one year to three years after
the date of grant and expire five years after the date of grant.
1995--options have a five year term, with one half of the options
exercisable on the first anniversary of the grant date and the
remainder exercisable on the second anniversary of the grant date. The
option exercise price is initially $5.50 (which is the fair market
value of the Company's common stock on the date grant) and increases
8.4% on each anniversary of the grant date over the five-year term of
the option. The 1995 option agreements provide that the exercisability
of the options may be accelerated in the event of a change in control
of the Company as defined therein.
1996--options have a ten year term, with one half of the options
exercisable on March 19, 1997 and the remainder exercisable on March
19, 1998. The 1996 option agreements provide that the exercisability of
the options may be accelerated in the event of a change in control of
the Company as defined therein.
As of December 31, 1996, 1995, and 1994, there were 101,722, 23,221 and
23,221 options outstanding under the 1992 Incentive Plan and 130,101 shares of
common stock remain available for issuance for outstanding and future grants. As
of December 31, 1996, there were 34,845 options exercisable under both the 1992
and 1986 Plans.
A summary of the Company's Employee Stock Plans as of December 31,
1996, 1995 and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................... 66,184 $ 7.91 32,858 $13.04 32,858 $13.04
Granted.......................... 58,159 8.63 39,226 5.96 0
Exercised........................ (7,399) 6.70 0 0
Forfeited........................ (7,535) 12.95 (5,900) 23.49 0
------- ------ ------
Outstanding at end of year....... 109,409 $ 8.03 66,184 $ 7.91 32,858 $13.04
======= ====== ======
Options exercisable at year-end.. 34,845
</TABLE>
50
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the Employee Stock
Option Plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- --------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$5.75-$9.75 109,409 6.1 years $8.03 34,845 $8.22
</TABLE>
The Company maintains for members of the Board of Directors the BNH
Bancshares, Inc. Stock Option Plan for Non-Employee Directors (the "Director
Plan") which was adopted in 1992. The purpose of the Director Plan is to attract
and retain the continued services of directors of the Company with the requisite
qualifications and to encourage such directors to secure or increase on
reasonable terms their stock ownership in the Company.
Two types of options can be granted under the Director Plan. "Annual
Stock Options" to purchase 250 shares of common stock are granted each year to
non-employee directors. The Annual Options are exercisable six months after
their grant date and expire ten years from the grant date unless terminated
earlier in accordance with the Director Plan. The exercise price for each Annual
Option will be the greater of the fair market value of the Company's Common
Stock on the date of grant or the par value of the Common Stock on the date of
exercise. As of December 31, 1996, 1995, and 1994, there were 13,250, 14,000 and
11,250 annual options outstanding, respectively, which can be exercised at
prices from $5.00 to $7.38 per share.
The Director Plan also makes available "Deferred Compensation Options"
which provide that each non-employee director may elect to receive nonqualified
stock options in lieu of all or part of the retainers and fees paid to them for
service on the Board. Deferred Compensation Options can be exercised after six
months and expire ten years after the date of grant. No Deferred Compensation
Options were issued as of December 31, 1996.
The aggregate number of shares of Common Stock subject to options
granted under the Director Plan in any calendar year may not exceed 2.5% of the
number of shares of common stock outstanding on January 1st of that year.
A summary of the Company's Director Stock Plans as of December 31,
1996, 1995 and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.......................... 14,000 $5.56 11,250 $5.41 8,000 $5.62
Granted........................... 3,750 7.38 3,500 6.00 3,750 5.00
Exercised......................... (3,250) 5.70 0 0
Forfeited......................... (1,250) 5.92 (750) 5.41 (500) 5.62
------ ------ ------
Outstanding at end of year........ 13,250 $6.01 14,000 $5.56 11,250 $5.41
====== ====== ======
Options exercisable at year-end... 13,250
</TABLE>
The following table summarizes information about the Director Stock
Option Plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- -------------- ----------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$5.00-$7.50 13,250 7.6 years $6.01 13,250 $6.01
</TABLE>
51
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123). As permitted by SFAS 123, the Company has chosen to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Plan. Had compensation cost
for the Company's Plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss)........................... $9,983,893 $9,911,570 $1,810,778 $1,790,163
Net Income (Loss) Per Share................. $2.71 $2.69 $0.49 $0.49
</TABLE>
The weighted average fair value of all options granted in 1996 and
1995, respectively, was $6.04 and $4.94. The fair value of each option granted
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996 and
1995, respectively: dividend yield of 0%, and 0%; expected volatility of 57.5%
and 135.6%; risk-free interest rates of 5.25% and 6%; and expected lives of 9.4
years and 5.4 years.
14. PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of BNH Bancshares, Inc. are as
follows:
CONDENSED STATEMENT OF FINANCIAL POSITION
December 31,
-----------------------------
1996 1995
----------- -----------
ASSETS
Cash on deposit with bank subsidiary......... $ 71,623 $ 3,559
Investment in bank subsidiary................ 25,523,492 15,584,309
Investment in nonbank subsidiary............. 845 925
Other........................................ 34,455 3,930
----------- -----------
Total assets............................... $25,630,415 $15,592,723
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities.................................. $ 19,130 $ 0
Shareholders' equity......................... 25,611,285 15,592,723
----------- -----------
Total liabilities and shareholders' equity. $25,630,415 $15,592,723
=========== ===========
52
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Interest on deposits with bank subsidiary................ $ 0 $ 311 $ 8,093
Income from management fees.............................. 288,057 0 0
Operating expenses....................................... 261,494 45,896 145,052
---------- ---------- -----------
Income (loss) before taxes............................... 26,563 (45,585) (136,959)
---------- ---------- -----------
Income (loss) before equity in undistributed loss of
subsidiaries............................................ 26,563 (45,585) (136,959)
Equity in undistributed income (loss) of:
Bank subsidiary......................................... 9,957,411 1,856,439 (5,946,391)
Nonbank subsidiary...................................... (80) (76) (104,797)
---------- ---------- -----------
Net income (loss)........................................ $9,983,893 $1,810,778 $(6,188,147)
========== ========== ===========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ..................................... $(9,983,893 $ 1,810,778 $(6,188,147)
Adjustments for items not affecting cash:
Equity in undistributed income (loss) of subsidiaries . (9,957,331) (1,856,363) 6,051,188
Other, net ............................................ 41,501 (31,012) (2,776)
----------- ----------- -----------
Net cash provided by operating activities ............. 68,064 (76,597) (139,735)
Financing activities:
Rights offering proceeds .............................. 0 0 0
Transfer from nonbank subsidiary ...................... 0 6,285 0
----------- ----------- -----------
Net cash provided from financing activities ........... 0 6,285 0
----------- ----------- -----------
Investing activities:
Capital contribution to bank subsidiary ............... 0 0 (300,000)
Capital contribution from nonbank subsidiary .......... 0 0 0
----------- ----------- -----------
Net cash used by investing activities ................. 0 0 (300,000)
----------- ----------- -----------
Net (decrease)increase in cash ........................ 68,064 (70,312) (439,735)
Cash and due from banks at beginning of year ........... 3,559 73,871 513,606
----------- ----------- -----------
Cash and due from banks at end of year ............... $ 71,623 $ 3,559 $ 73,871
=========== =========== ===========
</TABLE>
15. CONCENTRATION OF CREDIT RISK
The Company primarily makes loans for commercial, industrial, consumer
and real estate purposes to individuals and businesses in the greater New Haven
area. Commercial loans, which totaled $55,060,000, or 24% of total loans, as of
December 31, 1996 as compared to $59,145,000, or 29%, as of December 31, 1995,
primarily consist of obligations of small and medium-sized business entities
located in the Company's market area. Commercial loans are generally
collateralized by business assets, commercial real estate and, on occasion,
residential real estate. The Company prefers not to lend to even its most
creditworthy borrowers on an unsecured basis, and, accordingly, will take
residential real estate as collateral for a commercial loan. The source of
collateral does not always correlate with the borrower's use of the loan
proceeds.
53
<PAGE>
BNH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The Company's consumer loan portfolio totaled $65,686,000, or 28% of
total loans, as of December 31, 1996 as compared to $45,433,000, or 22%, as of
December 31, 1995. Consumer loans consist of automobile loans where applications
are taken directly at the Bank branch locations and also at the point of sale
through automobile dealerships. Other types of consumer loans can generally be
classified as all purpose loans used for financing, among other things,
education, home improvement and debt consolidation.
The Company's mortgage portfolio consists of both commercial and
residential mortgages. As of December 31, 1996, the commercial mortgage
portfolio totaled $59,283,000, or 25% of the total loan portfolio, as compared
to $54,518,000, or 27%, as of December 31, 1995. The residential mortgage
portfolio totaled $54,651,000, or 23% of the total loan portfolio, as of
December 31, 1996 as compared to $45,399,000, or 22%, as of December 31, 1995.
Most of the Company's mortgage loans are made to commercial entities and
individuals located within the Company's market area.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial assets and
liabilities for the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Fair Carrying Fair Carrying
Amount Value Amount Value
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks....................... $ 21,043 $ 21,043 $ 19,818 $ 19,818
Federal funds sold............................ 10,700 10,700 5,800 5,800
Investment securities:
Held to maturity............................. 21,391 21,546 23,825 23,831
Available for sale........................... 42,439 42,439 42,767 42,767
Loans......................................... 230,118 234,680 192,059 204,496
Less: allowance for loan losses............... (4,697) (5,893)
-------- -------- -------- --------
$325,691 $325,711 $282,269 $290,819
-------- -------- -------- --------
Financial liabilities:
Time deposits................................. $134,916 $133,811 $120,002 $118,521
Other deposits................................ 165,266 165,112 157,816 158,243
Federal Home Loan Bank advances............... 11,819 11,922 5,574 5,547
Federal funds purchased and securities sold
under repurchase agreements.................. 4,741 4,741
-------- -------- -------- --------
$316,742 $315,586 $283,392 $282,311
-------- -------- -------- --------
</TABLE>
54
<PAGE>
CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth Year
Quarter Quarter Quarter Quarter Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Net interest income ............... $ 3,028 $ 3,074 $ 3,313 $ 3,354 $ 12,769
Provision for loan losses(1) ...... (576) (526) (500) (362) (1,964)
Other income ...................... 788 853 886 815 3,342
Net gain (loss) on investment
securities ....................... 0 0 0 0 0
Operating expenses ................ (2,732) (2,865) (3,074) (3,299) (11,970)
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes ........ 508 536 625 508 2,177
Provision (Benefit)
for income taxes ................. (226) (235) (7,057) 161 (7,807)
---------- ---------- ---------- ---------- ----------
Net income (loss) ................. $ 734 $ 771 $ 8,132 $ 347 $ 9,984
========== ========== ========== ========== ==========
Net income (loss) per common
share(2) ......................... $ 0.20 $ 0.21 $ 2.21 $ 0.09 $ 2.71
Weighted average shares ........... 3,682,000 3,682,000 3,682,000 3,682,000 3,682,000
1995
Net interest income ............... $ 3,334 $ 3,242 $ 3,091 $ 3,197 $ 12,864
Provision for loan losses(1) ...... (1,394) (894) (775) (600) (3,663)
Other income ...................... 689 748 853 767 3,057
Net gain (loss) on investment
securities ....................... 0 6 0 (1) 5
Operating expenses ................ (2,892) (2,885) (2,811) (2,898) (11,486)
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes ........ (263) 217 358 465 777
Provision (Benefit)
for income taxes ................. (485) 5 5 (559) (1,034)
---------- ---------- ---------- ---------- ----------
Net income (loss) ................. $ 222 $ 212 $ 353 $ 1,024 $ 1,811
========== ========== ========== ========== ==========
Net income (loss) per common
share(2) ......................... $ 0.06 $ 0.06 $ 0.10 $ 0.28 $ 0.49
Weighted average shares ........... 3,682,000 3,682,000 3,682,000 3,682,000 3,682,000
</TABLE>
- ----------
(1) See discussion of provision for loan losses on page 19.
(2) Data adjusted to reflect reverse 1 for 4 stock split (April 1996).
55
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On October 19, 1995, the Audit Committee of the Board of Directors of
the Company recommended and the Board of Directors of the Company approved the
dismissal of Price Waterhouse LLP, effective October 19, 1995, as the
independent accountants engaged to perform the audit examination of the
Company's financial statements for the year ending December 31, 1995. On October
19, 1995, the Company notified Price Waterhouse LLP of the Board of Directors'
decision to replace Price Waterhouse LLP as independent accountants of the
Company. Price Waterhouse LLP acted as the auditors of the Company from the
fiscal year ending December 31, 1987.
The reports of Price Waterhouse LLP on the financial statements of the
Company for 1994 contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle.
During 1994 and 1993 and the subsequent interim period ending October
19, 1995, there were no disagreements with Price Waterhouse LLP on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Price Waterhouse LLP, would have caused Price Waterhouse LLP to
make reference thereto in their report on the financial statements for such
years.
On October 19, 1995, the Audit Committee of the Board of Directors
recommended and the Company's Board of Directors approved the engagement of
Coopers & Lybrand L.L.P., effective October 19, 1995, to perform the audit
examination of the Company's financial statements for the year ending December
31, 1995. During the Company's two most recent fiscal years and through October
19, 1995, the Company has not consulted with Coopers & Lybrand L.L.P. on items
which (1) were or should have been subject to SAS 50 or (2) concerned with
subject matter of a disagreement or reportable event with the former auditor.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 appears on pages 2 through 5,
ELECTION OF DIRECTORS, and page 14, Section 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE, of the Company's definitive proxy statement dated March 19, 1997 and
is incorporated by reference in this annual report on Form 10 -K.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 appears on pages 7 through 13,
COMPENSATION OF DIRECTORS and COMPENSATION OF EXECUTIVE OFFICERS, of the
Company's definitive proxy statement dated March 19, 1997 and is incorporated by
reference in this annual report on Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 appears on pages 4 through 6,
SECURITY OWNERSHIP, of the Company's definitive proxy statement dated March 19,
1997 and is incorporated by reference in this annual report on Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 appears on page 14, RELATED PARTY
TRANSACTIONS, of the Company's definitive proxy statement dated March 19, 1997
and is incorporated by reference in this annual report on Form 10-K.
56
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The financial statements listed on the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual
Report.
Financial Statement schedules are not required under the related
instructions of the Securities and Exchange Commission or are inapplicable and,
therefore, have been omitted except that the report of Price Waterhouse LLP, the
Company's predecessor accountant, is filed herewith (at page 33) in accordance
with instructions under Rule 14a-3 under the Securities Exchange Act of 1934, as
amended.
The exhibits listed below are incorporated herein by reference or filed
herewith, as indicated.
EXHIBIT INDEX
Exhibits
- --------
3(a) The Amended and Restated Certificate of Incorporation of BNH
Bancshares, Inc. is incorporated by reference to Exhibit 3(a) of
Amendment No. 1 to the Company's Registration Statement on Form S-1,
Registration No. 33-61638 at pages 180 to 207.
3(b) The By-laws of BNH Bancshares, Inc., as amended March 19, 1991, is
incorporated by reference to Exhibit 3(b) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990 at
pages 75-85.
10(a) The 1986 BNH Bancshares, Inc. Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10(a) of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
at pages 44 to 65. This is a compensatory plan for employees of the
Company and its subsidiaries.
10(b) BNH Bancshares, Inc. 1985 Warrant Plan for Directors is incorporated
herein by reference to Exhibit B of the Company's Proxy
Statement--Prospectus dated March 29, 1985 contained in Registration
No. 2-96217. This is a compensatory plan for directors of the Company.
10(c) The BNH Bancshares, Inc. 1992 Stock Incentive Plan, amended effective
March 18, 1997, is filed herewith by reference to Exhibit 10(c) of the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996. This is a compensatory plan for employees of the Company and
its subsidiaries.
10(d) The BNH Bancshares, Inc. Stock Option Plan for Non-Employee Directors
is incorporated by reference to Exhibit 10(z) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992 at page
93. This is a compensatory plan for directors of the Company.
10(e) Employment Agreement between The Bank of New Haven and F. Patrick
McFadden, Jr., dated as of May 1, 1993, is incorporated by reference to
Exhibit 10(aa) of the Company's Registration Statement on Form S-1,
Registration No. 33-61638, at pages 175 to 186. This is a compensatory
arrangement.
10(f) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and F. Patrick McFadden, Jr. dated as of March 21, 1995 is
incorporated by reference to Exhibit 10(g) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
45. This is a compensatory arrangement.
10(g) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and John F. Trentacosta dated as of March 21, 1995 is
incorporated by referenced to Exhibit 10(h) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
61. This is a compensatory arrangement.
10(h) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and Lorraine K. Young dated as of March 21, 1995 is
incorporated by reference to Exhibit 10(i) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
77. This is a compensatory arrangement.
57
<PAGE>
10(i) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and Thomas J. Cahill dated as of March 21, 1995 is
incorporated by reference to Exhibit 10(j) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
93. This is a compensatory arrangement.
10(j) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and Richard R. Barredo dated as of March 21, 1995 is
incorporated by reference to Exhibit 10(k) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
106. This is a compensatory arrangement.
10(k) Executive Compensation and Severance Pay Agreement between The Bank of
New Haven and Mark A. Candido dated as of March 21, 1995 is
incorporated by reference to Exhibit 10(l) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 at page
119. This is a compensatory arrangement.
22 Subsidiaries of the Registrant is incorporated by reference to Exhibit
22 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 at page 153.
23(a) Consent of Independent Accountants (Coopers & Lybrand L.L.P.) is filed
herewith.
23(b) Consent of Independent Accountants (Price Waterhouse LLP) is filed
herewith.
24 Power of Attorney is filed herewith.
27 Financial Data Schedule is submitted only in electronic format to the
Securities and Exchange Commission.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 1996.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BNH BANCSHARES, INC.
By /s/ F. PATRICK MCFADDEN, JR.
-----------------------------
F. Patrick McFadden, Jr.,
President and Chief Executive Officer
Dated: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ F. PATRICK MCFADDEN, JR.
--------------------------
F. Patrick McFadden, Jr.,
President and Chief Executive Officer
Dated: March 18, 1997
By /s/ JOHN F. TRENTACOSTA
---------------------------
John F. Trentacosta
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
Dated: March 18, 1997
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
--------- ----- ----
* Director Dated: March 18, 1997
- -----------------------------
Stephen P. Ahern
* Director Dated: March 18, 1997
- -----------------------------
Martin R. Anastasio
* Director Dated: March 18, 1997
- -----------------------------
Edward M. Crowley
* Director Dated: March 18, 1997
- -----------------------------
James J. Cullen
* Director Dated: March 18, 1997
- -----------------------------
George M. Dermer
* Director Dated: March 18, 1997
- -----------------------------
Thomas M. Donegan
* Director Dated: March 18, 1997
- -----------------------------
Theodore F. Hogan
59
<PAGE>
Signature Title Date
--------- ----- ----
* Director Dated: March 18, 1997
- ------------------------------
Jean G. Lamont
* Director Dated: March 18, 1997
- ------------------------------
Lawrence M. Liebman
* Director Dated: March 18, 1997
- ------------------------------
F. Patrick McFadden, Jr.
* Director Dated: March 18, 1997
- ------------------------------
Carl M. Porto
* Director Dated: March 18, 1997
- ------------------------------
Vincent A. Romei
* Director Dated: March 18, 1997
- ------------------------------
Stanley Scholsohn
* Director Dated: March 18, 1997
- ------------------------------
Cheever Tyler, Esq.
/S/ PATRICK MCFADDEN, JR. Dated: March 18, 1997
- ------------------------------
F. Patrick McFadden, Jr.
Attorney-in-Fact
- ----------
* F. Patrick McFadden, Jr., by signing his name hereto, does sign this document
on behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons.
60
<PAGE>
EXHIBIT INDEX
Number Page
- ------ ----
3(a) The Amended and Restated Certificate of Incorporation of BNH
Bancshares, Inc. is incorporated by reference to Exhibit 3(a)
of Amendment No. 1 to the Company's Registration Statement on
Form S-1, Registration No. 33-61638 at pages 180 to 207.
3(b) The By-laws of BNH Bancshares, Inc., as amended March 19, 1991,
is incorporated by reference to Exhibit 3(b) of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1990 at pages 75-85.
10(a) The 1986 BNH Bancshares, Inc. Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10(a) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 at pages 44 to 65. This is a compensatory
plan for employees of the Company and its subsidiaries.
10(b) BNH Bancshares, Inc. 1985 Warrant Plan for Directors is
incorporated herein by reference to Exhibit B of the Company's
Proxy Statement--Prospectus dated March 29, 1985 contained in
Registration No. 2-96217. This is a compensatory plan for
directors of the Company.
10(c) The BNH Bancshares, Inc. 1992 Stock Incentive Plan, amended
effective March 19, 1996, is incorporated by reference to
Exhibit 10(c) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996. This is a compensatory
plan for employees of the Company and its subsidiaries.
10(d) The BNH Bancshares, Inc. Stock Option Plan for Non-Employee
Directors is incorporated by reference to Exhibit 10(z) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 at page 93. This is a compensatory plan for
directors of the Company.
10(e) Employment Agreement between The Bank of New Haven and F.
Patrick McFadden, Jr., dated as of May 1, 1993, is incorporated
by reference to Exhibit 10(aa) of the Company's Registration
Statement on Form S-1, Registration No. 33-61638, at pages 175
to 186. This is a compensatory arrangement.
10(f) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and F. Patrick McFadden, Jr. dated as of
March 21, 1995 is incorporated by reference to Exhibit 10(g) of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 at page 45. This is a compensatory
arrangement.
10(g) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and John F. Trentacosta dated as of March 21,
1995 is incorporated by referenced to Exhibit 10(h) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at page 61. This is a compensatory
arrangement.
10(h) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and Lorraine K. Young dated as of March 21,
1995 is incorporated by reference to Exhibit 10(i) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at page 77. This is a compensatory
arrangement.
10(i) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and Thomas J. Cahill dated as of March 21,
1995 is incorporated by reference to Exhibit 10(j) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at page 93. This is a compensatory
arrangement.
10(j) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and Richard R. Barredo dated as of March 21,
1995 is incorporated by reference to Exhibit 10(k) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at page 106. This is a compensatory
arrangement.
10(k) Executive Compensation and Severance Pay Agreement between The
Bank of New Haven and Mark A. Candido dated as of March 21,
1995 is incorporated by reference to Exhibit 10(l) of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 at page 119. This is a compensatory
arrangement.
<PAGE>
22 Subsidiaries of the Registrant is incorporated by reference to
Exhibit 22 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 at page 153.
23(a) Consent of Independent Accountants (Coopers & Lybrand L.L.P.)
is filed herewith.
23(b) Consent of Independent Accountants (Price Waterhouse LLP) is
filed herewith.
24 Power of Attorney is filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the last quarter of 1996.
B N H B A N C S H A R E S , I N C .
THE BANK OF
NEW HAVEN BOARD OF DIRECTORS
Stephen P. Ahern*
Vice President, Ogden Allied
Security Services
Martin R. Anastasio, C.P.A.*
Weinstein & Anastasio, P.C.
Edward M. Crowley, President*
Dichello Distributors, Inc.
James J. Cullen*
President & CEO
Hospital of Saint Raphael
Thomas M. Donegan*
President, Donegan and Co., Inc.
Victor B. Hallberg*
President, L.G. Defelice, Inc.
Theodore F. Hogan, Jr.*
Retired
Jean C. Lamont
Head of School
The Foote School
Cheever Tyler, Esq.*
President, Partnership for
Connecticut Cities and
the Nonprofit Strategies Group
Lorraine K. Young
Executive Vice President,
The Bank of New Haven
EXECUTIVE
COMMITTEE
George M. Dermer*
Retired
Chairman of the Board
F. Patrick McFadden, Jr.*
President & Chief Executive Officer,
The Bank of New Haven
Thomas J. Cahill, Jr.
Executive Vice President,
The Bank of New Haven
Lawrence M. Liebman, Esq.*
Retired
Carl M. Porto, Esq.*
Partner,
Parrett, Porto, Parese & Colwell,
P.C.
Vincent A. Romei*
General Partner, Bernhard Associates
and General Partner, Colony
Inn Hotel
Stanley Scholsohn*
Retired
John F. Trentacosta, C.P.A.
Executive Vice President &
Chief Financial Officer,
The Bank of New Haven
* Members of Board of
Directors, BNH Bancshares, Inc.
THE BANK OF
NEW HAVEN
OFFICERS
George M. Dermer (1)
Chairman of the Board
F. Patrick McFadden, Jr. (2)
President & CEO
Thomas J. Cahill, Jr.
Executive Vice President
John F. Trentacosta, C.P.A. (3)
Executive Vice President & CFO
Lorraine K. Young
Executive Vice President
Richard R. Barredo
Senior Vice President
Mark A. Candido
Senior Vice President
(1) Also Chairman of
BNH Bancshares, Inc.
(2) Also President & CEO
of BNH Bancshares, Inc.
(3) Also Executive Vice
President & CFO of BNH
Bancshares, Inc.
<PAGE>
A N N U A L 1 9 9 6 R E P O R T
ADVISORY
BOARDS
ANNEX
John A. Acampora, Esq.
Michael Berkun
Josephine L. Brennan
Roy DeBarbieri, Esq.
Ralph Gentile
Peter Persano
John Prete
Anne D. Ryder
James A. Salatto
Mark Steinhardt
HAMDEN
Anthony Caiafa
Michael Federico, C.P.A.
Carlton Highsmith
Lucille Lupinski Fiorello
Joseph E. Luzzi
Jack Morici
James Murray
William Nathanson
James J. Nocerino, C.L.U.
Carl Porto, Sr.
William M. Raccio
Steven R. Rolnick, Esq.
Fred D. Sette, Esq.
Richard Simione
Thomas Sullivan
Tracey A. Vingiano
MAIN OFFICE
Michael J. Amore
David Avigdor, Esq.
Victor Cassella
Lawrence Cohen
Martha B. Copen
Edward F. Lapides
Bob McCarron
Norman Peccini
Joseph Salatto
Louis Stone
Romeo Vidone, M.D.
Anthony A. Vingiano
John Walsh
MILFORD
George W. Adams, III Esq.
Gerald Clark
Thomas M. Ginz
Frank L. Gruskay, M.D.
William E. Holodak
George Lucke
Robert Riggs
John Roy
Gregory M. Salmini
Bob Smith
Joseph Vanacore
NORTH HAVEN
Gail Bolling
Robert G. Buenger, Sr.
Daniel A. Carloni
Carl DaVia
Anthony J. Elia, Jr. Esq.
John F. Hughes
David E. Hungerford II
Robert A. Idarola
Elinor C. Pedalino
Joyce Pellegrino
Alan J. Spose
Louis J. Yavarone
ORANGE
Casper F. Amodio, Sr.
Ann L. Antonetti
Mead A. Batchelor, Jr.
Jeff Chandler
Frank D'Ostilio, Jr.
Phyllis Farace
Arnold R. Mantillia, Jr.
Susan Millen
Estelle Moss
James A. Nugent
Nikki Perakos
Fred Portoff
Jonathan A. Schneider, M.D.
Milton Spitzbard
Sid Teitelman
WHALLEY-NORTON
James G. Cammarano, D.M.D.
Nicki Dakis-Gallagher
Lonnie Garris
Richard S. Lebov
Michael A. Luchini, M.D.
Sheila Masterson
Frank McCarthy
Sandra B. Naclerio
Robert V. O'Brien
Stephen J. Papa
John Vuoso
Frank A. Williams
WOODBRIDGE
Steven Falcigno
Allan R. Frankel, D.D.S.
Jean T. Harrison
Don Priest, Jr.
M. S. Rubin
Alex Satmary
David Scott
Richard Sugarmann
Ellen M. Zanker
SHAREHOLDER
INFORMATION
The common stock of BNH Bancshares, Inc. is traded on the NASDAQ National Market
Tier of The Market NASDAQ Stock SM under the symbol "BNHB"
Annual Meeting
Tuesday, April 29, 1997
Transfer Agent/Registrar
Chase Mellon Shareholder Services
Transfer Service
111 Founders Plaza,
Eleventh Floor
East Hartford, Connecticut 06108
Shareholder Relations:
1-(800) 288-9541
Independent Accountants
Coopers & Lybrand L.L.P.
Whitney Avenue
New Haven, CT 06510
The following companies make a market in BNH Bancshares, Inc. common stock:
First Albany Corporation
Bushnell Towers
100 Wells Street
Hartford, Connecticut 06103
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Legg Mason Wood Walker, Inc.
195 Church Street
New Haven, Connecticut 06510
Prudential Securities, Inc.
157 Church Street
New Haven, Connecticut 06510
Tucker Anthony Inc.
545 Long Wharf Drive
New Haven, Connecticut 06510
The Company's home page, which contains bank product and corporate financial
information, can be accessed on the internet at the following address:
WWW.BNH.COM
<PAGE>
THE BANK
OF NEW HAVEN
E X E C U T I V E O F F I C E S
New Haven
209 Church Street
498-3500
B R A N C H E S
Main Branch
New Haven
209 Church Street
498-3500
Annex
New Haven
430 Forbes Avenue
498-3709
Branford
119 Montowese Avenue
498-3751
Hamden
2584 Dixwell Avenue
498-3733
Milford
295 Old Gate Lane
498-3721
Milford
123 Cherry Street
498-3748
North Haven
377 State Street
498-3743
Orange
222 Boston Post Road
498-3713
Whalley-Norton
New Haven
395 Whalley Avenue
498-3709
Woodbridge
194 Amity Road
498-3742
Member FDIC Equal Housing Lender
B N H B A N C S H A R E S , I N C .
EXHIBIT 10(c)
BNH BANCSHARES, INC.
1992 STOCK INCENTIVE PLAN,
AMENDED EFFECTIVE MARCH 18, 1997
03/19/97
<PAGE>
BNH BANCSHARES, INC.
1992 STOCK INCENTIVE PLAN,
AMENDED EFFECTIVE MARCH 18, 1997
1. Purposes.
---------
The purposes of the BNH Bancshares, Inc. 1992 Stock Incentive Plan (the
"Plan") is to promote the interests of BNH Bancshares, Inc. (the "Corporation")
and its shareholders by attracting, retaining and stimulating the performance of
selected employees, giving such employees the opportunity to acquire a
proprietary interest in the Corporation's business and an increased personal
interest in its continued success and progress.
2. Definitions.
------------
Unless the context clearly indicates otherwise, the following terms have
the meanings set forth below.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Code" means the Internal Revenue Code of 1986, as amended, now in effect
or as amended from time to time and any successor provisions thereto.
"Committee" means the Salary and Benefits Committee of three or more
members appointed by the Board of Directors and
<PAGE>
selected from those directors who are not employees of the Corporation, its
parent or a subsidiary, as defined in Section 424(e) and (f) of the Code,
which shall include at least two non-employee directors serving on the
Executive Committee of the Board of Directors. Members of the Committee
shall be "disinterested persons" within the meaning of Rule 16b-3 under the
1934 Act, or any law, regulation or other provision that may hereafter
replace such Rule. Such members shall not be eligible to receive stock,
options or stock appreciation rights under the Plan. The Board may at any
time and from time to time remove any member of the Committee, with or
without cause, appoint additional members to the Committee and fill
vacancies, however caused, in the Committee. A majority of the members of
the Committee shall constitute a quorum. All determinations of the
Committee shall be made by a majority of its members. Any decision or
determination of the Committee reduced to writing and signed by all of the
members of the Committee shall be fully as effective as if it had been made
at a meeting duly called and held.
"Common Stock" means the common stock of BNH Bancshares, Inc.
"Disability", as applied to a Grantee, shall have the meaning set forth in
Section 22(e)(3) of the Code.
"Fair Market Value" of a share of Common Stock on any
2.
<PAGE>
particular date is the last sales price of a share of Common Stock on the
Nasdaq National Market System as reported for that date by Nasdaq or the
mean between the bid and asked quotations for the Common Stock on that date
as reported by Nasdaq; provided that (i) if no such sales or quotations are
reported by Nasdaq for such date, or (ii) if in the opinion of the
Committee sales of Common Stock on such date were insufficient to
constitute a representative market, the Fair Market Value of a share of
Common Stock on such date shall be the last sales price or the mean between
the bid and asked quotations as reported by Nasdaq for the first preceding
date to which clause (ii) does not apply.
"Grant Date", as used with respect to a particular award, means the date on
which such award is granted by the Committee pursuant to the Plan.
"Grantee" means the individual to whom an award is granted pursuant to the
Plan.
"Immediate Family Members" of a Grantee means the Grantee's children,
grandchildren and spouse.
An "option" means an option granted pursuant to the Plan to purchase shares
of Common Stock and which shall be designated as either an "incentive stock
option" or a "non-qualified
3.
<PAGE>
stock option."
"Performance Stock" means an award entitling the Grantee to payment of
shares of Common Stock or cash or a combination thereof contingent upon the
attainment of performance objectives determined in the discretion of the
Committee.
"Plan" means the BNH Bancshares, Inc. 1992 Stock Incentive Plan as set
forth herein and as amended from time to time.
"Restricted Stock" means an award of Common Stock with such restrictions
placed thereon as the Committee in its discretion deems appropriate.
"Retirement", as applied to an employee, shall mean when the employee's
employment with the Corporation or any present or future parent or
subsidiary of the Corporation, as defined in Section 424 of the Code,
terminates following such employee's attaining sixty-five (65) years of
age.
"The 1934 Act" means the Securities Exchange Act of 1934, as amended, now
in effect or as amended from time to time and any successor provisions
thereto.
4.
<PAGE>
3. Administration.
---------------
(a) The Committee shall have all the powers vested in it by the terms of
the Plan, including exclusive authority (within the limitations described
herein) to select the employees to be granted awards under the Plan, to
determine the type, size and terms of awards to be made to each employee
selected (which need not be identical for each employee), to determine the time
when awards will be granted to employees, to establish objectives and
conditions, if any, for earning such awards, and the waiver or acceleration
thereof, to determine whether such awards will be paid after the end of an award
period, to accelerate the exercisability or vesting of all or any portion of any
award or to extend the period during which an award is exercisable, based in
each case on such considerations as the Committee shall determine, and to
determine all other matters to be determined in connection with an award. The
Committee shall have full power and authority to administer and interpret the
Plan and to adopt, amend and waive such rules, regulations, agreements,
guidelines and instruments for the administration of the Plan and for the
conduct of its business as the Committee deems necessary or advisable. The
Committee's interpretation of the Plan and all actions taken and determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all parties concerned, including the Corporation, its
stockholders, any Grantees and any other employee of the Corporation or any of
its subsidiaries.
(b) Options, stock appreciation rights, dividend equivalents,
5.
<PAGE>
Restricted Stock and Performance Stock shall be evidenced by written
agreements which shall contain such terms and conditions consistent with the
Plan as may be determined by the Committee. Each agreement shall be signed on
behalf of the Corporation by the Chief Executive Officer or other duly
authorized officer of the Corporation.
(c) All decisions made by the Board of Directors pursuant to the provisions
of the Plan shall be final and conclusive.
4. Eligibility and Participation.
------------------------------
The participants in the Plan shall consist of selected employees of the
Corporation and its present or future parent or subsidiaries, as defined in
Section 424 of the Code (whether or not directors of the Corporation), who serve
in executive, administrative or professional capacities, as may from time to
time be so designated by the Committee.
5. Effective Date of the Plan and Term of Option Period.
-----------------------------------------------------
The Plan shall become effective upon its adoption by the Board of
Directors, provided, that no option or award granted pursuant to the Plan shall
be exercised or will vest prior to the approval of the Plan by the Corporation's
shareholders within twelve (12) months of its adoption by the Board. The term
during which awards may be granted under the Plan shall expire on the tenth
anniversary of the adoption of the Plan by the Board of Directors. Subject to
the provisions of Article 16 hereof, the period during which an
6.
<PAGE>
award under the Plan may be exercised shall be the period, expiring not
later than the tenth anniversary of the Grant Date of the award, as may be
determined by the Committee.
6. Awards.
-------
(a) Types. Awards under the Plan shall be made with reference to shares of
Common Stock and may include, but need not be limited to, shares of stock, which
may be granted with or without restrictions in the discretion of the Committee,
options, stock appreciation rights, dividend equivalents and Performance Stock.
The Committee may make any other type of award which it shall determine is
consistent with the objectives and limitations of the Plan. Awards under the
Plan may be made singly, in combination or in tandem with other awards.
(b) Performance Goals. The Committee may, but need not, establish
performance goals to be achieved within such performance periods as may be
selected by it in its sole discretion, using such measures of the performance of
the Corporation and/or its subsidiaries as it may select.
(c) Guidelines. From time to time, the Committee may adopt written policies
implementing the Plan. Such policies may include, but need not be limited to,
the type, size and terms of awards to be made to employees and the conditions
for payment of such awards. The Committee may determine the amount and form of
consideration, if any, payable on the issuance or exercise of awards of stock,
whether granted with or without restrictions, and awards of
7.
<PAGE>
Performance Stock. However, Common Stock to be issued for such awards shall
be issued either at no cost, provided the consideration received for such shares
is, in the opinion of counsel to the Corporation, adequate under the laws of the
Corporation's state of incorporation, or a price not to exceed the par value of
such shares. Grantees of awards of stock, whether granted with or without
restrictions, and awards of Performance Stock must accept such awards by
execution of a written agreement with the Corporation in such form as the
Committee determines not more than sixty (60) days following the award date or
else such rights shall expire.
(d) Maximum Awards. A Grantee may be granted multiple awards under the
Plan. However, no one Grantee shall be granted an award if immediately after
such grant, were it made, he would be the owner or would be deemed in accordance
with Section 424 of the Code to be the owner of more than ten percent (10%) of
the total combined voting power of all classes of stock of the Corporation or
any of its subsidiaries.
7. Shares Subject to the Plan.
---------------------------
The shares of Common Stock that may be delivered or purchased or used for
reference purposes under the Plan shall be shares of the Corporation's
authorized Common Stock and may be unissued shares or reacquired shares, as the
Board of Directors may from time to time determine. Subject to adjustment as
provided in Article 17 hereof, the aggregate number of shares to be delivered
8.
<PAGE>
under the Plan shall not exceed 227,500 shares. In no event shall more than
30,000 option shares subject to the Plan be granted in any one calendar year,
except that any option shares granted under the Plan between January 1, 1997 and
March 1, 1997 shall not count against this restriction for calendar year 1997.
If any shares are subject to an award which for any reason expires or terminates
during the term of the Plan prior to the issuance of such shares or other
payment of such awards, the shares subject to but not delivered under such award
shall be available for issuance under the Plan. In the case of an award of
Restricted Stock any part of which is forfeited prior to full vesting, such
shares as are forfeited prior to vesting shall be available for issuance under
the Plan. The shares referenced in an exercised stock appreciation right, shares
in lieu of which an optionee elects to receive cash, or shares under a related
option which is surrendered upon the exercise of a stock appreciation right
shall all be charged against the aggregate number of shares available for
issuance under the Plan.
8. Option Requirements.
--------------------
(a) An Option shall not be exercisable after the expiration of the option
period set forth in the instrument evidencing such option.
(b) The Committee may provide, in the instrument evidencing an Option, for
the lapse of the Option, prior to the expiration of the option period, upon the
occurrence of any event specified by the Committee.
(c) The price at which shares may be purchased upon exercise of a
particular option shall be determined by the Committee but such price will
neither be less than the Fair Market Value per
9.
<PAGE>
share of Common Stock on the Grant Date nor less than the par value per
share of Common Stock on the date of exercise.
9. Incentive Stock Options.
------------------------
(a) An option designated by the Committee as an "incentive stock option" is
intended to qualify as an "incentive stock option" within the meaning of Section
422 of the Code.
(b) The option price per share of Common Stock under an incentive stock
option shall be equal to the Fair Market Value of a share of Common Stock on the
Grant Date, provided, however, that the option price per share of Common Stock
on the date of exercise shall not be less than the par value per share of Common
Stock on the date of exercise.
(c) The aggregate Fair Market Value determined on the Grant Date of the
shares of Common Stock with respect to which incentive stock options are granted
under the Plan and any other plan of the Corporation or its parent or
subsidiaries which are exercisable for the first time by any Grantee during any
calendar year shall not exceed $100,000.
(d) Should Section 422 of the Code be modified during the term of this
Plan, such modification may be included in the Plan, if so approved by the Board
of Directors, upon recommendation by the Committee.
10.
<PAGE>
10. Stock Appreciation Rights.
--------------------------
The Committee may also grant stock appreciation rights to selected
employees. Stock appreciation rights granted in conjunction with options under
the Plan may be granted either at the time of grant of such options pursuant to
the Plan or by subsequent action prior to the exercise, termination or
expiration of such options. Such stock appreciation rights shall be subject to
the same terms and conditions as the related options and may be exercised only
at a time when the Fair Market Value of a share of Common Stock exceeds the
option price for such shares, the options are otherwise exercisable, and if, at
the time of such exercise, the Grantee surrenders the privilege of exercising
the related options to the extent that the Grantee exercises a stock
appreciation right. In the event of a grant of stock appreciation right without
a related option, the Common Stock price referenced in such grant shall not be
less than the Fair Market Value per share of Common Stock on the Grant Date.
Upon exercise of a stock appreciation right and surrender of the related
option (or any portion of such option), if any, the Grantee shall be entitled to
receive, subject to the provisions of the Plan and such rules and regulations as
may be established by the Committee, a payment equal to the product of (A) the
excess of (i) the Fair Market Value of one share of Common Stock at the time of
such surrender over (ii) the price per share specified in such related option or
stock appreciation rights agreement, times (B) the number of such shares called
for by the related option, or
11.
<PAGE>
portion thereof, which is so surrendered or specified in such stock
appreciation rights agreement. Such payment shall be made as determined by the
Committee, in its sole discretion, either in (i) cash, or (ii) shares of Common
Stock valued at Fair Market Value as of the date of exercise, or (iii) partly in
cash and partly in shares of Common Stock. Neither a stock appreciation right
held by a Grantee who is an officer or director of the Corporation, the exercise
of which would result in a cash payment, nor any related option shall be
exercisable during the first six months of the option period (or during the
first six months from the Grant Date of the stock appreciation right if granted
subsequently to the related option). If, upon settlement of a stock appreciation
right, a Grantee is to receive payment or a portion thereof in shares of Common
Stock, the number of shares shall be determined by dividing such payment or
portion by the Fair Market Value of a share of Common Stock on the date of
exercise. However, if the Committee, in its discretion, decides to permit a
Grantee who is an officer or director of the Corporation to elect to receive
cash in full or partial settlement of the exercise of a stock appreciation
right, then such election shall be made during the period beginning on the third
business day following the date of release for publication of quarterly and
annual summary statements of sales and earnings of the Corporation and ending on
the twelfth business day following such date, unless a different period is
specified in Rule 16b-3 under the 1934 Act, as in effect at the time of such
exercise, or any law, rule, regulation or other
12.
<PAGE>
provision that may hereafter replace such Rule (the "Window Period").
The Committee shall also determine whether, and if so to what extent, the
exercise of an option shall be required as a condition to the exercise of a
related stock appreciation right. No stock appreciation right can be exercised
by a Grantee who is an officer or director of the Corporation unless the
Corporation has been subject to the reporting requirements of Section 13 of the
1934 Act for at least one year prior to the date of said exercise and has filed
all reports and statements required to be filed pursuant to that section during
that period.
11. Dividend Equivalents.
--------------------
The Committee may also grant dividend equivalents to employees granted
related awards under the Plan pursuant to rules and regulations adopted by the
Committee. The Committee may require or permit the immediate payment or the
waiver, deferral or investment of (1) dividends paid on awards under the Plan,
and (2) amounts equal to dividends which would have been paid if shares subject
to an award had been outstanding on the dividend record date. No payment,
credits or accruals shall be made on shares subject to an award which are not
yet issued and outstanding on account of the payment of a stock dividend or
other distribution in kind on the Common Stock.
13.
<PAGE>
12. Exercise of Options and Stock Appreciation Rights.
--------------------------------------------------
(a) Each option and stock appreciation right granted shall be exercisable
in whole or in part at any time, or from time to time, during the option period
as the Committee may determine and specify in the agreement pursuant to which
such option or stock appreciation right is granted, provided that the election
to exercise an option or stock appreciation right shall be made in accordance
with applicable Federal laws and regulations.
(b) No option may at any time be exercised with respect to a fractional
share or exercised in part with respect to fewer than twenty-five shares. In the
event that shares are issued pursuant to the exercise of an option or a stock
appreciation right, no fractional shares shall be issued and the Committee shall
determine whether cash shall be given in lieu of such fractional shares or
whether such fractional shares shall be eliminated.
(c) No shares shall be delivered pursuant to the exercise of any option or
stock appreciation right, in whole or in part, until qualified for delivery
under such securities laws and regulations as the Committee may deem to be
applicable thereto and until, in the case of the exercise of an option, payment
in full of the option price is received by the Corporation in cash, by check, in
stock as provided in Article 13 hereof or, if authorized by the Committee's
regulations and accomplished in accordance therewith, by delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Corporation the portion of sale or loan proceeds
sufficient to pay
14.
<PAGE>
the option price. Neither the holder of an option or stock appreciation
right nor such holder's legal representative, legatee, or distributee shall be
or be deemed to be a holder of any shares subject to such option or stock
appreciation right unless and until a certificate or certificates therefor is
issued in his or her name or a person designated by him or her.
13. Stock as Form of Exercise Payment.
----------------------------------
A Grantee who owns shares of Common Stock may elect to use the previously
acquired shares, valued at the Fair Market Value on the last business day
preceding the date of delivery of such shares, to pay all or part of the
exercise price of an award, provided, however, that such form of payment shall
not be permitted unless at least one hundred shares of such previously acquired
shares are required and delivered for such purpose and the shares delivered have
been held by the Grantee for at least six months.
14. Withholding Taxes for Awards.
-----------------------------
Each Grantee receiving or exercising an award as a condition to such
receipt or exercise shall pay to the Corporation the amount, if any, required to
be withheld from distributions resulting from such receipt or exercise under
applicable Federal and State income tax laws ("Withholding Taxes"). Such
Withholding Taxes shall be payable as of the date income from the award is
includable in the Grantee's gross income for Federal income tax purposes (the
"Tax Date"). The Committee may establish such
15.
<PAGE>
procedures as it deems appropriate for the settling of withholding
obligations with shares of Common Stock, including, without limitation, the
establishment of such procedures as may be necessary to comply with Rule 16b-3
under the 1934 Act.
15. Transfer of Awards.
-------------------
Awards granted under the Plan may not be transferred except by will or the
laws of descent and distribution and, during the Grantee's lifetime, may be
exercised only by said Grantee or by said Grantee's guardian or legal
representative, except that the Committee may grant non-qualified stock options
that are transferable, or amend outstanding non-qualified stock options to make
them so transferable, without payment of consideration, to Immediate Family
Members of the Grantee or to trusts or partnerships for such family members,
which in the case of Grantees who are subject to Section 16 of the 1934 Act
shall be transferable in accordance with such transferability restrictions, if
any, as may be imposed by Rule 16b-3 under the 1934 Act, as hereafter amended,
if Rule 16b-3 under the 1934 Act is amended to permit restricted or unrestricted
transfers of derivative securities granted under plans intended to qualify for
the exemption provided by such rule, provided that any such transferred
non-qualified stock option shall continue to be subject to the same terms and
conditions that are applicable to such option prior to its transfer (except that
such transferred option shall not be further transferrable by the transferee
inter vivos).
16.
<PAGE>
16. Death, Disability, Retirement and Termination of Employment.
------------------------------------------------------------
(a) An option, incentive or non-qualified, which has not theretofore
expired, shall terminate at the time of the death of the Grantee or of the
termination for any reason of the Grantee's employment with the Corporation, its
parent or subsidiaries, and no shares may thereafter be delivered pursuant to
such option, except that, subject to the condition that no option may be
exercised in whole or in part after the date determined by the Committee, which
date cannot be later than the tenth anniversary of the Grant Date:
(i) Upon the termination of the employment of any such Grantee due to
Disability or Retirement, the Grantee may, within a period of up to
three years after the date of such termination, as determined by the
Committee, purchase some or all of the shares covered by the
Grantee's non-qualified stock options which were exercisable
immediately prior to such termination; and
(ii) Upon the termination of the employment of any such Grantee due to
Disability or Retirement, the Grantee may, within three months after
the date of such termination, twelve months in the case of
Disability, purchase some or all of the shares covered by an
incentive stock option which was exercisable under the Plan
immediately prior to such termination; an incentive stock option not
exercised within three months (twelve months in the case of
Disability) after the date of termination due to Disability or
Retirement may be exercised within three years after the date of such
termination but no longer will be eligible for the treatment afforded
incentive stock options under Section 421 of the Code; and
(iii) Upon the death of any such Grantee while in active service or of any
such disabled or retired Grantee within the above-referenced periods,
the person or persons to whom the rights under the option are
transferred by will or the laws of descent and distribution may,
within twelve months after the date of the Grantee's death, exercise
some or all
17.
<PAGE>
of the Grantee's options which were exercisable on the date of death
by the Grantee.
Leaves of absence for such periods and purposes conforming to the personnel
policy of the Corporation as may be approved by the Committee shall not be
deemed terminations or interruptions of employment.
(b) In the event that a Grantee to whom a stock appreciation right has been
granted ceases employment with the Corporation, its parent and subsidiaries for
any reason, including death, Disability or Retirement, such stock appreciation
right shall be exercisable only to the extent and upon the conditions that its
related option, if any, is exercisable under subparagraph (a) of this Article,
or as provided in a stock appreciation rights agreement, if such right is
granted without a related option.
(c) The Committee may adopt rules and regulations, whether or not
inconsistent with this Article, but not inconsistent with the provisions of
Section 422 of the Code, setting forth the terms and conditions of awards
relating to the Grantee's rights in the event of termination of employment.
17. Changes in Common Stock.
------------------------
In the event of a merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, or other change in corporate structure or
capitalization affecting the Common Stock, such appropriate adjustment shall be
made in the number, kind, option price, etc., of shares subject to options,
rights and other
18.
<PAGE>
awards granted under the Plan, including appropriate adjustment in the
maximum number of shares referred to in Article 7 of the Plan, as may be
determined by the Committee.
18. No Right to Employment.
-----------------------
Nothing in the Plan or any instrument executed pursuant hereto shall confer
upon any employee any right to continue in the employ of the Corporation nor
shall anything in the Plan affect the right of the Corporation to terminate the
employment of any employee, with or without cause.
19. Legal Restrictions.
-------------------
The Corporation will not be obligated to issue shares of Common Stock or
make any payment if counsel to the Corporation determines that such issuance or
payment would violate any law or regulation of any governmental authority or any
agreement between the Corporation and any national securities exchange upon
which the Common Stock is listed. In connection with any stock issuance or
transfer, the person acquiring the shares shall, if requested by the
Corporation, give assurances satisfactory to counsel to the Corporation
regarding such matters as the Corporation may deem desirable to assure
compliance with all legal requirements. The Corporation shall in no event be
obliged to take any action in order to cause the exercise of any award under the
Plan.
19.
<PAGE>
20. No Rights as Shareholders.
--------------------------
No Grantee, and no beneficiary or other person claiming through a Grantee,
shall have any interest in any shares of Common Stock allocated for the purposes
of the Plan or subject to any award until such shares of Common Stock shall have
been transferred to the Grantee or such person. Furthermore, the existence of
awards under the Plan shall not affect: the right or power of the Corporation or
its stockholders to make adjustments, recapitalizations, reorganizations or
other changes in the Corporation's capital structure; the dissolution or
liquidation of the Corporation, or the sale or transfer of any part of its
assets or business; or any other corporate act, whether of a similar character
or otherwise.
21. Choice of Law.
--------------
The validity, interpretation and administration of the Plan and of any
rules, regulations, determinations or decisions made thereunder, and the rights
of any and all persons having or claiming to have any interest therein or
thereunder, shall be determined exclusively in accordance with the laws of the
State of Connecticut.
22. Amendment and Discontinuance.
-----------------------------
The Board of Directors may alter, suspend, or discontinue the Plan, but may
not, without the approval of a majority of the holders of the Common Stock, make
any alteration or amendment
20.
<PAGE>
thereof which operates (a) to increase the total number of shares which may
be granted under the Plan, (b) to extend the term of the Plan or the maximum
option periods provided in the Plan, (c) to decrease the minimum option price
provided in the Plan, or otherwise materially increase the benefits accruing to
Grantees through awards under the Plan, or (d) to modify the eligibility
requirements for participation in the Plan.
Adopted by the Board of Directors at its meeting of March 17, 1992, subject
to approval of the Corporation's shareholders and amended by the Board of
Directors at its meeting of March 18 1997 subject to approval of the
Corporation's shareholders.
Attest: /s/ EVELYN MILLER
------------------
Secretary
21.
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
BNH Bancshares, Inc. on Form S-8 (File Nos. 33-80908, 33-10097, 33-50534, and
33-50536) of our report dated February 21, 1997, on our audits of the
consolidated financial statements of BNH Bancshares, Inc. as of December 31,
1996 and 1995 and for the years then ended which report is included in this
Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Hartford, Connecticut
March 19, 1997
[COOPERS & LYBRAND FOOTNOTE TO LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-80908, 33-10097, 33-50534, and 33-50536) of BNH
Bancshares, Inc. of our report dated February 21, 1995 with respect to the
consolidated financial statements for the year ended December 31, 1994,
appearing on page 33 of the Annual Report on Form 10-K for the year ended
December 31, 1996.
/s/ PRICE WATERHOUSE LLP
- -------------------------
Hartford, CT
March 19, 1997
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of BNH Bancshares, Inc., hereby severally
constitute F. Patrick McFadden, Jr. and John F. Trentacosta and each of them
singly, our true and lawful attorneys with full power of substitution, to sign
for us and in our names in the capacities indicated below, the Annual Report on
Form 10-K of BNH Bancshares, Inc. for the fiscal year ended December 31, 1995,
and generally to do all such things in our name and behalf in our capacities as
directors to enable BNH Bancshares, Inc. to comply with the provisions of the
Securities Exchange Act of 1934, as amended, all requirements of the Securities
and Exchange Commission, and all requirements of any other applicable law or
regulation, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Annual Report.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ F. PATRICK MCFADDEN, JR. President and Chief March 18, 1997
- ----------------------------- Executive Officer and
F. Patrick McFadden, Jr. Director
/s/ GEORGE M. DERMER Chairman of the Board March 18, 1997
- ----------------------------- and Director
George M. Dermer
/s/ STEVEN P. AHERN Director March 18, 1997
- -----------------------------
Steven P. Ahern
Director March 18, 1997
- -----------------------------
Martin R. Anastasio
/s/ EDWARD M. CROWLEY Director March 18, 1997
- -----------------------------
Edward M. Crowley
Director March 18, 1997
- -----------------------------
James J. Cullen
Director March 18, 1997
- -----------------------------
Jean G. LaMont
/s/ THOMAS M. DONEGAN Director March 18, 1997
- -----------------------------
Thomas M. Donegan
/s/ THEODORE F. HOGAN, JR. Director March 18, 1997
- -----------------------------
Theodore F. Hogan, Jr.
Director March 18, 1997
- -----------------------------
Lawrence M. Liebman
/s/ CARL M. PORTO Director March 18, 1997
- -----------------------------
Carl M. Porto
/s/ VINCENT A. ROMEI Director March 18, 1997
- -----------------------------
Vincent A. Romei
/s/ STANLEY SCHOLSOHN Director March 18, 1997
- -----------------------------
Stanley Scholsohn
/s/ CHEEVER TYLER Director March 18, 1997
- -----------------------------
Cheever Tyler
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
DATED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,044
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,440
<INVESTMENTS-CARRYING> 21,546
<INVESTMENTS-MARKET> 21,390
<LOANS> 234,680
<ALLOWANCE> 4,696
<TOTAL-ASSETS> 342,229
<DEPOSITS> 289,924
<SHORT-TERM> 11,101
<LIABILITIES-OTHER> 1,031
<LONG-TERM> 5,562
0
0
<COMMON> 37
<OTHER-SE> 25,574
<TOTAL-LIABILITIES-AND-EQUITY> 342,229
<INTEREST-LOAN> 18,795
<INTEREST-INVEST> 3,715
<INTEREST-OTHER> 189
<INTEREST-TOTAL> 22,698
<INTEREST-DEPOSIT> 9,406
<INTEREST-EXPENSE> 9,930
<INTEREST-INCOME-NET> 12,769
<LOAN-LOSSES> 1,964
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 11,970
<INCOME-PRETAX> 2,177
<INCOME-PRE-EXTRAORDINARY> 2,177
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,984
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.71
<YIELD-ACTUAL> 0
<LOANS-NON> 3,622
<LOANS-PAST> 671
<LOANS-TROUBLED> 1,580
<LOANS-PROBLEM> 364
<ALLOWANCE-OPEN> 5,893
<CHARGE-OFFS> 3,443
<RECOVERIES> 282
<ALLOWANCE-CLOSE> 4,696
<ALLOWANCE-DOMESTIC> 4,696
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 529
</TABLE>
